WESCO International (NYSE:WCC) Q2 2020 Earnings Call

0:00 Good morning and welcome to the WESCO Second Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw from the question queue, please press star then two. We ask that you limit yourself to one question and one follow-up. Please note this event is being recorded. I would now like to turn the conference over to Brian Begg, Treasurer. Please go ahead.

0:37 Thank you, Kate. Good morning, ladies and gentlemen. Thank you for joining us. Joining me on today's call are John Engel, Chairman, President, and CEO, and Dave Schulz, Executive Vice President and Chief Financial Officer. This conference call includes forward-looking statements, and therefore, actual results may differ materially from expectations. Please see the webcast slides for additional risk factors and disclosures. For additional information on Wesco International, please refer to the company's SEC filings, including risk factors described therein. The following presentation includes a discussion of certain non-GAAP financial measures. Information required by Regulation G of the Exchange Act with respect to such non-GAAP financial measures can be obtained via Wesco's website at wesco.com.

1:27 Needs to access this conference call via webcast was disclosed in the press release and was posted on our corporate website. Replays of this conference call will be archived and available for the next seven days. With that, I'll turn the call over to John Engel.

1:42 Thank you, Brian. Well, good morning, everyone, and thanks for joining us for today's call. On behalf of Wesco, I hope that all of you have been staying healthy and safe in these challenging times. We prepared a very thorough update for you today. I'll lead off with a few introductory remarks, and then Dave will take you through our second quarter results. And then we'll provide a review of the excellent progress we're making on the Annexter integration, as well as the outstanding value creation that our transformational combination of Wesco and Annexter will create. So first, for an update on our business in the second quarter, results exceeded our expectations across the board. That is for sales, operating margin, operating profit, EPS, and free cash flow.

2:29 Business momentum improved through the quarter as we outperformed the market and built an all-time record backlog for the legacy Wesco business. Importantly, sales improved sequentially each month, and we saw continued growth in our utility business. Annexter also delivered a strong performance to close out the second quarter. Our positive momentum has continued into the third quarter. We're very encouraged by that, with quarter-to-date sales through Workday 28, that's quarter-to-date, down 8% versus prior year, but up 11% sequentially, with a book-to-bill ratio above 1.0. As we have done in prior economic cycles, we aggressively managed our business and took significant cost reduction in cash management actions, which enabled us to achieve a decremental margin of only 10% and generate exceptionally strong free cash flow of $140 million or 250% of adjusted net income.

3:30 As you know, we increased debt to complete the Anister combination. We expect our consistently strong and counter-cyclical free cash flow generation to enable us to rapidly de-level and get back within our financial target leverage range. within 36 months. In closing out the first half of 2020, I would like to take this time to recognize and thank all of our associates for their inspirational dedication, commitment, and hard work in effectively managing through this COVID-19-driven crisis. Now turning to Annixter. The second quarter will prove to be a watershed period in our Lesko history. as we successfully closed on our industry-shaping merger of Wesco and Anixter.

4:20 In combining two industry-leading Fortune 500 companies with successful track records, we are creating the premier electrical communications and utility distribution and supply chain solutions company in the world. In May, we completed a well oversubscribed and highly successful capital raise of approximately $5 billion in bonds and bank debt, all with very favorable terms. We satisfied the remaining closing condition when the waiting period for the Canadian Competition Bureau expired on June 18th and then successfully closed the Anister transaction on June 22nd. This timing met our commitment to close this transaction in the second or third quarter. Against the challenges imposed by the global pandemic, the extraordinary determination of our West Midland Anister associates to execute a flawless day one closing Just five months, just five months after signing the merger agreement was very impressive.

5:21 I could not be more proud or more appreciative of the entire team and their extraordinary efforts in achieving this noteworthy milestone. As I mentioned before, we've been executing a detailed, rigorous, and process-oriented integration planning effort over the last several months. Now all of our integration efforts and organizational focus shift from planning to execution and synergy realization. I'm happy to say we are off to an excellent start in integrating the two businesses in our first six weeks since closing and have already completed actions to deliver over 50% of our year one cost synergy target of $68 million. We have also begun to realize our first sales synergies through leveraging our expanded global footprint and cross-selling what is now our broader product and services portfolio.

6:16 The strong cultural alignment between Wesco and Anister is proving to be a key driver of our initial success. We are building on these early successes and we remain highly confident in capturing the significant upside potential and exceeding our three-year cost savings, sales growth, margin expansion, and cash generation synergy targets.

6:41 With that, I will now turn the call over to Dave.

6:43 He's going to walk you through our second quarter results and then discuss our integration, execution, and synergy capture plan in more detail.

6:53 Dave. Thank you, John, and good morning, everyone. I'll start with an overview of results beginning on page four. This slide presents our second quarter, walking you from our reported GAAP results to the legacy WESCO results. The column on the left shows our reported gap numbers, and to the right of that column are the various adjustments to our reported results to remove the transaction-related impacts. The third column subtracts the merger-related adjustments from the reported results to show the underlying results of the business adjusted for all deal-related costs and activities. To the right of that are the annexure and WESCO components of these adjusted results, respectively. Reported sales in the quarter were down 3%, and down 12% organically, driven by lower demand due to the COVID-19 pandemic.

7:43 I'll walk you through our sales results in more detail in a moment. The legacy Wesco business generated operating profit of $70 million, approximately $28 million lower than the prior year, on a sales decline of approximately $285 million, representing a decremental margin of 10%. SG&A was down $33 million compared to the prior year quarter, reflecting COVID-related cost actions and lower volume. Legacy Wesco adjusted operating margin was 3.8% for the quarter, and adjusted EPS was $1.04. The Legacy adjusted annexure results for the period following the merger had gross margin of 20.3% and operating margin of 8.3%.

8:30 This exceptional result was driven by the strong Anixter sales during the nine-day ownership period in the second quarter, continued gross margin expansion, and cost reduction actions initiated by Anixter in response to COVID-19. On an adjusted basis, the combined WESCO and Anixter business generated operating margin of 4.2% and diluted EPS of $1.36. A brief comment on the merger-related adjustments. The $73 million of SG&A primarily represents investment banking, legal, and integration management fees. Additionally, we recognize the one-time expense associated with the change in control provisions of the transaction. You will also note several impacts below the operating profit line, including interest expense of $45 million.

