Good morning. Welcome to today's WESCO's Fourth Quarter 2021 Earnings Call. My name is Candice, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity to question and answer at the end. [Operator Instructions] I would now like to hand the conference over to our host, Leslie Hunziker, Head of Investor Relations. Leslie, please go ahead.

Thank you, and good morning, everyone. Before we get started, I want to remind you that certain statements made on this call contain forward-looking information. Forward-looking statements are not guarantees of performance, and by their nature, are subject to inherent uncertainties. Actual results may differ materially. Please see our webcast slides as well as the Company's SEC filings for additional risk factors and disclosures. Any forward-looking information relayed on this call speaks only as of this date, and the Company undertakes no obligation to update the information to reflect the changed circumstances. Today, we'll use certain non-GAAP financial measures. Required information about these non-GAAP measures is available on our webcast slides and in our press release. Both of which are posted on our website at wesco.com. Also please note that all references to prior year comparisons reflect pro forma results as if the Company had completed the June 2020 merger with Anixter International on January 1, 2019. On the call this morning, we have John Engel, our CEO; and Dave Schulz, WESCO’s Chief Financial Officer. Now, I'll turn the call over to John.

Thank you, Leslie, and good morning, everyone. It's great to be with you this morning. WESCO's performance in 2021 was exceptional and laid the foundation for the extraordinary value creation opportunity that lies before us. We finished last year with another very strong quarter of market outperformance and achieved new company records for sales backlog and overall profitability. Importantly, we reduced our financial leverage to below 4x EBITDA in just 18 months since closing the Anixter acquisition. It's important to note that all of this has been done under the cloud of the pandemic and global supply chain challenges. I am truly proud of our team's commitment to our vision of the new WESCO and for their focus on providing our global customers with the products, services and supply chain solutions that they need. As the new WESCO emerges, our brand is evolving to align with our new vision, mission and values that reflect the unity, growth and ingenuity that now differentiate our company. We're carrying strong positive momentum into 2022, and the year is off to an excellent start. We strategically invested in our inventories last year to address the global supply chain challenges as well as support our strong pipeline of sales growth opportunities. We are very well positioned to meet increasing customer demand as supply chains are rebuilt this year. As a result, we expect to again deliver market outperformance in 2022, with both expanded margins and double-digit EPS growth. In addition, based on the strength of our continuing execution, we are again increasing the cost and sales synergy targets for a three-year integration program. We are only at the midpoint of our integration plan, but our progress is accelerating, as WESCO accelerates its market-leading positions, expanded portfolio, integration execution and digital transformation investments to build a…

Thanks, John, and good morning. Starting on Slide 9. This summary table compares our fourth quarter results to the prior year. As John mentioned, fourth quarter sales exceeded our expectations. When we updated our outlook in early November, we anticipated sales would decline sequentially versus the third quarter, consistent with historical trends and considering the impact of supply chain disruptions. Sequential organic sales and backlog increased 6% and 14%, respectively. We knew that December would be a wildcard, and we're pleased by the strength of volume that continued through each month of the quarter. Overall, sales were a record level and up 16% versus the prior year quarter on an organic basis, which excludes the benefit of an extra workday, favorable foreign exchange rates and the impact of the Canadian divestitures we completed in the first quarter of 2021. On a reported basis, sales were up 18%. Currency added 70 basis points to growth, which was partially offset by the divestitures, while the extra workday added 160 basis points. We estimate pricing added approximately 6 points to sales growth in the quarter. Notably, sales were up 11% versus 2019 pre-pandemic pro forma levels. Our backlog reached another record level this quarter, up 14% from the prior record in September. Each business unit posted backlog increases of more than 60% over last year. Heading into the first quarter, demand continues to be strong. Preliminary January results are encouraging, with sales up low teens year-over-year on a workday-adjusted basis and up high teens compared to the pre-pandemic 2019 level. Gross margin was 20.8% in the quarter, up 120 basis points versus the prior year. The strong gross margin performance reflected effective pass-through of supplier price increases, driven by the markets, supply-demand imbalance and the benefits of our value-based pricing program. Sequentially versus…

[Operator Instructions] Our first question comes from Deane Dray from RBC Capital. Your line is now open. You may go ahead.

