WESCO Steady in Q4

WESCO reported 2020 Q4 earnings and, while from a Wall Street perspective the growth number was great (48%), from an industry perspective it’s misleading as it is comparing combined Anixter / WESCO vs WESCO from 2019. Q4, however, was comparable, sales-wise, for their Electrical group versus Q3.

Digging into input from the call (and here is a link to their slides) …

• WESCO emphasizes the “cross sell” opportunities between the two companies. On the construction side of the business this infers increased datacom / network opportunities as well as taking advantage of some of Anixter’s wire capabilities. Probably some similar networking opportunities for industrial / global (national) accounts. (The takeaway for distributors is make sure that your salespeople are selling your breadth of offerings – both products and services. This gets to training (skills – asking questions, and product / offering), sales management and doing some data analytics to identify product gaps. Competing for some of the opportunities versus WESCO may also require some different local relationships.)
• WESCO is thinking about its business in four segments – electrical, communication, security and utility. 40% of the business is electrical and electronic. (With the economy rebounding from the pandemic, WESCO feels it is positioned to support industries via automation, the growth of data communications and a hoped for infrastructure and renewables environment with its utility group … all opportunity areas for many to consider albeit some of these will be more 2022 growth areas.)
• Overall sales up 4% sequentially on a comparable workday basis whereas, historically for WESCO, Q4 declined versus Q3. (note: comparable workday basis is used as Q4 had fewer days than Q3)
  • Electrical and Electronic (EES)
    • The historical WESCO business makes up 66% of this segment.
    • up 1% vs Q3 and up 6% on a comparable workday basis
    • improving construction, but backlog is at 4^th quarter revenue, probably indicating delays (which many have seen) and could also reflect material backorders for projects due to supplier delays.
    • Saw increases in industrial and OEM (which also was reported by other distributors)
  • Communications and Security (CSS)
    • Up 3% on comparable workday basis
  • Utility and Broadband (UBS)
    • Sales up 4% on comparable workday basis. Seeing opportunities with utilities for LED lighting and grid modernization. Also seeing 5G installs and fiber in the broadband area.
  • January had sales up low single digits (in fiscalese, it is between 1-3%)
• 2021 outlook
  • Growth of 3-6% (which should be very achievable with the price increases that currently being seen in the electrical industry across most product categories.)

Analyst questions

• Had had 650 full-time equivalent “people” leave the company over the past year due to the acquisition of WESCO (structural cost takeout). Some due to branch closings.
• According to WESCO, the 3-6% increase “does not specifically call out inflationary benefits expect to see as commodity prices increase” and are hence not built into the outlook. (Which will make tracking for 3-6% real growth very difficult and further, will make comparing to projection, shall we say, “interesting” in future reports.)
• Further business insights
  • CSS (Communications & Security) is the most global business and has the highest growth potential.
  • UBS (utility) is a stable business and WESCO expends mid to higher-end range growth.
  • ESS, the electrical business, is WESCO’s largest business with the focus “big” industrial and “big” construction. WESCO expects the lowest growth rate in this sector (which, if WESCO puts this about 3% is lower than many distributors are projecting.)
• Reportedly, due to not hitting internal 2020 goals, sales and management not receiving bonus / incentive compensation payouts.

Thoughts? Observations? Field feedback?

• With many supplier increases announced already, what do you think industry performance will be up? What are you projecting? Is 3-6% conservative? Aggressive? Or “right”?
  • And, perhaps more importantly, for the electrical segment, is 3-4% aggressive, conservative or “right”?
• Is the “cross-sell” opportunity significant enough that others will seek to emulate it in the construction and industrial space?
  • Graybar can match, especially construction and datacom
  • Others could with training and perhaps some local partnerships, but it is more difficult
  • Many can on the industrial side of the business … especially Rockwell distributors with their expertise in automation and most having good construction divisions
• WESCO isn’t integrating any “supplier rationalization” benefits into its projections and it says it is / will do supplier rationalization so, the question becomes, “are you experiencing or seeing any supplier rationalization or is it a way to negotiate “better” rebates? And, if better rebates are given, is performance returned (which then begs the question of does higher rebates result in greater distributor performance or are those funds better deployed at the manufacturer sales organization to generate demand … who generates demand for a manufacturer – the distributor sales force or the manufacturer sales force?

Overall, a steady Q4 for WESCO.