Q3 2025 WESCO International Inc Earnings Call
Speaker #3: Hello and welcome to West Coast 2025 third quarter Earnings Call . I would like to remind you that all lines are in a listen only mode throughout the presentation .
Speaker #3: 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 #3: I will now hand the call over to Scott Gaffner SVP , Investor Relations to begin .
Speaker #4: Thank you and good morning , everyone . Before we get started , I want to remind you that certain statements made on this call contain forward looking information .
Speaker #4: Forward looking statements are not guarantees of performance , and by their nature , are subject to uncertainties . Actual results may differ materially .
Speaker #4: Please see our webcast slides in the company's SEC filings for additional risk factors and disclosures . Any forward looking information speaks only as of this date , and the company undertakes no obligation to update the information to reflect change circumstances .
Speaker #4: Additionally , today we will use certain non-GAAP financial measures . Required information about these measures is available on our webcast slides and in our press release , both of which you can find at our website at Wesco .
Speaker #4: Com . On the call this morning , we have John West , chairman , President and Chief Executive Officer and Dave Schultz , Executive Vice President and Chief Financial Officer .
Speaker #4: Now , I'll turn the call over to John . Well .
Speaker #5: Thank you , Scott . And good morning , everyone , and thank you for joining our call today . We delivered very strong results in the third quarter , and we again outperformed the market with our leading portfolio of products , services and solutions .
Speaker #5: Sales growth is accelerated throughout the year with organic sales up 6% in the first quarter . 7% in the second quarter , and now 12% in the third quarter .
Speaker #5: And that marks for consecutive quarters of accelerating momentum . Our positive business momentum has continued into October . We're happy to say with month to date preliminary sales per workday up approximately 9% year over year .
Speaker #5: And that's with three days left in the month . Our record quarterly sales , and it was an all time record for any quarter .
Speaker #5: Sales of 6.2 billion were led by 18% . Organic growth in communications and security solutions , 12% organic growth in our electrical and electronics solutions business , and a return to growth in utility and broadband solutions .
Speaker #5: And that was driven by strong , high single digit growth with investor owned utilities and strength broadband . Also of note , all three Sbus delivered sales growth in this quarter .
Speaker #5: And that's the first time that's occurred since Q1 of 2023 . Total data center sales were again very strong at $1.2 billion . They set another quarterly record .
Speaker #5: They were up 60% year over year . And now represent 19% of our total Q3 company sales on a trailing 12 month basis .
Speaker #5: Our data center sales are now close to $4 billion , adjusted EPs earnings per share grew 9.5% versus prior year , and 16% versus Q2 sequentially , with both gross margin and EBITDA margin improving sequentially .
Speaker #5: We As the market leader , it's really the strength of our portfolio and the enduring secular growth trends of digitalization . That includes AI driven data centers and automation , electrification that includes increased power generation and reliability , and supply chain resiliency , which includes reshoring all of these secular trends fuel my confidence that Wesco will continue to outperform our markets and deliver exceptional customer and shareholder value in 2026 and beyond .
Speaker #5: are building on our positive business momentum as we enter the fourth quarter and as we prepare for continued market leading growth in 2026 .
Speaker #5: Looking ahead specifically to 2026 , our mid-term targets for annual sales growth and margin expansion that we provided at our Investor Day are the appropriate starting point for the outlook that we will provide in conjunction with our earnings release in February .
Speaker #5: So with that , I'll turn it over to Dave to walk you through our Q3 results and our outlook for the remainder of the year .
Speaker #5: Dave . Thank you . John .
Speaker #6: Good morning everyone . Turning to slide four . Organic sales in Q3 were up 12% year over year . This growth was driven by volume gains across all three sbus , supported by an estimated price benefit of less than 3% .
Speaker #6: Reported sales increased 13% , with sequential growth of 5% , which was better than historical seasonality . The strong performance was broad based , with continued momentum in our data center business and solid contributions from all three business units .
Speaker #6: As John mentioned , CSS delivered 18% organic growth . EES grew 12% and UBS organic sales increased by 3% . Adjusted EBITDA margin was 6.8% , down 50 basis points versus the prior year , but was up ten basis points sequentially .
Speaker #6: Gross margin contracted 80 basis points to 21.3% , reflecting consistent project and product mix dynamics experienced over the last four quarters . Importantly , gross margin increased sequentially by 20 basis points , driven by mix higher supplier volume rebates , and execution of our enterprise wide margin improvement program .
Speaker #6: Adjusted SG&A increased approximately 11% year over year , driven by the higher levels of sales growth , along with higher employee and facility costs .
Speaker #6: Specifically , over a third of the increase in SG&A dollars year over year was related to higher volume , with the balance coming from increased incentive compensation , merit increases , employee benefits , and facilities costs .
