Analysis of WESCO (NYSE:WCC) Q1 2022 Results: Strongest Quarter Yet for the New WESCO

WESCO’s new logo is a W with an embedded A that provides a visual representation of the coming together of WESCO and Anixter to drive growth and innovation, responsibly and sustainably

“Accelerating” was WESCO CEO John Engel’s description in one word for his organization’s Q1 2022 execution and results.  After a successful 2021, the “new” WESCO (Wesco+Anixter) beat expectations across the board in Q1 2022 with revenue up +22% YoY at $4.9B, gross margin up +120 basis points (bps) YoY to 21.3%, and EBITDA up +68% YoY at $364M (7.4% of sales).

Double digit sales growth was achieved in Q1 2022 in all three sales divisions:

  • EES (Electrical & Electronic Solutions) with $2.1B in sales at 21.5% growth QoQ
  • CSS (Communications & Security Solutions) with $1.4B in sales at 14.7% growth QoQ
  • UBC (Utility & Broadband Solutions) with $1.4B in sales at 31.6% growth QoQ

The EES Segment’s growth is attributed to the continued recovery of the non-residential market, as well as WESCO’s increasing momentum in the industrial and OEM businesses, supported by the industrial recovery.  The EES backlog is at a new record level (up 75% YoY) and up from Q4’s record level (up 25% sequentially).  The company sees long-term, sustainable growth for EES supported by the secular trends of electrification, automation and green energy.

To underscore the substantial growth and margin expansion of the combination of Wesco+Anixter, a comparison to pre-acquisition Q1 2019 (Pro Forma) was provided in the earnings slideshow (see Slide 5), showing sales for the new entity up 21%, adjusted EBITDA up +95% , and adjusted EBITDA margin up +280 bps.  The company’s leadership credits WESCO’s success to the value created by the new combination – with cross-selling initiatives to existing customers and new prospects driving market outperformance.

A significant element of WESCO’s strategy in the Wesco+Anixter combination is “unlocking the power of their big data” (e.g., information on customers, their operations, their demand profiles, what products, what maintenance is needed, what upgrades, what cadence.)  CEO Engel noted during the Earnings webcast Q&A that WESCO has significantly more data in its hands than supplier partners have since they sell through distribution.  WESCO will cover in detail this data strategy at a WESCO Investors Day (first since 2019) to be held later this year.  WESCO’s data will be unlocked through a series of digital applications that they are developing as part of their digital transformation.  He gave four examples of these digital products:  1) an AI-enabled product search function available to inside sales; 2) intelligent pricing; 3) Unified Sales Desk – an umbrella for all the digital applications to allow the front-end sales teams to do a more effective job with customers; and 4) Conference Room A/V as a service (first digital product to be taken outside of WESCO’s four walls to sell as a service).

At the end FY2021, EVP & CFO Dave Schulz noted that reducing WESCO’s significant debt position was a top priority.  In Q1 2022, faster-than-expected progress was made on this front, with leverage reduced to 3.6x net Debt/TTM Adjusted EBITDA (the high point was 5.7x when the Anixter acquisition closed in June 2020) and WESCO now expects to return to target leverage range of 2.0x to 3.5x earlier than anticipated – likely in Q2 2022.

CEO Engel reinforced the importance of the ongoing gross margin improvement program in WESCO’s results, a program that Anixter had implemented for multiple quarters in their business prior to their acquisition by WESCO.  WESCO has now deployed the Anixter program across the entire company, and are still in the early stages of getting benefit across the legacy WESCO business. He noted that WESCO is also seeing a benefit to gross margin from inflation by ensuring that they are effectively passing through price increases to their customers and getting paid for the value.

When asked by an analyst for comment on the Canadian market, CEO Engel offered the “level set” comments that pre-acquisition, WESCO Canada had a very strong electrical-based business, with deep, strong, broad roots and that Anixter brought to the table an exceptionally strong wire and cable business, along with the strong utility business they had acquired from HD Supply.  On this foundation, Canadian results with the two portfolios have been exceptional, with cross-sell contributing to a very large degree.  Also, secular trends in Canada have been a positive driver to the results, particularly broadband and 5G buildout.

Looking ahead to the rest of 2022, WESCO provided an adjusted outlook that was substantially higher.  Sales forecast for FY22 moved from an increase range of +5 to +8% to a new range of +12 to +15%.  Guidance on EBITDA margin is also up from the original range of 6.7% to 7.0% to a new range of 7.3% to 7.6%.  CEO Engel and his team are confident that WESCO is shifting to a growth company.  He maintains that the combination of the two Fortune 500 companies, their highly complementary portfolios with minimal customer overlap, and their much stronger enterprise is able to drive higher organic sales growth rates – backed up by putting points on the board for seven quarters in a row.  WESCO sees secular growth trends that are long-term secular, not cyclical as a major accelerant to their future growth – trends including Electrification, Automation and IoT, Green Energy, 24/7 Connectivity and Security, Supply Chain Consolidation/Relocation to N.A., and Digitization.

Go Deeper:

WESCO Q1 2022 Press Release: https://investors.wesco.com/news-events/news/news-details/2022/Wesco-International-Reports-First-Quarter-2022-Results/

WESCO Q1 2022 Presentation: https://s29.q4cdn.com/496171728/files/doc_financials/2022/q1/2022-05-Wesco-Earnings-Webcast-Slides_vFinal.pdf

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