Rosy outlook gets cold; WESCO underdelivers and acquires

“Numbers numbers, what are the numbers?”

Last week WESCO announced its Q1 results which was received with disappointment. In reviewing their presentation, it’s an interesting challenge to decipher the real performance with terms such as “normalized organic” and “workday adjusted” and “industrial / construction core” and more. The end result was only a .3% growth with the “challenging” start being attributed to weather, oil and gas (which is reportedly about 10% of their sales) and the dollar (which could have an impact on OEM sales as well as their international business).  Reportedly they had 4% organic growth in the U.S.

And at the same time they announced consolidation of branches and we understand there are targeted staff reductions (while we’ve also heard of a number of people actively looking to leave as there is “tension” in the Pittsburgh” headquarters.

The part that gets further interesting is that WESCO had its Investor Day on March 5th where they outlined their strategy to Wall Street analysts.  It is an interesting read.

They outline much of the strategy and painted a rosy picture of growth potentials.  The company has hired a number of new people for its management team, presumably to reinvigorate its performance.

Some interesting tidbits from the Investor Day presentation, in no particular order:

• The company expressed interest in increasing its private label offering.
• WESCO feels its “differentiator” is its management talent (which was just hired and remember, they are going through personnel changes just 45 days later)
• They are utilizing a gap analysis, called checkerboard execution, at the branch level to identify product categories where they feel they are under-penetrated in a marketplace. Presumably they are taking this down to the salesperson and account level.
• An eCommerce Leader was hired and significant investments are being made in this area. In the US, they want “small” customers (dollar value to WESCO) to purchase through call centers and online.
• They also hired a new Supply Chain Leader and new Lean Leader
• Consolidation in the electrical industry is an element of their strategy, which was mentioned numerous times (more on this further down). They’ll also consider adjacency and service offerings (which are about 25% of sales).
• They have a margin optimization initiative and there is a slide that outlines their approach.
• Suppliers beware! WESCO plans on identifying common skus and will seek better pricing through leveraging (while obviously expecting the same, if not better, rebates and continued marketing investments to support people and initiatives).
• In the U.S. 43% of the business is industrial, 26% is construction. In Canada it is 32% industrial and 52% in construction.  Could WESCO be looking to change its US business mix through acquisition?
• The company has over 100 field people devoted to lighting and lighting controls.
• They were expecting mid-high single digit sales increases in 2015 and now were hoping for mid single digits (but at the end of the Q1 report they projected +/- 3%).

And while they disappointed Wall Street and employees are stressed, the company announced the acquisition of Hill Country Electric Supply. This $140 million Texas-based contractor-oriented distributor. Further, they are a Square D and GE distributor.  Yes they have some Eaton divisions, but not Eaton switch gear.  This becomes WESCO’s first U.S. acquisition of a Square D distributor which, in the words of one distributor, “Interesting decisions now for Square D and Eaton.”

This begs a couple of questions:

• Would WESCO acquire a non-Eaton distributor to then risk converting the business to Eaton (risk only because these contractors could prefer SQD vs Eaton), thereby helping Eaton increase its market share in this area?
• Could this become the beginning of WESCO diversifying its gear line? When they acquired EECOL in Canada a couple of years ago, WESCO reportedly met with Schneider Electric in Paris and received “approval” to acquire U.S. distributors and reportedly has tried before.  Could this be an indication of how WESCO and Square D want to increase market share?
  • And if Square D has given a quiet “wink”, what does this say about their comfort level with Graybar’s growth rate?
• Has the value of other Square D distributors increased now that there is another potential acquirer (and reportedly WESCO is talking to others)?
• Is further diversification into the contractor market part of WESCO’s strategy to be more balanced? Could the construction market be more profitable for WESCO given its penchant for winning much national account business, according to distributors, on price?

So, the Investor Day report shows sales strategy and a margin focus.  The Q1 report shows weakness. The company is in “right-sizing’ mode while making acquisitions….

An active week for WESCO.  What are you seeing / hearing in your market?