Hello and welcome to the WESCO Fourth Quarter and Full Year 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded. I'd now like to turn the conference over to your host today, Will Ruthrauff. Please go ahead, sir.

Thank you, Steve. 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, Senior 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 the 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. Means 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.

Thank you, Will. Good morning everyone and thank you for joining us for today's call. I'll lead off with a few high level remarks and Dave will take you through our fourth quarter and full year results and provide an update to our 2020 outlook. We announced the agreement to acquire Anixter International two and a half weeks ago and I'd like to provide you with a brief update on our recent activities. We remain very excited regarding the transformational combination of WESCO and Anixter which will create a premier electrical and data communications distribution and supply chain services company. Our integration planning is well underway and we are actively speaking with external partner candidates to provide integration advisory services and to help us achieve the sizable synergy opportunity that this combination presents. The required filings with the SEC as well as other regulatory approvals are in process. Anixter has not yet scheduled their shareholder vote to approve the agreement. However we expect that will happen probably once the required SEC filings are in place. And we remain on target to close this very exciting transaction in Q2 or Q3 of this year. Now moving to our results on Page 4, we were pleased to finish the year on a strong note with sales up 4.4% to $2.1 billion. For the second quarter in a row sales grew in all end markets and geographies. These results were achieved in an economic environment that was more challenging than we expected across our end markets. Our continued trends of increasing organic growth in the U.S. coupled with double-digit growth in datacom, utility and CIG end markets is encouraging. Gross margin declined in the quarter driven partly by business mix as well as the time lag required to pass through the higher level of the supplier price increases that we experienced last year. Dave will take you through our margin drivers in more detail in a few moments. We continue to focus on effectively managing our operating costs and delivered adjusted operating margin that was in line with our expectations. Free cash flow was also strong in the quarter and our financial leverage ended the year at 2.8 times net debt-to-EBITDA. With that, I will now turn the call over to Dave to provide further details on our fourth quarter and full year results as well as our full year financial outlook for 2020. Dave?

Thank you John and good morning everyone. I'll start with an overview beginning on Page 5. Reported sales in the quarter were up 4.4% above our implied outlook for growth of approximately 3.5% that we provided in October. Recall that we issued a press release stating that quarter-to-date sales through December 23rd were up approximately 5%. In the last week of December, we saw a step down in daily sales. This result was driven by higher than normal slowdown in year-end activity due to midweek timing of the holidays and customer shutdowns, particularly in Canada. For the quarter, U.S. sales were up 4% with growth of 15% and 11% in our CIG and utility end markets respectively. Construction grew 2% in the U.S. and industrial sales were down approximately 2%. Sales in Canada were up 2% with our industrial and CIG end markets up 6% and 5% respectively. Construction sales in Canada were flat with the prior year. Utility sales were down 7% partly due to the contract non-renewal mentioned in previous quarters that we lapped during the quarter and partly due to slow sales in the second half of December. International sales were up 13% on an organic basis, driven by growth of more than 20% in both construction and industrial. SG&A expenses were approximately 1% higher than the prior year after adjusting for costs associated with the Anixter acquisition. This increase was driven by the SLS acquisition. Excluding the SLS acquisition SG&A expenses were down from the prior year due to a reduction in variable compensation expense reflecting results below incentive targets for 2019. Adjusted operating profit excluding costs associated with the Anixter acquisition was approximately $87 million in the quarter or 4.1% of sales, which was slightly below our implied outlook of approximately 4.2%. The effective tax…

Yes, thank you. [Operator Instructions]. And the first question comes from David Manthey with Baird.

First off, a lot of observers out there are thinking that there's an upward bias to commercial, industrial end markets as we look to the back half of this year. And I'm wondering, John, how are you thinking about the complexion of 2020 and what are some of the factors that inform you on that outlook?

It’s a great question. Well you saw what outlook we provided and that outlook was provided the last third quarter’s earnings call, Dave, and then we’ve kept that outlook the same. If you look at the nature of -- first -- I'll first talk about some of the supporting factors and then give the outlook. When you’re talking about kind of the nature and mix of our backlog and how that’s performed throughout 2019, particularly in the second half, it's a really solid backlog and we feel good about what's in the backlog, the mix of the backlog and it's performing more consistent with normal seasonality. So -- and the margin rates in the backlog are up year-over-year. So that's a good strong data point I think as we enter 2019. By end markets, as Dave outlined, we've got a kind of greater visibility I think into both utility and CIG. Utility is supported by the pipeline of opportunities that we’re working, what we bid and what we've expect to bid as we move through the first part of 2020. And we got really good momentum and you can see how utilities performed in the fourth quarter. I think that's very supportive of that and the backlog is very healthy. In CIG, we've got really solid momentum in our datacom and security categories and that was reestablished and built momentum throughout 2019 and that's against an end market backdrop that isn't particularly robust for those applications overall, but relatively stable and consistent with what we're seeing now. So I think that, that performance and outperformance we expect to continue. When you move into industrial and construction, I think that's where there is more variability. I would say that the indications around industrial, notwithstanding some of the overall weakness that we're…

And the next question comes from Deane Dray with RBC Capital Markets.

