Did WESCO Really Increase Sales by 14%?

Last week during a conversation with a client we talked about the concept of the 7 layers of an onion.  
The concept, for those of you who don’t know, is that as you peel back the layers of the onion (or an issue) back, new issues (and opportunities) or sometimes “realities”, become more exposed … and sometimes people would prefer that others see one reality when, sometimes, the layers don’t equal the reality.

Or, perhaps you remember the story of the emperor who had no clothes but no one wanted to tell him?

Either way, yes, WESCO did report about a 14.3% growth but only about a 1.5% (pre currency exchange issues) organic growth with the other 13.8% being acquisitions, and mostly Canada.

A read through the analyst call and a review of the presentation is interesting (peeling back the onion) as it makes one wonder if WESCO maintained market share in the electrical distribution space (remember, WESCO is in the electrical (inclusive of utility), datacom and then some ancillary businesses like safety.  Below is information from the analyst call.  Comments are in italics:

• low growth economic environment
• results consistent with Q3
• sales growth below expectations … disappointed (and we spoke with many distributors at the NAED Western and the Eastern who felt 2013 was a decent year … tough but they had increases … and a number who where up high single digits and some double digits … without acquisitions)
• organic growth was up 1.5% with the growth coming from datacom, lighting, utility and commercial / institutional / government (CIG) accounts
• operating margin increased due to cost controls (some of which we understand have been people-oriented due to some restructuring which occurred, presumably at the behest of some regional management and higher changes)
• added 200 jobs in 2013 in global accounts, integrated supply, safety, pricing, supply chain management (gives you a sense of where they had sales opportunities.  Pricing and supply management may be due to employee churn, the need for improvement or increased workflow.)  This generated a core, non-acquisition related, employment increase of 2%
• core SG&A was down $13M in Q4 (cost cutting, branch closing, employee changes … to meet the numbers or because growth wasn’t keeping pace with the industry?)
• January to date (Jan 26 or so) was down 4% (weather was blamed)
• Industrial down due to 2012 large project comparison (but doesn’t everyone have this issue to some extent?)
• Construction, flat in Q4 and second half but up from -6% in 1st half
• Saw growth in LED / lighting (as everyone else who focuses here has)
• Utility up 11% vs. prior year quarter but down .2% sequentially … and represents 13% of business
• CIG up 5% for quarter vs. prior year but down 7.5% sequentially and represents 12% of business.
• Datacom up 5% in Q4
• Lighting up 5% in Q4, for year up 6% on fixtures
• Industrial market (which includes some lighting) was down 3.2% over prior year quarter and represents 43% of the business (sounds like they aren’t getting their unfair share of the petro-chem market, which has had high growth in many areas)
• Construction was down .3% over prior year quarter and 4.1% over prior quarter.  This area represents 32% of their business
• 25% of WESCO revenues are in Canada and a slightly greater percent of its profitability
• Interesting, no comment, or questions, were asked as it relates to e-commerce, which is a big industry issue and would think analysts would ask this in light of Grainger’s continued growth, Amazon Supply and the importance of global / national accounts for WESCO.

A 2013 thought … if the business is flat and the two largest segments, industrial and construction, which account for 75% of the business are down, seems like there are some “challenges” and maybe the emperor is losing some of his clothes? 

• For 2014
• projecting a 3-6% increase without acquisitions, which they no longer will forecast (essentially they are changing the game with the analysts. Instead of putting out numbers that require significant growth, and hence acquisitions, they are putting out market average growth … our 2014 Electrical Distribution Outlook survey which has had 200 companies respond is projecting a 4-6% sales increase nationally.  This essentially says, WESCO is shooting for “average”)
• For Q1 WESCO is projecting a 0-3% increase (if the weather cooperates)
• WESCO is positive about the automation business and said their Rockwell business (EESCO) is “consistent with Rockwell results”
• WESCO wants to “grow at a rate greater than the channel for suppliers” as this says WESCO is doing a better job for them” (challenge is, as mentioned, they are projecting a growth rate in the range of the expected industry growth.  For 2013, AD’s electrical members, as a group, grew 3.5%)

So, it looks like WESCO is reverting to the norm or perhaps may have gone somewhat backwards (but probably not too significantly).  They have improved their profitability (to a gross margin of over 20%).

And coincidentally two of their senior executives just sold a significant percentage of their shares … one sold about 50%, the other about 25%.  Could more changes be coming?

What are you seeing from WESCO in your market? Does the AD results reinforce the “independent distributor messaging” that customers do business with people and prefer local relationships, especially in the face of lack of standardization (a la national retail chains?)

Thoughts?

(and we’ll share some observations from a few other quarterly / annual reports in the coming weeks)