It’s a “new era” at WESCO International Inc.
That’s how John Engel described the mindset at the Pittsburgh, Pennsylvania-based distributor where he serves as chairman, president and CEO. And the company he leads is indeed sporting a nifty new look.
After acquiring Anixter International Inc. for $4.5 billion (the deal closed in June), WESCO now boasts an annual revenue of nearly $17 billion, $1.1 billion in pro forma adjusted EBITDA, a product offering of more than 1.5 million products and $2 billion in inventory across three categories (electrical and electronic solutions, communications and security solutions; and utility and broadband solutions).
But it’s also a new era for wholesale distribution based on the sheer size and scale of what WESCO can provide, not only in its current channels but adjacent ones as well.
“As an industry leader, we are now larger and more diversified with differentiated scale and capabilities in what remains a highly fragmented industry,” Engel told analysts on Thursday’s conference call after the company reported 2Q earnings. “As a result, we are exceptionally well-positioned to lead not only a digital transformation of our business but also of our industry.”
And that new era got off to an auspicious start on Thursday when WESCO reported second-quarter sales of $2.2 billion, down 2.9% from the same period a year ago but ahead of analysts’ expectations by $90 million. Organic sales during the period were down 12.3%.
Shares of WESCO also benefited, jumping $3.26, or 7.4%, to $47.16 at market close Thursday.
The company did report a loss of $34.5 million compared to a profit of $63.5 million in the year-ago period, but WESCO’s non-GAAP earnings per share of $1.04 beat expectations by 42 cents.
“Results exceeded our expectations across the board,” Engel said. “That is, for sales, operating margin, operating profit, EPS and free cash flow. Business momentum improved through the quarter as we outperformed the market and built an all-time record backlog for the legacy WESCO business.
“Importantly, sales improved sequentially each month and we saw continued growth in our Utility business. Anixter also delivered a strong performance to close out the second quarter. Our positive momentum has continued into the third quarter.”
WESCO’s performance for the first half of the year fared much better. Revenue of $4.06 billion marked a decrease of only 1.4% compared to the year-ago period while the company reported a small loss, just $0.1 million, compared to a profit of $105.8 million for the same period of 2019.
Integration Pitfalls Lurk
WESCO is riding high now that it’s squarely the top dog in electrical distribution and soon, perhaps, other channels. But the looming integration could be a tough obstacle to navigate and not only because of the ongoing pandemic and recession.
After all, we’re talking about a company that now operates in more than 300 cities in 50-plus countries with more than 18,000 employees worldwide. The leadership of the newly united WESCO and Anixter said there are $200 million in synergies with the companies, which means some big cuts in branches or other operations in the coming months.
“From here, the key question is the integration of AXE [Anixter],” Baird analyst Dave Manthey wrote in a note to clients. “If successful, longer-term upside could be significant, but in light of the high degree of difficulty in integrating acquisitions at any time, let alone one this size during a pandemic/recession, we think a more cautious approach to valuation is appropriate, leaving 12-month risk/reward fairly balanced.”
Engel, of course, addressed the massive undertaking that has begun but still has a long way to go before completion.
“We’ve been executing a detailed rigorous and process-oriented integration planning effort over the last several months,” he said. “Now, all of our integration efforts and organizational focus shift from planning to execution and synergy realization. I’m happy to say we are off to an excellent start in integrating the two businesses in our first six weeks since closing and have already completed actions to deliver over 50% of our year one cost synergy target of $68 million.”
The company outlined three integration priorities:
- Flawless Day 1-Day 100 Execution
- Ensure uninterrupted operations and protect the base business
- Detailed plans for key business processes for Day 1, including integration architecture, tracking and governance
- Communication and onboarding for combined teams
- Deliver Value Capture
- Combined company spend and growth synergy targets by function, geography and business
- Prioritize and deliver synergy in functions that drive majority of value capture
- Optimize working capital
- Build World-Class New Company
- Implement operating model and design organization structure
- Talent selection and retention plans
- Build change management into integration
- Deploy cutting edge digital business capabilities
“Integration is off to an excellent start and execution is accelerating,” Engel said. “We expect to exceed our cost savings, sales growth, margin expansion, and cash generation synergy targets, and deliver the substantial upside potential and value creation associated with this transformational combination.”
Click here to see WESCO’s earnings presentation, which includes a breakdown of the integration objectives.
And stay tuned to mdm.com for more analysis on how WESCO’s new era transpires.