A Busy Week for WESCO

Last week was a busy week for the industry with the NAED South-Central. This week was a busy week for WESCO.

First they announced the acquisition of Atlanta Electrical Distributors and then on Wednesday they had their Investor Day which is when they do a “state of our future” presentation to analysts and answer questions.

Given the two events, we sought some input and did a little research (to review the Investor Day presentation).  We’ve also reached out to some in the industry for their perception / feedback.  Let us know your thoughts.

Atlanta Electrical Distributor

Atlanta Electrical Distributors (AED) was an $85 million, 5 branch, contractor-oriented Square D distributor serving the Atlanta metropolitan market.  The price hasn’t been announced but that is because the deal closes later this month.  This acquisition continues in the mold of WESCO’s previous two electrical acquisitions.  The companies

• Are contractor oriented
• Are not Eaton houses (this is the second Square D distributor that WESCO has acquired, the other being Hill Country).

It then begs the question of “what could this mean”.  Could it mean …

• • They are seeking diversification from the industrial space (actions speak loud)
  • They are seeking diversification from Eaton’s gear business (again, actions speak loud and perhaps this is why Eaton has diversified from WESCO?
  • It is their way of buying themselves to a higher stock price and improving sales & profitability.  Makes comparables a lot more difficult
  • Distract Wall Street
  • They want to compete more directly with Graybar
  • They want to copy the Sonepar strategy of multiple name brands
  • They are acquiring in “growth markets” where they are minimal / nominal share
  • Will they keep the names? Become involved in “WESCOizing” the business? Force the acquired branches to eventually purchase from WESCO RDCs?

And maybe Square D tacitly endorses this to reduce its reliance on Graybar? Remember, they just gave / expanded the line with MSC to help them on the industrial side. Perhaps they are underwhelmed with Graybar growth or want to have another acquirer offering Square D (although they do have CED and Sonepar)?

And a question for distributors is, “why sell to WESCO given their challenges or is it ‘all about the money'”? The one thing that could be suggested is that the value of a Square D distributorship may have just increased now knowing that WESCO is seeking contractor-oriented Square D acquisitions.

According to contacts in the Atlanta marketplace, a few larger independent distributors are looking at this as an opportunity.  They expect there to be change (people, process, service) and are glad WESCO made the acquisition as it is an opportunity to take share using the strategy for pursuing business from a national chain that is perceived to be “disorganized / in transition”.  It AED / WESCO doesn’t have non-competes or retention bonuses in place for key personnel, local distributors expect change.  A couple of distributors with high exposure to the industrial sector are a little concerned about another industrial distributor entering the market and the probable price / margin erosion.

Investor Day

Let’s turn our attention to an overview of WESCO’s Investor Day presentation.  Here’s a copy of it.  Feedback from some distributors were:

• “Interesting reading to say the least …”
• “Creative writing”
• “Good marketing spin”

And please remember when you are reading this that analysts focus on the financials and, from listening to calls, typically don’t know, or ask, much about the dynamics of the industry. So high level information is what they like.  For the most part they could be classified as “naively knowledgeable” (yes, an oxymoron!)

Some observations / comments (in italics) regarding the presentation:

