Hello, and welcome to WESCO'S 2024 First Quarter Earnings Call. [Operator Instructions] Please note, this event is being recorded. I'll now hand the call over to Scott Gaffner, SVP, Investor Relations, to begin.

Thank you, and good morning to everyone joining us today. 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 and 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 changed circumstances. Additionally, today, we have -- we'll 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 are posted on our website at wesco.com. On this call this morning, we have John Engel, 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.

Thank you, Scott. Good morning, everyone, and thank you for joining our call today. Our first quarter sales met our expectations, and our overall performance, compared against a very strong first quarter a year ago, was in line with our typical seasonal pattern and our full year outlook. Quoting, bid activity levels and backlog all remain healthy and support our view for sequential growth as the year progresses. Our free cash flow generation, and it's something we're acutely focused on, was a record $731 million in the first quarter. We utilized a portion of this free cash flow to repurchase $50 million worth of common stock in the first quarter, and we've reduced our net debt, bringing our financial leverage down by 0.2 of a turn. Our financial leverage now stands at 2.6x EBITDA, and that's getting very close to our recently reduced target range of 1.5 to 2.5x. More importantly, and I want to highlight this, we generated more than $1.4 billion in free cash flow over the trailing 12-month period. Historically, WESCO's demonstrated the ability to consistently generate free cash flow of 100% of net income over time. With double-digit growth and significant supply chain disruption in 2021 and 2022 coming out of the COVID pandemic, we invested in net working capital, resulting in cash flow conversion that was well below our historical average. Our trailing 12-month cash generation results smooth out the inter-quarter effects that we experienced last year as supply chains normalized. I want to highlight that all 3 components of working capital, that is, accounts receivable, inventory, and accounts payable, contributed to this record $1.4 billion of free cash flow generation over the last 4 quarters, clearly highlighting the power of our distribution business model. In addition, during the first quarter, we announced the divestiture…

Thank you, John. Good morning, everyone. Turning to Page 4 of our deck, organic sales were down approximately 3% versus the prior year, reflecting about a 1% benefit from price, offset by lower volumes. Differences in foreign exchange rates were minor in the quarter, as shown by the other category on the sales walk. The volume decline was attributable to a very challenging comparison, sales up 12% in the prior year period and continued choppiness in certain end markets. On the lower half of the page, you can see the adjusted EBITDA impacts of lower sales, gross margin headwinds and higher SG&A in the first quarter. Gross margin was down about 60 basis points, with approximately half of the decline and the impact of lower billing margin due to mix. We continue to see a higher proportion of direct ship sales, which has a lower gross margin than stock sales. Direct ship sales, however, have a much higher return on net assets as we recognize the sale and profit with the product never hitting our inventory. The rest of the decline in gross margin was attributable to billing-to-gross margin adjustments, including a higher inventory adjustment versus the prior year. The year-over-year increase in SG&A was primarily due to higher salaries and higher costs to operate our facilities. These increases were partially offset by the cost reduction actions taken last year. In total, adjusted SG&A represented 15.1% of sales, up 60 basis points from the prior year, with about 0.5 basis point increase driven by the impact of lower sales. Turning to Page 5. On a sequential basis, sales were also in line with expectations and were down 4% organically, primarily due to lower volumes. Differences in foreign exchange rates and the benefit of 1 extra work day contributed about 1.5…

[Operator Instructions] And our first question today comes from Nigel Coe with Wolfe Research.

Appreciate all the details, especially Slide 6, which is, I think, quite [indiscernible], although you better be careful with those bad guys. The data there is pretty suspect. Just kidding.

I thought we might get a comment like that, Nigel.