9:19 This includes interest paid on the bonds issued and non-amortized financing fees. We also recognize preferred dividends expense of just over $1 million in the quarter related to the preferred stock consideration to Anixter stockholders. We will provide a detailed update on the Anixter acquisition a bit later in the call as we have made substantial progress on the integration of the businesses and the generation of synergies. Turning to slide five, this summarizes the organic sales growth by end market and geography for the legacy Wesco business and does not include any contribution from Anixter. You can see on the right-hand side that monthly organic sales in the quarter were down 16%, 10%, and 13% in April, May, and June, respectively, versus the prior year.

10:08 As John mentioned, sales improved sequentially through the quarter on the same workday basis, with April down 13%, followed by increases of 9% and 5% in May and June, respectively. Differences in foreign exchange rates reduced growth by 90 basis points, primarily reflecting unfavorable Canadian dollar exchange rates. Looking at the sales results by geography, the U.S., which is roughly 75% of legacy WESCO overall revenue, was down 12%. Canada was down 17% organically. Both the U.S. and Canada results were driven by declines in our industrial and construction end markets, as many projects were delayed beginning in March.

10:53 Industrial sales were down 21% organically in the U.S. and 22% in Canada, as we saw broad-based weakness in market verticals we served due to COVID-19. Bidding in project activity remained strong, however, and a number of industrial markets improved sequentially from Q1. Construction sales were down 16% in the U.S. and 21% in Canada, reflecting the project delays due to COVID-19. Our legacy WESCO backlog reached a new company record and was up 17% versus the prior year and up 4% sequentially from Q1. Consistent with what we saw through the end of April, construction projects had been delayed rather than canceled. Utility sales continued to be exceptionally strong in the quarter, with the U.S.

11:42 up 6% organically and Canada up 36%. Sequentially, U.S. utility sales were up 8% and Canada utility sales were up 27% versus Q1. This was our 12th consecutive quarter of organic growth in the U.S. utility business. Commercial, institutional, and government, or CIG, organic sales ended down approximately 5% for the quarter. This end market exhibited positive momentum in the quarter as sales were up 13% and 11% sequentially from Q1 in the US and Canada respectively. Projects related to data center builds, security, and cloud computing projects with large technology customers continue to provide significant sales growth opportunities.

12:29 Moving to slide six, let me take a moment to remind you of our liquidity and some features of our new borrowing facilities that we closed on in June as they position us to meet the challenges related to the economic impact Our liquidity, which is comprised of invested cash and borrowing availability on our bank credit facilities, is strong at $819 million. We have maintained sufficient cash on the balance sheet of $265 million. Collections throughout the quarter and into August have performed at or above historical trends. Bad debt reserves are also tracking consistent with historical levels. In connection with our closing the annex to merger, we raised new senior unsecured notes of approximately $2.8 billion, a portion of which was used to refinance annexers 2021, 2023, and 2025 notes.

13:23 We also entered into a new $1.1 billion ABL facility and increased the AR facility commitment to $1.025 billion in June. Our bank credit facilities are low-cost LIBOR-based agreements and Mature in June 2023 and 2025. We expected our ratio of fixed rate debt to variable rate debt to be approximately 70 percent at closing, and it ended up at 72 percent at the end of June. Our credit facilities include limited operating covenants, and we easily pass the liquidity thresholds by which compliance is measured by a very large margin. Having completed the annex to merger, our capital allocation priority will be to support the integration, organic sales growth opportunities, and to rapidly retire debt.

14:14 We do not expect to utilize any remaining amounts available under our board authorized share repurchase program that expires on December 31st of this year. Turning to slide seven, let me recap our second half priorities. Our first priority is to build on the improving sales momentum we experienced this quarter. Despite weakness in certain markets in Q2, we capitalized on improving momentum within our business and are well positioned to leverage our broad portfolio of products and services to drive sales ahead of the market. We will maintain our cost discipline to meet or exceed the $50 million in cost savings generated by the actions that we took in April in response to COVID-19.

15:00 We are planning to reinstate full compensation on October 1st for Legacy Westco employees that was temporarily reduced between 12% and 25% effective May 1st. We will be deploying across the Legacy Westco business, Annexer's gross margin improvement programs that enabled Annexer to deliver seven consecutive quarters of year-over-year improvement. We will continue to rapidly execute our integration plan and deliver the year one merger synergies with a high confidence of delivering substantial upside. As we generate cash, our priority will be to retire debt consistent with our objective return to our target leverage of two to three and a half times debt to adjusted EBITDA within 36 months post-close of the transaction.

15:49 Finally, beginning in the third quarter, we will begin reporting results for the three strategic business units announced as part of our new organizational structure in early June. With that, let me turn the call back to John as we will provide an update on the Annexter merger.

16:05 Thank you, Dave. So I'd now like to reemphasize the outstanding value creation that our transformational combination of Wesco and Annexter will create. There are seven key highlights regarding this industry-shaping merger. Number one, The merger is a transformational combination that creates, as I said before, the industry leader in electrical communications and utility distribution and supply chain services. Number two, the combined company benefits from a step change in scale and capabilities in what remains a highly fragmented electrical and communications distribution space. On a combined basis where the industry leader in North America with approximately $17 billion in sales revenues and over $1 billion in adjusted EBITDA on a pro-formal basis, including the identified cost.

17:01 Number three, the two businesses are highly complementary in terms of products, industries, and geographies, which enables us to sell more products to more customers in more locations around the world, and more importantly, accelerate our sales growth by more than 100 basis points versus Standalone Projections. I've said this before, this is an extraordinary combination of two successful companies where one plus one is equal to three. Number four, we're executing an integration plan to deliver well over $200 million worth of cost synergies. As I mentioned previously, we're off to an excellent start, only six weeks since closing this acquisition in late June. And Dave will take you through our notable progress in much more detail shortly.

