WESCO INTERNATIONAL INC Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Sales Growth: Fourth quarter sales growth sparked by data center (over 70% growth), broadband (20% growth), and EES returning to growth. Industrial and utility had slowdowns. January sales per workday up 5% adjusted for M&A.
• Free Cash Flow: Fourth quarter free cash flow $268M, full-year over $1B (record), driven by effective working capital management.
• Digitalization and Transformation: More than halfway through enterprise-wide digitalization efforts, expected to accelerate earnings growth via cross-sell, margin expansion, etc.
• Portfolio Moves: Divested integrated supply, acquired Ascent (data center facility management) to strengthen portfolio for margin improvement.
• Dividends and Share Repurchases: Increased common dividend 10%, repurchased $425M shares in 2024, plan to redeem preferred equity in June 2025 to improve cash flow and EPS.

Segment Performance

• EES (Electrical and Electronic Solutions): Fourth quarter organic sales grew 1%, reported sales up 2%. Full-year organic and reported sales down 1%. Adjusted EBITDA margin up 10 basis points.
• CSS (Communications and Security Solutions): Fourth quarter organic sales up 11%, reported sales up 14% (driven by over 70% growth in data center solutions). Full-year CSS sales up 5% reported, 4% organic. Adjusted EBITDA margin down 150 basis points.
• UBS (Utility, Broadband, and Solutions): Fourth quarter organic sales down 6%, reported sales down 17% (broadband sales grew over 20% in Canada). Full-year organic sales down 5%, reported sales down 13%. Adjusted EBITDA margin up 40 basis points.

Guidance

• Organic Sales: Expect 2.5% to 6.5% organic sales growth in 2025.
• Operating Margin: Expected to expand as all business units aim for profitable growth.
• Free Cash Flow: Anticipate $600M to $800M free cash flow in 2025.
• Dividend: Plan to increase common stock dividend by 10% to $1.82 per share.
• Preferred Equity: Intend to fully redeem outstanding preferred equity in June 2025.

Risks

• Market Weakness: Slowdown in industrial customers and continued weakness in utility business.
• Tariffs: Potential inflationary effects on supply side, requiring pricing management.
• Working Capital: Net working capital intensity still higher than pre-COVID, need for continued improvement in working capital efficiency.

Question and Answer

Q: Help us with what gives you confidence with respect to your visibility into the second half recovery of the utility vertical?

A: John Engel mentioned new customer wins starting ramp-ups in first quarter, secular growth trends (electrification, green energy) supporting utility growth, and overall power demand increase pulling utility investment.

Q: You mentioned that you expect gross margins to be up slightly for the year. Is that a fair representation?

A: Dave Schulz stated it's fair, noting higher supplier volume rebates expected in 2025 as they were at low historical levels in 2024.

Q: For the moment, could you just give us some of the backstory here on what was the decision-making process on going ahead and providing that disclosure and what you want to make sure we take away?

A: Dave Schulz explained it's due to new SEC requirements for companies filing after Dec 15, 2024, to provide key segment expenses, and they intend to continue disclosing gross margin at the SBU level.

Q: As you laid out your EPS guidance range for the year, how many quarters are you assuming we'll have that roughly $14 million headwind there? And then as you redeem these in the June time frame, is the expectation you'll be able to fully redeem with cash on hand, or there would potentially need to be partial debt financing just given the timing of cash flows?

A: Dave Schulz said they'll pay two quarters' worth of preferred dividend, and will evaluate funding via cash on hand, borrowing, or new notes.

Q: Just a question on SG&A. You've mentioned the reset of the incentive comp, but you also, I believe, have a 3% annual merit increase. And remind me, does that hit April 1st? And then in light of those two items, could you provide any color on how SG&A steps from 4Q to 1Q and then from the first quarter into the second quarter progressively?

A: Dave Schulz said merit increase is effective April 1, expecting uptick in SG&A from Q4 to Q1 due to incentive comp, then step-up in Q2 from low single-digit people cost increase.

Q: Can we put the spotlight on the good start to January? Just take us through the composition of the business, you know, stock and flow, what kind of mix, direct ship, any kind of pricing difference versus what you saw in the fourth quarter?

A: John Engel said January had 5%+ growth adjusted for M&A, mix similar to fourth quarter, bookings strong with book-to-bill above 1.0.

Q: I was curious about comparing the public power versus IOUs at utility, John. I think the slides called out public as kind of weak.

A: John Engel said both public power and investor-owned utilities were down mid-single digits in fourth quarter, market-driven effects.

Q: You know, maybe first I just wanted to get a quick clarification, Dave, from an earlier question. First, is the earnings guidance that you outlined on slide fifteen or fourteen, does that include a full year of the preferred dividend, or is that not the case?

A: Dave Schulz said it assumes half a year of preferred dividend payout, about $14 million per quarter for first two quarters of 2025.

Q: I had a question first maybe on the sales cadence through the year. It looks to me like the first quarter you're guiding down about 1% on a workday-adjusted basis versus the fourth quarter. And historically, my math says it's typically down 4% to 5% on a workday-adjusted basis sequentially. So what this means, I think, is you'd need below seasonal trends for the rest of the year to hit the midpoint of your guide. Are there any large projects maybe for data center construction that are coming off from the first half to the second half that would cause this or any other color you could provide on why that would be?

A: Dave Schulz said Q1 outlook influenced by utility recovery in second half, data center growth impacting EES, and non-residential construction verticals' impacts.

Q: On the Ascent deal that you guys did, you booked, like, $30 million in the quarter. Which for one month of ownership seemed like a big number. What's, like, the right run rate of sales for this business, and why would the fourth quarter have been so high in terms of sales contribution from that business?

A: Dave Schulz said Ascent acquisition completed in December, had run rate sales ~$115M/year growing 30%, strong December contribution to CSS growth, expected to continue growing double digits in data center space.