I think you've explained the mix issue this quarter, we get that. And maybe could you provide some more color on price cost. So, when you referenced the time lag in putting through supplier price increases, overall, you like the conditions in rising prices. So -- and you should be prepared for that. So were these lags a system issue or procedural issue, or was it customer resistance, because that -- I saw that second bullet about the competitive environment. So maybe if you could just tie those together, price costs, what the dynamics are there?

Yes. So I think there's two factors. I think the environment was challenging. And you saw soul that someone else reported this morning a few other reports were prior to today, and you get a sense of what other distributors are saying in terms of customer pricing environment. So I think overall, the environment was a bit challenging. That's on the customer pricing side. That -- call that market Deane. On the supplier side, Dave outlined, that's why we want to specifically point out with his prepared comments about the number and the magnitude of the price increases. In number, they are a little bit lower in '19 and '18, but the magnitude of the increases were substantially larger in '19 and '18. So that's on the other end of our value chain with suppliers. So that's the market and that continued through Q4. It was a little different for WESCO and we've talked about over the years is our mix. And so it takes us some time to work it through with our global accounts customers, our integrated supply customers and such. And that time lag, we've seen time and time again. We're working through that. I think we've got good traction in terms of how we're pushing those through a time lag. Now we should start seeing the other side of that as we move through 2020. And we're encouraged with the start of January. January is not fully done yet. But month-to-date, we've seen a step-up in our daily transaction margins, billing margins sequentially versus the fourth quarter, which is encouraging data point.

Yes. I probably should have added that we have seen industrial distributors this quarter one reported today that had negative price for the first time in years. So we understand this is the environment that you're in and it's not a WESCO specific pressure there. And then second question, could you give some color around the SLS issue. Was this execution and degree of confidence in addressing the problem this quarter?

Not execution, I would say there’s was an excellent and very strong pipeline of opportunities and we actually cited -- we always try to cite wins by the market. Two of the wins that we cited this quarter were lightning, LED retrofit renovations, update retrofit related projects. I think the real challenge was just some delay of the projects that they have been working in their pipeline opportunities, as well as projects that were underway. So there's been a bit of a delay on some of those projects, which moved things to the right. And how would you read that or translate that? That translates into for retrofit, renovation and upgrades, those types of projects. There's a discretionary aspect to those in terms of when they get launched. So if there's some uncertainty around the environment by customers, they can kick the can out a quarter or two. The economics and the ROI in terms of lower energy saving -- lower energy consumption, which translates to energy savings and sustainability benefit, those business cases are intact and LED retrofit projects are providing very compelling business cases to do the retrofits. But the decision on making those kicked out a month, a quarter or two depending on what that particular customer's view of the market environment is and what their particular situation is on spending. So that's what happened, Deane. I still -- lighting is one of our big growth engines. We're still very bullish on our prospects in lighting and we have an excellent set of end user customer relationships. The opportunity pipeline is very large and robust and we expect that to be a strong contributor as we move through 2020 and beyond for the WESCO.

Thank you. And the next question comes from Sam Darkatsh with Raymond James.

Good morning, John. Good morning Dave, how are you? Two questions if I could. First, Dave last week, Standard & Poor's disclosed that it doesn't -- it's not going to be considering the 9.25 preferred as an equity instrument when determining their ratings -- their debt ratings. How does this -- or does this affect your thoughts on the amount or the -- what constitutes the equity and/or debt issuance up going forward? I think there's a fair amount of confusion or concern in terms of whether this actually means that there would be more of an equity dilution or an equity issuance because of it?

Sam. So that's obviously something that we're still working our way through. But just to give you a little bit of a background on this. As we put together the offer consideration for the Anixter combination, we work with our advisors to structure the preferred to receive equity treatment and that was based on the guidelines that are established by both agencies that we're using. You may have seen that Moody's has issued the note stating that they expect to assign full equity credit to the preferred, S&P placed our rating on watch negative. And in their preliminary note, they expressed the need for more information. So we're going to continue to work with S&P to provide them with the information that they need and hopefully reach the conclusion that we were planning for when we put together the consideration mix with the preferred. As we think about it, you know, right now there's still a lot of situations that we're working our way through as it relates to this. So, as soon as we have more details on that, we expect to inform the market, particularly when it comes to the capital structure to complete the acquisition. And again, right now there's just a lot of moving pieces on that. But we're expecting from the accounting treatment perspective, the preferred has not changed. We intend to recognize the preferred as equity. We're waiting to see how the rating agencies will also view that going forward.