17:50 Number five, the financial benefits of this combination that will be generated will be exceptional. We expect our EPS growth rates to double and adjusted even margin to expand by more than 100 basis points through the cost synergies I just discussed. Number six, both companies benefit from a highly resilient business model to generate substantial free cash flow through all phases of the economic cycle. The combined company is expected to generate free cash flow of more than $600 million annually by year three, which we expect will enable rapid deleveraging to within our target range within 36 months, as well as provide future capital deployment options to drive value creation.

18:42 And finally, number seven, the collective Wesco and Anixter management teams are results-oriented and laser focused on driving an efficient integration and on generating these synergies to drive the substantial value creation. In summary, with Anixter, the new WESCO will capitalize on the accelerating secular trends of electrification, increased bandwidth demand driven by higher voice, data, video and mobile usage and the digitization of our B2B value chain. We are more bullish than ever on the substantial value creation that this transformational combination will create for our customers, our supplier partners, our employees, our investors, and the communities in which we operate.

19:31 With that, I will now hand it back to Dave to provide additional details on the excellent progress we're making on the annexation integration.

19:39 Dave. Moving to slide 10, the enhanced scale that this merger creates is clear. It brings together two highly complementary companies. Combining them benefits our customers and creates value through significant cross-selling opportunities, premier supply chain services, acceleration of our digital initiatives, and improved operational and supply chain efficiencies. On a trailing 12-month basis through June 30th, the business generated revenue of approximately $17 billion and adjusted EBITDA of over $1 billion on a pro forma basis including the $200 million of cost synergies we are confident that we will deliver. Turning to slide 11, the North American electrical distribution industry is very large and highly fragmented with an estimated total size of $114 billion per year.

20:30 With the merger, the company has a share of approximately 13%. Even with this merger, the market remains highly fragmented and offers substantial opportunities for accelerated organic growth. Both Wesco and Anixter have invested in supply chain services to differentiate our overall customer value proposition. The combination of these two companies not only increases our overall scale, but also improves our ability to better serve our customers through an expanded product and services portfolio. Moving to page 12, as we consider the future of the combined enterprise, there are numerous ongoing and attractive secular trends and growth opportunities. The demand for increased bandwidth driven by higher voice, data, video, and mobile usage, greater connectivity needs for remote work, home, and school applications, and the increasing electrification of our infrastructure are just a few of the growing secular trends that are directly aligned with the core capabilities of our combined business.

21:32 The right-hand side of this page outlines the financial benefits of this transformational combination. We are highly confident in exceeding our three-year cost savings, sales growth, and cash generation synergy targets communicated earlier this year. With a challenging economic cycle we're facing near term, this strategic combination remains compelling as we're doubling the size of our company and will transform the new enterprise through execution of the integration plan and delivery of these synergies. Moving to slide 13. We are focused on meeting and exceeding the commitments we made to our investors when we announced the merger in mid-January. We raised approximately $5 billion in bank and bond debt with favorable terms, and the bond offerings were substantially oversubscribed.

22:20 We closed the transaction near the end of Q2 in line with our initial commitment to close in Q2 or Q3. We increased our liquidity to more than $800 million as of the end of Q2. We are rapidly executing our integration plan and have already completed actions to deliver over one half of our year one cost savings target of $68 million. We're already generating sales synergies from the merger that are in addition to the minimum $200 million of cost synergies that we expect to generate. Turning to page 14, our top focus is executing a detailed, rigorous, and process-oriented integration that delivers our committed synergies as well as the clear upside potential while combining the best elements of each company.

23:11 The three objectives that our planning has encompassed are first, executing a flawless day one and first 100 days post-closing that ensures business continuity and an effective onboarding process. Second, delivering the value of the combination through both the cost and sales growth synergies. And third, implementing an operating model for the new enterprise which deploys cutting edge digital tools and applications and is led by an organization that is staffed with the best leaders of each company. Value delivery teams comprised of approximately 150 employees from both legacy organizations have identified more than 500 initiatives and 2,500 milestones to combine the best of our two companies.

23:56 The six value delivery work streams that we are working on in our integration planning and execution include commercial, Digital and IT, Supply Chain, Operations, Marketing, and the Corporate Functions. We are also mindful of the critical importance that culture plays in the value creation opportunity of this combination. We conducted a wide scale and thorough survey of all employees to understand the key attributes of the cultures and are developing a plan to combine the best of both. The high degree of collaboration among and across these teams has been inspiring and underscores the strong cultural alignment between the two companies. We are taking advantage of the opportunity to leverage the best talent and ideas of two successful organizations as we create a new world-class enterprise.

24:48 Turning to slide 15, this slide highlights our progress against the three core integration objectives outlined on the prior page. We achieved our first priority, which was to execute a flawless day one. Our various value delivery teams have spent months preparing for day one, which I'm pleased to report was very successful. We executed a detailed plan of communicating to our customers and suppliers, providing updates to our 18,900 colleagues, and held multiple town hall events for our employees to get to know our new management team. Our second critical objective is to complete all of our master planning and value capture initiatives. Having generated more than half of our year one target of $68 million of run rate synergies, we're on track to exceed this target.

25:38 We have deployed commercial targets for sales growth, margin improvement, and cash flow, and are already experiencing success with our first cross-sell pilot programs. Our final critical objective is to build a new world-class company. We have announced our three strategic business units and the first two levels of our senior management team. Moving to page 16, you can see the detail of the composition and expected timing of our synergies. Of the 45% that is corporate and administrative, approximately two-thirds will come from the elimination of duplicative general administrative costs, and one-third will come from corporate overhead. Of the 55% that will be generated from supply chain and field operations, the majority will come from supply chain efficiencies.

26:26 The field operations estimate includes the footprint rationalization of both companies' branch networks. Approximately two-thirds of WESCO and Annexer facilities in the U.S. are within 20 miles of each other. Additionally, with a combined $14 billion in total cost of goods, we have identified over $70 million of supply chain-related synergies. Both the supply chain and field operations synergies are expected to begin in year one, but the bulk of these opportunities will be realized in years two and three. We are confident in achieving the synergies and believe that they can be realized efficiently with minimal disruption to our day-to-day business. To date, we have already executed more than 30 unique initiatives across the four synergy types, resulting in more than $35 million of run rate synergies.

