WESCO Delivered … 2016 Projections

WESCO delivered its 2016 projections on Tuesday, providing some insight into how 2015 is finishing and what they foresee for 2016.  The company issue a press release, a report that is available on WESCO’s website and held an analyst call. We’ve both listened to the call, read the transcript and reviewed the presentation.

The guidance for 2016 was to the downside. For 2015 they affirmed what they said during their Q3 call.

Here’s some comments, and notes, regarding 2015 (and some are repetitive from earlier in the year):

• Reduced 400+ personnel
• Consolidated / eliminated 13 branches
• Stabilized margins due to lean & productivity initiatives
• Said its “advanced One WESCO platform is improving sales, planning & execution to drive market share gains with key accounts
  • Comment:  Interesting that the focus is on “key” accounts
• Made 2 acquisitions – Hill Country and Needham Electric.
  • Comment: Both are contractor houses and neither are Eaton Electrical distributors nor Philips Lighting distributors according to their websites. Perhaps WESCO is actively seeking diversification of lines and its business mix?
• The company repurchased 2.5M shares this year
  • Comment: It does help improve the company’s earnings per share when their are less shares held in the public domain.
• They are running at close to 8% down for Q4. Saw some uptick in November but no comment on continuing into November.
• Performance by segment and by quarter is in the presentation.

And WESCO delivered their thoughts regarding 2016:

• Company priority is increasing market share and they expect 1% of their 2016 “growth” / performance based upon taking share
• Margins will be impacted due to business / product mix as well as lower supplier rebate income.
• In their reporting, WESCO does not segment by product category (i.e. electrical, safety, datacom, etc) but prefers to be broader and refer to customer segments (industrial, construction, utility, CIG)
  • The industrial segment is 40% of company sales. They expect this segment to be down by 5-9% (mid to high single digits down)
  • 32% of sales is to non-residential construction with 1/3rd of this being industrial construction. This is expected to be +/- low single digits with commercial construction being up.
    • Verticals seeing some growth are education, healthcare and commercial with product categories experiencing some growth are lighting, security and datacom.
    • geographically, as many have seen, the market is “spotty”
    • perhaps their contractor-oriented incentive travel programs will help generate contractor business (visit www.wescovip.com)
      • Comment: We’ve seen some more distributors consider travel and frequent buyer programs to differentiate themselves and capture discretionary business.
  • Utility is expected to be flat
  • CIG (essentially government, commercial MRO and institutions) are expected flat to a little up
  • The company has a “good” backlog
• Overall, the company expects the US to be low single digits
  • Comment – it should be mentioned that Electrical Wholesaling, through 237 distributor surveys, projected a 3.6% increase and DISC, the industries most reliable forecaster, is projecting 5%.  WESCO mentioned that they think their projections “outperform the market”.  We’ve spoken to others who are projecting higher albeit others are more construction-oriented.
• Overall, excluding foreign currency, the company is projecting being down 1-4% although acquisitions, which are desired, could affect this (and they mention wanting electrical acquisitions … “their core”). And the overall includes Canada, which is expected to be down significantly due to market and foreign currency

Some other insights.  They are

• using analytics and other “tools” to optimize pricing (and have a new supply chain leader)
• continuing to work on “our pricing sourcing initiatives”
• “seeing billing margins being relatively stable”
• “actively working additional cost reduction contingency planning that if we see the top-line move from 0 to 5% down at the low end of the range, we’re obviously going to work and initiate additional contingency planning and cost reduction action.”
  • “Branch network optimization” is also expected in 2016
• Seeking to negotiate “best price” / “lowest price” across the country, hence leveraging their purchasing power. New purchasing leader driving this.
  • Comment: national chains have tried this before only to be rebuffed by most manufacturers. The markets in this industry have typically been treated, for the most part, as unique. Pricing in Florida will differ than NYC, vs Asheville, NC vs Los Angeles, vs “pick a place”.  Competitive pressures, operational costs, freight all impact pricing decisions. It’s not a “one size fits all”.  If WESCO becomes successful, other national chains will follow, marketing groups will want larger rebates so as not to disadvantage independents and lower market pricing will result for all.
• Working with large preferred suppliers to improve rebate programs on a yearly basis
  • Comment:  Perhaps a message to other national chains and marketing groups? Question becomes, what do manufacturers get in return? Historically, WESCO has not made significant line conversions, commitments or maximized the potential of its RDCs for manufacturers in an RDC.
• Pulling additional suppliers into preferred supplier agreements
  • Comment:  Seems to go against the previous bullet
• Consolidating suppliers in certain categories
  • Comment:  Supports the comment on improving rebates but conflicts with pulling in additional suppliers.

And unfortunately the analysts ask macro financial questions versus questions that would give them more detail on the business as it relates to product / service sales by segment as well as by key geographic area, nor any questions regarding the competitive environment (i.e. Grainger in the industrial segment and Grainger’s growth via eBusiness and where WESCO is competing) and similar, hence many of the questions (and answers) become repetitive.

And this financial analyst had some interesting comments in reviewing whether WESCO is a good investment:

• The company has only a $2B market cap
• The Hill Country Electric acquisition cost WESCO $68M for a $140M company, or 48.6% of sales.
• In 2014, WESCO acquired  LaPrairie, Inc. (“LaPrairie”), Hazmasters, Inc. (“Hazmasters”), and Hi-Line Utility Supply (“Hi-Line”) – all non-electrical distributors.  According to this report ” According to WESCO’s cash flow statement, cash paid for acquisitions in 2014 totaled $138M. With the industry median P/Sales being 0.62x, WESCO might have been too generous”, however, given that these were in another industry, the margins may have been different.

So, if you are a distributor and are approached by WESCO, at least these are some reasonable comparables (the EECOL deal was a different type of strategic acquisition.)

And, in the words of Fox News … “fair and balanced” (just about all of the content came from public sources; private conversations remain private.)