On the SG&A, you mentioned the pickup sequentially on comp. But are we still in the kind of the framework where SG&A growth for the full year will be sort of below revenue growth, we still get a little bit of SG&A productivity? And maybe just talk about some of the kind of measures to that inflation [indiscernible]

Yes, Nigel, let me start with the expectations for our SG&A. As we mentioned, we do have a $100 million headwind related to not only the merit increase, which is effective in the second quarter, that will be a low single-digit increase to our people costs but we also do have the restoration of the incentive compensation. And we called out that, combined, that's about a $100 million headwind. So when you think about how we're looking at the cost actions, we do have some carryover benefit of the cost actions that we had taken in 2023, we're doing -- we did $20 million of additional structural cost takeout as part of the first quarter actions. So from our perspective, if you take a look at those bread crumbs, part of our issue that we have is, we mentioned with the Integrated Supply divestiture, we will see the gross margin benefit. There's not a lot of SG&A benefit with that business coming out. So from that perspective, we are expecting to have efficiency on SG&A. But given the sales growth, it will be more difficult.

Okay. Okay, great. And then on the free cash flow, obviously, a strong performance on accounts payable. I'm assuming that's more of a timing issue, that you might have some headwinds from accounts payable over the remainder of the year. So we should think about offsets from accounts receivable and inventory to offset maybe some of that over the balance of the year. Any help there, David? And then, obviously, the 5-year framework is putting to operating cash flow of $1 billion for the next -- or $1 billion-plus for the next couple of years, 2025, 2026. Just want to confirm that's the case.

That is the case. So yes, just going back to the cash flow expectations for 2024, we did have that temporary benefit of accounts payable. That will normalize over the course of the next couple of quarters. While we do still expect that the accounts payable balance will be a source of cash for 2024, we are laser-focused also on reducing our inventory days. So again, we would expect our accounts receivable will grow sequentially with our sales, and then we will continue to stay focused on reducing our inventory levels.

And the next question comes from Sam Darkatsh with Raymond James.

So first, a couple of clarification and quick questions, and then most of my -- thrust of my questions have to do with your inventory management. So the $200 million bump in free cash flow guidance, Dave, is that entirely coming from payables? Since I think you originally were thinking about taking 3 days out of inventory and sales organically doesn't change much. Is that the way to read that?

It is a combination of the net working capital. So it is benefits on inventory and the accounts payable source of cash, offset by the accounts receivable.

Got you. And then can you remind us the seasonality of EBITDA for the second quarter as a percent of the year, and whether you expect to be in that general range?

Yes. Generally, we see about a 45-55 split between our EBITDA based on the front half, back half of the year. We are still anticipating to see that level of seasonality in the business. So again, as we see sequential sales growth, we've got moderation to our SG&A based on the cost actions. So from that perspective, we do have a back half-loaded EBITDA plan, supported by the sequential sales growth.

Got you. And then my real question, though, has to do with inventory management. Obviously, you've got really high carrying costs. Your cost of debt is similar to your EBITDA margin. I think, a couple of things. First off, I think you had some issues with branches needing better visibility into other branch inventory. What's the timing of when you might see improvements there and how much might that help? And then secondly, with inventory tied up with projects, are you able to, like, de-kit? I don't know what the technical term is, but break apart kits and maybe bleed that into stock and flow? Or are you reticent to do that maybe because it risks future price cost? Just tactically, how do you handle the inventory as long as certain lead times remain extended?

Certainly. Let me address the inventory management at the location level. We are still in the middle of our digital transformation, so we are operating a number of different platforms in which we manage our inventory. We have provided our team with some digital applications, which help them see the total level of inventory at the business unit level, at the location level. We also have a specific tool that helps us monitor the amount of inventory that is allocated to a project. So in that case, we win a big job. We negotiate back with the suppliers on what the cost of goods will be to support that project. We'll work the lead times. We'll bring that inventory into our location to service the job site or the project site. So we do have better visibility to that. In the environment that we're operating in, there are some projects that are delayed. That means we're holding on to inventory longer than we had initially expected. We experienced that throughout the pandemic and the recovery coming out of the pandemic. But we do have the tools that our team has, that they can monitor that inventory per project. In some cases, we're able to de-allocate that inventory and move it to a different project, all depending on the lead times and when that project is expected to ship. So we do have that visibility. It's something that we initiated in the latter part of 2023. We are beginning to see some benefit of that. So one of the early indicators of our inventory management is the amount of on-order that we are reducing. So go back 2 years when lead times were extended, we had to order material much earlier in order to ensure that we could deliver it to the customer. As lead times have come down, we're better managing that allocated project inventory, and we're also providing better visibility to order timing so that we've reduced the on-order. We're seeing that primarily in our CSS business first, their supply chain yield first. They also have the majority of their projects on 1 platform. We're now starting to see the benefits of that in our other 2 strategic business units. We're confident we're going to be able to reduce the inventory days.

