Hello, and welcome to WESCO's 2025 Third Quarter Earnings Call. [Operator Instructions] Please note that this event is being recorded. I will now hand the call over to Scott Gaffner, SVP, Investor Relations, to begin.

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 uncertainties. Actual results may differ materially. Please see our webcast slides and the company's SEC filings for additional risk factors and disclosures. Any forward-looking information speaks only as of this date, and the company undertakes no obligation to update the information to reflect changed circumstances. Additionally, today, we will use certain non-GAAP financial measures. Required information about these measures is available on our webcast slide and in our press release, both of which you can find on our website at wesco.com. On the call this morning, we have John Engel, WESCO's Chairman, President and Chief Executive Officer; and Dave Schulz, Executive Vice President and Chief Financial Officer. Now I'll turn the call over to John.

Thank you, Scott, and good morning, everyone. Thank you for joining our call today. We delivered very strong results in the third quarter, and we again outperformed the market with our leading portfolio of product services and solutions. Sales growth has accelerated throughout the year with organic sales up 6% in the first quarter, 7% in the second quarter and now 12% in the third quarter. And that marks 4 consecutive quarters of accelerating momentum. Our positive business momentum has continued in October. We're happy to say with month-to-date preliminary sales per workday up approximately 9% year-over-year, and that's what 3 days left in the month. Our record quarterly sales and was an all-time record for any quarter sales of $6.2 billion were led by 18% organic growth in Communications and Security Solutions, 12% organic growth in our Electrical and Electronic Solutions business and a return to growth in utility and broadband solutions. And that was driven by strong high single-digit growth with investor-owned utilities and strength in broadband. Also of note, all 3 SBUs delivered sales growth in this quarter, and that's the first time that's occurred since Q1 of 2023. Total data center sales were again very strong at $1.2 billion. They set another quarterly record. They were up 60% year-over-year and now represent 19% of our total Q3 company sales. On a trailing 12-month basis, our data center sales are now close to $4 billion. Adjusted EPS, earnings per share grew 9.5% versus prior year and 16% versus Q2 sequentially, with both gross margin and EBITDA margin improving sequentially. We are building on our positive business momentum as we enter the fourth quarter and as we prepare for continued market-leading growth in 2026. Now turning to our full year 2025 outlook. We are raising our full year…

Thank you, John. Good morning, everyone. Turning to Slide 4. Organic sales in Q3 were up 12% year-over-year. This growth was driven by volume gains across all 3 SBUs supported by an estimated price benefit of less than 3%. Reported sales increased 13% with sequential growth of 5%, which was better than historical seasonality. The strong performance was broad-based, with continued momentum in our data center business and solid contributions from all 3 business units. As John mentioned, CSS delivered 18% organic growth, EES grew 12% and UBS organic sales increased by 3%. Adjusted EBITDA margin was 6.8%, down 50 basis points versus the prior year, but was up 10 basis points sequentially. Gross margin contracted 80 basis points to 21.3%, reflecting consistent project and product mix dynamics experienced over the last 4 quarters. Importantly, gross margin increased sequentially by 20 basis points, driven by mix, higher supplier volume rebates and execution of our enterprise-wide margin improvement program. Adjusted SG&A increased approximately 11% year-over-year, driven by the higher levels of sales growth, along with higher employee and facility costs. Specifically, over 1/3 of the increase in SG&A dollars year-over-year was related to higher volume, with the balance coming from increased incentive compensation, merit increases, employee benefits and facilities costs. SG&A as a percentage of sales improved due to operating leverage on our sales growth. Finally, adjusted EPS was up 9.5% year-over-year driven by the improved operating performance and the absence of the preferred stock dividend following the redemption in Q2. I'll walk you through our business unit results, beginning with EES on Slide 5. In the third quarter, EES delivered very strong results with organic sales up 12% year-over-year driven by growth across all 3 operating groups, construction, industrial and OEM. Construction grew mid-teens, driven by robust wire and cable…

[Operator Instructions]. And our first question today will come from David Manthey with Baird.

Just a quick question here on -- I think you mentioned it right at the end there, Dave, you said that you expect to see some EBITDA margin improvement into 2026. So I'll put that one on the side. Could you tell us approximately how much price contributed to growth by segment or at least ballpark to give us an idea?

