WESCO Reports Q3 Performance.

Earning season continues and with it an opportunity for distributors and manufacturers to benchmark their performance.  We’ve shared some already and will have more in the next few days but, next up, is one that is anticipated by many … WESCO.

And the headline is “WESCO misses on revenue, exceeds on earnings”.

Which, to many in the electrical industry, is a little bit of a misperception as earnings, in the current sales environment, are made based upon cost savings and cost reductions … and in this case there were unfortunately many people impacted.

But, let’s take a look at the earnings call and the WESCO presentation.  All input focuses on the electrical industry. You’ll recall that WESCO has become diversified into other segments and also has a strong utility group.

• Organic sales, overall, were down 5% (total business)
• Significant decline in oil & gas (no surprise)
• More “operating savings” are underway.  Perhaps code word for more branch closings and layoffs? During the quarter WESCO had some senior management change (COO “retiring” at the end of the year and we’ve heard of some regional management changes recently).
• Did a share buy-back, which helps increase the earnings per share…especially when the stock price dropped significantly during the quarter – an opportunity to repurchase more shares.
• US industrial performance down 10%, Canada down 16%.  Performance blamed on demand outlook, commodity prices and strong dollar impacting manufacturer sector.
  • Reportedly customers seeking process improvement, cost reductions and supplier consolidation which is driving global / national account bidding.  This begs the question of 1) are other distributors seeing this and offering process initiatives and 2) is SupplyForce and other national account players seeing increased activity solely due to economic conditions … and frequently these agreements are on 3 year or 5 year contracts.
• Construction business “declined 10% in Q3 with both US and Canada down 5% on a local currency basis”. This skewed towards industrial contractors (no surprise) with commercial contractors better. Interesting that contractor performance was so far down, and possibly it would have been much further down, as WESCO’s contractor incentive program concluded during Q3 and they have 800 people traveling to Hawaii next month.  Were industrial contractors down so much more?
• Utility in US up 6% (and utility is a significant % of the business, so helped make overall revenues look decent.)
• CIG, which is commercial / institutional business, was up 2% in the U.S, driven by energy efficiency
• Q4 outlook is “more of the same”… 5-8% decline vs 2014 Q4
• Foreign exchange reduced sales by 4% but Hill Country, an earlier SQD acquisition, added about 2%.  Interesting that WESCO said SG&A declined for the quarter, but remember that they added headcount with Hill Country (who is up 10% over the past 4-5 month) is  … so the reduction in personnel was significant (400+ people and 13 branches) and drive the savings to achieve the earnings / share (plus the share buyback)
• Margins declined 1/2 a point vs prior year due to mix (and rebates get blamed again.)  Market place pricing also drove margin erosion … many distributors who have not undertaken a price optimization strategy have suffered due to this.
• Interesting comment that WESCO “increased the priority and emphasis on the backend of our business, operations and supply chain.”  Makes one wonder how it was prior if they are focusing on it now.
• WESCO is trying to institute programs, processes or “requiring” more support for local RDCs to improve stock / flow business and better utilize inventory (and initiative that many manufacturers will applaud and say “about time” whereas others prefer dealing direct with branches (especially if they are not in the RDC or if they want to avoid the RDC service fee.)
• Negotiating more SPAs.  Hopefully achieving 100% (or close to) collection.

Observations

• WESCO isn’t able to transition, or pivot, to construction market as quickly as it would like. If construction contractors are up, and Hill Country is up 10%, the company’s contractor business is more weighted to industrial rather than construction.  Essentially they are not known as a construction house, although Eaton is a good line for this market.
• On the construction side, WESCO is seeing what we’ve previously called a “patchwork” market.  For them it may be more spotty given that in a number of markets WESCO is not viewed as a major construction player according to manufacturers and local distributors.
• They have enough cash flow to still do acquisitions. Wonder if they are pursuing SQD acquisitions given the success of Hill Country and ability to diversify the business (based upon gear line to see more of the market and construction-orientation)?
• The made the numbers “look good” to get to the EPS with the buyback and cost savings.
• Also interesting that WESCO did not mention lighting at all on their call given that this is the one segment of the electrical space exhibiting growth.  To what degree is WESCO active in this market?

Given that Eaton reported that they will have a $300M short-fall (but not knowing what divisions are responsible for this) and that WESCO is a major Eaton distributor (for gear, lighting and other product categories) and represents a significant percentage of WESCO’s electrical sales, one wonders how much WESCO’s “performance” impacts Eaton.  Analysts should ask about the impact of Eaton and what % of COGS does Eaton represent.

So, in summary, WESCO met expectations. Many expected a sales decline, knew about the layoffs and operational challenges, probably didn’t know about EPS but that is a Wall Street issue to try to support the stock.  It appears that they only area where the company is having success is utility (and this could be performance, their historical strength, or the changes that HD Supply may be undergoing with their recent acquisition by Anixter).

We’ve heard of more field changes but this isn’t unusual for national chains responding during a downturn (we’ve heard of Graybar undergoing the same to the tune of 400-500 people throughout the country … quietly and to be completed by end of the year). We’re hearing from opportunistic independent distributors that there are some good people now on the street.

What are you seeing / hearing? How competitive is WESCO now in your market?