Thank you. Good morning everyone and congrats on the strong finish to the year. So maybe you start with the demand outlook for '22. Dave commented on the strength in January. Can you rank order your end markets by expected strength? And really talk about the pricing power. The 6 percentage points you realized in the fourth quarter, how much does that carry into '22? And then if I can also have you address backlog, how much do you expect to be able to work that down, in what time frame?

Yes. I'll start, Deane, by saying the execution momentum and just call it, the positive results, the build across Q4 was -- in retrospect, was exceptional. We obviously finished much stronger than we thought in December. And what was even more, I'll say, very encouraging and even a bit surprising is, with that strong December close, we got out of the gate very strong in January. And the strength is really reflected in the backlog build sequentially the sales growth sequentially in Q4 -- and then you look at January with where we are in terms of prior year preliminary results, just overall very strong. In terms of your end market question, we're seeing very good balance across all the end markets. We're in a demand recovery part of the cycle. It's still a bit supply constrained, which is why we consciously and strategically invested in our inventories. We think we're exceptionally well positioned, with a strong structural setup for 2022. But we're seeing demand across all the end markets. Remember, we don't really play in residential. So any perturbation, there don't affect us. Industrial is under recovery. You see continued strength. That shows up in the EES results. There's a little bit of supply chain challenges in some certain categories for CSS. But that would have been -- we probably would have had another point or two of sales growth in Q4 had those supply chain constraints not impacted CSS. With that said, the backlog growth there is exceptional and outpacing the other two businesses. And the secular growth trends are going to drive outstanding growth as we look forward. And then UBS was an absolute standout, call it, blowout performance in the fourth quarter. And the momentum across all three continued in the start. Dave and I feel…

That's all really helpful, and I realized I asked a multipart first question. So just to clarify, on that backlog, you said you would be converting. But any sense -- it was up 88% year-over-year. How much earnings visibility do you have from that backlog? Is it linear? Is it front-end loaded? Just to give us a sense of how that converts, if you could.

So maybe I'll give this measure. So, it is -- all three businesses, all three SBUs grew above 50%. Our backlog is north of 60%. So it's very balanced, first point. Second point is, it's comprised of a balanced mix, being of short cycle, mid-cycle and longer cycle orders. Longer cycle being bigger projects, but not different than what our normal composition will be. I will say this, we don't talk about this often, the margins in our backlog also are -- have been -- are at a higher level. And that -- but that has been the case as we were building the backlog in 2021. So that's another very encouraging sign in terms of our ability to manage in this supply-constrained value chain. And it supports -- as those backlogs convert to sales and out the door sales and shipments and out the door sales, we'll get -- we'll continue to see the margin contribution with the -- because the margins are at an elevated rate versus what they were a year ago in the backlog.

Thank you. Our next question comes from David Manthey of Baird. Your line is now open. Please go ahead.

I'll just say I like the clean and green new logo. It looks good. So that looks really nice on the slide deck anyway. And I'm sorry to always be the corporate expense guy here, but it was lower than we estimated this quarter. And I was wondering, Dave, if you could talk about why that downtick from the prior two quarters despite the really strong sales and earnings performance you saw here this quarter. And then as you look to 2022, based on -- you mentioned the 100% target incentive comp you're occurring for, but I assume now technology and other costs, what should we expect for corporate expense in '22?

Yes. So primarily, the change in to the incentive compensation accruals and some of the true-up that we did in the fourth quarter relative to what you saw in previous quarters. As we think about -- one of the other things that we've discussed quite a bit is we are on this digital and IT transformation. More of those costs will reside in the corporate segment, particularly some of the enterprise level resourcing that we are hiring. And we have working on some of our projects. So you will see a tick up in the corporate segment expenses on a like-for-like basis, excluding the incentive accrual.

Okay. Could you scale that for us or just hirings what we're going to do?

