Hello. And welcome to WESCO’s Fourth Quarter and Full Year 2022 Earnings Call. I would like to remind you that all lines are in listen-only mode throughout the presentation. [Operator Instructions] Please note that this event is being recorded. I will now hand the call over to Scott Gaffner, Senior Vice President of Investor Relations. Please begin.

Thank you, and good morning, everyone. Before we get started, I wanted 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 the company’s SEC filings for additional risk factors and disclosures. Any forward-looking information related on this call speaks only as of this date and the company undertakes no obligation to update the information to reflect the changed circumstances. Additionally, today, we will 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. On the call this morning, we have got John Engel, WESCO’s Chairman, President and Chief Executive Officer; and Dave Schulz, Executive Vice President and Chief Financial Officer. And now, I will turn the call over to John.

Thank you, Scott, and good morning, everyone. It’s a pleasure to be with you today. WESCO delivered a stellar encore performance in 2022, clearly demonstrating the power of our ongoing transformation and our ability to drive sustained growth and market outperformance. We again set new company records for sales, margin and profitability, and reduced leverage to below 3 times for the first time since 2019. With this trajectory, we have taken a significant step forward in the achievement of our long-term 10% plus EBITDA margin target. We also delivered record quarterly free cash flow and reduced net working capital in the fourth quarter, notably on the strength of double-digit organic sales growth that exceeded our expectations. We are carrying very strong positive momentum into 2023 and I am confident that this year will be another transformational year, with advances in our digital capabilities, above-market growth, continued margin expansion and record free cash flow generation that supports our capital allocation priorities. Now turning to page four. The strength of our business model and the success of our integration efforts over the past two and a half years have established a track record of superior results for our company. This page highlights our record 2022 results compared to the pro forma pre-pandemic results of legacy WESCO plus legacy Anixter in 2019. As you can see, we have clearly outperformed the market, delivering impressive sales growth and margin expansion and we achieved record profitability all while rapidly deleveraging our balance sheet. Most importantly, our dedicated team of WESCO associates continues to provide resilient and critical supply chain solutions for our customers around the world, capturing the benefits of our exposure to sustainable secular growth trends that are both deep and drive our future sales and profitability. Turning to page five. This page outlines…

Thanks, John, and good morning, everyone. Thank you for joining our call. I will start on slide eight with a summary of our fourth quarter results compared to the prior year. As John mentioned, sales were an all-time fourth quarter record and cross-sell again exceeded our expectations. Our ability to cross-sell WESCO and Anixter products and services contributed more than $260 million of sales in the quarter. I will provide more details on cross-sell synergies in a moment, including an increase to our expectations for 2023. On an organic basis, sales were up 14% in the quarter, driven by a combination of strong price and volume, along with share gains largely attributable to our cross-sell initiatives. We estimate pricing added approximately 6 points to sales growth, with the benefit primarily in our UBS and EES businesses. On a reported basis, sales were up 15% as additional sales from Rahi were partially offset by a headwind due to differences in foreign exchange rates in the quarter. Supply chain challenges have continued to impact our business, although we are seeing signs of supply chain pressures easing in certain product categories. We continue to strategically invest in inventory to ensure we provide continuity of supply for our customers. Backlog continues to be at historically high levels. In total, backlog was up 44% year-over-year and was down approximately 1% sequentially from the end of September. The sequential change in backlog was primarily driven by increased availability of security products within our CSS business that allowed us to ship certain customer projects. As we start the first quarter, demand has continued to be strong. Preliminary reported January results are encouraging, with sales up approximately 17% year-over-year, including the impact of a stronger dollar, which is expected to negatively impact first quarter sales growth by about…

[Operator Instructions] Our first question today comes from Deane Dray with RBC Capital Markets. Please go ahead.

Thank you. Good morning, everyone.

Good morning, Deane.

Hi, Deane.

I was hoping to start with some what would be real-time color on the demand outlook, so daily stock and flow, bid activity, product availability. And John, as you take us through this, we are all trying to gauge what does normalization look like, there’s some references to the supply chain getting better, but you are still -- it sounds like you are adding some buffer inventory in some places. So just kind of take us through the real-time update and then kind of frame for us about normalization to any degree in 2023?