Speaker #6: SGA , as a percentage of sales improved due to operating leverage on our sales growth . Finally , adjusted EPs was up 9.5% year over year , driven by the improved operating performance and the absence of the preferred stock dividend .
Speaker #6: Following the redemption in Q2 . I'll walk you through our business unit results beginning with Ease on slide five . In the third quarter , EES delivered very strong results with organic sales up 12% year over year , driven by growth across all three operating groups construction , industrial and OEM .
Speaker #6: Construction grew mid-teens , driven by robust wire and cable demand and ongoing infrastructure projects , including sales to data centers . Industrial was up mid-single digits , supported by improved day to day demand in the US , and increased project activity in Canada and OEM sales grew mid-teens , reflecting strong momentum in both the US and Canada .
Speaker #6: Notably , data center sales were up 60% year over year , now representing approximately 6% of EES sales . Backlog remained flat year over year , with healthy quoting activity and a strong pipeline of opportunities .
Speaker #6: Profitability improved with adjusted EBITDA margin of 8.4% , up 30 basis points sequentially , driven by improved gross margin and stable operating cost leverage .
Speaker #6: Gross margin was 23.3% , down 100 basis points year over year , but up 30 basis points sequentially . Lower gross margin year over year was primarily due to project and product mix .
Speaker #6: SG&A remained stable at 14.9% of sales , and adjusted EBITDA increased to $198 million , up 9% year over year . Looking ahead , EES remains well positioned to capitalize on secular trends in electrification .
Speaker #6: Data center expansion and infrastructure modernization . Turning to slide six . In the third quarter , CSS again delivered very strong results with organic sales up 18% and reported sales up 21% year over year .
Speaker #6: This growth was driven by continued strength in Wesco Data Center Solutions , which was up over 50% from large project activity with hyperscale and multi-tenant data center customers .
Speaker #6: Enterprise network infrastructure also contributed to growth , with sales up mid-single digits year over year . Any growth was due partially to the timing of project activity during the quarter , and a favorable year over year comparison .
Speaker #6: Security sales were up low single digits , including data center related sales . Security growth was up mid-single digits . CSS backlog increased 17% year over year , reflecting continued strength in data center project activity .
Speaker #6: Profitability improved with adjusted EBITDA margin at 9.1% , up 30 basis points sequentially , driven by improved gross margin and stable operating cost leverage .
Speaker #6: Gross margin was 21.2% , down 80 basis points year over year , but up 30 basis points sequentially . Lower gross margin year over year was primarily due to business and project mix included elevating volume from large hyperscale projects .
Speaker #6: Significant operating leverage year over year drove 90 basis points of EBITDA margin improvement . And adjusted EBITDA increased to $221 million , up 22% year over year .
Speaker #6: Overall , CSS continues to demonstrate strong growth in profitability , supported by sustained demand in AI driven data center projects and security markets , along with disciplined cost management .
Speaker #6: We remain focused on improving margins with our large customers by expanding the scope of services we provide to them throughout the entire data center lifecycle .
Speaker #6: Turning to slide seven . I want to take a moment to discuss the continued momentum we're seeing in the broader data center space .
Speaker #6: And Wesco's role in that growth . Customers continue to rely on Wesco and our supplier partners to meet their evolving needs , including our expanding portfolio of services .
Speaker #6: We provide across the data center lifecycle . From a total company perspective , data center sales were about $1.2 billion in the quarter .
Speaker #6: Data center represented approximately 19% of Wesco sales in the third quarter , and 17% on a trailing 12 month basis . This growth was driven by strong performance in both the white space and the gray space , with CSS representing the majority of sales contribution .
Speaker #6: The top of the slide outlines the two key stages of the data center construction cycle . Time to power , and the construction period .
Speaker #6: The key takeaway projects announced and funded today typically take 4 to 7 years to become operational . Our solutions now span the full spectrum of the data center lifecycle from power and electrical distribution systems and advanced AI , and IT infrastructure to on site services and solutions that support ongoing operations .
Speaker #6: This ensures we can deliver value throughout every phase of the data center lifecycle . On the lower left of this slide , you can see the substantial and accelerating growth in our data center business .
Speaker #6: Over the past seven quarters . Total data center sales on a trailing 12 month basis were approximately $4 billion . This growth has been driven by organic initiatives , along with tuck in acquisitions that have expanded our services capabilities .
Speaker #6: We remain committed to partnering with our suppliers to service our customers from Cradle to Cradle , supporting everything from initial builds on site services and solutions , ongoing upgrades , retrofits , life cycle upgrades and modernization .