27:16 We have eliminated duplicative public company-related expenses of approximately $7 million, as well as C-suite and other duplicative roles that provide an additional $20 million in savings. Moving to page 17, both Wesco and Anixter have strong track records of generating free cash flow throughout the economic cycle. Over the past five years, the business has generated an average of $370 million in free cash flow on a combined basis. With the combination of earnings growth and the realization of cost synergies, we expect the annual cash generation of the combined company will expand to over $600 million per year by year three. This includes $75 million in free cash flow through the release of working capital.

28:01 As we mentioned earlier, the strong free cash flow and earnings growth will enable us to rapidly deleverage the balance sheet. Our ratio of debt to adjusted EBITDA was 5.7 times as of June 30, 2020. including year one synergies of $68 million. Our leverage ratio is 5.3 times. We are expecting to return to leverage within our target range of two to three and a half times net debt to EBITDA within 36 months. Moving to slide 18, both WESCO and Annexer benefit from several dynamics that make our company highly resilient to economic cycles. First, our cash flow is countercyclical as we release working capital during a downturn. Second, a cost structure that allows for quick adjustments in response to changing demand levels. And third, low required capital expenditures given the nature of the business model.

28:56 Over the past 10 years, Wesco and Annexer capital expenditures have averaged less than half a point of sales. In the current environment, this resilience is enhanced by Wesco and Annexer's high degree of diversification by customer, supplier, and market and geography. Both Wesco and Anixer have proven abilities to deleverage through the economic cycle as they both did from 2007 to 2011 when their net leverage was reduced to below two turns as a combined $1.9 billion of free cash flow was generated. Additionally, both companies have demonstrated the ability to use their cash flow to rapidly pay down debt following a sizable acquisition. In the case of Wesco, We reduced leverage from 4.5 turns to 2.7 turns following the acquisition of Ecole in 2012. In Annexer's case, it reduced leverage from 4.1 turns to 2.8 turns in the two years following its acquisition of HD Power Solutions in 2015.

29:59 This quarter was an excellent example of our strong counter-cyclical free cash flow as the combined company generated $142 million in free cash flow or approximately 248% of adjusted net income. Moving to slide 19, you may have seen the press release we issued on August 6, announcing the consent agreement we reached with the Competition Bureau of Canada. We had closed the merger on June 22, 2020, as the waiting period for the Competition Bureau expired on June 18, 2020. Under the terms of the agreement, Wesco agreed to divest the legacy Wesco utility and datacom businesses in Canada. This includes the utility businesses of Brews, Tridor, and La Prairie acquired some years ago. Combined, the Wesco Canadian utility and datacom businesses represent approximately $150 million in sales, or less than 1% of the revenue of the combined organization.

31:02 The divestitures will have no impact to the overall outstanding value creation opportunity of this merger. I'd now like to hand it back to John for a quick summary before we open it up to Q&A.

31:12 Thank you, Dave. We've covered a lot of material this morning, so before opening call to your questions, I'd like to just walk you through a quick summary. We responded to a quick and decisive actions in response to the global COVID-19 pandemic. We will continue to aggressively manage our business as we have done in prior economic cycles and respond to this crisis as needed. Just five months after announcing the definitive annexure agreement in January, we completed a very successful and oversubscribed capital raise in May, and then we successfully closed the annexure merger on June 22nd. Most notably, all of this was done against the COVID-19 backdrop. As I mentioned earlier, Integration is off to an excellent start and execution is accelerated.

32:03 We expect to exceed our cost savings, sales growth, margin expansion, and cash generation synergy targets and deliver the substantial upside potential and value creation associated with this transformational combination. And finally, it's the start of a new era for Wesco. As an industry leader, we are now larger and more diversified, with differentiated scale and capability in what remains a highly fragmented industry. As a result, we are exceptionally well positioned to lead not only a digital transformation of our business, but also of our industry. Overall, we are doing what we said we would do, and we will continue to transparently provide our progress versus our plan and our commitments.

32:48 With that, I'd like to open the call for your questions. We will now begin the question and answer session. To ask a question, you may press star then one on your question phone. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two. Please limit yourself to one question and one follow-up. If you have additional questions, you may reenter the question queue. The first question comes from Dean Dre of RBC Capital Markets. Please go ahead.

33:24 Thank you. Good morning, everyone, and congratulations.

33:27 Thank you, Dean. Good morning.

33:29 Hey, really great to see how well you've hit the ground running on the cost energy side and already realizing half of the first-year target. And lots of good color on the merger rationale and specifics, and just really appreciate the color you provided today. Question I wanted to ask is, because we've hit you with this a couple different times in the last five months, and with regard to some more specifics on annexers, business practices, P&L, and where and how are they able to generate such attractive margins? And the idea here was you were never able, you had not gotten full access to their books.

34:17 Well, you have now. So what have you learned now? that you didn't know before, maybe have a higher degree of confidence that especially gives you this line of sight on margin expansion and maybe specifically gross margin. Start there, please.

34:33 Yeah. Yeah, Dean, thanks. That's a great question. You know, to your point, when we had a clean team room process in place all the way up until closing, so we couldn't get to the – really the specifics on pricing, costing, by customer, by supplier, what the construct of the margin was and the margin improvement programs. So we've been working aggressively since June 22nd when we closed, and that's when we crossed the wall, so to speak, and could get all our commercial teams engaged. The bottom line is I'm more bullish than ever.

35:20 As I've gotten a much deeper understanding now of where the strength is and how the business is run, it reinforces and reaffirms my expectations around the following. We have the global leader in communications and security, absolutely the global leader, unmatched capabilities, and the operating and business models are outstanding. and they generate very good margins from gross margins through to operating margins through to return on total capital or invested capital. Number one. Number two, their wire and cable business. Absolutely a leader, undisputed leader, and as we've gotten deeper insight into that business, the power and structure of the margins, again, from gross margins to operating margins, return on total capital, very strong.

