WESCO Shares 2018 Outlook

Last week WESCO shared it’s 2018 outlook with analysts.  While many in the industry have been projecting 2018 overall industry growth in the 3-6% range (depending upon whom you talk), much of these projections excluded any potential benefits from the new tax cut / reform and a potential government-driven infrastructure bill … so marketplace growth could eclipse industry and WESCO projections.

WESCO 2018 Outlook

From John Engel and WESCO: (and click here and look under Latest Presentation for the slides)

• Mr. Engel reaffirmed that their outlook did not include any benefit from tax reform.
• Tenets of their outlook includes “above-market performance, execution of profitable growth initiatives, investments in people and processes and maintaining cost and cash management discipline.” (in other words, reads like hedging bets that they do everything right / as they plan)
• Top priorites:
  1. Executing One WESCO growth initiatives
  2. Maintaining focus on sales execution and effectiveness
  3. Differentiating the business with value-added services for customers and suppliers (many distributors are seeking to enhance their value-added offerings and identify customers who are willing to pay for those services)
  4. Capitalizing on growth markets
  5. Making accretive acquisitions (either they have a pipeline that has movement or opportunistic. Will be interesting to see if it helps them diversify their MRO play, be more contractor-oriented as Atlanta Electrical Distributors, Hill Country and NESCO were or something else.)
  6. Continuing to execute pricing and sourcing initiatives (Manufacturers, get ready for more requests but WESCO may find this a challenge as more manufacturers are now asking “show me the growth”, in general, in exchange for more rebate. Rebate programs are becoming more performance-based.)
  7. Delivering productivity through lean operational excellence initiatives
  8. Maintaining strong free cash flow generation and executing against capital deployment priorities

Interesting that one of WESCO’s announced priorities isn’t eCommerce, unless that is considered a subset of “sales execution”.  Additionally, with contractors becoming very involved in the use of technology to manage large projects, this could/should be an area of focus.

• Growth projections:
  • Industrial market (37% of their business) – up low single digits to mid single digits in 2018 (which is on par with what DISC, Electrical Wholesaling and many manufacturers have projected)
  • Non-resi construction (33% of the business) to be flat to up mid-single digits (the market is projecting 3-5% without tax reform)
  • Utility market (15% of the business) – flat to up low single digits driven by transmission and distribution.
  • Commercial, institutional and government (15% of the business) – projecting up low to mid-single digits (a little below industry forecasts, which is more mid-single digits)
  • Continued growth in lighting and datacom. (Lighting is to be expected, however, it requires more units sold to overcome continued price erosion and the need to diversify sources to ensure margin is achieved.)
  • Overall expect end market sales to be up 1-5% and net sales up 3-6% which results in a 1% benefit from market out-performance (aside from utility, it seems like their projections are the same as industry projections per DISC and EW, both independent sources.)
  • Expect operating margin of 4.2-4.6%, which includes 30-50 basis points of margin improvement due to pricing initiatives, sourcing and operational excellence (perhaps this 30-50 bps is a benchmark for distributors to consider for pricing initiatives and purchasing goals?)
  • Above goals do not include acquisitions. WESCO hopes that they add another 1-3% annually from acquisitions, however, the timing cannot be predicted.

From analyst questions:

• A question regarding Q4 to date backlog being 10% of sales, which is viewed as a positive going into 2018.
• WESCO claims that 60-70% of revenue is tied to some service.  Engel admitted that “we haven’t even done, quite frankly, a good job of really having the customer understand all the incremental value we’re delivering.” (but didn’t share type/example of services and if these are billable services so difficult to understand how calculated and if customers are willing to pay a premium in products or for the service to do business with WESCO.  And John’s comment could also be echoed by many distributor senior management!)
• Mentioned they have invested in digital and eCommerce capabilities over last few years, but no insights on where stand and ability to compete vs Grainger, let alone Amazon Business.
• US and Canadian 2018 growth are projected to be equal.

So, bottom line, and aside from utility, it appears that WESCO’s pre-tax bill forecast is in line with industry projections.