WESCO International Q1 2025 Earnings Call Transcript

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May 1, 2025
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Operator

note that this event is being recorded. I will now hand the call over to Mr. Scott Gaffner, SVP, Investor Relations to begin.

Scott Gaffner
Scott Gaffner
Senior Vice President-Investor Relations at WESCO International

Thank you, and good morning, everyone. Before we get started, I want to remind you that certain statements made on this call contain forward looking information. Forward looking statements are not guarantees of performance and by their nature are subject to uncertainties. Actual results may differ materially. Please see our webcast slides in the company's SEC filings for additional risk factors and disclosures.

Scott Gaffner
Scott Gaffner
Senior Vice President-Investor Relations at WESCO International

Any forward looking information speaks only as of this date, and the company undertakes no obligation to update the information to reflect changed circumstances. Additionally, today, we will use certain non GAAP financial measures. Required information on these measures is available on our webcast slides and in our press release, both of which you can find posted on our website at wesco.com. On the call this morning, we have John Ingle, WESCO's Chairman, President and Chief Executive Officer and Dave Schulz, Executive Vice President and Chief Financial Officer. Now I'll turn the call over to John.

John Engel
John Engel
Chairman, President & CEO at WESCO International

Thank you, Scott. Good morning, everyone. Thanks for joining our call today. We're pleased that our positive sales momentum in the fourth quarter last year carried into 2025, and that's we're posting six percent organic sales growth in the first quarter. This was ahead of our expectations coming into the year.

John Engel
John Engel
Chairman, President & CEO at WESCO International

Our total data center business was again the strong driver of our growth and was up 70% along with high single digit growth in our OEM and broadband businesses. This was partially offset by continued temporary weakness in utility end markets, which is what we expected. We continue to expect our utility business to return to growth in the second half of the year. Gross margin was relatively stable on a sequential basis versus the fourth quarter and improved sequentially in CSS also as we expected. We continue 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
John Engel
Chairman, President & CEO at WESCO International

Our increased inventory will help us manage the potential supply chain impact of global tariffs. We also issued $800,000,000 of new senior notes to redeem our preferred stock in June and repay a portion of our revolving credit facility. This refinancing, along with the preferred stock redemption, refinancing preferred strengthens our balance sheet, it extends our debt maturities, it increases our financial flexibility, and it significantly improves our earnings and cash flow run rates. Dave will take you through those details shortly. Following this preferred stock redemption, we have strong liquidity to address our capital allocation priorities, reinforcing what we outlined at our last Investor Day.

John Engel
John Engel
Chairman, President & CEO at WESCO International

After supporting our common stock dividend payments 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. In the near term, our capital allocation priorities are focused on debt reduction and stock repurchases. And we continue to invest in our tech enabled business transformation and actively manage our M and A pipeline in parallel. So now let's shift to the second quarter. And as we've begun the second quarter, I'm very encouraged that our positive momentum is building.

John Engel
John Engel
Chairman, President & CEO at WESCO International

Backlog is up from the prior year, and it's up sequentially in all three of our business units: CSS, EES and UBS. Our positive sales momentum has continued into April and is building, with preliminary sales for Workday up 7%. We are reaffirming our full year outlook based on our positive momentum through the first four months of the year. 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, our enterprise wide gross margin expansion program and operational improvements resulting from our tech enabled business transformation.

John Engel
John Engel
Chairman, President & CEO at WESCO International

Like all companies, we're operating in the current rapidly evolving global trade environment. 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 addressed global supply chain challenges in the past, including tariffs and managing through cycles of increased inflation. This was most recently demonstrated during the global pandemic.

John Engel
John Engel
Chairman, President & CEO at WESCO International

We've shown the ability to successfully manage and expand margins during these periods while delivering growth. 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 will take you through our playbook in much more detail shortly. One final comment on tariffs.

John Engel
John Engel
Chairman, President & CEO at WESCO International

Supply chain reengineering and reshoring back to The U. S. And overall USMCA markets was initiated during the global pandemic. I've spoken about this at length. The global pandemic effectively put a spotlight on a significant risk associated with the extended global supply chains that were in place and were established over the last three to four decades.

John Engel
John Engel
Chairman, President & CEO at WESCO International

And in many cases, these extended global supply chains were single sourced, representing significant risk. Supply chain reengineering and reshoring has become a secular growth trends and tariffs are already beginning to provide a potential accelerant for even higher reshoring growth. With that, I'll hand it over to Dave to take you through our first quarter results and our outlook for the rest of the year. Dave?

David Schulz
David Schulz
EVP & CFO at WESCO International

Thank you, John, and good morning, everyone. 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 1.5% and volume was up about 4%. Reported sales were flat as a strong organic growth was offset by the impact of our integrated supply divestiture, foreign exchange rates and one fewer workday.

David Schulz
David Schulz
EVP & CFO at WESCO International

Recall that we divested the integrated supply business on April one of last year, so this will be the last quarter where we see an impact on reported year over year growth rate. In the first quarter, our data center business continued to grow rapidly and was up 70% versus the prior year. Additionally, we delivered high single digit growth in our OEM and broadband businesses. As expected, utility remained soft as customers continue to work through inventory destocking. On the lower half of the page, you can see that adjusted EBITDA margin was down 60 basis points.