It will be hires, and it's incorporated in our adjusted EBITDA outlook that we provided you.

Yes. Okay. Yes, fair enough. And then on gross margin and inventory, it sounds like supply is still tight and prices are still going up. But your inventory position is really strong. So you should continue to enjoy benefits of inventory gains in 2022. But at the point where those things do catch up, can you just give us an idea of those -- the short-term inventory gains that all distributors are seeing right now as they use their balance sheets? Can you talk about what that will look like? Is that normalizes out? Is it 50 basis points? Is it 100 basis points? What kind of magnitude are you thinking there?

Yes, Dave. It's extremely hard for us to calculate that. But we are very clearly seeing the benefit of price running ahead of cost as it hits our income statement. That's primarily because we are on average with inventory company. So as you think about our balance sheet, as we are replenishing inventory, that average cost given the inflation is going up. So, it is -- has still been a net positive for us. That over the course of time, all other things being equal, including no more inflationary pricing from suppliers, that favorable balance will continue to deteriorate. But again, we've got a long runway on that cost of goods improvement.

And Dave, the other thing I would mention is Anixter pre-acquisition close, they had put in place an enterprise-wide margin improvement program. I know we've talked about that in the past. The cost price environment was different back then, taking you back into 2018 and 2019. But they had enjoyed 10 quarters in a row of core gross margin expansion prior to acquisition close. And that's the program that we refreshed. They wanted to refine it as well, and we took it enterprise-wide. It's very focused on value-based selling. So I think the other thing I see that's very different with the new WESCO is that it's not just cost plus a markup, standard distribution. It's really focusing on the value we're delivering on customer and pricing for that value. And we're still -- we still have a lot of legs left, a lot of runway left, let's say, in this enterprise-wide margin expansion program. So I think as the price cost effect occurs, like Dave said, we're fundamentally looking at expanding the core margins and seeing terrific results on that front. And the final point is, increasingly, the digital applications that we're investing is do unlock the power of our big data. And there's just -- there's a plethora of opportunities that continue to drive margins up. And I alluded to a few of the digital products that we launched inside our four walls in the last call. One is focused on intelligent pricing. Another is focused on an AI-enabled product search function. Those are two that are underway now, we're deploying across our enterprise. So again, I think that we're -- we see this as having a lot of runway in front of us in terms of core margin expansion.

Our next question comes from Sam Darkatsh from Raymond James. Your line is now open. Please go ahead.

A couple of questions. I suppose these are for you, Dave. And my first one, I apologize. I'm going to be throwing a bunch of numbers at you. I'm trying to reconcile the EBITDA guidance for '22. It's effectively $100 million to $200 million up on a year-on-year basis. But when I try to look at some of the line item guidances that you've been providing, I'm getting something much higher than that. So for example, you have $50 million in the variable comp reset. You've got $60 million or so in synergies. You've got, call it, I don't know, $25 million, $30 million in PPE write-downs in fiscal '21. I know you have the $30 million logistics cost as a headwind. But I'm still getting north of $100 million in good guys for '22. And then you have whatever you're going to get EBITDA from the 5% to 8% organic. So I'm trying to figure out why you're only guiding $100 million to $200 million up on a year-on-year basis. I know there's digital, but that can't be that dramatic. It doesn't sound like you're assuming any cost. So, I'm just trying to understand what the offset is that I might be forgetting, Dave.

Yes. I think the one thing that we've not provided any of the details behind it. We did hint to this in our fourth quarter discussion for 2021. But as we've talked about, we are investing in our transformation and in digital. That means expanding the capabilities and expanding the headcount that we have applied to our big data and our enterprise solutions. So right now, that is one of the drivers that we've not called out the specifics, but that would be a headwind as we think about the 2022 outlook that you've just discussed.