Speaker #6: Turning to slide eight . This provides additional information of our data center , product services and solutions offerings . Our offerings span both gray space and white space , delivering a comprehensive portfolio that positions Wesco as a trusted partner for hyperscale , multi-tenant colocation and enterprise data center customers in the gray space , which accounts for approximately 20% of our overall data center sales serviced by our EES business .
Speaker #6: We deliver extensive power , electrical automation and MRO solutions that support the build out of high performance , reliable and scalable data centers .
Speaker #6: Some of our product offerings include electrical infrastructure such as medium voltage cables and cable trays alongside mechanical and cooling products like automated switches and sensors .
Speaker #6: Additionally , we supply MRO and safety products to help ensure safe , efficient and reliable data center operations in the white space , which accounts for approximately 80% of our total data center sales .
Speaker #6: Through our CSS business . We delivered next generation infrastructure and services for always on connectivity . Our white space products include communications equipment , advanced IT infrastructure such as racks and enclosures , wireless technologies , access controls and video surveillance equipment .
Speaker #6: Beyond products, we offer extensive services and holistic solutions spanning the entire data center lifecycle—from planning and design through installation and commissioning to ongoing operations through onsite services and decommissioning.
Speaker #6: We are there every step of the way , moving with speed to help our customers quickly adapt and thrive in a rapidly evolving environment with a global ecosystem of suppliers and partners .
Speaker #6: Wesco offers a leading portfolio and complete solutions , providing customers with a single source for for their evolving data center needs . Wesco enables seamless global execution , moving products and solutions across borders to support our customers .
Speaker #6: We believe our combination of products , services , solutions and expertise uniquely positions Wesco to capture the accelerating demand for data center capacity driven by cloud , AI and edge computing trends .
Speaker #6: Turning to slide nine . In the third quarter , organic and reported sales in UBS increased 3% year over year , marking a return to growth after seven quarters of declines .
Speaker #6: This improvement was led by high single digit growth in our investor owned utility customer base , partially offset by continued softness in public power .
Speaker #6: We expect the utility market to continue to improve as greater clarity is obtained on tariff impacts and as interest rates are reduced . Additionally , we expect public power customers to return to growth in 2026 .
Speaker #6: Broadband performance accelerated in the third quarter , with sales up over 20% year over year , driven by increased demand in the US .
Speaker #6: This marks a significant improvement from Q2 , where broadband growth was up mid-single digits . Backlog increased 11% year over year , reflecting stronger customer order rates .
Speaker #6: Adjusted EBITDA margin for UBS was 10.4% flat sequentially , reflecting disciplined cost management and sustained profitability . Adjusted EBITDA margin was down 90 basis points year over year , primarily driven by lower gross margin due to competitive pressures within public power markets , partially offset by improved operating cost leverage .
Speaker #6: We remain confident in the long term growth potential of our utility business , supported by secular trends and electrification , green energy and grid modernization .
Speaker #6: These drivers are expected to accelerate demand for our utility services and solutions , and we anticipate further margin improvement in Q4 as mix improves and utility growth continues .
Speaker #6: Turning to slide ten . In the third quarter , free cash flow was a use of $89 million . Recall that our distribution model requires investment in working capital , especially in times of significant growth , which we have experienced year to date .
Speaker #6: The third quarter was the highest growth quarter of the year , with organic sales up 12% . In addition , you will see later in the presentation that September , organic sales were up mid-teens , which is the highest growth month of the year .
Speaker #6: And represents an all time record for monthly sales per workday . Given a top line strength in the quarter and in September . We generated significant increases to accounts receivable , resulting in a use of cash of $270 million .
Speaker #6: I'll provide you with an update on our free cash flow outlook shortly . Turning to accounts payable , we've had strong performance over the trailing 12 months , and a third quarter period with cash generation of $526 million on a trailing 12 month basis and $100 million in the third quarter .
Speaker #6: Inventory has increased in 2025 to support customer projects and to ensure supply chain disruptions are minimized as we work to meet our customers needs and the rising demand curve .
Speaker #6: On the right side of this slide , you can see that net working capital intensity has steadily improved over the past three years .
Speaker #6: This quarter , we saw a 60 basis points year over year improvement on a trailing 12 month basis with net working capital intensity declining from 20.4% to 19.8% .
Speaker #6: That follows a 50 basis improvement in 2024 over 2023 . We remain confident in our ability to drive stronger cash generation through the cycle .
Speaker #6: Turning to slide 11 . We redeemed our $540 million series A preferred stock in June . The first opportunity to do so at face value .
Speaker #6: This high cost instrument carried a ten and 5/8 dividend rate , and its redemption marked a significant milestone in our capital structure optimization .