Yeah. Good question, Deane. I’d, first of all, start with January because that’s in the record books. Very strong start to the year, after delivering an encore performance last year, we turned the calendar page. In January, I’d say, the beat goes on and just a very strong start with 14% growth plus the additional incremental contribution of Rahi. So as we look to the balance of the first quarter, the comps are a little bit more challenging, but I will tell you that momentum vector that we had in January is continuing so far in February. So I will also say that margins are holding up very, very well. So it’s just -- it’s an excellent start, sales and margin wise so far. I would say, our outlook for the year and what does normalization look like, I think, it’s going to be a multi-speed economy. You look at our end markets, there’s parts of the end market that will experience some significant pressure, but the good news is that’s not lined up with our portfolio. Residential construction faces some headwinds but we don’t serve into that market. When you look at our EES business, non-resi is off -- got record backlog entering the year, strong momentum vector and performed sequentially stronger in Q4 versus Q3 versus normal seasonality. Industrial end markets holding up very well and strong. You move to CSS and that business was particularly supply chain constrained, Deane, as we talked about all through last year. Those constraints started to heal in Q4. Not fully healed yet, but I think, we will see that healing as we move through 2023 and you saw the significant step-up in momentum vector of CSS in Q4 and that’s continued as we started 2023. And then, UBS, just an absolute…

All right. That’s comprehensive. Really appreciate all the color. And just as a follow-up, like to put the spotlight on free cash flow, if we could and this was an exceptionally strong quarter by our estimates, like 2x your seasonal free cash flow conversion. So, for Dave, can you just take us through expectations on the cadence of free cash flow for the year? You said first quarter would be a use, you called that out on stock comp. Maybe some color on buffer inventory, because the extent to which you start peeling that out, that should have a positive impact to free cash flow and are we kind of stuck with this hockey stick fourth quarter, just kind of gauging what that cadence is through the year? Thanks.

Yeah. Certainly. So let me start by providing the historical context of generally, in a normal demand environment, we would see our free cash flow generation split 30% first half, 70% the second half, 40% of that free cash flow generation in a year typically occurred in the fourth quarter primarily because we would see the sequential decline in sales, we would then release both accounts receivable and inventory. I mentioned that we do anticipate that our first quarter will be a draw. That’s primarily because we are going to be making the incentive compensation payment in March. But after that, we should expect to see things begin to normalize from a free cash flow perspective. As you mentioned, Deane, supply chains haven’t healed yet, so we would anticipate that we would begin to see inventory releasing in the second half of the year as those supply chains heal.

That’s really helpful. Thank you.

The next question comes from Sam Darkatsh with Raymond James. Please go ahead.

Good morning, John. Good morning, Dave. How are you?

Good morning, Sam.

Good.

Two questions. First, John, you mentioned in your prepared remarks that you see WESCO shares is trading far below in [Technical Difficulty] as that due to a concern around the sustainability of gross margins. I mean, they are up a couple of hundred basis points over the past two years, three years. If we could just unpack gross margins a little bit [Audio Gap]

Sam, I think, you lost…

…over the past couple of years? Hello?

Would you…

Can you hear me okay.

Yeah. Would you mind repeating after unpacked gross margins, I think, we lost you?

Sure. I am sorry. Can you hear me now, John?

Yeah, Sam.

Okay. Sorry about that. Just trying to get a sense, how much of the gross margin expansion is specifically price cost benefit on stock and flow inventory?

So let me answer the question this way. The enterprise-wide gross margin improvement program that we put in across the enterprise that we now are multiyear -- several years into execute has great momentum. It’s not focused on stock and flow versus ship and debit versus, it’s looking at all categories of our all fulfillment method types. It’s really focused on at the core level of pricing and the value of our supply chain solutions and services. So we have seen improvement in margins both for stock and flow and our DS business, our direct ship business. So and we are focused on continuing to drive gross margin expansion across all our business models. I think there’s tremendous legs left in our gross margin expansion program. And look, we have set a mark of 10-plus percent EBITDA margins for the enterprise. We have got north of 8%, a huge mark for us, all-time record results in 2022 to eclipse the 8% adjusted EBITDA margin level. And we are looking at, going forward here, having a strong contribution of both gross margin expansion plus operating cost leverage, those two both being additive to contributing to overall operating margin expansion. So I understand your question. I can tell you that the bottomline is, we have seen contributions, since we put the two companies together, including in 2022, improvement in gross margins for both stock and flow and DS, and again, it’s because of the nature of our gross margin improvement program and the way we are going about pricing value. I know this is the question. I think the bigger question is, how does the new WESCO perform against an economic backdrop that has some recessionary pressures? Well, look at the guide we just put out there for 2023 and we are highly confident in the guide that we have outlined and so that should speak volumes about our confidence in the new WESCO and our ability to generate profitable sales growth across all phases of the economic cycle.