And I wouldn't call it a headwind, Sam. I mean, I'll take you back to -- when you think about the top strategic rationale for why we put these two companies together, that was in the top I'll take everyone back to, because it's out there in the record books, on what we said in our Investor Day in 2019, about consolidation that's occurring in our part of the value chain, the impact of digital. We're at the beginning part of the S curve. So look, I think we couldn't be more pleased with the power of this combination. We're getting core margin expansion. We're getting outstanding operating cost leverage. And as I mentioned earlier, the breakout move is the top line growth and outperforming the market. But it gives us the ability also to invest in our digital transformation while still delivering outstanding year-over-year incrementals. And it's a beautiful thing when a plan comes together.

Yes. Two other things I'll highlight for you, Sam. The first is that we are seeing substantial pressure on our leases. So as you think about the demand for well-suited warehouse space, as we're going to renew leases, as we're looking for new opportunities to expand our footprint, to consolidate our footprint, we are seeing considerable pressure from our occupancy cost. The other thing is, we've been hiring people throughout 2021. As I'm sure you're all seeing in the press, I mean, there is substantial pressure on wage inflation. And so that is another headwind that we've got built into our outlook.

I mean, again, the good news is you put that all together, Dave, and with how we've -- for how we've outlined 2022, 2022 is positioned to be another very strong year of -- in the journey of incremental value creation.

Agreed. Second question. The synergies for '22, the $60-some-odd million incrementally, I'm guessing a big chunk of that is going to be supply chain related. As such, because your vendor negotiations typically occur in the first quarter, might we then imagine that those synergies would be more front-end weighted this year as it works through your cost of sales?

So Sam, it's not just supply chain. So I'd like to make sure it's clear to everyone. It's operations plus supply chain. And I mentioned this in the last earnings call that we're in the early phases of seeing a new WMS, TMS package. And so that's also a key enabler in terms of, in conjunction with our supply chain network optimization. We've done the easy -- a lot of the easy stuff -- it didn't -- but as we roll out the new WMS, TMS across our network, that enables even further streamlining and consolidation of our operations and how we manage our part of the supply chain and down to our supplier base. So, it's really important to understand that we're in those phases of the integration plan now. We're midway through. This was always the way we laid it out. This is the second part of our three-year plus plan, and that's what is in our priority list as we go through this year.

So, the synergies would be ratable as the year progresses then? Is that the takeaway, John?

I think, Sam, that's the right assumption.

Yes, yes. They're not front-end loaded. That's the short answer, Sam. And I think as we work the supply chain network in the first 18 months. We're literally picking out dozens of facilities. But the optimization is the second half of this integration program and -- but I'm really looking forward to seeing the benefits of that when that's all in place.

Our next question comes from Nigel Coe of Wolfe Research. Your line is now open. Please go ahead.

Obviously, a really strong finish to the year, congratulations. I want to go back to the EBITDA margin bridge. Just do the end question on the price cost, because one of your competitors talked about a slight step back with the inflationary pressure. So just wondering, we're still expecting price cost to be a tail in '22. But really, my question is, how do you see the 20, 50 basis points shaking out amongst the segments? And the third of the question really that CSS was flattish in '21. Obviously, inventory was effect of it. Just wondering, if any of the three segments is pushing on putting that range more or less?

Yes. Nigel, it's Dave Schulz. So outside of the adjustment that you just discussed related to the inventory write-downs, we would expect all of our business units to be within the range of the adjusted EBITDA that we've outlined here. There aren't any specific or unique items that are impacting one business unit versus the other. We see the market opportunity relatively consistent across the three SBUs, great opportunities against all three. All three have margin improvement programs that they're continuing to execute. We're keeping a sharp watch on our cost structure. So nothing that would be unique or -- one SB would have a less opportunity or greater opportunity than the other to expand from an EBITDA margin percentage.

That's great. Very, very clear. And then on the inventory, good job on sort of like stocking up there. Would you expect to still build inventory for the first half of the year as to normal? So, we're sort of more back on a normal seasonality basis here. And then just any color on sort of how you're faring on stock outs and availability of product versus some of your competitors?