• Interesting slide to present their competitive differentiators.  Elements included product portfolio, service capabilities, global footprint and talent / culture. (while there are a number of talented individuals in the field, there are many who say the company is “challenged” in Pittsburgh and has lost some skilled people. The product portfolio, at least on the electrical side, is essentially the same as many companies as it has been a challenge to convert WESCO to a broad-based MRO player. Their vision is to be the “global leader of supply chain solutions addressing customers’ MRO, OEM and capital project demand streams. It’s a lofty goal that, in reality, is electrically weighted.)
• They want to grow faster than the market (recently they haven’t, hence the acquisitions and diversification.  They also, according to many lighting companies, underperform in the lighting segment given the growth in LEDs as evidenced by Lighting / Sustainability products only representing 10% of sales.)
• Interesting comment on their Product Portfolio slide that they emphasize an interest in private labeling (must make manufacturers happy although this could be for market niches such as mobile homes or working with some OEMs) and “expanded global sourcing” as well as “supplier-optimized value chain” (move costs to suppliers, solicit more rebates and redistribution funds)
• They want to be global, but want to achieve this by supporting their blue-chip customers (which also then essentially says “nominally” and really won’t compete with Rexel or Sonepar who have extensive footprints throughout the world.)
• On their Talent Management slide, all of the management team has joined the company in the last two years (which says something about continuity and industry experience / understanding.) They list “talent is our differentiator” but focus on senior / executive management.
• They are on a “Lean Journey” and are espousing a “continuous improvement culture” (we’ll let you read between the lines here.)
• There are “Sales and Marketing Priorities” listed with an emphasis on “integrating around customer efforts”, “focusing on growth opportunities”, “specialists” and “branding, demand creation programs and marketing leverage”. (historically they fund little on the marketing side and expect manufacturers to fund people and initiatives, so manufacturers should prepare to open the wallet … again. Demand creation seems to be the “term du jour” for everyone. The challenge is that for many product categories this is a challenge. The alternative, for a distributor, is new account development so that their ‘services’ are in demand.  Want to bet money, especially when many are trying to do the same thing?)
• From a supply chain / operations viewpoint they want to streamline processes, “optimize footprint” (there is the phrase “branch network optimization efforts” in the Summary slide … more closures / consolidation coming?), have some supply chain management initiatives (optimize supply base, leverage, and inventory issues)  and improve pricing (which many distributors would appreciate.)
• Sales & Marketing
  • Recruit “top” sales & marketing talent and use CRM to support 2000+ sales associates (1200 outside salespeople in US and Canada)
  • Pursue more “global / national” accounts
  • Institute sales leadership training (something that many distributors could use)
  • Implement supplier planning process (surprising that they didn’t have a robust one before). They’ve identified 4500 target accounts
  • eCommerce
  • Want to get more performance management oriented to have increased accountability at the account level. (and is it a surprise that the “sum of individual targets exceeds WESCO sales growth plan?  Doesn’t every salesperson do this … overly opportunistic? Rule of thumb … discount sales submitted projections as the customer, in many cases, can’t control his future … especially contractors (hoping they win business) and with industrials, will they retain their budget / will they switch business in a product category.)
  • Focusing on product mix / gap analysis reporting to drive account level sales. (it appears that the initial focus of this is on global / national accounts)
  • For “small” customers going to use inside sales to drive the account to online ordering. For large accounts want to move them to punchouts and EDI. Mid-size accounts / high growth potential will also have a digital focus to free-up sales time.
  • Want growth of 2% above market growth from sales and marketing initiatives
• Supply Chain & Operations
  • WESCO has over 12,000 SPAs! and over $800M in inventory and does pricing for 80,000+ customers
  • Going to evolve to managing spend by category whereas today much is done locally (major cultural change for branch network and for suppliers in interacting with Pittsburgh)
  • Seeking to evolve to fewer, more strategic, suppliers and reduce costs while improving rebates.
    • Example of steel conduit, from 10 suppliers to 4 suppliers. Costs decreased 150 bps and rebate increased 10%. Provide monthly “awards” (buys)
  • Want to become more sophisticated on pricing and develop tools / pricing intelligence by category and customer size … (matrices)
    • Tested in a geographic area and had a 200 bps margin improvement with increased sales of 10%
  • Expect 20 bps margin improvement in 2016 solely from Supply Chain & Operations group.
• US Business
  • Overall $5.6B spend (not all electrical as this includes other product categories, utility, etc)
    • Only 27% construction.  40% industrial.  Only 9% lighting, 9% distribution equipment, 9% Automation, 40% “supplies”
  • Seeking overall a 40 bps margin improvement from sales and ops benefits
    • “Continued organizational streamlining and network rationalization” (or, more closures / consolidation and layoffs … perhaps pruning, perhaps “significant”)
• WESCO does $1.5B in Canada through 127 branches and using Lean there also. Canada is 54% construction and 30% industrial.
  • Interestingly, lighting is 19% in Canada and distribution equipment is 17%.  Significant mix differential probably driven by the customer mix differential.
  • EECOL sales down to $700M, significant reduction since acquisition.

In setting a 5 year goal … for 2020, WESCO is seeking 7-9% compound annual growth rate consisting of 2-3% annual from acquisitions plus market growth plus 2% from organic initiatives (account penetration / new account development)

So, a busy week for WESCO … and perhaps more insights into their direction.  If you’re Graybar, what do you think? If you’re Eaton, what would you think? If you’re a WESCO employee, what do you think about the strategy introduced at the Investor Day (and we hope they shared this with you in advance)?  As a competitor or supplier, any insights?