Posted August 3, 2023

Wesco ups sales synergy target following Q2 results

Wesco International achieved a second quarter net sales record of $5.7 billion, up 5% YOY.

Other highlights include:

  • Organic sales growth of 3% YOY
  • Operating profit of $364 million; operating margin of 6.3%
  • Adjusted EBITDA of $442 million, flat YOY; adjusted EBITDA margin of 7.7%
  • Gross margin of 21.6%, down 10 basis points YOY
  • Earnings per diluted share of $3.41
  • Adjusted earnings per diluted share of $3.71, down 11% YOY
  • Operating cash flow of $318 million
  • Free cash flow of $293 million; 141% of adjusted net income
  • Leverage of 2.8x; at lowest level since the Anixter merger in June of 2020

"The power of our portfolio and mix-shift into higher-growth markets is clear in our record second quarter sales," said Chairman, President and CEO John Engel. "Continued strong growth and record sales in our CSS and UBS businesses more than offset a quarterly drop in our EES business that was largely the result of unprecedented supply chain rebalancing in the electrical industry and select weakness in certain sectors including commercial construction and manufactured structures. Our long-term secular growth drivers remain intact and are reflected in the continued sales growth in utility, data centers, security, and industrial sectors. On the strength of our industry-leading customer value proposition, strong cross-sell execution continued in the quarter, we're raising our sales synergy target from $1.8 billion to $2.0 billion.

"Lead times for most product categories have returned to 2019 levels," he continued. "The extraordinary supply chain disruptions and customer purchase patterns driven by the pandemic over the last few years are now correcting with the rapid reduction in supplier lead times. Against these supply chain rebalancing conditions, our gross margins remain healthy and stable. While economic conditions remain positive, we did see pockets of underperformance in certain end markets served by our EES business.

"Even with increased overall sales in the second quarter, our free cash flow generation of $293 million was strong and brought us into positive territory for the half of fiscal 2023 – back in line with our expectations," added Engel. "During the second quarter we reduced inventories and paid down debt. Our financial leverage now stands at 2.8x, near the mid-point of our target range and at the lowest level since the Anixter acquisition in June 2020. Given our anticipated free cash flow generation in the second half of fiscal 2023, we stand in a good position to use that cash flow to increase value to our shareholders."

Engel concluded, "We remain confident in and focused on the transformational steps we are taking to improve our digital capabilities, capture market share, and create value for all our stakeholders. We continue to invest in our digital transformation plan, and we are working to deliver digital capabilities to benefit our customers and supplier partners that will be game-changing. We have already taken steps to address the supply chain re-balancing in our EES business through a $25 million annualized cost reduction set of actions, taken in June that will begin to benefit our second half. Given EES results in the second quarter, we are revising our full year outlook, that still delivers record sales, EBITDA and free cash flow at the midpoint. The power of Wesco's scale, industry-leading positions, and expanded portfolio of products, services and solutions positions us to capture the benefits of enduring secular growth trends as well anticipated increased infrastructure investments in North America. We are committed to and remain confident in our ability to deliver the financial objectives presented at our Investor Day including long-term margin expansion, profit growth and cash generation targets."

Wesco is now expecting reported net sales growth of 5%-7% versus 6%-9% prior largely driven by market weakness in certain sectors of the electrical and electronic solutions business unit. EBITDA margins are forecast to be 7.8%-8.0% versus 8.1%-8.4% prior primarily due to the lower sales range. At the mid-point of the guidance range, adjusted EBITDA is approximately $1.8 billion versus $1.9 billion prior. Earnings per share is now forecast to be $15.00-$16.00. The company's free cash flow outlook is $500-$700 million.

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