Certainly. So overall, our pricing benefit in the third quarter was just under 3%. And that was primarily driven by our EES segment, which was about 4% and that's where we saw the largest benefit from commodity pricing on our pure commodity products. Our CSS business saw a price benefit of about 2% and UBS about 1%.

Okay. And then maybe on outside of data center, could you just talk about whether it's industries or applications where you're seeing some strength there. It's great to see a return to growth, nice growth in EES. And maybe you could just help with a little bit of color there.

Thanks for that question, Dave. This is John. Yes, we're really pleased. I think it's a highlight of the quarter, actually. I mean CSS, the beat goes on. That's clear. The strong performance due to AI-driven data centers. But for EES, this is the fourth consecutive quarter of improving sales growth. I'll just remind everyone, we returned to growth in the fourth quarter of last year, grew 3% in Q1, 6% in Q2. Now this is a significant step up to 12% growth in Q3. All 3 operating groups in the business, Dave, as construction, industrial and OEM, all 3 grew particularly for construction, I'll double click. I mean that was up mid-teens. And it's not just growth in data center projects. There's also growth in other big projects, infrastructure related. We saw growth in water -- wastewater, hospitals, public transit. They're just a really nice step-up in construction. Very pleased with that. In terms of industrial, also pleased with that performance, up mid-single digits. We had improved day-to-day demand in the U.S. We had increased project activity in Canada, and our stock sales increased each month of the quarter. That's our stock and flow business, which is a good indication of what kind of the daily demand in the market is. So we feel good about that. And then OEM up mid-teens, really strong growth again across the U.S. and Canada. That's being driven by semiconductor and other infrastructure markets. So that's the business in EES that has our most semiconductor exposure. And that would be, again, you're seeing -- that's driven kind of the semiconductor expansion big mega projects and such. We have some terrific semicon relationships there. So all in all, I think we feel good about EES' top line momentum. Also EBITDA margins are above 8% for the second quarter in a row. And I do want to mention, because I didn't mention it in my prepared remarks, we do have a new leader on board, Danny Castillo, terrific leader, returns to the electrical industry, has a long history and was part of Cooper when Eaton bought Cooper, worked for some other companies since -- post that combination. And he's off to a great, great start. Thanks for that question, Dave.

Your next question today will come from Sam Darkatsh with Raymond James.

I wanted to follow up on Dave Manthey's last question. I mean we're -- you're right. I mean, the 10% EES growth, excluding data center, just really notable. We're hearing a lot of reports about just general AI and tech spending by customers crowding out other sorts of CapEx. And it doesn't look like you're seeing that in your results. Are you not seeing that crowd out effect? Or is the EES growth, excluding data center, more so via share gains, John?

Sam, we're not seeing it crowd out based on our activity levels. But I do think it's pretty clear that this quarter's results there was overall market outperformance across our 3 businesses. And if we stay on EES in particular, there's enough other data points out there in terms of market surveys and competitors who have reported that this is a very strong outperformance versus market. So I'll tell you, this did surpass our expectations. We did expect EES to pick up pace in Q3 and Q4, and we outlined that. And we did have improving momentum vector, but this was a more meaningful step up, Sam, to your point, getting north of -- get a 12% growth and double-digit growth ex data centers than we expected.

Yes. My last question, looking at data center itself. I know the margins are a little bit lower than fleet average because of all the large projects, but I'm also -- I imagine that since it's a lot of direct ship special order that asset velocity is also better than fleet average. Can you talk to that, put a little bit of clarification in terms of what your ROA is for that data center business?

Yes. So we haven't been public on that yet, Sam. I think at some point in the future, we may do that. So I appreciate the question. I will -- maybe I'll focus on it this way, which is another dimension of your question. DS, direct ship margins inherently have lower gross margin, but we have significant lower operating costs to execute those transactions. We've always said that it represents very good operating profit pull-through. I'm really pleased that CSS has a third quarter in a row of sequential EBITDA margin expansion. And we're getting it with gross margin and operating cost leverage. This quarter, CSS' gross margins were up 30 basis points sequentially. And I'll remind everyone that -- we did have a big shift in our kind of margin mix in Q4 last year when CSS really started to drive outsized growth. Data centers grew 70% in Q4 last year. And I mentioned that we're going to work margins up over time. If you look at that, CSS has -- their margins or gross margins are 40 basis points higher than they were in Q4. So we're walking those margins up and we're getting operating cost leverage on the growth. So I, at least, wanted to hit that point, Sam, on your question. In terms of ROIA, yes, it is much better asset velocity to your point. We just haven't put a number out there by SBU.