So to be clear, the 4.5 times leverage that you expect considers the preferred as equity. That's the consideration?

That is correct.

Okay. And then -- thank you. And then the last question I have, there's a fair amount of question as to potential accretion from the deal, especially year three, there's obviously a huge range out there that we've seen from both the sell side and buy side. And any thoughts or quantification or range that you might be able to provide at this point?

We expect to provide an estimate of the accretion during the first quarter. So right now, we are still working through several factors that will inform and influence that accretion calculation. Now obviously, the timing of the close, the amount of cash that's generated by both companies between signing and close and how that will impact the capital structure, and obviously, we're still doing quite a bit of evaluation work as it relates to the intangibles on the purchase price. So there's a lot of variables that we're still working our way through, but we fully expect that during the first quarter, we will be informing the market of our estimate of accretion at least for year three.

Thank you. And the next question comes from Nigel Coe with Wolfe Research.

Good morning everyone. This is Cristian Ramos filling in for Nigel. So I just wanted to touch back on an -- and we've been getting questions on whether or not the management team would consider issuing the equity a little sooner just given the overhang that exists in the stock today. Any color or thoughts there? Thanks.

Yes, Cris, it’s Dave Schulz. So again, we're still working our way through the capital structure decisions. I would tell you that we're clearly focused on ensuring that we get a Q2 or Q3 close of the deal. We're working through all the appropriate regulatory approvals that are required. We're working through the specifics on the capital structure. Again, I would tell you that it's not going to be influenced as much by our stock price as much as it's going to be influenced by the timing of those approvals and then when we can get out and begin raising the appropriate number of shares outstanding. So we're working on it.

And then just if I could squeeze another one on price -- on gross margins really. Could you guys parse out how much of the decline was driven by price costs versus mix? Thank you.

Yes, I would tell you that in previous quarters we said that it was approximately half and half. Half mix, half price cost. I would tell you that in this environment, in the fourth quarter, we saw a little bit more of an impact on price costs. But again, our gross margins were sequentially flat with Q3. And again, we saw a little bit more of an impact from price costs in Q4. As we think about our operating margins going forward, we fully expect as is shown in our guidance that we're going to see operating margin improvement in 2020. That includes improvement in our gross margins as well. So, again, for the fourth quarter, a little bit more on the price/cost as an impact than we saw in Q3.

Thank you. And the next question comes from Hamzah Mazari with Jefferies.

Hi, this is Mario Cortellacci filling in for Hamzah. So, kind of question on the deal. I know one of the reasons why you wanted to do a transformational deal is to get better supplier concessions, and I think the largest supplier for you and Anixter are different. So I was just curious to know, I guess how hard or how tough those negotiations tend to be? And how long do you think it will take before you get better rebates?

So first I think the construct of your question kind of centers around a point you're making on the rationale for the deal. It’s not the rationale for the deal. So let me kind of take you back through that, I think it's incredibly important. I spoke at this at length at our Investor Day last year in June. So I encourage you to go back and go back through that. We spent -- we had a 4 plus hour Investor Day and we were very clear about our views of the nature of the B2B distribution value chain, how that’s evolving, the impact of digital, what's happening in terms of the customer end of our value chain and those customers are looking at consolidating the supplier base, what's happening on the supplier end of our value chain where suppliers have been coming together, be it acquisitions and combinations over the last decade and it was an imperative for distribution that it’s still very highly fragmented particularly in North America, both U.S. and Canada to consolidate and we consolidate at a faster rate. And I foreshadowed that I expected that the bigs would good time together, “the bigs.” The bigger distributors in the core and the distribution portion of value chain would come together. And I also said the imperative was that these will be -- give the opportunity for the bigs to have a transformational combination that does several things. You have greater scale with an enhanced footprint -- geographic footprint and a broader portfolio of supply chain services. That absolutely is the case with the WESCO/Anixter combination and also on the combined platform which provides significant growth in cross-selling opportunities. That absolutely is the case for the WESCO and Anixter combination. And there'll be the opportunity to generate…

And just one follow-up and I'll turn it over. Just curious to know I guess how you’re thinking about structuring your sales force or the combined sales force once the deal is closed?

In terms of specific integration planning, and those details, look, we're early in our integration planning, preparations and discussions. So look, we're very focused on getting through the activities between signed and closed. And as we move forward in the process, we get the deal successfully closed. We'll have a dedicated integration team and be working aggressively to take the best of the best of both companies and drive what I said, the top-line opportunities, the cost synergies. And through that process we'll be very clear as we make decisions and integrate the two large leading distribution companies.