My second question, assuming my phone is still working. So the -- what expectations do you have, Dave, for year-on-year backlogs by the end of the fiscal year 2023 that informs your free cash flow guide for the year?

Yeah. So, Sam, I would say that our free cash flow guide is less tied to the backlog. It’s more tied to the supply chain’s healing. And one of the ways that I would ask you to think about this is through the first half of the year, we are expecting some product categories, we will still be facing severe supply chain constraints. Some product categories, we are starting to see some improvement, but right now, our expectation is that it will be the back half before we get more to a normal lead time in order to support our customers. The way that I would encourage you to think about this and how we think about it internally is that, we expect that in order to support our sales growth, our net working capital will grow half the rate of sales. And that includes that we have elevated our days of inventory outstanding. So our financial days outstanding, you can take a look at that, it’s up substantially because of the supply chain lead times and our need to service the customers. We expect to make some progress against our DIO metric in 2023. That’s what’s informing our free cash flow and we are assuming that we will have a typical seasonal pattern to sales, meaning fourth quarter sales will be down sequentially from the third quarter to release working capital.

Thank you, both.

The next question comes from Nigel Coe with Wolfe Research. Please go ahead.

Thanks. Good morning. So I wanted a little bit…

Good morning, Nigel.

Hi. Just want to switch gears to Rahi, really exceptional performance as you pointed out. So where did the upside come from, the 110, I think, it was in the quarter versus 60 to 80 guide. If I have got this wrong, please correct me. But where did that strength come from and how much visibility do you have in that 20% growth in 2023?

What was the second part of that, Nigel? How much -- what did you say...

Yeah. The visibility -- yeah. The visibility…

Oh! Visibility…

… on the 20% growth.

Visibility.

Yeah.

Okay. Thank you. Yeah.

Yeah.

I missed that. Well, we -- when we closed on Rahi, we had been giving updates and you see that’s in our public materials, about what their trailing 12-month sales were. So you saw what it was when we initially announced the deal and you saw what it was when we did our Q3 earnings. So that number is and they came in substantially stronger. We then gave an outlook for the stub period in Q4. It was the result of releasing stub projects and delivering projects that were in backlog. With that said, they grew their backlog. So the momentum vector there is exceptionally strong and we are getting to learn that business. Now we have got a good sense with parts of the Anixter CSS business and that now has been absorbed and integrated and the leader of Rahi’s running WESCO data solution, data center solutions. So we have taken the Rahi assets and combined them with Anixter’s legacy data center capability and assets globally and the leader of Rahi is running that as part of Bill Geary’s business. But the short answer to your question, Nigel is, it’s the -- it was releasing out of backlog booked orders that were there, but the backlog grew. And coming into 2023, we have got a very clear view of what the operating plan commitments are, that that leader who started the business committed to. He’s been over delivering against these expectations, as long as we talked to Rahi, which was many, many, many months. He kept beating and raising, quote-unquote, his performance against his plan. So we locked in his plan. But when I look at the backlog growth and the momentum vector of the business, we are just -- we are set up for just an outstanding year. I think it comes down to, Nigel, fundamentally, the core value proposition of Rahi and combined with the secular growth that’s associated with data centers and how we -- where we play in the value chain and the combination with Anixter’s CSS business is exceptional. This is just a terrific acquisition and we are thrilled with the start.

No question. That’s -- congratulations on the acquisition. Maybe just talk about the kind of the free cash deployment in 2023. So after dividends, both preferred and equity dividends, you are going to have about $550 million of cash flow to deploy. Just wondering how you are seeing that shaking up between debt paydown versus share buybacks versus maybe M&A, maybe just some thoughts on that. And then just on top of that, I think, if you just take your EBITDA plan, you are going to be down to about 2.6 times leverage just on EBITDA growth. So curious how much you want to take down leverage this year.