And your next question today will come from Guy Hardwick with Barclays.

With volumes so strong, I was wondering whether the -- as a company as a whole is hitting levels in terms of where volume rebates, which have been kind of declining as a percentage of EBITDA but may start to recover, whether this sets you up for them becoming a positive tailwind to margins next year?

Yes. Guy, thank you for the question. So year-over-year in the third quarter, some of the increase in our gross margin was driven by better supplier volume rebates. That does include the benefit we're getting this year from reaching some of those higher volume tiers, which is translating to a better rate with certain suppliers. We also expect that we will continue to see that in the fourth quarter. So year-over-year, we do expect to see supplier volume rebates contributing to gross margin expansion. I do believe it is a good setup as we go into 2026. We'll provide you more details on that in February when we do our next earnings call.

And just as a follow-up. I didn't hear you mentioned much about the digitalization investment. Are you beginning to see benefits in terms of cross-selling yet? Or is that more of a story for out years?

Guy, it's a great question. Thanks for asking. Look, I think that first, on cross-selling, I don't want to link that to our enterprise-wide digital transformation because that will help accelerate it and improve our execution across the global enterprise. But I'll take all the investors back to this has been really one of the most significant value creation levers that we've been executing exceptionally well against since we put Anixter and WESCO together. And we had significantly overdelivered the sales synergies that we committed to. We had committed to 1% of pro forma sales, which would be $170 million a year. We ended up delivering over $2.3 billion cumulative of cross-sell sales. So that process we put in place and the incentive structure supporting it that's deployed across our sales force and the way we're executing, we're gaining better traction every day on our cross-selling, and we're seeing that in our results. The digital transformation, when it's done, will result in, I think, even further acceleration of improved execution there. With respect to the overall digital transformation since you touched on it, at least I'll make a comment. We're making very good progress. All 3 SBUs are running the initial build of our new digital platform and at least 1 location, that's call that baseline set of capabilities. In the second half of 2025, we've been focused on continuing to build out additional capabilities while beginning deployment. And in 2026, deployment will really start to scale up. As we outlined at our last Investor Day, our check enabled business transformation is on track and with the time lines we outlined at our last Investor Day in 2024. More on that as we move into next year, we'll be providing more robust updates.

And your next question today will come from Deane Dray with RBC Capital.

I appreciate all the clarity on the revised outlook, especially the change in free cash flow guidance, which we consider to be a high-quality problem given all the growth.

Thank you, Deane. Yes, it's -- we don't like the printed number of free cash flow, but our sales for workday in September were the highest monthly sales per workday we've ever had in our history, in the 15-plus percent range. And all that AR result in growth of AR. AR grew $271 million. So this is -- you said it well, very high-quality problem because that AR will get collected.

Yes. And your working capital intensity continues to improve. So you're not losing anything on the receivables, payables, et cetera?

Yes. That's an important point, which is why we include that page, Deane, the net working capital as a percentage of sales, which is obviously AR plus inventory minus payables. We're showing improved efficiency. And so this is just a high-quality problem on the AR growth. And so we're doing that now still with all the various "ERP" instances we're running in the company. We do expect, as we outlined at Investor Day, when our digital transformation is done to get really substantial benefits in overall net working capital.

Exactly. All right. Just a couple of quick ones for me here. First, I'll echo all the previous comments about EES and I was a little surprised not to see some backlog build there. So was it all really short, quick turn business that was done? That would probably be the explanation, but would love to hear your color.

Yes. I think your backlog is still very healthy. We just didn't grow it, and it was just the exceptional step-up in sales growth, as I talked earlier, but versus normal historical seasonality, we're -- it's intact. It's very -- it's strong, it's high quality. The opportunity pipeline continues to increase. So we're seeing more opportunities. We're putting more shots on goal to use that analogy. And so that's what's encouraging. And again, we're not giving a full guide for '26 yet. But we did make some commentary, Dave, did just around stronger electrical markets in '26. So I think that gives some indication of the confidence level we have given backlog plus sales execution.

That's really good to hear. And since you opened the door on the 2026 kind of data points that Dave shared, the one on data center, the mid-teens growth, that would be what we consider to be industry growth, the kind of footprint rollout given the multiyear backlog. You've been outgrowing that significantly for the past year plus and increasing your share of wallet, do you see where that ramps down? And just what's your visibility on this outgrowth in data center heading into '26?