Speaker #6: To fund the redemption , we utilize proceeds from our $800 million issuance of six and 3/8 senior notes due 2033 , which we completed earlier in the year .
Our expectation for free, cash flow has been lowered due to the significant Topline growth in 2025, which requires networking Capital Investments principally accounts receivable.
We are revising our 2025 sales Outlook based on the accelerated growth, we are. Experiencing organic. Sales are expected to be up 8% to 9%.
Versus our prior forecast of 5% to 7%.
I want to emphasize that our outlook does not include the impact of future pricing actions, including tariffs.
this is consistent with our past practice, given the lag between when a supplier announces a price increase and when it begins to impact our Revenue,
all we have seen a significant uptick in price increase notifications as we move through the year,
Our Outlook does not include any additional benefits to sales beyond what we realize in the third quarter, and the rollover impact of those price increases.
Turning to EPS, we are raising our Outlook by 10 cents at the midpoint to a range of 13.00 $13.10 to $13.60.
Improved. Operating results are the primary driver of the increase EPS Outlook which is partially offset by higher estimates for interest expense.
in terms of free cash flow, we now expect to deliver between 400 million to 500 million in 2025
As a percentage percentage of adjusted net income, this implies a range of approximately 60% to 75%.
Our strategy for how we deploy? Cash flow remains unchanged.
The use of 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.
Our top priority is to invest organically in the business to drive growth and operational efficiency.
Including the completion of our digital business transformation.
In the near term. Given the current economic environment. We expect to prioritize de-levering the balance sheet.
However, we will continue to be opportunistic. Regarding, share, repurchases and acquisition opportunities.
We continue to seek Acquisitions that. Expand our capabilities and better serve our customers particularly those engaged in our high growth and markets.
We've also included updated modeling assumptions. On the right hand side of the slide, most notably interest expense is now forecast to be about 10 million dollars higher,
To support the current level of growth.
Turning to slide 15.
This slide shows the year-over-year monthly and quarterly sales growth comparisons over the past year and our expectations for the fourth quarter.
You can see the return to growth in the last quarter of 2024 and the acceleration throughout 2025.
As mentioned, preliminary month-to-date October sales per workday are up approximately 9% with 3 days to go in the month.
we expect fourth quarter, reported sales will be up, high single digits, Plus
With growth across all 3 business units.
We expect organic sales will be up a similar amount as there is no difference. In work days, year-over-year and FX impacts have moderated.
We expect adjusted ebit doll. Margins will be up approximately 30 basis points versus the prior year
with improved gross margin driven by higher supplier volume rebates.
And scna headwinds due to higher incentive compensation.
Moving to slide 16, let me briefly recap the key points before we open the call to your questions.
We delivered another very strong quarter with sales up 12% year-over-year, marking 4 consecutive quarters of accelerating sales. Momentum CSS. Led the way up 18%? EES grew 12% and UBS was up 3%.
Utility returned to growth driven by investor-owned utilities and total data center sales were approximately 1.2 billion dollars up about 60% year-over-year.
on margins expanded 10 basis points, sequentially supported by improved, gross margin and strong operating Leverage
Adjusted EPS was up 9.5% year-over-year.
We raised our full year, organic growth Outlook adjusted ebita and adjusted EPS to reflect this strength.
We remained very well positioned to benefit from secular growth Trends, including AI driven data, centers power generation, electrification Automation, and reassuring.
As John noted earlier, when looking ahead to 2026, our midterm targets for annual growth and margin expansion that we provided at our Investor Day are still appropriate and would be the starting point for any outlook that we will provide in February.
Based on the strength of the secular Trends we would expect mid single digit, organic sales growth in 2026 with continued strength in our electrical markets.
A return to full year growth in utility with a recovery and Public Power and mid teens growth in Data Center.
We are also targeting annual adjusted, Evita margin Improvement of 20 to 30 basis points with the majority of the Improvement being generated by operating Leverage.
With that operator. We can now open the call to questions.
Thank you.
We will now begin the question and answer session. If you would like to ask a question, please press star. Followed by 1 on your telephone keypad. Please, let me your questions to 1 question and 1 follow-up.
And our first question today, will come from David manthy with Barrett. Please go ahead.
Hi, hi. Good morning, thank you. Um, just uh, quick question here on. Um I think you you um mentioned it right at the end there. Dave, you said that you expect to see some height down margin Improvement into 2026. So um, so I'll I'll put that 1 on the side. Um, could you tell us approximately how much price contributed to growth by segments or at least ballpark to give us an idea?
certainly, so overall our
Pricing benefit in the third quarter was just under 3% and that was primarily driven by our EES segment was which, which was about 4% and that's where we saw the the largest benefit from commodity pricing on our Pure commodity products.