David Schulz
David Schulz
EVP & CFO at WESCO International

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. SG and A was up about 2% year over year due to normal inflationary pressures, particularly within transportation and facility costs. However, the higher cost on relatively flat reported sales was about a 40 basis point headwind to EBITDA margin in the quarter. Adjusted earnings per share of $2.21 was down 4% from the prior year. Let me walk you through our business unit results beginning with EES on Slide five.

David Schulz
David Schulz
EVP & CFO at WESCO International

First, please note that we transferred about $155,000,000 in annual revenue of specialty wire and cable, including $35,000,000 in the first quarter from EES to CSS to better align the customers we serve in that business. All prior year periods for EES and CSS have been recast to reflect that transfer, including those in the table on this page. For a reconciliation of the recast amounts by quarter, please see the appendix in today's presentation. 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.

David Schulz
David Schulz
EVP & CFO at WESCO International

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. 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, reflecting continued temporary softness with some customers.

David Schulz
David Schulz
EVP & CFO at WESCO International

Backlog was up 3% from the prior year and up 4% sequentially, supporting an encouraging start to 2025. EES adjusted EBITDA 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. Turning to Slide six. CSS sales growth accelerated in the first quarter with sales up 18% year over year on an organic basis and up 17% as reported.

David Schulz
David Schulz
EVP & CFO at WESCO International

The strong growth was driven by WESCO Data Center Solutions, which was up more than 65% with especially strong growth with hyperscale data center customers. This growth has significantly increased the mix of data center within both CSS and West Coast total sales. Within CSS, data center represented nearly 40% of sales in Q1, up from a little more than 25% of segment sales in the prior year quarter. Lastly, I'd like to mention that we have not seen any change in order or buying patterns with data center customers. Based on discussions with our customers, they have not reduced their capital budgets.

David Schulz
David Schulz
EVP & CFO at WESCO International

We're pleased to report that they have been increasing their level of spend and expanding their scope of supply with WESCO. Enterprise network infrastructure was up low single digits in the quarter, reflecting growth with service provider and wireless customers. Digits, which excludes security sales that are part of WESCO Data Center Solutions. Including those sales, security was a strong performer in Q1 and up mid single digits. CSS backlog was up 32% year over year and up 18% sequentially, reflecting substantial growth of our data center business.

David Schulz
David Schulz
EVP & CFO at WESCO International

Adjusted EBITDA margin for CSS was up 20 basis points, driven by strong operating leverage on higher sales growth, partially offset by a decline in gross margin. Similar to Q4, the mix of large projects, primarily in the data center space, impacted gross margin versus the prior year. Sequentially, CSS gross margin was up 20 basis points consistent with our expectation that margins would improve from the fourth quarter level. Turning to Slide seven. 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 Schulz
David Schulz
EVP & CFO at WESCO International

We have had several large customers announce changes to leases and proposed AI driven data center builds. Based on conversations with these customers, these changes are impacted out year plans with spending to be allocated to other projects. In short, we have not seen any change to the level of activity in the data center space. Customers continue to partner with WESCO and our suppliers to meet their evolving needs, including an expanding portfolio of services that we can provide. From a total company perspective, data center was approximately 16% of WESCO sales in the quarter and up approximately 14% on a trailing twelve month basis, including sales across all three business units.

David Schulz
David Schulz
EVP & CFO at WESCO International

Note that this is an increase from the comparable 10% of WESCO sales for the trailing twelve months through June of twenty twenty four. We first provided the information on the left side of this page at our Investor Day last September. It highlights the two stages of the data center construction cycle, time to power and the construction period. 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. Our solutions now encompass everything from the electrical distribution systems to advanced IT infrastructure to services that support data center operations, ensuring our customers have comprehensive solutions throughout all phases of the data center life cycle.

David Schulz
David Schulz
EVP & CFO at WESCO International

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. This growth has been driven by organic initiatives, along with impactful acquisitions we've made to increase our service capabilities within the space. We want to partner with data center customers from cradle to cradle, including the initial build, on-site services and data center technology upgrades. 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. As we've discussed going back to the beginning of twenty twenty four, 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 Schulz
David Schulz
EVP & CFO at WESCO International

We expect these impacts to continue through the first half of twenty twenty five with a return to growth in the second half of the year. We remain highly confident in the future benefit from the secular trends of electrification, green energy and grid modernization and believe that these trends will support substantial growth acceleration in our utility business over the long term. 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. UBS backlog was down 13% from the prior year, but up 13% sequentially due to improving order rates and new utility customer wins.

David Schulz
David Schulz
EVP & CFO at WESCO International

Adjusted EBITDA margin was up 10 basis points over the prior year. Margin benefit from the integrated supply divestiture was partially offset by the impact of lower utility sales. Turning to Page nine. In the first quarter, we delivered $9,000,000 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. This exceeded our expectation as we anticipated a use of cash in the quarter.