All indications are the data center market remains incredibly strong. Again, we have a unique and very strong set of end-user customers. We're in dialogue with them. We get good insights into their multiyear investment and deployment plans for data centers. We're helping them execute globally. So the market is strong and robust, I will say it this way. I wouldn't get -- again, we're not giving the guide for '26 yet. We are focused and committed to and confident that we will continue to outperform the market in data centers. And it's driven by the strength of -- we have this tremendous strength in the white space. It's extensive. We've added services. We have increasing strength in the gray space, and we talked about that the last several calls. We wanted to provide some more details on our mix. You see that in today's webcast materials. And increasingly, too, our UBS business is getting pulled in and engaged on the front end because really the #1 driver of what's going to support data center growth is power. And so it's why I'm so bullish on utility turning into a secular growth industry because fundamentally, it's increased power generation that's going to be driven, required to support the data center build-out, and that bodes very well for us. So a final point, our white space capabilities, our gray space capabilities, our power and utility capabilities, coupled with the global footprint and increasing services, we think, puts us in a very unique position. to continue to outperform the market for data centers.

Your next question today will come from Nigel Coe with Wolfe Research.

We covered a lot of ground already, but I'm just wondering, I'm sorry if I missed this, 30 basis points of margin expansion for 4Q. How should we think about that between gross margin and SG&A?

Nigel, the one thing I'll emphasize is that given the increase in our top line, part of that 30 basis points of expansion will be improvement to our supplier volume rebates. And so when you think about the 30 basis points, you should assume a modest increase in the supplier volume rebates, and we're confident we'll be able to get to the 30 basis points through a combination of that supplier volume rebate, other gross margin actions, but then also operating leverage.

Okay. Great. And then on the price increases, I think we understand how you're layering those in now for 4Q. Would that be gross margin accretive as well? Because normally, when you raise prices, you normally have a maybe a temporary benefit on inventory. So just wondering if that's having an impact as well.

It will have a slight impact because we are averaged with inventory. So as market prices increase, our inventory has not caught up to that market increase. What I would tell you what we experienced in Q3 was it was a very modest impact. We're not seeing that pricing translate from our suppliers into the market and into our sales yet. So we had rough round just under 3% pricing benefit, that's after seeing these high single-digit price increase notifications in Q1 and into Q2. So all of that pricing is not translating to the market yet. As we do get pricing traction, we should see a modest benefit to our gross margin.

Okay. And then a quick one on cash flow. If we do get into that mid-single-digit zone on growth in 2026, would you expect conversion to be, if not 100% pretty darn close?

Yes.

And your next question today will come from Ken Newman with KeyBanc Capital Markets.

First, Dave, could you just talk about, obviously, the implied acceleration in UBS organic sales growth in fourth quarter. Just talk a little bit about the color and the confidence there. If there's any comment you have on how much of that revenue is already secured in backlog just versus an easier comparison math there?

Well, I'll start with the easier comparison. So if you take a look at our overall utility and broadband solutions business in the fourth quarter of 2024, we do have an easier comp, particularly within the utility space. So utility was down high single digits in Q4 2024. And given the acceleration that we've seen, particularly with the investor-owned utilities, we're confident that we will have significant growth here in the fourth quarter of 2025. Again, some of that's just the trends that we're seeing, not only the backlog, but the day-to-day activity primarily, again, in those investor-owned utilities, some of the project work that we're doing, but we also are getting some benefit from an easier comp.

Got it. Okay. And then -- sorry if I missed it, but did you disclose how much gray space revenue was up this quarter versus white space? It was nice to see the stronger margins in both the ESS and CSS this quarter. I'm just trying to see if there's a way to think about the longer-term margin trend as we balance the mix impacts from growth in those 2 channels.

Yes. The data center sales in our EES business, those gray space sales were up approximately 60% in the third quarter.

And the white space was up over 50%.

Over 50%. Correct.

So we did mention that, Ken. So both 50% plus.

And then any comments on that -- how you think about mix kind of normalizing into '26?