Our CSS business saw price benefit of about 2% and UBS about 1%.
Okay, thank you. And then maybe um, on EES uh, outside of data center. Could you just talk about whether it's Industries or applications where you're seeing some strength there, it's great to see a return to growth. Nice growth in EES, and maybe you could just help out with a little bit of color there.
Due to AI-driven data centers, but for EES, this is the fourth consecutive quarter of improving sales growth. I'll just remind everyone.
We return to growth in the fourth quarter of last year. We grew 3% in Q1, 6% in Q2, and now this is a significant step up to 12% growth in Q3. All three operating groups in the business made gains—Construction, Industrial, and OEM—all three grew.
Uh, and particularly for construction, I'll double click. I mean that was up mid teens and it's not just growth in data center projects. There's also growth in in other big projects infrastructure related. We saw growth in in waste water, Wastewater hospitals, public transit. So just a really nice Step Up in construction, very pleased with that. In terms of industrial, also pleased with that performance up mid. Single digits, we did improve day-to-day demand in the US, we had increased project activity in Canada and our stock sales increased each month of the quarter, and that's our stock and flow business, which is a good indication of what, you know, kind of the, the daily demand the market is what so we feel good about that, and then OEM up mid-, teens, really strong growth again in across the US and Canada. That's being driven by semiconductor.
And other infrastructure markets. So that that's the business and E's that has our most semiconductor exposure and that would be again you're seeing the you know that's driven you know, kind of the semiconductor expansion, big Mega projects and such we have some terrific uh semicon relationships there. So uh all in all I think,
Feel good about about EES, Topline momentum, also IBA, margins are above 8% for the second quarter in a row. And I do want to mention because I didn't mention it in my prepared remarks. We do have a new leader on board Danny Castillo terrific. Terrific leader returns to the electrical industry. Has a long, a long history, uh and was part of Cooper. When eaten bought Cooper, worked for some other companies since Poe post that, um, uh, combination. And he's off to a great. Great start. Thanks for that question. Dave.
Yeah, it's great to hear John. Thank you and see you in a couple weeks.
Yep. We'll see you in a couple weeks.
And your next question today, will come from Sam darkish with Raymond James. Please go ahead.
Good morning. John. Good morning. Dave, how are you morning? Sam.
I, I wanted to follow up on on, uh, Dave Matthews last question. I mean, we're, he, you're right. I mean, the, the 10% EES growth excluding data center just really notable. Um,
the um,
We're hearing a lot of reports about, you know, just general AI and tech spending by customers crowding out other sorts of CapEx.
And it doesn't look like you're seeing that in your results. Are you not seeing that crowd out effect? Or is the EES growth excluding data center more? So via share games, John
Oh, so good morning again, Sam. The we're not seeing a crowd out based on our activity levels.
Um, but I do think it's it's pretty clear.
That this quarter's results.
There was overall market outperformance across our 3 businesses. And if we stay on EES in particular, there's enough other data points out there in terms of Market surveys. And uh and and competitors who have reported that this is, this is a very strong outperformance versus market. So um, you know, I I uh, I'll tell you this, this did, uh, did surpass our expectations. We did expect the es to pick up pace in q.
Q3 and Q4 and we outlined that and we did have an improving momentum Vector. But this was a more meaningful step up Sam to your point uh getting north of of, you know, get it. 12% growth and double digit growth X data centers. Then we expected
Yeah, my, my last question. Um, looking at data center itself, I know the margins are a little bit lower than than Fleet average because of all the large projects. But I I'm I'm also, I imagine that since it's a lot of Direction, special order that the asset velocity is also better than Fleet average. Can you talk to that? Um, put a little bit of of clarification, um, in terms of what your Roa is for for that data center business? Yes,
Sam, I think at some point in the future we we may do that. So I appreciate the question. I will maybe I'll focus on it this way.
Uh, which is another dimension of your question.
You know DS Direction, margins inherently have lower gross margin but we have significant lower operating costs to execute those transactions. We've always said that it represents you know, very good uh operating profit pull through. Uh I'm really pleased that CSS has a third quarter in a row of sequential, Evita margin expansion and we're getting it with gross margin and operating cost. Leverage this, this quarter CSS is gross margins. We're up 30 basis points, sequentially and I'll remind everyone that we did have a, a big shift in our kind of margin mixing Q4 last year, when CSS really started to drive outsized growth data centers, through 70%, in Q4 last year,
And we, and I mentioned that we're going to work margins up over time. If you look at that, CSS has their margins, are are gross margins.
They are 40 basis points higher than they were in Q4.
So, we're walk Walking those margins up, and we're getting operating costs, leverage on the growth. So I, at least wanted to hit that point Sam on your question in terms of roia. Yes, it is. It is much better asset velocity to your point. We just have them put a number out there by spu
Thank you, much.