David Schulz
David Schulz
EVP & CFO at WESCO International

You can see on the right side of this page that we reduced networking capital intensity by approximately 50 basis points year over year in the first quarter. We remain focused on making further progress, including reducing inventory as a percentage of sales. Turning to Page 10. Yesterday, we formally announced our intention to redeem our $540,000,000 Series A preferred stock on June 22, which is the first opportunity to redeem it at face value. We issued $800,000,000 of senior notes in the first quarter in anticipation of this redemption.

David Schulz
David Schulz
EVP & CFO at WESCO International

This will strengthen our balance sheet and reduce our total financing costs. The estimated net income and cash flow benefit of this refinancing is approximately $30,000,000 on an annualized basis or roughly $0.65 per diluted share. In addition to the refinancing, we also extended the maturities of our accounts receivable facility and revolver to 2028 and 02/1930 respectively. As a result, we have no significant maturities on our balance sheet until 2028. Turning to Page 11.

David Schulz
David Schulz
EVP & CFO at WESCO International

On this slide, we'll provide an overview of the actions we are taking to manage the potential impacts to our business from the recent tariff announcements. The left side of the chart lists the potential impacts. First, supplier price increases, including a 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 the prior year, but it is up 150% in the second quarter to date. The average price increase announcement in the first quarter was at a mid single digit rate, while in the second quarter, it's averaged a high single digit rate.

David Schulz
David Schulz
EVP & CFO at WESCO International

Second, we recognize the potential for lower customer demand due to higher costs. And third, in an inflationary environment, we recognize a transitional benefit from inventory gains. Our inventory is 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 supplier price increases are absorbed in the market. Note, this is a temporary benefit, keeping in mind we turn our inventory every two to three months.

David Schulz
David Schulz
EVP & CFO at WESCO International

Lastly, WESCO is the importer of record on less than 4% of our cost of goods sold, primarily on goods received into The U. S. And Canada. In response, we are taking the following actions to mitigate these impacts and protect our margins. We are passing supplier price increases through to customers and working with our suppliers to ensure that minimum lead times between announced price increases and effective dates are adhered to.

David Schulz
David Schulz
EVP & CFO at WESCO International

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. Lastly, we will optimize our supply chain logistics and reengineer our global supply chains to mitigate risk and manage tariff exposure. In short, WESCO has a long operating history and has successfully navigated similar global supply chain challenges. We're executing our playbook to respond to the current volatile and uncertain environment. Turning to Slide 12.

David Schulz
David Schulz
EVP & CFO at WESCO International

This slide shows our 2025 outlook by strategic business unit and the individual operating groups. As John mentioned, we are reaffirming our 2025 outlook and in general expect the same sales patterns within our strategic business units that we walked through last quarter. However, we've made two adjustments to this slide. First, due to the continuation of exceptionally high growth in our data center business, we are increasing our full year outlook for reported sales growth from up mid teens to up about 20%. 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 Schulz
David Schulz
EVP & CFO at WESCO International

We continue to expect that within EES, construction will be flat and 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 deliver growth in 2025, partially offset by Broadband, which we expect to be flat. Moving to Page 13. We are reaffirming our 2025 outlook. We acknowledge the uncertainty and volatility surrounding tariffs and the impact of the overall economy.

David Schulz
David Schulz
EVP & CFO at WESCO International

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. 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. We are maintaining our ranges for organic and reported sales growth, adjusted EBITDA margin, adjusted diluted earnings per share and free cash flow.

David Schulz
David Schulz
EVP & CFO at WESCO International

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. 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. 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. We recognize the risk of an impact to demand given tariff related pricing.

David Schulz
David Schulz
EVP & CFO at WESCO International

Any future pricing would help mitigate any demand impact to our revenue outlook. In terms of free cash flow, we expect to deliver between $600,000,000 to $800,000,000 in 2025. As a percentage of adjusted net income, this implies a range of approximately 95% to 105%. 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.

David Schulz
David Schulz
EVP & CFO at WESCO International

Our top priority is to invest organically in the business to drive growth and operational efficiency, including the completion of our business and digital transformation. In the near term, given the current economic environment, we expect to 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 engaged in high growth end markets. 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 Schulz
David Schulz
EVP & CFO at WESCO International

You can see the return to growth in the last quarter of twenty twenty four and the acceleration in the first quarter. As mentioned, we estimate April sales per workday will be up 7% and expect second quarter reported sales will be up mid to high single digits. We expect organic sales to be about a point higher than reported sales primarily due to foreign exchange rates. The second quarter has the same number of workdays as the prior year. We expect adjusted EBITDA margins will be approximately 50 basis points lower than the second quarter of the prior year, again primarily reflecting the project and product mix impact to gross margin discussed earlier.

David Schulz
David Schulz
EVP & CFO at WESCO International

Moving to Slide 15, let me briefly recap the key points before we open the call to your questions. Sales in the first quarter were up 6% organically at the high end of our outlook and driven by data center, broadband and OEM. 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 Schulz
David Schulz
EVP & CFO at WESCO International

We issued $800,000,000 of 2,033 notes in anticipation of redeeming our preferred stock in June, which we formally announced last night. And we're pleased with the April momentum we've experienced to date. Lastly, we reaffirmed our 2025 outlook based on the first four months of the year. With that, operator, we can now open the call to questions.