Sam, it's Scott. Just 1 clarifying point. You mentioned the DIO. We had not given a 3-day reduction in DIO on the fourth quarter earnings call, so that's a new item this quarter.

And the next question comes from Deane Dray with RBC Capital.

Maybe we can start with some color, John, on the kind of tone of business. You mentioned bidding activity, but anything specifically around stock and flow, quote activity, any kind of context there for starters?

Yes. The overall bid activity levels, the quoting, the types of quotes we're getting, seeing, in many cases, either for larger, more complex solutions and sometimes megaprojects, it's very strong. So our backlogs are holding at historically high levels overall. And when you think about that and compare that against where supplier lead times are now versus 6 months ago, 12 months ago, 18 months ago, that shows even greater strength in the backlog because most of the SKUs across our supplier partner base were back to pre-pandemic levels in terms of lead times. Now we still have extended lead times on switchgear, transformers, some breakers, some older products, but they're starting -- there are some early indications that they're going to start to be brought in a bit. So I think there is some positive news on the horizon as we look out in terms of those lead times. So I think that's a way to think about our backlog in conjunction with the bid activity levels. I feel very good about that. We're getting -- we continue to drive the cross-sell. We're not reporting on that every quarter anymore because we -- that was such a key value creation lever of the combination, and we reported on that through the end of last year. And I think, as you know, we far exceeded our target. We've beaten and raised that numerous times. I will tell you that, that momentum around the cross-sell continues to build in our company, and it's reflected in RFPs we're getting but also our approach to the opportunities, Deane. So we are, as a matter of practice now, no matter what the bid is, we're trying to offer up additional portions of our portfolio and open the door to try to get the broader cross-sell, irrespective of what the RFP requires. So I would kind of cap it by saying that front end of the business, which is the leading indicator, very, very healthy, very strong, and it speaks to, I think, the future demand profile.

That's all very helpful. And the follow-up question is, if there's been any changes structurally within electrical distribution, and the term disintermediation comes up sometimes with questions. So 2 specifics. One, is there any kind of structural change with the role electrical distribution will play in these big megaprojects? There's been this question of whether, oh, the suppliers will be doing mostly direct. They won't use traditional distribution. So can you address that topic? And then related, and this came up on one of your big supplier's question about data centers, is it -- do they go direct? Do they use distribution? And the supplier said, some of the data centers want the direct and are less inclined to use distributors. So just those 2 topics, megaprojects and the data center.

So in terms of the macro question, is there any fundamental shift from distribution to direct? Overall, I'll say, and then with respect to megaprojects, we are not seeing that. And I would think, if you were to look at the other bigs that have capabilities, our core big competitors are not seeing that as well. So let me double-click on the data centers. I think it's really important to kind of talk about that value chain, how it's worked historically, how it's working now and where it goes in the future. First, I must say that AI and Gen AI is going to significantly increase power consumption on behalf of the new data centers that are getting built. So these projects are going to be much larger and more complex. When you think of a data center project, it requires 3 things: a power solution and then all the equipment that goes in the gray space, I'll call that kind of build-out of the structure. It's what's -- it's the infrastructure portion of that building and that what's required to run the data center. And then it requires what we call the white space solutions. So all new data centers require that. How does that match up with WESCO? Our UBS business, utility, power solutions, our EES business, gray space, our CSS business, white space. So we're working cross-sell with our customers. I'll come back on that in a minute. But the 1 key point I want to bring up, which gets to the heart of your question is, from a data center build schedule standpoint, the gray space, which, again, is the infrastructure portion of the project, it includes switchgear, that occurs well ahead of the white space in terms of the project schedule, the construction project schedule.…

And the next question comes from Tommy Moll with Stephens.