And your next question today, will come from guy Hardwick with Barclays. Please go ahead.
Hi, good morning.
Morning guy.
Um, with volume so strong. As I was wondering whether the, uh, as a
as a company, as a whole is hitting levels in terms of where volume rebates, which have been kind of declining as a percentage of ebit Da that may start to recover or whether this sets you up for
Them becoming a a positive Tailwind to margins next year.
Yeah, guy. Good morning. Thank you for the question. So, year over year in the third quarter, some of the increase in our gross margin was driven by better supplier. Buying rebates that does include the benefit. We're getting this year from reaching some of those higher volume tears.
Which is translating to a better rate with certain suppliers. Uh we also expect that we will continue to see that in the fourth quarter. So year-over-year we do expect to see supplier buying rebates contributing to gross margin expansion. Uh I do believe it is a good setup as we go into 2026 we'll provide you more details on that in.
February when we do our next earnings call.
And just as a follow-up. Um, I didn't hear you mention much about the digitalization investment, you need to see benefits in terms of cross-selling yet or is that more of a, a story for our years?
Guys, it's a great question. Thanks for asking. Uh look, I think that first on cross-selling, I don't want to link that to our to our Enterprise, why digital transformation because that will help accelerate it and improve our improve, our execution of the global Enterprise. But I'll I'll take take all the investors back to this has been really 1 of the most significant value creation, levers that we've been executing exceptionally. Well, again since we put an external Westco together,
And we, you know, we had significantly over-delivered, the sales synergies that we committed to uh we had committed to 1% of performance sales which would be 170 million a year. We end up delivering over 2.3 billion. Uh cumulative of cross sell sales so that process we put in place
And the incentive structure supporting it that's deployed across our sales force. And the way we're executing, we're gaining better traction every day on our cross-selling. And we're seeing that in our results, the digital transformation when it's done.
Well, result in, I think even further acceleration of of improved execution there, with respect to the overall D dual transformation since you touched on it. At least I'll make a comment. We're making very good progress. All 3 S spus are running the initial build of our new digital digital platform and at least 1 location that's call that Baseline set of capabilities.
And the second half of of 2025 we've been focused on continuing to build out additional capabilities while beginning deployment.
Providing more robust updates.
Thank you.
And your next question today will come from Dean Dre with RBC Capital. Please go ahead.
Thank you. Good morning everyone.
Morning Dean. Hey, I appreciate all the clarity on the revised Outlook, especially the change in free cash flow guidance, which we consider to be a high quality problem given all the growth.
Thank you Dean. Yeah, it's, uh, we don't like the printed number free cash flow, but
our sales per workday in September where the highest monthly sales per workday we've ever had in our history.
In the, in the, in the, in the 15th percent range and all that are I resulting growth of our, our our grew 271 million. So you know this is you said it, well, very high quality problem because that are will get collected. Yeah. And you're working capital intensity continues to improve so you know you're not losing anything on the um receivables payables Etc.
Yeah, on it. That's an important point, which is why we include that page. Dean, the networking capitals are percentage of sales, which is obviously our plus inventory, you know, minus payables. We're showing improved efficiency, and this is just, you know, a high quality problem on our growth. And, you know, we're doing that now.
Still, with all the various quote, unquote Erp instances, we're running in the company. We do expect as we outlined an investor day when our digital transformation is done to get sub, you know, a really a substantial benefits and overall networking capital.
Exactly. All right, uh, just a couple quick ones for me here first. Uh, I'll Echo all the previous comments about EES. Um, and I was a little surprised not to see some backlog build there. So, you know, was it all really short quick turn business? That was done. That would probably be the explanation but would love to hear your caller.
Yeah, I think if backlogs still very healthy, um, we just didn't grow it and and it was just the exceptional Step Up in sales growth as I talked earlier, but versus normal historical, seasonality. We're itching tagged, it's it's, it's it's, it's very, it's real, it's strong, it's high quality, the opportunity pipeline continues to increase. So we're we're, um, we're seeing more opportunities, we're putting more shots on goal to use that analogy. And so that's what's encouraging. And uh, you know, and again I we're not giving a full guide for 26 yet, but we did make some commentary. Dave did just around, you know, stronger electrical markets in 26, so I think that that gives some indication of, you know, the confidence level we have given backlog plus sales execution
That's really good to hear. And since you opened the door on the 2026 kind of data points that Dave shared the 1 on data center, the mid teens growth. That would be what we consider to be industry growth. The kind of footprint, roll out, given the multi-year of backlog. You've been out growing that significantly, um, for the past year plus and, you know, increasing your share of wallet. Do you see where that ramps down and just what's your visibility on this outgrowth and data center heading into 26?