Nigel, thanks for the question. We are going to be balanced with how we deploy the available cash. We are working through with our Board to get the approval for the common stock dividend, so that will be happening here shortly. We also are committed to the $1 billion buyback and we will be focused on leveraging available cash as part of that buyback program. But from our perspective, right now, the primary concern is we want to operate within the middle of our range on leverage. We are getting closer to that, but that does provide us with significant optionality, which will include providing capital back to shareholders, plus we will continue to take a look at M&A activity and see what may make sense for our company. But again, I think, the common stock dividend and the buyback is something that we will be initiating here in 2023.

Great. I will leave it that. Thanks.

The next question comes from David Manthey with Baird. Please go ahead.

Yeah. Thank you. Good morning, everyone.

Good morning, Dave.

Good morning. I’d like to circle back on the gross margin. Dave mentioned that you are expecting record gross margins in 2023 and you clearly have a lot of company specific factors that are driving it higher. But what would need to happen to drive 2023 gross margin below what you just reported here in 2022?

Yeah. Dave, I think, we would have to see a considerable amount of pressure on our topline and if we see that considerable pressure on the topline, we would see our supplier volume rebates would fall to the lower end of the historical range. And just to put that into perspective, as we outlined, we did get the benefit of higher supplier volume rebates versus the prior year. So that will be a headwind going into the more normalized period in 2023. But if you start to see demand from, call it, a deep recession, then that would mean that our supplier volume rebates would tend to the lower end of the historical range. That would put pressure on gross margin. We have been very clear about our margin improvement program and our focus on passing through costs to our customers. We have been positive on that throughout the full period of 2022. It will be incredibly important that we are able to sustain that momentum into 2023. We believe that we have provided our sales force with the right tools and techniques in order to do that. But clearly if we saw significant demand destruction, that would put pressure on gross margin.

Okay. Thank you. That’s helpful. And related to that, you are seeing 17% growth in January, you are guiding full year to 6% to 9%. That -- it clearly implies some sort of slowdown overall, and notwithstanding the growth driver overlays you have, what is your core assumption for the economy, industrial production when you are thinking about formulating that topline guidance?

Yeah. As we mentioned, we think that GDP here in the U.S. is going to be essentially flat. We do think that there are pockets of the end markets that we serve that will still be very positive, including non-res construction, the industrial markets, data center growth. We are still expecting that to be. And so that’s where we are still assuming that we have a volume opportunity as well as the pricing carryover, that’s going to move our sales up in 2023. So we are taking a look at all the same economic data that you are. We are also talking to our customers. That’s informing how we have positioned our outlook for 2023.

Got it. Thank you very much.

The next question comes from Ken Newman with KeyBanc Capital Markets. Please go ahead.

Hey. Good morning, guys. Thanks for fitting me in.

Yeah. Hello, Ken.

First question for me. Sorry if I missed this, but obviously, you have increased the synergy target here, but I know when you first introduced Rahi, there were no identifiable synergies yet as the deal was just closing. Given all the opportunities that you have had to look into that business and obviously, the demand is improving, any way you can kind of parse out just what the identifiable synergies are for Rahi specifically?

So I will just tell you I think that, the way to think about that business is it’s going to -- it’s a major growth engine and it’s got a tremendously positive business momentum vector and the synergies will be cross-sell, but we haven’t put a specific target on that. Again, we did that when we put two equal sized Fortune 500 companies together back and which was actually announced pre pandemic, closed at the beginning of the pandemic. We are not going to break out a separate synergy target, cross-sell synergy target for Rahi, but that’s how to think about it, Ken.

Okay.

The discipline and the process we put in place across, as a result of the combination of Anixter and WESCO is still in place. I have said -- made the statement before, it’s turning out to be the single largest, most sustainable value creation lever of putting these two companies together. I think it’s a demonstration of the combined market leadership position, the superior value proposition, the global scale and we have just raised that combined synergy target again and we think we have got tremendous legs to that as we have tremendous legs to our gross margin improvement program, but Rahi now will draft off of that process. So think about it as taking Rahi’s services, products, really services and solutions, because they are much more service-oriented and just literally adding that to our cross-sell program. And so that will be leveraged inside Anixter. Anixter’s prior CSS business, which is Bill Geary’s CSS business, as well as across the SBUs.