I want to make sure I heard correctly on the sales trajectory and then unpack some of the assumptions there. But I think I heard you say, Dave, from a sequential standpoint, sales improved from 1Q to 4Q. So maybe you could just clarify if I heard that correctly. And if so, are you assuming the typical sequential improvements there just through the months? Or is there some haircut you're applying at some point along the way?

Yes, Tommy. So we do have the expectation, more sequential increases in our sales. So when you take a look at the typical seasonality by quarter, on a sequential basis, we typically see our first quarter down that low to mid-single digits, which we just delivered. For the second quarter, we anticipate a mid-single-digit increase sequentially. That ties out with about the last 5 years of the history. Q3, we see a low single-digit increase versus the second quarter. The fourth quarter is where it's generally flat to up low single digits versus the third quarter. One of the other things to keep in mind is we had 2 extra work days in the second half of 2024 versus the front half of 2024, so that will also provide a benefit on a reported sales basis.

That's very clear and helpful, Dave. Associated with that revenue trajectory, it's clear that you should start to see some volume leverage on the OpEx line as the year progresses. And so if you look at what's implied by your guidance for the EBITDA margin, I think it's up a couple of hundred basis points second half versus first half. Is all of that substantially all of it volume? or are there other dynamics you would call out?

There's a combination of things. First and foremost, it is volume, so we're getting the operating leverage in the back half of the year. The other thing to keep in mind is that we will be seeing a sequential benefit from Q1 to Q2 on the gross margin line relative to the Integrated Supply divestiture. Now that doesn't have a huge impact on total SG&A dollars because of what was sold as part of that divestiture. But again, we do have the restoration of incentive compensation and a merit increase effective from Q2. And we are laser-focused on continuing to drive those cost reduction actions that we took in the first quarter.

And the next question comes from Christopher Glynn with Oppenheimer.

Just picking up on Tommy's question. Within the second quarter, relative to the down 2% April versus flattish 2Q guide, what's the visibility confidence? Any particular nuances with May and June that we should be aware of?

There's no particular nuances with May and June off of what we saw in the month of April. The 1 thing that I'll just remind you is that, that divestiture occurred on April 1, so you've got to pull out the $700 million of sales on a reported basis in Q2 through Q4. But we are essentially anticipating that the second quarter shapes up in line with typical seasonality versus Q1. In the months within the second quarter, we're expecting that typical seasonality as well. We typically see April down versus March. That is what we just delivered in line with typical seasonality with the decline in March. Then we see a rebound in May and June, particularly as you're tying that back to the outlook that we provided for each of our business units. We're still very busy with project activity. We do have some expectations for some of the end markets like broadband, which we'll see some recovery in the latter part of 2024. The comps get easier as well versus the prior year.

Right. And I'm curious about OEM down high single digit in the first quarter, flattish for the year. I understand that, that's probably significant destocking impact. Do you see that resolving in the near term and well within the first half? Or does that take kind of the full first half and second quarter to kind of get back to matching end demand and consumption? An EES-focused question, I guess.

Yes. So specifically on that EES OEM, it's stabilizing. That's a current-state comment. It's been stabilizing. We're seeing signs of that through the first quarter, continues in the second quarter. And I think we're positioned for some improvement as we get into the second half. So that remains to be seen, but we're well positioned for that, and that could be an upside driver. We'll see.

Okay. And the last one for me. The size of the inventory adjustment, maybe both absolute and the incremental or outsized portion?

Yes. The inventory adjustment versus the prior year in the first quarter was 15 to 20 basis points.

And the next question comes from David Manthey with Baird.

First question is, could you just tell us what approximately the first quarter revenues were related to Bruckner, so we can conceptualize what normal pro forma sequentials might look like?