Operator

Thank you, sir. We will now begin the question and answer session. If anyone wishes to ask a question, please press star followed by one on your telephone keypad. Please limit your questions to one question and one follow-up. Our first question comes from Steven Volkmann of Jefferies.

Stephen Volkmann
Managing Director at Jefferies & Company Inc

Hey, good morning guys. Thanks for taking the question. Dave, I just want to be clear on what's in your revised outlook relative to a couple of things. One, is the tariff stuff. Is all the announcements that you described in the first quarter, the up 11% mid single digit, is that in your guide, but the 2Q stuff that you've seen so far is not?

Stephen Volkmann
Managing Director at Jefferies & Company Inc

Is that the right way to look at it?

David Schulz
David Schulz
EVP & CFO at WESCO International

There are no tariff related price increases incorporated into our outlook. So our outlook assumes organic growth rate of 2.5 to 6.5%. Of that, about one point points is carryover pricing from 2024. We have not incorporated any new pricing that was announced in either the first quarter or the second quarter to date into our outlook yet. And let me explain why.

David Schulz
David Schulz
EVP & CFO at WESCO International

We generally see a two quarter lag between a price increase effective date and when it begins hitting our revenue. Couple of drivers of that. First, about half of our revenue is 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.

David Schulz
David Schulz
EVP & CFO at WESCO International

And again, as we're seeing these price increase notifications, we're managing that back to meet our commitments with our customers, working back with our suppliers. So generally, when we see an announced price increase of, say, 8%, 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.

Stephen Volkmann
Managing Director at Jefferies & Company Inc

Understood. Okay. And is that 8% that you just threw out, is that sort of ballpark where we would be today if everything was mark to market? Or was that just illustration?

David Schulz
David Schulz
EVP & CFO at WESCO International

That's just illustration. Again, we would only be marking to market about 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.

Stephen Volkmann
Managing Director at Jefferies & Company Inc

Okay. And does your revised guidance include the $0.65 from the preferred? And then I'll pass it on.

David Schulz
David Schulz
EVP & CFO at WESCO International

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, we did assume that there would be a benefit to earnings per share based on half of the year of the preferred dividend coming out, offset partially by the financing costs.

Stephen Volkmann
Managing Director at Jefferies & Company Inc

Got it. Thank you.

Operator

The next question is from Nigel Coe of Wolfe Research.

Nigel Coe
Managing Director at Wolfe Research, LLC

Thanks. Good morning.

John Engel
John Engel
Chairman, President & CEO at WESCO International

Morning, Nigel.

Nigel Coe
Managing Director at Wolfe Research, LLC

I really hate morning. I hate to be sort of kind of come back to the tariffs here, but can you maybe just give us a flavor of the supplier price increases that you've seen so far? And I understand the project versus stock and flow conversation, but are you seeing any surcharging where you might have to kind of pass that through quicker than the normal? Any color there would be helpful.

John Engel
John Engel
Chairman, President & CEO at WESCO International

Yes. So let expand a bit on Dave's commentary. In Q1, the number of supplier increases that we saw ended up being down about 15% versus prior year Q1. So and and the average was mid single digit mid single digit range. Some were low single digits, some were mid, some a little bit higher.

John Engel
John Engel
Chairman, President & CEO at WESCO International

But it was in that kind of band, is Nigel's is more of a normal pricing increase as part of a normal cycle. I think what we saw was some effect where some of the suppliers delayed their normal price increase announcements as they were working through, as the tariffs were getting announced, working through what the impact was on the whole supply chain and their operations and figuring out what price increases they wanted to put. There were a few suppliers that posted increases that actually pulled them back. So and have come back since. So interesting dynamic for q one.

John Engel
John Engel
Chairman, President & CEO at WESCO International

As we got into q two and look, we're only only the first month is in the record books, April. The the number of price increases have stepped up significantly. So far in April, what's been announced for q two is up a 50%, not in price, but in number of increases announced versus q two of last year. So, and I know we'll expect to see some more get announced here in May and in June in the second quarter. Now, and the average price increase has moved up to mid single digit plus to high single digit.

John Engel
John Engel
Chairman, President & CEO at WESCO International

There's 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. 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 we don't see any meaningful impact of the tariffs at all in our Q1 results. We thought Q2 would really where we see the ramp and so far that's come true.

John Engel
John Engel
Chairman, President & CEO at WESCO International

Relative to 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 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 support us in that.

John Engel
John Engel
Chairman, President & CEO at WESCO International

Some want to have separate tariff line item pricing or line item surcharges as you described. We typically push back on that. In some cases, we do have to show that separately with customers and we work that process. But by and large, we like to build it into the price.

Nigel Coe
Managing Director at Wolfe Research, LLC

Okay. Thanks, John. That was great color. And then my follow on, I think this is, maybe for David. Materials referenced continued destocking, at the utility customers.