All all indications are Data Center Market remains incredibly strong again. We we have a, we have a unique and very strong set of end-user customers. We're in dialogue with them. We get a good insights into their multi-year investment and deployment plans for data centers. We're helping them execute globally. So, um, the Market's strong and robust, I will say it this way I wouldn't get again, we're not giving the guide for 26 yet. We are we are focused and committed to and confident that we will continue to outperform the market and data centers.
It's driven by its driven by the strength of. We have this tremendous strength in the white space. Its extensive. We've added Services, we have increasing strength in the grey space and we talked about that, the last several calls we wanted to provide some more details on our mix. You see that in today's, uh, webcast materials and increasingly too, our UBS business is getting pulled in and engaged on the front end because really the number 1 driver,
Of what's going to support data. Center growth is power.
and so, it's why I'm so bullish on utility turning into a secular growth industry because
It's increased power generation that's going to be driven or required to support the data center build out and that both very well for us. So final point
Our white space capabilities are gray space capabilities, our power and utility capabilities. Coupled with the global footprint and increasing Services. We think puts us in a very unique position to to continue to outperform the market for data centers.
Thank you.
And your next question today, will come from Nigel Co with wolf research. Please go ahead. Oh, thanks. Good morning. Thanks for the question, guys. Um, we've had a lot of ground already but um, I'm just wondering, I'm sorry if I missed this, um the 30 basis points of margin expansion for uh, 4 q. How should we think about that between gross margin and sgna?
And Nigel. Good morning the you know, 1 thing. I'll I'll emphasize. Is that given the increase in our Top Line.
Part of that 30 basis points of expansion will be Improvement to our supplier, volume rebates. And so when you think about the 30s, you should assume a modest increase in the supplier volume rebates. Uh and you know we're confident it will be able to get to the 30s through a combination of that supplier volume rebate. Other gross margin actions but then also operating Leverage
Okay, great and and then, uh, on the price increases, I think, I think we understand, uh, you know, how you layer those in now, for 4 q. Would that be gross margin accredited as well? Because normally, when you, um,
when you raise prices, you normally have a, you know, maybe a temporary benefit on inventory. So just wondering if that's having an impact as well.
It will have a slight impact because we are average with inventory. So as market prices increase, you know, our inventory has not cut up to that market increase. What I would tell you what we experienced in Q3 was it was a very modest impact. We are not seeing that pricing translate from our suppliers into the market and into our sales yet. So, you know, we had, you know, rough round, you know, just under 3% pricing benefit that's after seeing these high single-digit, price, increase notifications in q1 and into Q2. So, all of that pricing is not translating to the market yet, you know? As we do get pricing traction, we should see a modest benefit to our gross margin, okay? And, and then a quick 1 on cash flow. Uh, if if we do get into that mid single digit Zone, uh, on growth in 2026, would you expect conversion to be, you know, if not 100% pretty, pretty, darn close.
Yes.
Nice, short answer. I like that. Thanks. Thanks, Nathan.
You bet.
And your next question today will come from Ken Neumann with keybanc capital markets. Please go ahead.
Good morning guys. Thanks for squeezing me in.
Morning.
First, uh, Dave, can you just talk about, um, you know, obviously being implied acceleration and UBS organic sales growth and fourth quarter, just talk a little bit about, um, the color and the confidence that, um, if there's any comments you have on, how much that revenue is already secured in backlog, just versus an easier comparison math. There
Well, I'll start with the easier comparison. So if you take a look at, uh, our overall utility and Broadband Solutions business in the fourth quarter of of 2024, you know, we do have an easier comp particularly within the utility space. Uh, so utility was down high single digits in Q4 2024 and given the acceleration that we've seen, particularly, with the investor-owned utilities, we're confident that we'll, we will have, uh, you know, significant growth here in the fourth quarter of 2025, again, some of that, just the trends that we're seeing, not only the backlog, but the day-to-day activity primarily again in those investor-owned utilities, some of the project work that we're doing but we also are getting some benefit from an easier comp.
Got it. Okay. And then, um,
Sorry if I missed it, but did you disclose how much grace Revenue was up this quarter versus versus whitespace? You know, it it it was nice to see the stronger margins in both the es and CSS this quarter. I'm just trying to see if there's a way to think about the longer term margin Trend as we balance the mix impacts from growth in those in those 2 channels.
Yes. The the data center sales in our EES business, those great space sales were up approximately 60% in the third quarter.
And and a white space was up over over 50, correct.
Yeah. So both both 50. They have a both 50 plus.
And then any comments on that? How do you think about the mix, kind of normalizing into 26?