So on the first part, I would say, and this ties in to Deane's question, Nigel, at the beginning. To the extent as supply chains are being rebuilt as our demand picks up and we're able to support even higher out-the-door sales and backlog starts to come down, that -- then the -- what we've done strategically with inventories will support that. So we would expect that the inventory build approach that we took in 2021, we're ratcheting that back. I only say that it's based on that assumption, because to the extent that we continue to significantly outperform the market, demand picks up, but our backlog continues to grow. I just -- we're going to make sure that we position working capital to support that. So -- but I think we do expect as we move through the year and supply chains are rebuilt, more of a return to normalcy. Relative to your stock out question, we're laser-focused and have an electron microscope on our availability and our sell rates. And I will tell you, that was a driver behind how we manage our working capital and particularly inventory. We've been able to maintain very strong availability and fill rates even in this supply chain constrained global environment that we're operating in. So, we pride ourselves on being kind of the oasis in the desert or the lighthouse in the storm. And really it is our job. It is our job as a leading B2B distributor to manage the supply chain's challenges that our customers have. And I think what you're really seeing is it's the power of our scale and our supplier relationships, and using those together to ensure continuity of supply for our customers. So, I couldn't be more pleased with how the team is performing on that. And we're really well positioned, again, as I said, structurally set up well for 2022. I'll end on this point, and this is more of a strategic point. Supply chain integrity, supply chain resilience, supply chain sustainability, that's core to our value proposition, working with our supplier partners, but on behalf of and in support of our customers.

Thank you. Our next question comes from Tom Moll of Stephens. Your line is now open. Please go ahead.

Wanted to circle back to the outlook you provided on the adjusted EBITDA margin for the coming year. So if I look at the midpoint of the 20 to 50 basis points improvement that you called out, and I tried to sum up everything we've heard thus far. I think you're communicating that both in terms of gross margin rate and on operating expense leverage, both of those should improve on a full year basis, but if you could just confirm or push back there? And then anything you would want to call out on the sequential progression on the SG&A line, even qualitatively, just to help us think about the quarters would be helpful as well.

Yes. So, let me -- just -- again, we're not going to guide specifically the gross margin versus the operating expense we provided you with the adjusted EBITDA margin. We've made some comments about our margin improvement program, which is primarily focused on gross margin. Now, we're going to execute hard against that. But we're focused on providing you with that adjusted EBITDA outlook. In terms of how we think about the quarters for 2022 from an SG&A perspective, obviously, there is going to be a ramp-up from Q1 to Q2 in SG&A expenses. That's primarily related to the timing of our merit increases for the organization, all streamlined, effective April 1. So, we see that typical step-up in SG&A from Q1 to Q2. The balance of the year will primarily be based on the volume and sales profile. And we have assumed a typical seasonal trend by quarter on our sales. We typically see a sequential decline from Q4 to Q1. We anticipate that, that will occur again here in 2022 particularly given the strength of our fourth quarter. We've assumed that given the project backlog and the exposure of our business to seasonality, we'll see sales grow Q2 to Q3. And then we'll have a sequential decline from Q3 to Q4. So, the SG&A pattern will follow a similar rate, with the exception of that large merit increase that will occur and impact SG&A in the second quarter.

That's helpful. And as a follow-up, I wanted to talk strategically on your M&A pipeline here. With the visibility to hitting your target range on leverage by midyear, I think you said, and with several quarters now where both on the cost synergy side and the sales synergy side, you're performing above expectations on Anixter, so there is an argument to make that the better that integration goes, the more appetite and the more urgency there would be for continued consolidation. On the other hand, you've got your hands full with the transaction of that size even if it's gone well thus far, but could you update us there on the M&A appetite?