Nigel Coe
Managing Director at Wolfe Research, LLC

But the comments you made seem to suggest a bit more rate sensitive, maybe projects pushing out to the right. So just want to understand the kind of the right frame of reference for what you're seeing right now in the utility vertical and your confidence in that inflection of growth in the back half of the year?

David Schulz
David Schulz
EVP & CFO at WESCO International

Yes. We've not seen a significant change from how we describe the utility market back in February to what we're seeing now. We're seeing some customers 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, we're in contact with them every day.

David Schulz
David Schulz
EVP & CFO at WESCO International

And based on their projected activity levels, we see a return to growth in the second half of the year. We have seen this end market over the past three years be tremendously impacted by higher product costs. 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 cost has to be approved through the regulators, through the local utility commissions, and then is part of a capital budget for each of these utilities. So we've not seen a dramatic change from February to now.

David Schulz
David Schulz
EVP & CFO at WESCO International

The conversations we're having, the activity levels that we're seeing, plus we've got some new accounts that we won, That's providing us with the confidence of a back half recovery.

John Engel
John Engel
Chairman, President & CEO at WESCO International

Yes. And I'll add a bit. Again, this is exactly how we thought the year would start out. In Q1 and Q2, we expected a second half recovery. The budgets have been set now.

John Engel
John Engel
Chairman, President & CEO at WESCO International

They're going to maintain their budgets. It's a matter of do they have to reprioritize 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 numerous opportunities with our customers and securing supply chain and supply for shipments that are going to be impacting the out years in a major positive sense. So again, I think the overall secular growth trends around power generation, grid modernization, etcetera, that we've talked about at length are intact.

Nigel Coe
Managing Director at Wolfe Research, LLC

That's great. Thank you.

Operator

The next question is from Deane Dray of RBC Capital Markets.

Deane Dray
Deane Dray
Managing Director at RBC Capital Markets

Thank you. Good morning, everyone.

John Engel
John Engel
Chairman, President & CEO at WESCO International

Good morning, Deane.

David Schulz
David Schulz
EVP & CFO at WESCO International

Good morning.

Deane Dray
Deane Dray
Managing Director at RBC Capital Markets

Hey, I appreciate all the color you've given on tariffs and pricing and so forth. So I'll ask some questions related to data center, if I can. You put up some really growthy numbers the past two quarters, seventy percent last quarter, 65% this quarter. The market's not growing that fast. So maybe you can expand on your point that customers are increasing their scope of business they're doing with WESCO.

Deane Dray
Deane Dray
Managing Director at RBC Capital Markets

And as you flesh that out, maybe talk about the mix of products versus services that you are engaged in a data center.

John Engel
John Engel
Chairman, President & CEO at WESCO International

Yeah, Dean, great question. Look, we're really pleased with the very strong and growing momentum in data centers, our data center business. Really strong, I'll say, results. The backlog's up very strongly as well. Our bid activity levels are exceptionally strong.

John Engel
John Engel
Chairman, President & CEO at WESCO International

And you'll see that we made a very clear disclosure this quarter. I want to point it out again that we're now showing the EES related data center sales that's in the gray space portion of the data center. And that's now approaching a $400,000,000 trailing twelve month basis run rate. And that's up in the same kind of 70 plus percent range in the quarter. So, we are absolutely seeing as we expected we would see, we've targeted, we've signaled this you because our customers are looking to increase scope of supply with us.

John Engel
John Engel
Chairman, President & CEO at WESCO International

That includes in the white space, it includes, I'll call it, rack power, everything around the rack, the rack installation and the services that we now have. Our acquisitions of Rahi continues to contribute strongly. That was a number of years ago. The recent ones of Intracem and Ascent are having a very positive impact on our business. They're strongly contributing.

John Engel
John Engel
Chairman, President & CEO at WESCO International

They've allowed us to grow up the value chain even further and provide solutions across the whole life cycle. Customers are absolutely asking us to do more as a one stop shop, and it includes pulling in the gray space as well, which which we foreshadowed. So I think we're very encouraged with the trends. We're not seeing any reduction in our booking or sales rates, not one iota. I think, really, this is important to understand.

John Engel
John Engel
Chairman, President & CEO at WESCO International

Again, at the cycle of data center projects where we play in the space. We're clearly expanding scope of supply, and our customers are telling us the following. Their 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, in the third quarter, in the balance of the year, you're going to see increasing priority on the AI driven data center builds versus the, I'll call it, the more traditional CPU based builds. And the AI driven data center builds, GPU based versus CPU based, that drives much greater power density and increased white space products, which is good for us.

John Engel
John Engel
Chairman, President & CEO at WESCO International

So, I think that, look, it is the strong data center growth that drove CSS to deliver 18% growth overall as an SBU, as a business unit, and it's having a very positive impact on our overall business. And the final point I make, which we didn't touch on, but I want to emphasize it. We think strategically we made the right move with how we're focusing on data centers. We had a major uptick in q four, 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.

John Engel
John Engel
Chairman, President & CEO at WESCO International

We did both in Q1. Gross margin is up sequentially versus Q4, so is 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 the utility model that we've done such a great job with over the last decade plus playing out in data centers now.