I will just highlight that right now we are not going to separate out any of the merger integrated -- integration related costs for Rahi. It’s not material the way that the Anixter merger was. So what you see on Rahi will be its fully reported results in our adjusted results, we won’t be breaking out any synergies for you as we go forward in 2023.

We will call out the topline growth so you will see reported versus organic sales. So you will see that until we lap the acquisition of the 12-month point post close.

Understood. For my follow-up here, I really wanted to clarify the CSS guidance for the year. I think if I -- after the re-segment and backing out the acquisitions, I think, the guide implies organic growth for that segment being in the low to maybe mid-single digits in 2023. One, I just want to see, is that right, and if so, that seems a bit slower than I would have anticipated just after all the positive commentary on the backlog that you guys mentioned in the prepared remarks?

Yeah. Ken, so we expect our CSS business reported sales will be high-single digits and that does include about the benefit that we will get for both Rahi. And remember, though, that the CSS business doesn’t have the same pricing carryover as the other two SBUs. The pricing in CSS has been low single digits throughout 2022, we don’t get that same carryover benefit that we get with EES and with UBS.

Hey. But just a comment on EES. Ken, was your question EES?

No…

It was CSS…

It was CSS specifically on organic growth, but I will…

Okay. I got you.

…definitely welcome any…

Okay.

… comments you have on EES as well.

No. No. No. Dave gave that guide, too. I mean, he said EES’ outlook is mid-single digits. UBS and CSS are high-single digits as part of the construct and the guide for 2023. Just we talked about throughout 2022 about the supply chain constraints as it started to heal and some recovery. It was different by product category and supplier obviously. CSS was still feeling severe impacts throughout the majority of 2022, started to heal late in the year, and you saw the improved results in 2020 and then in the fourth quarter and that’s continued to start this year. So that’s what serves the basis of the guide for CSS stepping up its growth rates in 2023 versus 2022.

Got it. Very helpful. Thanks, guys.

The next question comes from Christopher Glynn with Oppenheimer. Please go ahead.

Thanks. Good morning, everybody.

Good morning.

I was curious -- good morning. I was curious, for CSS, how are you thinking about prospects or market backdrop for sort of price reclamation on a deferred basis as the supply chains normalize. I know it’s not in your guide?

So I think Dave mentioned that briefly, Chris, but we started -- we saw an improved contribution from price in CSS in the fourth quarter, I mean, it goes hand-in-hand and in concert with the supply chain’s healing as well. So -- and we do expect that we will have -- that kind of sets us up well for the beginning of 2023. Dave, I don’t know if you want to add to that commentary.

Right. I mean, we are still monitoring what the suppliers particularly those that service our CSS business, where we are in conversations with them, how are they thinking about capturing price cost, obviously, we have not included that in our outlook at this time for 2023. But again just to reiterate, we haven’t seen the same frequency and magnitude of supply price increases from our suppliers in the CSS category. That’s been low single digit throughout 2022 and we would not anticipate at this point any incremental price increase activity. But, again, we will continue to monitor that with our suppliers.

I mean, the backdrop is those strong secular demand, secular growth and you look at our Rahi results, which shines a spotlight on our global data center solution, that’s very encouraging. So, look, we will -- we are pricing value as part of our gross margin improvement program. We will -- and the sales force is very focused on optimizing that. As we said, I want to reinforce, that program has tremendous legs left in it and we are incentivizing the sales force for incremental gross margin improvement. That’s where they get the increased compensation in the kickers. So it sets us a floor, as a starting point, what we did last year, and so again, there’s tremendous incentive in place to sell our full value proposition to customers.

Thanks. Appreciate that filling color. And then digital transformation, a lot of mention of acceleration of the deployment and yields on that. I am curious if any metrics you could share around operating efficiencies or service levels that you are seeing more or less directly tied to your big data utilization ramp?