There's approximately $200 million of revenue from the Integrated Supply business that we recorded in the first quarter.

Got it.

Okay. And Dave, that had very nice growth, too. It's important to understand. Because if you take the $200 million-plus, what we've outlined as the bridge for the full year, the $700 million, we've been -- we had several quarters in a row of nice growth. And then that supported an operating plan that had meaningful growth in 2024.

I see. Okay. Second, as we look ahead here on SG&A, there's a lot of moving parts, and I want to be sure I'm seeing them clearly. Could you tell us which factors were baked into the first quarter and which ones are incremental as we move from first to second? And the items I'm looking at are -- that I think are in the first quarter, reinstated incentive comp, annual merit increases, and carryover from the 2023 cost saving benefits. And then new in the second quarter that were not in the first quarter would include the $20 million annualized cost actions you took at the end of the quarter, variable expenses on whatever the quarter-to-quarter sales delta is, and then the Integrated Supply cost, which you said had a small SG&A impact. But can you -- any light you can shed on that for us, Dave, so we can make that bridge?

Certainly. So the -- I'll start with the fourth quarter. So rough numbers, $800 million of adjusted SG&A. We just reported about $810 million. So that $10 million sequential increase versus the fourth quarter was essentially the restoration of incentive compensation. The bridge to go from Q1 to Q2, we will still have the restoration of incentive compensation in the balance of the year, but we also have the merit increase. So think about that in terms of a low single-digit increase to our people cost effective April 1. So that is the step up, which would be partially offset by the cost actions that were initiated with carryover in the prior year, but then also the benefit of the $20 million of cost reduction actions, which were primarily people reductions, that were effective just at the end of the first quarter.

And the next question comes from Chris Dankert with Loop Capital.

Forgive me if I missed it, but just focusing on that down 2% in April. Are we already seeing a rebound in the CSS business, just kind of given what the outlook is for the year here? Or is it more of a back half kind of dynamic when we're thinking about the volume rebound in CSS, specifically?

So year-over-year, CSS and EES for April, these are preliminary sales results, are down low single digits. But UBS, which is now without WIS, so it's utility and broadband, was flattish. So compared to Q1, we're seeing UBS is kind of a little better year-over-year.

Understood. And then just when we're thinking about the technology spending and the digital transformation there, can you just maybe flag what some of the next modules are that go live in the near term or kind of key focuses on spending for that digital transformation into the back half here?

Yes, certainly. So on digital transformation, I also want to clarify that we had expenses that were in our reported results in the prior year: mergers, integration, including the digital transformation. For 2024, we no longer had the pure integration costs, but we are continuing with our digital transformation. So we did record some expenses that were onetime in nature, but that we pulled out of our adjusted results. So on a go-forward basis, we would continue to spend dollars as associated with that digital transformation. Keep in mind that this is things like the financial package that we had initiated back in 2022 and into 2023. There are some digital applications associated with our global business services, so think about accounts payable, accounts receivable. We will be providing more details about that digital transformation when we do our Investor Day in the second half of the year. But these are consistent with the initiatives that we had outlined back in late 2022 that are part of that how do we continue to transform the company, how do we continue to get better use of our data and then also get much more efficient from an SG&A perspective going forward.

And the next question comes from Ken Newman with KeyBanc Capital Markets.

So obviously, very nice to see the improvement in the free cash flow guide. So you obviously talked about being more active on the share repurchases this quarter. But I am curious if you could talk about how you look to prioritize capital allocation between debt paydown versus M&A in the near term. I think your preferred stock becomes callable in the middle of next year. And then wondering if you -- if we should think that you plan to make moves on the balance sheet ahead of that call date.