Well, look, I think that that's a key value creation lever for us going forward. If you look at WESCO's history, since we became a publicly traded company, we clearly have used M&A as a value creation lever. And the value chain that we're in, and particularly our portion of the value chain, which is really the most relevant point, still remains fragmented, highly fragmented. And so as we look forward, Tommy, M&A is going to clearly be one of the levers that we use to support our overall value creation. With that said, our focus in the short term is to still continue to user strong free cash flow generation to delever. And that what’s we doing, and just to make sure, it is there we had -- our original target was the effect within our target leverage range. By mid-2022, we had accelerated that to the second half of this year and clearly we’ve very positive momentum against that and less below the forehand over the call down last year. I mean the sort answer is key value creation lever we see there is a strong leader and now shown the ability to not just to do smaller strategic acquisitions, but large transformational. The availability to put two equal size company together is incredibly challenging in any environment or any market, and we do it against the backdrop of the pandemic makes it essentially challenging and we could be more pleased if the initial results. So, lot of run rate -- to your point, still lot of run rate to deliver on the integration benefits that we’ve submitted too and as well as digital transformation.

Thank you. Our next question is from Steve Barger of KeyBanc. Your line is now open. Please go ahead.

Thanks for to put me on the end here. I’m just trying to use the Slide 4 in front of the presentation. I'll ask about conference room as a service. Just how big is that market? What do you expect the CapEx is to stand that up? What's the return profile? And really, what's the objective here?

I'll address the last part first. Steve, we've been -- and good morning by the way. We've been -- the last few calls, we've talked about, the initial applications that we're focused on and a part of our overall digital transformation agenda. And the example that we gave over the last couple of quarters were focused on applications, I'll use the term inside our four walls. So applications that would leverage the power of our big data, and we spent a substantial amount of work, with focus in these first 18 months taking WESCO's big data, WESCO's big data, Anixter's big data, putting it together into one brand new world-class data lake and beginning to operationalize that data to run our business better. So, that's foundational. But in parallel with that, we're beginning to look at taking these new digital products and applications external. And so, this conference room as a service is a good example. And that's why we started it this quarter just to show you that these digital products and applications won't just be inside our four walls, but we're going to -- there will be some customer-facing opportunities in terms of new products and services that we take to customers. It's capability, a core capability in A/V, audio visual. WESCO had one as well as Anixter. And together, it's actually a very attractive market. It was attractive pre-pandemic. But the pandemic and the impact on return to the workplace and hybrid work environments have created even a greater opportunity. So this is just one product/service application. It's very interesting because, again, it's a subscription-based model. We don't own -- the customer doesn't own the product. We take care of that for him. It's alternative. I encourage you to go on a website and punch into it and get a sense for how we're presenting ourselves as a customer and how we could stand up that service capability. It's very new and different for WESCO. We're Anixter for that matter. And those of you that know us if we go punching on the website, you'll see that. So again, just an example of one of the -- that will be a long list of these new launches that we'll be working in the coming years.

And to the first part of the question, how are you defining addressable market there? And how much are you spending on CapEx in terms of staffing that and then expanding it up?

Steve, the incremental investment is de minimis. We did not have to add resources. It was repurposing the resources we have work in the A/V part of our business already as well as new resources that we had been adding anyway as part of our IT and digital group in support of our transformation. So no, you think of the incremental investment as being de minimis. And we've not sized that -- it's an individual product. It's not a market. So, I'm not going to release -- we're not going to size that information. But the reason we included it today was just indicative of digital investments we're making aren't just going to be focused on applications inside four walls leveraging our big data, but will also include new products and services that are customer facing.

Understood. I'll just ask one more on that. As you've gone through this process of integrating the data and thinking about how to go external with that, any other updates or thoughts on follow-on offerings and just where you want to take? How big could the service model be overtime?

So, that is the -- really the biggest question, and it's a phenomenal opportunity. That's what our digital transformation will enable. So, cannot be well developed in an earnings call. So stay tuned for our Investor Day, which will begin to kind of put the meat on the bone in terms of that. Okay. I think we're a little bit over time, but these are terrific questions. So, I know if we have anything else -- anybody else lined up in the queue, we'll follow up with you post. With that, I'd like to bring our call to a close, and thank you all for your support. It really is much appreciated. We look forward to speaking with many of you in the coming days as well as investor events. And they include -- the next two events we'll be participating in are the Raymond James Institutional Investors Conference and the JPMorgan Industrials Conference shortly within the coming weeks. So with that, have a great day.

This concludes today's conference call. Thank you for your participation. You may now disconnect your line.