WESCO Reports on 2019

February is the time for Q4 earnings and outlooks, so, with that let’s look first at WESCO.

WESCO

From their earnings call:

• Regarding Anixter, which WESCO cannot share much about, the highlighted a key reason for the acquisition when it described the combined company as “a premier electrical and data communications distribution and supply chain services company.”  WESCO historically was understood to be an electrical distribution company. Anixter provides an entry into the data communications side of the business, with eventual synergies with Anixter’s electrical and utility businesses.  The deal is expected to close in Q2 or Q3 (summertime.)
• 2019 Q4 was up 4.4% to $2.1 billion.  (during a quarter where many manufacturers are reporting essentially flat, this performance is pretty good and appears to have outpaced the general marketplace as reported by DISC.)
  • Experienced double-digit growth in datacom, utility and commercial / institutional / government markets.
  • Gross margin lagged due to “business mix”. (Most likely an increase in projects which, as most distributors know, is a win from a net profit basis due to not having to handle the inventory and delivery.)
  • US was up 4%
    • CIG up 15%
    • Utility up 11%
    • Construction up 2%
    • Industrial sales down 2% (which, at first glance is comparable to what we’ve seen from industrially-oriented electrical manufacturers.)
  • Canada was up 2%
    • Industrial up 6%
    • CIG up 5%
    • Construction was flat
    • Utility down 7%
  • International up 13% (A small part of the business that will grow significantly with Anixter.)
• Gross margins flat at 18.6%
• On the slides that accompany the presentation, WESCO shared historical margin guidance, primarily for analysts, by business segment. Of note, their Construction group is below their average of 18.6% which is an indicator of customer type (large customers) and probably project-driven due to Eaton.  Their industrial, as expected, is higher than the 18.6%)
• Tariffs were still mentioned as a price increase driver (however, the industry hasn’t seen it as a significant sales revenue driver as evidenced in our latest Pulse of Lighting report relating to the lighting sector.)
• It appears that WESCO’s SLS acquisition (formerly Sylvania Lighting Services) hasn’t gone too well as they reported “inconsistent revenue” and a “revenue miss”.  (This could have been loss(es) of a contract, people leaving who had relationships or the challenges in the lighting market.  Overall this business, when purchased, was about a $100M business. With lighting being a segment that is growing greater than the industry rate, question becomes “why” or is this an issue that is unique to the type of lighting business SLS focuses on?)
• For the year
  • Overall sales up 2.6%
    • Industrial up 1%, driven by Canada (US was down 2%)
      • Technology and petrochemical markets were strong
    • Construction up 1%
      • Comment was the market is constrained due to labor (a long-term issue that impacts the entire industry.)
      • Backlog was down (not good unless they shipped much from it in December to get a strong December.)
    • Utility up 10% driven by US market.  WESCO sees “secular trends” in this sector (which they will also benefit from Anixter.)
    • CIG up 11% with a focus on sales of security and datacom with data centers and lighting being highlights (two other segments that Anixter is strong.)
• Making significant investments in “digital tools”, presumably to benefit sales organization, marketing, eCommerce / eBusiness and business analytics.
• 2020 Outlook
  • Expect Q3 & Q4 2019 performance to be representative in 2020 with a “soft demand environment.” (so, in the 2-3% overall range with industrial and construction very low single digits)
  • Expect to “outperform the end markets by 1-2%” (which can happen on a macro, especially if take share from other national distributors, given many independents are difficult to compete against.)
• From analyst questions
  • The 2020 outlook was questioned with the premise that others are looking for a stronger second half.
    • WESCO gave a long answer about greater visibility into utility and CIG due to contracts.  Mentioned that industrially-oriented contractor business returned to growth in Q3 and Q4 2019 in the US.
    • Opportunity pipeline is strong; global accounts pipeline is strong
    • (Optimism and indicators don’t seem to jive with outlook, or case of being cautious.)
  • An analyst questioned on pricing of how much of the delay is market driven .. customers pushing back … versus process driven, not getting the supplier price increases into the system.  Part of the issue for WESCO, as it is for Grainger, is global / national accounts where there are contractual issues and limitations in customer agreements.
  • The SLS performance issue was described as “delays in projects.”
  • Regarding Anixter deal, WESCO espouses:
    • Expect 1+1 to be much greater than 2
    • Cost structure will be lower than the combined current cost structure
    • Invest significantly in digital
    • Expects increased margins
  • Q1 revenue outlook is 2-5% with full year guidance of 0-4%
    • Q1 performance driven by backlog
    • January performance was about 3.5%
  • Expect some gross margin improvement in 2020
    • Some generated from getting pricing increases through on contracts.

Overall, by WESCO standards, seemed to be a sold quarter.  Industrial in line with what we hear from many others. Contractor a little on the low side, overall, but this could be based upon the influence of industrially-oriented contractors as well as the possibility that a higher percent of business is switchgear (Eaton) than other distributors (not getting a comparable market basket of products).  Additionally, other distributors have a broader mix of contractor business (size of customers) and hence margins.

How do you see WESCO as a competitor? As a supplier, what percent of your efforts are focused on WESCO and do you receive a comparable ROI for those efforts? Reps, is WESCO is a “preferred” relationship for you or a manufacturer-driven / opportunity-driven relationship?

And 2020 should be an “exciting” year for WESCO!