36:15 I had a view that they were both leading businesses, but now I've got a much better sense understanding their true profit and cash generation characteristics. And furthermore, I think this is something there where Wesco has had some deficiency historically, and I've been here for some time, as you know. We didn't have anywhere near the wiring cable strength of Anixter. They were far and well beyond us in terms of capability. So we're now in the for the first time in my WESCO tenure in a unique position to sell the entire electrical package with very strong capabilities in core wiring cable, that whole category.

37:01 So that's at the highest level, Dean. Maybe the only other thing I would say is we had two, quote unquote, industry leaders coming together in utility. That speaks for itself, and I think you see the results that we posted in Q2, not only in the U.S., but in Canada, so I feel very good about that. I would say that's also a reaffirmation. Probably the biggest surprise of all is just, and I had a sense there was good cultural matching, and that occurred, but again, post-June 22nd, we got all the field teams engaged and the business leaders. We announced our new business leadership structure. The cultural alignment is exceptional. And I think that's what speaking to our ability to execute and deliver results so quickly out of the gate post-close.

37:53 That's all helpful. And just given how much of the integration roadmap you provided this morning and the progress you've made so far, I don't feel like I need to start nitpicking on any of those assumptions. So my follow-up question is, might surprise you a bit in having covered Wesco for so long with multiple storm events. We have seen where and how Wesco benefits and provides critical support during power restoration. My house in Connecticut was without power for seven days, so I felt this real time. We did have a generator, but still. Good to hear.

38:36 I'm glad you did. That's important.

38:39 Well, we do cover electrical equipment.

38:42 Yes, true, true.

38:44 But I'd love to hear some real-time color as to how you coordinated as the merged company in response to all of these utilities. Did you have any? Supply Chain Issues, and where does that stand? And am I correct in assuming that's about a percent of top line in a benefit if I compare that to what you did with Sandy? So that's my follow-up. Thanks.

39:09 So I'll make a comment. We, internal to the company, we have a pretty robust process. Every week we're communicating our successes. out of the integration office, a dedicated fully staffed integration office with an external consulting firm or one of the leading consulting firms, as we mentioned before, and communicating with all the Wesco and Agster associates. And this was one of our top ten, and that is what? How we coordinated the efforts and how we operationalized supporting customers when Isaiah came through up the East Coast, but particularly through the Northeast. This was more a wind-driven storm, Dean. Both Wesco and Anixter both had utility customers that were in the swath of the storm, particularly in the Northeast.

40:00 And we've touted that already, as I said, in the early days post-close as one of our true success stories in terms of leveraging the integrated teams. We looked across both supply chains, supplier relationships, inventory positions. and we mobilized resources as if they were one company. I mean, I'm absolutely thrilled with that rapid reaction and response that was executed but now with a combined company. In terms of meaningful sales impact, this was more wind-driven. It's not meaningful. It's not meaningful yet. Now, we'll see what happens down the road in terms of permanent damage and rebuild but that's all kind of swept up into where the whole non-resi construction and resi construction market is, I think. But so far, I can tell you we've looked at that August Q3 slash August quarter to date, not material at all.

40:58 We're talking under $10 million of specific incremental sales associated with Isaiah. So I think that just puts the Q3 to date numbers in even better light, I think, in terms of the improved momentum.

41:15 That's exactly what I wanted to hear. Best of luck. Thank you.

41:19 Thank you. The next question is from Sam Darkash of Raymond Gang. Please go ahead.

41:28 Good morning, John. Good morning, Dave. I hope you both are well.

41:31 Good morning, Sam. Likewise. I hope you and your family are safe and healthy.

41:35 Thank you. A couple questions, if I could. The first, the backlog growth obviously encouraging the up 17% year on year. And this is a little bit more challenging for us to see, especially with the new segment reporting. Can you remind us right now within your non-resi construction, including your backlog, what your end market vertical mix is, specifically where we might see some longstanding hotspots like office and retail and hospitality and what have you? And then remind us what the total non-resi construction is pro forma. And I've got a follow-up.

42:13 Yeah. So first of all, I'll start on a WESCO basis first. The WESCO backlog is legitimate booked orders. And I say that to make a distinction of where we have a multi-year global accounts contract, utility alliance contract, or a large global capital construction project that results in numerous releases, packages released over time that are not yet booked. The global accounts, utility alliances, those large complex capital projects, that's not in our backlog. So this is true booked orders. And in what's our current, our old WESCO segment reporting and market segment, which we're pivoting to a new structure, as you mentioned, which I'll get to, the majority of that backlog is construction-related projects. but also if we have a direct end user customer and any orders that are already booked, that are in bookings, whether it's MRO, materials or projects directly with end users, it would show up in our backlog, Sam.

43:28 So it's a very good indicator, I think, overall of directionally of our project portion of our business as opposed to the MRO, supplies piece, or OEM. I'm really pleased with how strong it's holding up. You know, again, I'd like sales to be stronger, so some of that is sitting in backlog. With that said, the opportunity pipeline is exceptionally strong. If you look at Annexter, they had very strong backlog that they operated in through the first half. And coming out of the second quarter, I'm really pleased in particular around what will be our new communications and security solutions business, which I'll talk to in a minute. That backlogs up double digits as well year over year.

44:21 So a little more color to help with that. We will be, as part of Q3 earnings, doing a much more detailed presentation of our new segment reporting. I'll just take a moment on that now. We've announced it internally. We're operating under that structure now inside the company. The first is electrical and electronic solutions. We call it EES, and we're calling these strategic business units. That's our largest business. It's global. The second would be communication and security solutions, acronym CSS. That's also global, the second largest. And the third would be utility and broadband solutions, also a global business. and the acronyms UBS. So that'll be our segment reporting going forward.

45:11 We'll do that effective with our Q3 results. And obviously we'll have full segment reporting at that point. So I think we'll have a very much more expansive presentation at that time that walks you through. Here's what's in each of the three businesses. You know, here's the end markets they serve, the business models, the operating characteristics, et cetera, if that's helpful.