Yeah, don't I don't know that there that mixed normalizes again, the dynamic there is, we've talked about it, you know, it it prior earnings calls and also the investor conferences. We have we have deep and long-standing strength and white space, these end-user relationships, we're adding Services. Um, and we're, we're managing helping manage the global deployments for hyperscalers and mg and, and Global mg mtdc customers. So that that, you know, think of the market and because of our unique value proposition, and execution, ability globally, we're outperforming the market with that white space strength, the grey space of big good portion of that. Historically has been served direct, but we're now picking up pieces that are moving in the distribution because we become the 1 overall supply chain, uh, management manager on behalf of our end user customers. So uh that's what's driving some of that growth there. So, I, I would
Expect we will continue to see very strong growth in both white and gray space. Again, Apple forming the market is our expectation.
Perfect. Thanks guys.
And your next question today will come from Patrick Bowman with J.P. Morgan. Please go ahead.
Oh hi. Good morning guys. Thanks for taking my questions. Um, morning wanted to morning, wanted to start off on utility if we could and and to focus a little bit on the Public Power side. Um, I think that's I guess a third of your utility sales. Correct me if I'm wrong. Um wondering what? How much it was down in the quarter and then, you know, what gives you confidence? It returns to growth. Uh, next year, um, and along those lines, you mentioned something about
I guess competitive price in in that side of the world and maybe that led to, some of the gross margin compression quarter on quarter, maybe if you could flush that out a little bit,
Yeah, so maybe just a a level set again. If you think of our utility business, the U of UBS
90% of that is US 10% Canada.
uh, when you so when you take the US now that 90%
You know, 60 plus percent investor owned utilities, 10% or so is direct to Specialty. Utility contractors that leaves about 30% in in Public Power.
Our sales or IOU. Customers are investor owned. Utility customers are up high single digits in in the third quarter and we're we're very pleased with that momentum. Uh, our strength and I use is really carrying the day with the for the utility return to growth.
Public Power softness continued, and I mentioned this last quarter and I'll, I'll just go back and, and, and double click on it because it's the same situation. When you look at what a cross, the pandemic, it really was the IOU customers that were prioritizing. They were delivered material. As the supply chain started coming on back online, and the Public Power, customers started building inventory much later than the IOU customers those inventory builds for Public, Power continued through 2024. And and that's as the manufacturers switched, from serving the, I use the building up for the Public Power customer. So that's really what we're seeing we're seeing that kind of customer stocking issue and it's not AC cross the board categorically its distribution Transformers and wiring cable for Public Power but not for a line construction material so we're seeing it getting healthier. Uh we've got overall improve
Improving customer order rates, that's a, a positive leading indicator.
Uh, because again of the current stocking situation, that's more locally market driven. Some of our competitors are also not-for-profits, the so-called cooperative distributors. But that's been the nature of the beast for decades, quite frankly.
Got it helpful. Um, thanks for the caller, uh, on the, on the 2026. Margin Outlook the, the 20 to 30 basis points of expansion on. Uh, I guess mid single digit organic Topline growth.
Can you walk through us? Like the confidence? You have in getting leverage. Um, and I asked um just in in um, respect to 2025 when you you know you're growing High single digit organically and and not getting leverage. Um, maybe remind us of the moving Parts on why you're not getting leverage in 2025 and why that turns in 2026?
Yeah, Patrick 1 of the things. I'll I'll highlight is, you know, relative to incentive compensation. We still have about a 20 basis point headwind to adjusted, ebit da margin with the expected payouts for incentive compensation, so in 2025. So, that's a headwind in 2025. Um, obviously we've been able to drive significant sales growth, but that's also come with uh, some product mix and project. Mix impact on the gross margin line.
Yeah, the other thing, I'll I'll highlight is like many companies. We're also continuing to invest in our it capabilities and so we've made significant investments in that area. Uh, we do believe that that is is part of our continued investment into our digital transformation and new capabilities, to service our customers. And, you know, 1 of the other things that we'll we'll highlight is we've made sequential Improvement as we progress through the year. Yeah, that's leads us to a good setup for 2026. We'll provide you the full outlook for 2026. When we do our call in February,
Understood. So it's a it's a better jumping off point at the end of the year, combined with less incentive comp when maybe less project makes year-over-year. Those are some of the factors, I'd imagine you're going to keep investing.
Correct.
Makes sense. Thanks a lot. Best of luck.
Thank you, Patrick.
Concludes our question and answer session.
I'll now turn the conference back over to John Engel for any closing remarks.
Well, thank you, uh, for your questions and support today. I think we've addressed all the questions that were in the queue. I'll bring the call to a close. Again, thanks for your support as much appreciated. We look forward to speaking with many of you over the