Deane Dray
Deane Dray
Managing Director at RBC Capital Markets

Got it. Really appreciate all that color on the data center framing, especially across the two segments. And then just a follow-up. Can we can you address mix in EES? You cited in the slide deck more project activity also.

Deane Dray
Deane Dray
Managing Director at RBC Capital Markets

Is there direct shipments involved in that mix issue as well? Because that's usually a high quality problem because it is fabulous returns on direct ship, but just low margin. But just help us understand the mix issue.

John Engel
John Engel
Chairman, President & CEO at WESCO International

Short answer to your question is yes. I'll ask Dave to

John Engel
John Engel
Chairman, President & CEO at WESCO International

expand in a minute, but let me

John Engel
John Engel
Chairman, President & CEO at WESCO International

give a little color to set the context. I think look, it was fourth quarter last year that EES returned to growth. 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, data centers are helping there.

John Engel
John Engel
Chairman, President & CEO at WESCO International

And the same data center margin impact on the front end of those project cycles that we saw in CSS is weighing on EES, but we'll work those margins up over time as well. As provide the complete data center solution, white space, gray space and focus on services, including power. 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 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 through the year, which that will have a positive margin mix impacting.

John Engel
John Engel
Chairman, President & CEO at WESCO International

With that, Dave, it's probably good to double click again on EES in the quarter though.

David Schulz
David Schulz
EVP & CFO at WESCO International

Yes, certainly. So within the quarter, two things that I'll call out. 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.

David Schulz
David Schulz
EVP & CFO at WESCO International

That impacted the overall gross margin of the business. We also had year over year some higher provisions for inventory. As we called out the last several quarters, the 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 in the first quarter.

David Schulz
David Schulz
EVP & CFO at WESCO International

Could you just size that solar write off? I would say that overall, of the adjustments that we had, both the write off, differences in supplier volume rebates, rough around about 25 basis points.

Deane Dray
Deane Dray
Managing Director at RBC Capital Markets

Got it.

Deane Dray
Deane Dray
Managing Director at RBC Capital Markets

Thank you

Deane Dray
Deane Dray
Managing Director at RBC Capital Markets

very much for all that color.

John Engel
John Engel
Chairman, President & CEO at WESCO International

Thanks.

Operator

The next question is from Sam Darkat of Raymond James.

Sam Darkatsh
Sam Darkatsh
Managing Director at Raymond James Financial

Good morning, John. Good morning, Dave. How are you?

David Schulz
David Schulz
EVP & CFO at WESCO International

Good morning, Sam.

Sam Darkatsh
Sam Darkatsh
Managing Director at Raymond James Financial

Back to price, because of course. So is perspective pricing overweight in any of your verticals? I'm saying that in light of the fact that you obviously called out some pricing competition specific to EES and construction. I know Graybar was mentioning the same sort of thing. Just trying to get a sense of when the where the prices that you're likely to push through, is that overweight, underweight or pretty uniform across your businesses?

Sam Darkatsh
Sam Darkatsh
Managing Director at Raymond James Financial

That's the first question.

John Engel
John Engel
Chairman, President & CEO at WESCO International

It's an excellent question, Sam. And I don't know that we've gone through this in the detail historically, but I'll give you a little sense. When you think of the three business units, and this is a generalization. CSS has a large portion of the supplier base, at least from the biggest supplier partners that have US based operations, US based manufacturing. One of our largest supplier partners announced yesterday.

John Engel
John Engel
Chairman, President & CEO at WESCO International

And so you get a good sense of what tariff impact is proportionally versus others that have greater offshore manufacturing, let's say. And I would say that results in a different and the value chain is working differently, just exceptional growth, 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 in the the, for our CSS business that we are for that we expect to see for our EES business as these increases have been stepping up here in Q2. That's focused predominantly in the EES business, which also impacts our utility business.

John Engel
John Engel
Chairman, President & CEO at WESCO International

And those supplier partners have a mix of manufacturing that is US, Mexico, sometimes Canada and other countries, including China. Some of those supply chain changes have been occurring. They've made some changes, meaningful changes over the last few years post pandemic. But I think now they're taking a hard look at that as well, given the current tariff environment and what expectations are for tariffs going forward to continue to optimize that footprint. I wanted to give you a little color of that.

John Engel
John Engel
Chairman, President & CEO at WESCO International

Dave, you may want to comment as well. But the weighting, I would say, is more Electrical and Utility versus CSS on an SKU basis.

David Schulz
David Schulz
EVP & CFO at WESCO International

Absolutely. So if you think about just here in the first quarter, both CSS and UBS had essentially no pricing benefit to their top line. We talked about our pricing being about one point points. That was primarily driven by EES. If you take a look at even 2024, CSS had essentially no pricing benefit to the top line.

David Schulz
David Schulz
EVP & CFO at WESCO International

We saw low single digit benefit into both EES and UBS. So again, it goes back down to how some of these supply chains are currently managed, the impact of tariffs. Obviously, that's going to flow through to us as a price increase. And I just again want to reiterate that 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 them pass through some of the tariffs.

David Schulz
David Schulz
EVP & CFO at WESCO International

It comes to us as 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.