45:35 And total non-resi construction pro forma as a percentage of your mix?

45:40 So total non-resi pro forma, that's a really great question. It's an exceptionally important point because we have dramatically reduced our exposure to the more cyclical portion of non-resi construction. It's now roughly 24%, 24, 25% of total company, approximately, mix. and if you go back to the original, I said there's a new era for Wesco, right? You go back to the original Wesco spin-out days, that was 90 plus percent of the business. So here we sit here today and the company was a billion five in sales. So here we sit here today at a $17 billion approximately revenue base and 24, 25% is not ready.

46:24 So my final question then, after the Canadian divestiture, the small operation there, and following the close of the annexed or deal, I'm guessing there may be other businesses that you're looking at that may be deemed, I don't know, non-core or potentially distracting or potential sources of cash. What are your thoughts in terms of other planned contemplated divestitures at this point?

46:51 So we're going through an unconstrained clean sheet of paper evaluation of divestitures The strengths and capabilities of all the businesses across the entire enterprise and particularly how they're lining up with our 3S global strategic business units. And that's, again, this is extensive work we're doing that really ramped up in earnest once we closed, Sam, because now we're able to cross the wall fully and get the business leaders engaged. So that's something we're looking at. Right now I feel terrific about the portfolio in terms of fundamentally we've mixed, shifted up to a much more attractive, higher growth set of end markets that were lined up with leading value propositions to serve. So I'm thrilled with the overall mixed shift up.

47:50 With that said, there may be some areas of the business that are not as strategic or core that make sense to, you know, to to this position. So that's a process we're going through now. Nothing to report on that yet, but we're taking an unconstrained look across the whole portfolio on that.

48:09 So the two to three and a half times of leverage prospectively in year three does not really contemplate any material divestitures and or equity raises or anything like that. It would be entirely an organic pre-cash flow and EBITDA growth story?

48:24 100% correct. And we are highly confident of that. I think you can see from the The cash generation in Q2 alone, I think we've set the bar on our free cash flow target three years out with substantial upside potential against that. And so, yes, the answer to your question is yes. So to the extent there's any parts of the business, albeit whether they're small or whatever, that don't fit that we disposition, that would just incrementally help us de-lever quicker.

48:58 Very helpful. Stay well.

49:00 Yep, thanks. The next question is from David Nanty of Baird. Please go ahead.

49:09 Good morning, everyone. Morning, Dave. Morning.

49:13 Yeah, first off, thanks for the insight into how you're going to segment report this going forward. But as you roll into these new segments, will it be like EES, will be Annexter EES plus Wesco Construction and Industrial, and DSS is Annexter NSS plus Wesco CIG or something, or are you just going to put everything in a blender and reshuffle and give us restated historicals?

49:46 I'm not sure I would use the blender now, but I'll kind of give you how we're thinking about it. Again, we need to give you a very detailed presentation of this. which we will do as part of our Q3 earnings. But the way I would ask you to think about it is the core strong deep roots that Wesco had in electrical, that forms the basis of EES. That's the big anchor, call it in a positive sense, the big deep roots of EES. What gets added to that from the Anixter side is Their legacy, which they are the absolutely undisputed leader of wire and cable business, that moves, that will get coupled, and Dave, that was my earlier comment, that that now gives us the complete, strong, entire electrical package to sell, because that wasn't efficiency on the LESCA side. In addition, the electrical portion of HD supply power solutions that Annexter bought will become part of the EES business, which from a broad-based electrical standpoint was predominantly in the east called southeastern portion of the U.S. So that's EES. It will be a global business and will be the largest of the three. The second will be communications and security solutions.

51:11 So that will include, you know, it's the classic NSS business of Anixter. Bill Geary is leading that, so he was leading that previously. He's off to an absolutely outstanding start as a result of the combination. And we've taken the legacy Wesco Datacom business that was, you know, CSC and what we've invested over the years back since 2006, and that's rolling into that annexed business. So we'll have all communications and security together. Wesco had some legacy Datacom and IP security. nowhere near the size or scale of Annexter. They're the undisputed leader. We also had a nice AV business, as well as Annexter has an AV business. When you look at those two, more on this in the future, they're highly complementary, but that'll be part of Bill Geary's business.

52:06 And then the third business is utility and broadband solutions. That includes the prior number one, number two leaders in utility, both ourselves and what Annexter bought from HD Supply. You know, their utility business. It has deep roots back to the old Hughes Supply, which I think you all know well. So it's utility, but it's also broadband communication. So there's this outside plant focus. And, you know, that's the prior WESCO TVC, but it also includes broadband, the broadband business that was in Anister's NSS segment. And that's highly complementary. More on that in the future. when we kind of go through the businesses in more detail. But I'm absolutely thrilled with the complementary nature of that combination, particularly given the tremendous growing secular trends around 5G acceleration, demand for bandwidth increasing, increased security needs, et cetera. So there's a quick little run-through.

53:11 will obviously give you a sense of end markets for each of the three businesses, the product categories, how they line up. We'll go through that in great detail. I would say this question I got earlier, probably the most surprising thing to me, and I've reflected upon it, is I thought I knew their business well, and we knew their business well, and they knew us pretty well as competitors, prior competitors. But it's more complimentary than I fully appreciate it. If I were to put the fine point on it, that is the biggest takeaway. The electrical complementary nature I absolutely thought of. That was part of the key rationale of the deal. The wiring cable is so strong. Core Wesco electrical is so strong.

53:56 Put it together, we've got the whole electrical package. But the communication and security is actually highly complementary. When you look at exactly what Wesco had, how it was done versus Anixter, it tucks in nicely. They're obviously the undisputed leader. The AV pieces are complimentary. Broadband is exceptionally complimentary. And utility is just a significant, you know, well, it's a one and two coming together. So that kind of speaks for itself. So does that help there?