I don't know that, that mix normalizes. Again, the dynamic there is we've talked about it at prior earnings calls and also at the investor conferences. We have deep and long-standing strength in white space, these end-user relationships. We're adding services and we're managing -- helping manage the global deployments for hyperscalers and global MTDC customers. So that -- think of the market and because of our unique value proposition and execution ability globally, we're outperforming the market with that white space strength. The gray space, a big good portion that historically has been served direct. But we're now picking up pieces that are moving into distribution because we become the one overall supply chain management manager on behalf of our end-user customers. So that's what's driving some of that growth there. So I would expect we will continue to see very strong growth in both white and gray space, again, outperforming the market is our expectation.

And your next question today will come from Patrick Baumann with JPMorgan.

I wanted to start off on utility, if we could, and to focus a little bit on the public power side. I think that's, I guess, 1/3 of your utility sales, correct me if I'm wrong. Wondering what -- how much it was down in the quarter? And then what gave you confidence that it returns to growth next year? And along those lines, you mentioned something about, I guess, competitive price in that side of the world and maybe that led to some of the gross margin compression quarter-on-quarter. Maybe if you could flesh that out a little bit.

Yes. So maybe just the level set, again, if you think of our utility business, the U of UBS, 90% of that is U.S., 10% Canada. So when you take the U.S. now, that 90%, 60-plus percent investor-owned utilities, 10% or so is direct to specialty utility contractors that leaves about 30% in public power. Our sales to our IOU customers, our investor-owned utility customers were up high single digits in the third quarter, and we're very pleased with that momentum. Our strength in IOUs is really carrying the day with -- for the utility return to growth. Public power softness continued. And I mentioned this last quarter, and I'll just go back and double-click on it because it's the same situation. When you look at what occurred across the pandemic, it really was the IOU customers that were prioritized and they were delivered material as the supply chain started coming on back online and the public power customers started building inventory much later than the IOU customers. Those inventory builds for public power continue through 2024. And that's as the manufacturers switched from serving the IOUs to building up for the public power customers. So that's really what we're seeing. We're seeing that kind of customer stocking issue. And it's not across the board. Categorically, it's distribution transformers and wire and cable for public power, but not for line construction materials. So we're seeing it getting healthier. We've got overall improving customer order rates. That's a positive leading indicator. And public power, we do expect will absolutely return to growth in 2026. I think the thing I'd focus investors on are the breadth and strength and diversity of the rest of our utility business. And obviously, the IOUs and those multiyear agreements we have in place where we are essentially the supply chain management partner, solutions partner for them is exceptionally strong and good to see them with high single-digit growth. But we're also seeing very strong opportunities and growth not just in the D of transmission and distribution, but transmission and substation portions of the market. And that we're seeing kicking in this year. We've got a strong set of capabilities there. And we expect that to be a very strong growth driver in 2026. So there's the public power story. It is more competitive. Because, again, of the current stocking situation, that's more locally market-driven. Some of our competitors are also not for profits, the so-called cooperative distributors. So -- but that's been the nature of the beast for decades, quite frankly.

Got it. Helpful. On the 2026 margin outlook, the 20 to 30 basis points of expansion on, I guess, mid-single-digit organic top line growth. Can you walk through us like the confidence you have in getting leverage. And I ask just in respect to 2025 when you're growing high single-digit organically and not getting leverage. Maybe remind us of the moving parts on why you're not getting leverage in 2025 and why that turns in 2026?

Yes, Patrick, one of the things I'll highlight is relative to incentive compensation. We still have about a 20 basis point headwind to adjusted EBITDA margin with the expected payouts for incentive compensation in 2025. So that's a headwind in 2025. Obviously, we've been able to drive significant sales growth but that's also come with some product mix and project mix impact on the gross margin line. The other thing I'll highlight is like many companies, we're also continuing to invest in our IT capabilities. And so we've made significant investments in that area. We do believe that, that is part of our continued investment into our digital transformation and new capabilities to service our customers. And one of the other things that we'll highlight is we've made sequential improvement as we progress through the year. That leaves us to a good setup for 2026. We'll provide you the full outlook for 2026 when we do our call in February.

Understood. So it's a better jumping off point at the end of the year, combined with less incentive comp headwind, maybe less project mix year-over-year. Those are some of the factors. I'd imagine you're going to keep investing.

Correct.

That concludes our question-and-answer session. I'll now turn the conference back over to John Engel for any closing remarks.

Well, thank you for your questions and support today. I think we've addressed all the questions that were in the queue. I'll bring the call to a close. Again, thanks for your support. It's much appreciated. We look forward to speaking with many of you over the [Audio Gap]