Chris, great question. We have that on our road map to begin to start disclosing that. We have not done that yet, so let’s put a pin on that and say that’s something we are going to get to. I won’t foreshadow, is it one or two quarters out or at what point, but clearly on our road map to start to provide that. I will say that, and we have mentioned that we got a new digital -- digital’s impacted a series of applications across our company. I have cited those before our Investor Day last year. We put a finer spotlight on that at our Investor Day. And they include what we are seeing tremendous benefits from thus far, our AI-enabled product search, our intelligent pricing application and something we call unified sales desk, which is brand new and kind of knits together all the applications and the behind the scenes work we have done on our big data in one master data lake and making that -- turning that into more valuable information that we can use as we -- as the sales force engages with customers in developing their solutions. It also includes products that are -- that include an as-a-service capability like that AV-as-a-service that we highlighted a year ago and so we are getting very nice momentum with those as we continue to also build out the tech stack that we took you through at Investor Day, where we have got a new finance app implementation, a new human capital implementation, they are in place and continue to be expanded and we have started with our WNS team to that’s rollout [ph].

Thanks, John.

So think it is digital transformation, it’s a great question as a continuum. When we put these two companies together, I will remind everyone, that was one of the major strategic rationales for putting these companies together. None of us in the distribution portion of the value chain could invest in digital fast enough. We put the two companies together. We established strong aggressive targets on synergies. It allowed us to improve our core profitability. We have been over delivering and beating and raising those, but we have been taking some of that overdriving investing in our digital transformation. We will bring the three-year integration program to a close at the end of 2023. But we have got another couple of years left on this digital transformation and that is what I am most excited about. It really is all about unlocking the power of our big data. Again, we are already seeing some tremendous examples of that and we will -- again it’s on our road map to bring that to life more for you going forward and establishing these KPIs and reporting against that. Excellent question. Thank you.

Sounds great, John. Thanks.

Yeah.

Today’s last question comes from Chris Dankert with Loop Capital. Please go ahead.

Hey. Good morning, guys. Thanks for fitting me in here.

Yeah. Good morning.

Just to kind of clarify on the guide, you said expect a fairly seasonal pattern to the year. I assume that that kind of means any benefit from Infrastructure and Jobs Act or Inflation Reduction Act spending kind of pushing you to the market, that would be kind of incremental upside to what you are contemplating today?

Yes. Short answer.

Perfect. Short and sweet.

Yeah. I mean, yeah, I think, the secular trends are in place, we think they are enduring they are long-term and we are seeing increased contribution from them. But honestly, it’s our leading value proposition, taking advantage of those is what we are really seeing the effect that result in our sales. But to your point and we didn’t talk much about it, Dave did allude to it though. That -- when you really look at that starting to unveil itself and deploy through the value chain, that could be substantial upside, absolutely.

Perfect. Perfect. And just very quickly, again, just to build up the last question, I guess. I know we are waiting on the KPIs, but when I think about maybe the earlier gross margin initiatives that started rolling years ago, the supplier segmentation stratification kind of pushing cost visibility to the sales force. How do you feel about some of those initiatives that have a little bit more maturity to them at this point?

So I would say that, we had -- we took all that that was being done there, Chris, what you alluded to. But when we brought the two companies together, Anixter had an existing gross margin expansion program across their enterprise and we put the two together and drove it enterprise-wide. But it’s continuously being refined and improved. If you look at what we have done for 2023, we are not using statically what was in place for 2022. We have introduced a whole series of additional improvements in terms of applications and visibility and leveraging our big data that’s being brought to bear as a sales force is working individual order kind of bidding opportunities and order opportunities. This is, again, the power of digital. When you get all our data into one world-class data lake and you can begin to leverage it, it’s continuous. And so, I mean, that’s what I am very excited about, and again, underpins our confidence around the legs that we have left in this gross margin expansion program.

Yeah. Really appreciate the color there, John, and then best of luck on 2023 here.

Thank you. So thank you. We are a little bit past the top of the hour, but we had quite a few questions. I will bring the call to a close. Thank you all for your support. It’s very much appreciated. We have got a number of engagements planned here in the coming months -- a month or two. We look forward to speaking to many of you later this quarter. We will be participating in the Raymond James Institutional Investors Conference, the Loop Capital Investors Conference, as well as the JPMorgan Industrials Conference next month. So, with that, thank you very much. Have a great day.

The conference has now concluded. Thank you for your attendance. You may now disconnect.