54:24 Yeah, yeah. Sorry, I was going to ask just what annexer segments did in the quarter, but I guess we can talk about that offline maybe. I did want to talk about the core SG&A reduction, which is clearly a highlight of this quarter. How much of the $33 million in legacy WESCO OpEx reduction was COVID-related that we should expect will come back in the third quarter versus costs that will only feather back in with volume? And second, did any of the synergy benefits hit the second quarter at all? And third, I guess we should assume, I don't know, roughly half of the $68 goes into the third quarter for synergy capture?

55:07 David Safe-Schulz. So I'll start with the COVID-related savings that we posted in the second quarter. Just to remind everyone that we had talked about during our April call that we expected to deliver $50 million of run rate savings versus Q1. And this is only on the legacy Wesco business. And that $50 million would be realized in Q2 through Q4. We delivered greater than $20 million of that $50 million in the second quarter It's primarily temporary in nature. So these were cost actions to meet the cost structure requirements due to lower demand. With the exception of the volume-related decline, we would anticipate that those costs would come back as we progress through the balance of Q4 and into next year. One of the things to keep in mind is that our salary reduction plan was only in effect until the end of the third quarter. and so we'll see a full benefit in the quarter of the monthly salary reductions, but that will be restored beginning in Q4.

56:12 And just to emphasize, we did not get any Synergy savings in the Legacy Wesco or Legacy Annexter numbers during the second quarter. We would anticipate seeing some of those savings beginning here in the third quarter. We'll call those out to you as we present our results.

56:30 Okay. Thanks a lot for the time, guys. Thanks, Dave. The next question is from Nigel Coe of Wolf Research. Please go ahead.

56:41 Thanks. Good morning, everyone. So I think I'll give you a crack at that. Here you go. So I think I'll give you a crack at that question. How did the legacy ANISTA proforma numbers look for 2Q? And I'm just curious because, obviously, the contribution, the 10-day contribution was exceptionally strong, especially at the margin line. So I'm just curious how it performed.

57:08 So the legacy annexed businesses performed relatively in line with the legacy WESCO numbers. And when you take a look at that by their segments that they previously reported, their NSS sales were down roughly 13%, EES was down 22%, and their utility business was down just under 4%. and again, that would be on a like-for-like quarter basis that they would have reported historically. So again, relatively in line with the overall result that Wesco posted in the second quarter.

57:48 And that's great information. And the 10% contribution margin within that bridge, is that just the seasonality that we normally see strengths at the end of 2Q and or was there something else that explains that 10% margin contribution?

58:06 That's exactly right. So when you take a look at the nine days of ownership post the transaction closing, you saw a relatively higher level of sales from the legacy Anixter business on a roughly level-loaded SG&A. And so that's what drove the higher margin in that stub period for Anixter.

58:27 And then a quick follow-on is, obviously, you know, You're very confident on the free cash flow bridge, the delivering story. Is equity off the table here, or is there a level of a stock price where you would contemplate, you know, come back in with a treasury issue?

58:45 Well, presently, you know, you'll recall kind of where, you know, we originally had equity as part of financing the annex or merger, and we made the decision to go to all depths. when the stock price was higher than it is currently. And we made that decision because of the strength and conviction around what the opportunity was. Here we sit here today. It's months later. We used all debt to finance it. And I look at where our stock price is trading, honestly, currently, and I factor into the, you know, you take our three-year financial targets, which we have great confidence in not just delivering but exceeding, and we think we clearly signal to you that we see substantial upside to the cost synergies piece alone coupled with we've got attractive sales synergies that have started out of the gate and they typically prove to be the most elusive.

59:48 So if you just take our three-year financial targets without even the upside, put a normal multiple on it, our stock prices should be multiples higher than it is today, multiples higher. Presently where we're trading, that's well below the intrinsic value from our success.

1:00:08 Very clear. Thanks, John. Thanks, David. The next question is from Michael McGinn of Wells Fargo. Please go ahead.

1:00:18 Morning, everybody. Morning. Good morning. Feels good to be back covering Wesco again.

1:00:26 Great to have you back covering us. Thank you. Yeah.

1:00:30 Yeah, so as we switch gears from talking about decrementals to hopefully incrementals by year end, I know you mentioned the $75 million release in relation to the long-term free cash flow target. Can you frame what a near-term recovery looks like specifically in terms of working capital? Because you've outlined facility and fixed cost energies and also have some supplier overlap with Annexer. So does that mean working capital load-in is different versus maybe what it looked like as a standalone entity?

1:01:03 So Mark, it's Dave Schulz. Typically, and you've seen this through other cycles, we have the ability to rapidly reduce our net working capital during a downturn. We then tend to see net working capital return as sales return, and it's primarily driven by the accounts receivable. So we've not provided any specific guidance on an outlook for 2020, so I don't want to get too far into the weeds on our net working capital plans for the year. only to remind our investors that we are laser focused on the working capital. We do believe that there are significant working capital synergies that can be gained through the combination. We've provided a number that we've included $75 million of a net working capital release as we bring the two companies together. We've not framed out the timing on that yet.

1:01:58 Okay. and then more, I guess, another short cycle question. I believe July was your toughest comp both overall and in the U.S. last year. So can you just frame how much of that played into the 8% figure, what you're seeing out there right now in terms of a broadening of the recovery, either by end markets, new segments? Anyway, I'll take it.

1:02:25 Yeah, so I think maybe I'll just start Michael, you look at Q2. So, you know, we didn't guide, but I think versus expectations, we did better than we thought, clearly. I said across the board, starting with sales. You look at what we did in construction and look at what we did in industrial, you know, a little better than I thought we might end up in Q2 for both end markets. Remember, construction, we're not Reggie-driven, very, very low percentage. single-digit percent of our construction mix is resi, so we're non-resi. So some of the resi pickup and benefit that some other distributors are getting, we won't see that on a first derivative basis.

1:03:15 We'll see it as a benefit ultimately down the road for a non-resi cycle which follows resi and for utility if new meters are going in the ground. So actually when you put, when you analyzed our second quarter results through that lens, and if you were to mix adjust, absolutely even better than the print. Utility we already talked about, exceptionally strong. CIG came in much better than we thought. Now we did think that would perform disproportionately better, i.e. not down as much versus industrial and construction because of the nature of the drivers, the secular growth trends that are impacting those customers that we serve that are CIG. But with that said, it's still getting better than we thought. We're thinking about this business through a sequential lens, because we're still down year over year. So I can just tell you how we're focused on it.

