WESCO Muddles through Q1, Meets Wall Street Expectations

Q1 reporting is starting for many manufacturers and publicly held distributors in the electrical space. Over the next week we’ll share overviews and insights but today we’ll start with WESCO‘s Q1 report.

WESCO was pleased that it beat its earnings estimate by 3 cents but revenues were down a little but within their expectations range. While the company states that its goal is to exceed market growth and hence take share, its performance lagged behind many distributors whom we’ve spoken with as well as the Q1 projections from DISC … so they lost share in the eyes of the industry (but met Wall Street’s expectations.)

So, observations from the quarterly report (with comments in italics)

• Earnings “in line with expectations and outlook provided in January”. Have “improving momentum”
• Seeing growth in industrial (which many are given an increase in the number of oil rigs since last May and an increase in industrial production. The question becomes is WESCO seeing increased sales from its existing “good” / “significant” volume customers, is it taking share within what were smaller accounts and growing them or is it acquiring new customers. Additionally, if seeing momentum, is that with increasing (or at least maintaining) margin or are they having to “buy” business.)
• April down low single digits vs last year (with Easter mentioned as a reason … again … isn’t it always on a Sunday and isn’t Good Friday the same … and either always a working day or always closed depending upon the company? (Sorry, I don’t understand.)
• Up 2% vs Q4 2016
• US industrial up 3% in US vs PY, (which is consistent with industry growth)
• Global accounts pipeline is healthy (but pipeline and closed business are two different things. We’ve heard that this business has suffered significantly over the past three years between lost accounts and eroding business within accounts … more maverick buying and bidding to reduce pricing.)
• Construction in US was down 6% (Surprising as we haven’t spoken to a distributor who was down in construction. This may reflect on the types of projects that WESCO typically works and possibly the stages of those projects (nearing completion. Wire should have given them some sales lift as should lighting unless they are not participating much in the retrofit market.)
• Backlog improving.  Up 11% Q1 vs Q4 2016 (which is good and is consistent in what we are hearing from distributors)
• CIG, which is commercial / institutional and government, was down in the US. This market for WESCO is datacom / security driven (don’t know if Amazon Business joining the Communities Initiative could have any impact on WESCO)
• Overall down 1.7% globally and across divisions, which is more than electrical)
• Margin down a little (which is indicative of a very competitive market or changes in product or business mix. Many distributors have been interviewing Strategic Pricing Associates and Jigsaw Systems in a quest to improve their pricing processes, and some philosophy.  Perhaps something for WESCO to consider?)
• SG&A decreased $6M vs last year.  500 less positions than 2016 and almost 1000 less than 2015 (we heard of more layoffs, including some at corporate, in February (According to sources “being a distributor account manager, it’s not scalable. At least not at this company at this time. As you develop your accounts you soon get maxed out doing simple, routine tasks. Turnover is constant so you end up receiving, picking and delivering product, expediting orders, taking simple orders at vendor managed inventor accounts, inventory counting at consignment accounts, getting involved in accounts receivable, etc. Soon, the only way to grow is more hours, which has its limits. As account maintenance responsibilities grow, less time is allocated to business development or being a clients solution provider. In just over one year, the company has become far more lean. It feels like they are not investing for growth but focusing on lowering expenses.”)
• Benefited from a reduced effective tax rate.
• Company is seeing some MRO growth and awaiting industrial capital improvement to drive growth.
• Lighting performance was “flattish.” LED business (fixtures) had nice growth. Has “decent” legacy lamp business which is declining rapidly (and hopefully WESCO is being proactive with these accounts to recommend retrofits. Giving its industrial focus, this should benefit companies like Holophane (Acuity) and Dialight.)
• e-Commerce business is “wrapped around customized applications for specific multi-location customers … with punchout catalogs…” This was in response to pricing and online. Feel have a “stickier” business relationship” and hence eCommerce from a website / point and click viewpoint isn’t too important.
• Plan to continue to “refine and optimize” the US branch network (more to larger formats) to “optimize back-ends and improve customer service and satisfaction metrics (more layoffs and branch consolidation / closings?)
• “Working with suppliers on price increases” (pushing back on supplier price increases and those that have gone through WESCO is not adding a little to improve margins.)
• Interesting that they mention the reason for not being able to improve margins is customer demand but as soon as customers get busier WESCO feels customers will be less aggressive on pricing because they will be busier (or do they think customers will get lazy and take their eye off of pricing?)

So

• For those of you who sell to WESCO, what are you seeing?
• For those who compete against them in the industrial space, how competitive are they? How are they performing?
• And if you work, or worked, for WESCO, is the company finally on the right track?