So let me make a few comments. Dave, you can add. As we said, we've been very clear, the pref, we're going to take out when that's available, and it's June of next year. That's very high priority for us. And we've said we wanted to be balanced with our cash flow, debt reduction, buyback. And then M&A is episodic, right? So we need to be positioned when the deals can be done and come to fruition. So we continue to work our M&A pipeline, right? And I would tell you, it's a very robust pipeline. And I think I did mention this in a previous call. We've got a new Senior VP of Corporate Business Development who's done an absolute phenomenal job since he joined our team in 2023. And so just we've got a tremendous pipeline of opportunities that we're sorting through. Our bar is high, so it takes a lot to get over our bar in terms of what meets our criteria. In terms of -- I want to make a specific comment with respect to using the full amount of the $300 million approximately after-tax proceeds from the WIS divestiture on a buyback. I mean, the way to think about that is, it's a combination of our confidence in our business plan, our execution of those business plans and our outlook, coupled with the fact that we believe, strongly believe, we're trading far below our intrinsic value. So we think taking the full $300 million and applying it to a buyback is the best return on investment, by far, given where we are trading. So with that, Dave, I think I hit most of his comments, but you may want to...

Yes, certainly. So in terms of how we think about capital allocation between buying back shares, which John mentioned, is usually around intrinsic value versus continuing to delever, particularly given the interest rate environment, versus M&A. We have a very high bar on M&A. And if we believe that we can make the right deal, we want to stay very actively engaged in both the process, but then also being able to close out acquisitions that will allow us to continue to drive competitive advantage, provide more products and services to our customers. So it's really coming back down to the economics behind each of those choices. Clearly, we feel that the stock is undervalued, so we're going to take the proceeds from the Integrated Supply divestiture, apply that to buying back shares. That also helps us partially offset the dilution of the profit that's coming out from an EPS perspective. Now we have been very active with our capital structure. So in the first quarter, we made some additional moves to basically go ahead and issue the bonds to retire the $1.5 billion of notes that we have coming due in 2025. We avoided the breakage cost on that by warehousing those funds against our current facility. So those are the types of ways that we've been thinking about this. We want to make sure that we stay balanced between additional share repurchases, delevering, but then making sure that we have enough dry powder for M&A.

That's really helpful color. Maybe just for my last one here. John, it was really great color on the data center commentary earlier. But I just wanted to see if you could help us size that opportunity or how you think about sizing that opportunity going forward. I think in the CSS business, data centers maybe around 8% to 10% of sales on a total sales perspective. But just any help on sizing that opportunity on the power and white space buckets you mentioned earlier?

Yes. It's -- we've not been public on that yet, Ken, so let me just say it. And it's also a moving target because what happens is, now, I think there's not any new data centers that are being designed that are not designed to expressly take advantage or be able to operationalize Gen AI applications. So the fundamental design requirements of data centers have markedly changed. I don't know if you'll see this in writing much, but markedly changed over the last 6 to 12 months, which, actually, the power consumption goes up dramatically. And that drives the need for more complex power solutions, that's our UBS business; more challenging electrical solutions, that's our EES business; and obviously, more -- there's more throughput, in addition to the power, which is better for our CSS business. So I don't want to size it on this call. We do have plans in our Investor Day this year for all our end market verticals and where we see these exceptional secular growth trends to begin to put some more parameters around that. And I think you can look for, in anticipation too, about drill down in the data centers, the whole value chain and the incredible market-leading role that we play because of our unique portfolio globally to help support our end-user customers. So stay tuned for that. That will address your question directly.

And this concludes our question-and-answer session. I would like to turn the conference back over to John Engel for any closing comments.

So I think we've addressed all your questions. Mike, thank you again for supporting us today. It's very much appreciated. We look forward to speaking with many of you over the next 2 months. We're going to be busy next 2 months as the year has been so far. We've been heavily out on the road and engaging investors. But we've got 4 conferences we're going to participate in, in the coming months: the Oppenheimer Industrial Growth Conference on May 7; the Wolfe Research Global Transportation and Industrial Conference on May 21; Barclays Leveraged Finance Conference on May 21 as well; and the KeyBanc Industrials and Basic Materials Conference on May 29. So with that -- I should say, finally, we expect to announce the second quarter earnings on Thursday, August 1. Thank you very much, and have a good day.

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