Sam Darkatsh
Sam Darkatsh
Managing Director at Raymond James Financial

So my follow-up question to that would be, remind us how your order contracts are structured, especially when you have tariffs. I mean, are you do you end up repricing the backlogs? Does your vendor eat that because you've already established pricing 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 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?

David Schulz
David Schulz
EVP & CFO at WESCO International

Yes, certainly. So for our large projects, 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, which would include any tariff impact that the customer has agreed to take. So we would work back with our suppliers.

David Schulz
David Schulz
EVP & CFO at WESCO International

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. 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. That answer your question, Sam?

Sam Darkatsh
Sam Darkatsh
Managing Director at Raymond James Financial

Thank

Sam Darkatsh
Sam Darkatsh
Managing Director at Raymond James Financial

you. And is there a 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 in a basis point standpoint?

David Schulz
David Schulz
EVP & CFO at WESCO International

It varies so much. It would be hard for me to give you a rule of thumb. But just thinking from the context of you're seeing price increases. Generally, there's 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.

David Schulz
David Schulz
EVP & CFO at WESCO International

So 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, not hundreds of basis points for that phenomenon with our inventory.

Sam Darkatsh
Sam Darkatsh
Managing Director at Raymond James Financial

Very helpful. Thank you.

Operator

The next question is from David Manthey of Baird.

David Manthey
Senior Research Analyst at Baird

Thank you. Good morning, everyone.

John Engel
John Engel
Chairman, President & CEO at WESCO International

Good morning, Dave.

David Manthey
Senior Research Analyst at Baird

First question, a two parter here. First off, when you say guidance doesn't anticipate any future pricing and Dave, your commentary, it sounds like you're excluding announced and even expected price increases as a hedge to any potential demand destruction.

David Manthey
Senior Research Analyst at Baird

Am I reading that right?

David Schulz
David Schulz
EVP & CFO at WESCO International

You are. Again, that is consistent with our past practices. If 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 recognized in our income statement. And we understand that there could be some demand destruction given higher prices, particularly in some of our more price sensitive businesses.

David Schulz
David Schulz
EVP & CFO at WESCO International

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.

David Manthey
Senior Research Analyst at Baird

Okay. So logically, the second quarter guidance, if you take a 7.5% reported growth midpoint and 6.8 EBITDA, that's right around $400,000,000 EBITDA give or take, which is kind of where the street is. But so within that, what you're telling us is there may be some price increases that are hitting April, May, June, that by convention, you're just not including in that outlook, correct?

David Schulz
David Schulz
EVP & CFO at WESCO International

That is correct.

David Manthey
Senior Research Analyst at Baird

Okay, fair enough. Second question, flipping over to SG and A. I think 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 15,000,000 or $20,000,000 But are there other puts and takes we should consider as we bridge from first quarter SG and A to second quarter?

David Schulz
David Schulz
EVP & CFO at WESCO International

The primary driver sequentially from Q1 to Q2 would be the merit increase. So to size that, I think it would be you're starting with our Q1 twenty twenty five adjusted EBITDA I'm sorry, SG and A, which was right around $829,000,000 about two thirds of that is people costs for which we saw about a 3% increase overall to our costs, both salaries, wages plus benefits. So that's what you should assume for the sequential to the second quarter.

David Manthey
Senior Research Analyst at Baird

Okay. And then, of course, volume escalators and that sort of thing. But any takeaways from that number we should be considering?

David Schulz
David Schulz
EVP & CFO at WESCO International

No, nothing significant.

David Manthey
Senior Research Analyst at Baird

All right. Thank you.

John Engel
John Engel
Chairman, President & CEO at WESCO International

Thanks, Dave.

Operator

The next question is from Patrick Baumann of JPMorgan.

Patrick Baumann
Patrick Baumann
Analyst at JP Morgan

Hi, thanks. Just following up on that question. The outlook for the year, I missed the beginning of the call, but have you changed the components of the margin guide? I think at the midpoint you had assumed a little bit of gross margin benefit from supplier volume rebate initially for the year and that would be offset by some of the incentive comp headwind in SG and A. Now with the guide, I think implying something below the mid midpoint, any thoughts on those components relative to how you initially guided them for the year?

David Schulz
David Schulz
EVP & CFO at WESCO International

Yes, 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. On an SG and A perspective, our SG and A assumptions are essentially still holding. We will, of course, have some additional variable costs as we see increases to sales. And we have highlighted that we expect sales would be in the upper end of the range.

David Schulz
David Schulz
EVP & CFO at WESCO International

With that, we would see some operating leverage coming through on the SG and A margin line.

Patrick Baumann
Patrick Baumann
Analyst at JP Morgan

And you just mentioned second quarter gross margin. What did you say on that? I guess I missed that at the beginning of the call.

David Schulz
David Schulz
EVP & CFO at WESCO International

For the full year, we would expect our gross margin would be down versus 2024. Call that we did 21.6% in 2024. We initially guided back in February that we expected gross margin to expand slightly. That was part of our margin recipe that would be offset by some of these incremental costs due to incentive compensation on the SG and A line. So our expectation at this point is that gross margin would be down slightly versus the prior year.

