After merging with Anixter in June 2020 and essentially doubling the size of its company, Wesco International has been focused on driving revenue and cost synergies as it integrates the business. Its target now is a 10% operating margin.
The electrical, data and security products distributor went from just over $17 billion in Pro Forma 2019 sales to $21.4 billion in 2022, and the merger has exposed the Pittsburgh-based company to a higher mixed portfolio. In 2023, Wesco topped MDM’s Top Electrical, Data & Security Distributors List, and ranked among the top distributors on the safety, industrial and MRO industrial lists as well.
The primary driver of reaching its 10%+ EBITDA margin will be 1) continued mid-single-digit organic sales growth, paired with 2) customer- and internal-facing digitization efforts to drive sales and productivity, alongside 3) a margin improvement plan the company has been making progress on the past three years, said Wesco Executive Vice President and Chief Financial Officer Dave Schulz during a presentation at the Baird Global Industrial Conference on Nov. 8, which was streamed for media.
“We operate in a highly-fragmented industry,” Schulz said. “We believe that as our industry continues to consolidate, we’ll see the opportunity for margins to improve like we’ve seen in other end market verticals and — within our own market verticals — what we’ve seen in other geographies where we have higher concentration within the channel.”
Wesco’s Merger Improvement Plan
Anixter initiated the margin improvement plan prior to the merger with Wesco, and it’s been in play ever since.
“Back when we started to see their results, they were one of the only players within our space that was actually growing gross margin, consistently quarter over quarter,” Schulz explains. “We did not get visibility to that until we closed the transaction in the summer of 2020. And once we saw it, we were able to then deploy that across the entire company, and we began to get results. There is nothing that we do that no one else knows that this is how you drive margin. It’s not a revolution.”
He said the success of the plan comes from:
- capability building,
- a sales process and playbook,
- a performance management component, and;
- systems and dashboards that allow sales reps and operations leaders to manage margin on a day-to-day basis
“We’ve incentivized this, so our reps get compensated on growing their margin,” Schulz said. “This is not only enabled by having the right information, but also demonstrating to our customers that we’re adding value with our portfolio of product and service.”
Schulz said Wesco makes modifications to the improvement place on a consistent basis to continue to get traction.
Dive into 3Q Results
A third-quarter decline in two of nine of Wesco’s strategic business units — the broadband business, and the OEM business within the Electrical and Electronic Solutions business segment — prompted the company to moderate its 2023 expectation to the low end of its organic sales range, now about 5%.
The decline in the broadband business followed a “very strong” 2022, and was led by delays in projects and spending with key customers in the U.S. and Canada. Meanwhile, the OEM business decline was driven by consumer-centric or interest-rate-sensitive customers, including in manufacturing, construction, housing and specialty vehicles.
Wesco hasn’t yet released its 2024 framework, but Schulz gave some color on the dynamics and health of the commercial construction market during Baird’s Global Industrial Conference, saying that while some customers have been destocking within the construction business in the second and third quarters, he thinks this is normalizing.
“Our expectation is there is still going to be some significant pockets of strength that will be driven, in part, by some of the infrastructure spend that will impact our end market, also some of the large projects which we’ve already won in our backlog that would be expected to be revenue in 2024,” he said.
He added: “We built our backlog to record levels and we’re starting to see what the normalization of the supply chain with lead times coming back down to normal across most product categories. We are seeing our backlog begin to normalize, but it’s still at historically high levels.”
Backlogs are moderating more notably in the communications and security solutions business, but Schulz said there are several product categories that remain constrained by the supply chain, including those with engineered components, switch gears, transformers and breakers. These constraints impact the timing of some of the projects Wesco can deliver.
Wesco officials say they envision several trends within the markets Wesco serves having growth opportunities for the electrical distributor, including the boom of electrification in the utility space, which requires more power generation, and an increase in the transmission and distribution networks.
