WESCO INTERNATIONAL INC Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Sales in the third quarter were at the high end of the outlook range, with growth in the data center business offsetting weakness in utility and broadband.
• Free cash flow was $280 million in the third quarter, with $777 million year-to-date, equating to 154% of adjusted net income. Focus on working capital management, especially beneficial in Communications & Security Solutions.
• Reaffirmed full-year 2024 outlook for sales, profitability, and free cash flow. If current run rates continue, expected to be within the lower half of the outlook range for sales and adjusted EBITDA margin.
• Highlighted recent large business awards across business units, reinforcing positive bidding and cross-sell activity.
• Repurchased $375 million of common shares and reduced net debt by $475 million year-to-date, with plans to allocate capital to value-accretive M&A, share repurchases, and debt reduction.

Segment Performance

• EES: Organic sales down 3% in the third quarter, reported sales down about 2%. Adjusted EBITDA margin was flat year-over-year despite lower sales, driven by higher gross margins and cost controls. Backlog was up 2% sequentially and down about 1% from the prior year.
• CSS: Organic sales were up 8% year-over-year on an organic basis and up 10% as reported, driven by WESCO Data Center Solutions (up over 40%). Adjusted EBITDA margin for CSS was down 90 basis points versus the prior year, but gross margin was up 20 basis points sequentially. Backlog was up 8% sequentially and 15% versus the prior year.
• UBS: Organic sales were down 7% in the quarter and reported sales were down 18%, primarily due to the Integrated Supply divestiture. Adjusted EBITDA margins were down 40 basis points. Backlog was down 7% sequentially and 14% lower year-over-year.

Guidance

• Sequentially, expected fourth quarter reported sales to be flat to down low single digits due to one fewer workday in Q4 versus Q3.
• Adjusted EBITDA margins expected to be in line or slightly lower than the third quarter as non-recurring positive impacts to gross margin in Q3 are not expected to repeat.
• Reaffirmed full-year 2024 outlook for sales, profitability, and free cash flow, with expectation to be within the lower half of the outlook range if current run rates continue.
• Narrowed ranges of outlooks for depreciation, amortization, interest expense, and other expense, and adjusted the effective tax rate based on year-to-date results.

Risks

• Macro-economic environment presents challenges, including continued weakness in utility and broadband markets.
• Inventory management challenges, with not expecting to see reduction in inventory days this year due to lower-than-expected sales in EES and UBS.
• Uncertainty related to election outcomes impacting investment priorities and policy uncertainty for industrial customers.

Question and Answer

Q: Just wanted to dig into the mid-single-digit growth in October and the impact of storms and UBS backlog erosion.

A: Dave Schulz mentioned hurricane impact was neutral in September, with some pick-up in October from EES shipments delayed. On UBS backlog, not seeing many projects shift from opportunity pipeline to backlog, but long-term confidence in utility growth due to secular trends.

Q: Pricing outlook as we look into 2025 and inventory days take out goal.

A: John Engel said number of products with increasing prices is relatively stable, magnitude lower than a year ago but stable. Dave Schulz said the onetime benefit from supplier volume rebates in September was between 10-20 basis points, and goal for inventory days take out for next year will be provided in Q4 call.

Q: On UBS, talk about storm demand, mix, and transmission growth.

A: Dave Schulz said storm impact on utility was nominal, with strong growth in transmission through substation portion. WESCO is benefiting from sales and growth in this portion of the power chain, shifting into a secular growth industry due to rising power demand.

Q: On CSS data center mix and stock/flow.

A: John Engel said data center growth is strong with accelerating momentum, backlog is inflecting up, and there's strong growth in the gray space off a smaller base. CSS margins expected to improve sequentially due to higher sales and operating cost leverage.

Q: On EES non-res markets, solar weakness, and industrial automation.

A: John Engel said EES had improving momentum in construction and OEM, but industrial had slowing momentum. Solar business in EES is down double digits. Automation within industrials is impacted by industrial slowdown but driven by secular trends like IoT and automation.

Q: On EES margins, CSS EBITDA, and capital deployment.

A: Dave Schulz discussed EES margin expectations and capital deployment priorities, balancing M&A, preferred debt takeout, share repurchases, and delevering based on long-term value creation opportunities.