David Schulz
David Schulz
EVP & CFO at WESCO International

With the higher sales being in the upper end of the range, we will get some operating leverage though on that SG and A line.

Patrick Baumann
Patrick Baumann
Analyst at JP Morgan

Right. I guess I was talking I thought you had said something about second quarter gross margin.

David Schulz
David Schulz
EVP & CFO at WESCO International

EBITDA margin, Pat. EBITDA margin, we've provided you our expectation that, that would be down 50 basis points versus the prior year.

Patrick Baumann
Patrick Baumann
Analyst at JP Morgan

Understood. Okay. And then if you can maybe talk a little bit about what you're seeing in the Canada market, kind of a decent size exposure for

Patrick Baumann
Patrick Baumann
Analyst at JP Morgan

you guys

Patrick Baumann
Patrick Baumann
Analyst at JP Morgan

and curious the macro up there, different end markets up there, what you're seeing in your business and your expectations there for balance of the year?

John Engel
John Engel
Chairman, President & CEO at WESCO International

Yes. We to your point, we have a very strong Canadian business and we had a very strong quarter to start the year. Very pleased with our Canadian results. There is a separate market report that the industry publishes up there, that both distributors and suppliers are part of that association. And that report showed our performance versus the market was very strong.

John Engel
John Engel
Chairman, President & CEO at WESCO International

We outperformed the market and took market share and felt very good about our start to the year. And so backlog grew very strongly as well in the first quarter. So I think we're set up for a really strong year in 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.

John Engel
John Engel
Chairman, President & CEO at WESCO International

But I feel very good about our momentum vector with how we started the year and our position.

Patrick Baumann
Patrick Baumann
Analyst at JP Morgan

And what are the key verticals driving that up there?

John Engel
John Engel
Chairman, President & CEO at WESCO International

So when you look at the structure of the Canadian market and where we're positioned, it's meaningfully more consolidated than The US, by a large margin. US is significantly more fragmented. And we are clearly the leader in the Canadian market. And it's our entire portfolio, Patrick. So we got a strong electrical business.

John Engel
John Engel
Chairman, President & CEO at WESCO International

It's the legacy WESCO business. The big acquisition we did that was E. Col in the Western Provinces. And then Anixter with their leading wire and cable capabilities. So we have a tremendously strong, I'll call it EES value proposition, the full solution portfolio across really from the Pacific Ocean to the Atlantic Ocean all the way up through the Northwest Territories.

John Engel
John Engel
Chairman, President & CEO at WESCO International

We have a very strong utility business as well, and serve all the major utility customers up there, equally strong, same value prop that we have in The U. S. And we have a very strong CSS business, very strong datacom, strong broadband. Our broadband business grew overall in Q1 after growing very strongly in Q2. So, seeing a little different dynamic of broadband in The U.

John Engel
John Engel
Chairman, President & CEO at WESCO International

S, but the Canadian broadband business is off to a very good start after a very strong Q4. So the short answer is our entire all three SBUs are well represented. And overall, we have a very strong leadership position in Canada. Questions. Thank you for those.

John Engel
John Engel
Chairman, President & CEO at WESCO International

We'll bring the call to a close. Thank you all for your support. It's very much appreciated. We do look forward to speaking with many of you over the next couple of days with the follow-up calls. And then over the next two months, we'll be attending the following conferences, Oppenheimer Industrial Growth Conference, the Wolf Transportation and Industrials Conference, we'll be participating in the Baird Industrial Distribution Field Trip, We'll be attending the KeyBanc Industrials and Basic Minerals Conference and the Goldman Sachs Leveraged Finance and Credit Conference.

John Engel
John Engel
Chairman, President & CEO at WESCO International

And finally, we expect to announce our second quarter earnings on Thursday, 07/31/2025. So with that, have a good day. Thank you.

Operator

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

Executives
Analysts
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Key Takeaways

  • Strong 1Q sales momentum: WESCO delivered 6% organic growth, driven by a 70% surge in data center sales and high single‐digit gains in OEM and broadband, offset by expected utility weakness returning in the second half of the year.
  • Stable margins and positive cash flow: Gross margin held steady sequentially and CSS margin improved, while adjusted EBITDA margin dipped 60 bps from mix and SG&A inflation; free cash flow beat expectations as inventory was built to mitigate tariff risks.
  • Balance sheet fortification: The company issued $800 million of senior notes to redeem preferred stock and repay revolver, extending debt maturities, boosting liquidity and freeing over 75% of free cash flow for dividends, share repurchases and debt reduction.
  • Tariff mitigation strategy: Facing mid‐to‐high‐single‐digit supplier price increases, WESCO will pass costs to customers, leverage local sourcing, optimize logistics and reengineer supply chains using its proven playbook from past inflationary cycles.
  • Robust backlog and reaffirmed outlook: Backlog grew year‐over‐year and sequentially across all three business units, April sales rose about 7%, and management reconfirmed its full‐year guidance despite anticipated Q2 margin headwinds from project mix.
AI Generated. May Contain Errors.
Earnings Conference Call
WESCO International Q1 2025
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