Thank you. And the next question comes from Steve Barger with KeyBanc Capital Markets.

I appreciate all the end market commentary you gave to start the call. I just want to make sure I understand the 1Q revenue guide. I believe you said you expect softer demand environment in the first part of the year, but the 1Q revenue guide of 2% to 5% is above the full year guidance 0% to 4%. So can you just talk through the assumptions that went into that specifically?

Yes. Certainly Steve, it's Dave Schulz. So clearly as we take a look at Q1 and knowing what we have in our backlog, what's expected to shift in Q1, clearly we're comfortable with the range that we’ve put out there. Also it’s demonstrated by our results in the month of January. So we talked about January month-to-date being up low single-digits. We're right around the midpoint of the guide of 2% to 5% in the month of January to-date. And so we feel good about the 2% to 5%. Remember that last year Q1 was also probably our softest comp and we have one extra day in the quarter this year versus last year.

And I understand Dave the comment on how the secondary won't be influenced by stock price but more the timing of approvals. But just as you've gotten more to the planning process, is there any updated thought on the size of the planned secondary? And just in general, do you think that's a 1Q or a 2Q event when you go to market?

Yes Steve, we haven't been able to define that size more definitively yet. We've talked about it being greater than $400 million in equity or equity content securities that we would issue. We're still working through the timing. Obviously a lot of that will be dependent upon when we receive a regulatory approval, as we've got to file, the registration statement with the SEC. We're working through all of that. So that will obviously influence the timing of when we're out there marketing the equity.

Thank you. And the next question comes from Robert Barry with Buckingham Research.

So we don't like to get into specifics and talking about guiding gross margin. But just given the pressure seems to be continuing and when you look at the expectations for growth by end market, it does suggest some continued mix pressure on gross margin this year. Just, is it fair to assume though that in that 4.1 to 4.4 op margin outlook that you have contemplated? I know there's some decent amount of gross margin pressure in there.

Hey Rob, it's Dave Schulz. Yes, we have that included in how we think about 2020 and the progression of the gross margin in 2020. So very clearly, looking at the outlook for 2020 with a midpoint of 2% on sales, plus inflation on the SG&A. In order for us to get that margin improvement at the midpoint, we do have gross margin improvement. That's what we've been working on. We've talked about being able to recover that price cost lag as we progress through 2020. So again, we do have the gross margin improvement built into our expectations for this year.

So I'm sorry, just to clarify. Do you think that the gross margin will be up in 2020 year-over-year?

That is correct.

Okay. Yes, I was actually suggesting the opposite. It just seems like, given the comments about price cost and given the outlook for growth is better in the lower gross margin end markets that in fact, the gross margin would be down. But it sounds like I don't know, you have some confidence that there will be some offsets there where pricing will improve?

We do and very clearly we've been seeing that lag, particularly in the last six months on getting price costs. And we've been able to push through on a dollar-for-dollar basis. But we've seen the erosion of the gross margin rate which is just the math. Our team is working very diligently to continue to pass through price increases from suppliers and restore the gross margin rates. And so that's something that we're focused on, we understand. And it is clear that based on the mix of our outlook with the end markets for 2020, we do have clearly some higher growth in like our utility business as expected. That will create a slight impact on a mixed line. But we are laser-focused on driving through price to our customers, and again, ensuring that we get full value for the products and services that we can provide. So we do have that assumption built into our 2020 outlook.

Got it. And then I guess I just wanted to get a little more clarity on what was going on in CIG. I mean, the growth rate really stepped up dramatically against actually what was also the toughest comp of the year. So any kind of big projects happening there or timing of anything or anything to say about just that significant step up in growth?

Rob, I already alluded to that. I think Dave had in his prepared commentary and I hit it earlier with an answer to a question, datacom. Datacom and security, very strong growth, built momentum across 2019. Feel very good about the execution we're doing with that, with those categories, with those customers.

Just lastly from me, a quick win on the deal. This may also be a question you don't -- can’t answer at the moment yet. But any thoughts initially on what your amortization might look like? And if it's significant might it be a warrant considering going to a cash EPS number?

Rob, that's one of the things that we're still working our way through is evaluation of the purchase price allocation to the intangibles and what impact that would have on amortization. Clearly, this is work that we were only really able to start after we had signed the agreement. So we're still relatively early in this. That is something that right now we don't have an answer. And that's also one of the key reasons why we're just not at that stage where we're able to provide you with that full accretion estimate. Once we nail that down, along with the capital structure we will be able to provide you with more details.

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to John Engel for any closing remarks.

Thank you all for your time this morning. Brian, and we will be available to take your questions. And we look forward to seeing many of you at one of our investor markings events that we will be participating in during the first quarter, including the Raymond James 2020 Institutional Investors Conference in early March. Have a great day.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.