1:04:07 Everything's focused on sequential. Grow sequential, grow sequential. As we do that, we'll eventually get to the point where we've gotten flat the prior year, and then we start growing again. And so all our effort and intensity is focused on that through our operations, our sales teams, And so in terms of color, as we moved in a third quarter, we're seeing that improving momentum vector continue, as I outlined. And it's been occurring through July into August thus far. We're not quite halfway through the quarter. We're not quite halfway through the quarter, but we're close to halfway through the quarter. So with respect to that, this is It's nice to see the momentum continue to build.

1:04:52 I told you we had record backlogs. Backlogs are holding up exceptionally well because book the bills above 1.0. We're really focused on what we can control. There is something we did in prior downturns and with customers, particularly end-user customers, a little more difficult to do with a contractor with a construction project because that scope gets defined pretty tightly. But with an end-user customer, we're engaging with them. And Exeter has a blue-chip set of end-user customer relationships, as does Wesco. So combined, I think that's a distinctive differentiator and advantage versus our competitors. With that said, what we did in the last downturn, we doubled down on those customers and tried to sell them our complete portfolio and do other things for them, which ended up paying huge dividends when the cycle turned and we took a disproportionate amount of market share as we came off the bottom.

1:05:50 And that's how we're focused now. You know, Wesco, I always believed, had a disproportionately higher number of end-user customers than our standard industry competitors. Annixter has that as well, and it was through the prior NSS business and their utility business. And so together, this is one of the most distinctive differences. Most distributors in core electrical and communications sell to and through contractors, and they're very important customers to us, but we have a disproportionately higher percentage of end-user customers You can think of that being kind of higher up the value chain with a more complete solution. And that's central to our strategy going forward.

1:06:35 So hopefully that gives you a little bit of color.

1:06:39 Yeah, definitely. Makes sense. Thanks for the time. Yep. And the last question today comes from Chris Dankers of Longbow Research. Please go ahead.

1:06:52 Hey, morning, guys. Morning. A lot of detail. Thanks so much for all the color thus far. Thinking about the reformatted segments, I guess, how are the legacy Wesco businesses and kind of the new Anixter pieces talking to each other within the new segments? I know we were talking about an SAP changeover within Anixter before. Where do we stand technology and kind of communication-wise internally?

1:07:15 Oh, great question. So I think, look, we're in our new structure now, and we've got our top levels of management defined. We're now building down the organization. and building out the rest of the organizational layers. And that will be completed here in the third quarter. So as we exit the third quarter, we'll have the complete organization of structure top to bottom laid out in concert with and in alignment with our new top level three global SBU structure. The discussion, the collaboration, the teamwork is absolutely outstanding. And in terms of systems talking together, both IT teams have done some terrific work in terms of connecting the two systems.

1:08:07 We both are essentially big data-oriented distributors. And so we've already written a series of internal apps that have allowed us to look across the disparate systems and get a better sense of how we leverage the combined inventory, how we start to look at customers on a combined basis, the price that we're selling to them, et cetera. So we're doing that with some quick custom apps that we've stood up already inside the company. And we're using that as a key driver on how we're measuring our cross-sell synergies. Great question, because that's kind of into the details, but that's how we're working it so far, and I'm very pleased with how that's going.

1:08:58 Got it. Thank you so much for the color there. And I guess really just any further detail as far as, you know, the Canada broad beyond the divestiture, is that still a higher margin business overall for Wesco here, kind of following everything that's shaken out?

1:09:18 Yes, absolutely yes. And I mean, we've gone through this before. The fundamental reason, first of all, it's a terrific team, great capabilities, but it has inherently higher market share than the U.S. That was true on a legacy Wesco basis. Now it's a whole different equation in the U.S. and globally now that Wesco and Anixter combine. Take a look at, again, our deck. and you'll see the market shares in Core Electrical. We've essentially doubled the company overnight. What a tremendous opportunity in any market, but particularly the market we're in right now that appears to be challenged because we think it just gives us, springboards us to be even more aggressive in creating more value for customers.

1:10:15 And I've said for a long time, I thought the big will get bigger faster. and we're hearing this more than ever from our customers. It's consolidating their supply base, which speaks very well for us as an overall macro secular trend that's growing. But also we're hearing, and I'm surprised I didn't get this question, we're having more and more reshoring discussions. And that's, I think, gonna be, is exceptionally were exceptionally well positioned to take advantage of that with our undisputed leadership across all of North America, not just Canada, but U.S. and Canada.

1:10:53 And that was, I think, where I really wanted to take the question. My apologies. As far as the cross-selling opportunities, and there seem to be quite a few here, I guess, is it really the international portion or is it kind of cross-segmented? No, no. That's really a bigger opportunity.

1:11:09 No, no, no. There will be some globally, and we've got some interesting opportunities. I'll use the term cross-selling pipeline that are leveraging the new Anixter global footprint. But no, this is cross-segment. We've got a more complete portfolio, and we're going to both respective customer bases and saying, now let's sell the whole portfolio. I mean, Anixter did not have safety. Anixter did not have lighting. We got a turnkey retrofit renovation upgrade lighting capability, right? Both broadband businesses are very different. I already talked about high complimentary. So we could take every Anixter customer and bring safety and lighting to them right out of the gate, and that's what we're prioritizing. And on the Wesco side, we're taking Anixter's wire and cable capability and communications and security. So there's a lot more underneath that, but that is the very highest level.

1:12:02 It speaks to the opportunity.

1:12:05 Thank you so much for the call, John, and best of luck going forward here.

1:12:08 Thank you. This concludes the question and answer session. I would like to turn the conference back over to John Engel for closing remarks.

1:12:18 It was a very busy quarter. I think you all got a sense of that. We feel really good about how we closed it out, and we're looking forward to executing strongly here as we go through the next two quarters and close out this year. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.