Title

Presentation

WESCO International, Inc. misses on earnings expectations. Reported EPS is $2.21 EPS, expectations were $2.23.

Operator: Hello and welcome to Wesco’s 2025 First Quarter Earnings Call. I’d like to remind you that all lines are in a listen-only mode throughout the presentation. [Operator Instructions] Please note that this event is being recorded. I will now hand the call over to Mr. Scott Gaffner, SVP, Investor Relations to begin.

Scott Gaffner: 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 on these measures is available on our webcast slides and in our press release, both of which you can find posted 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. And now I’ll turn the call over to John.

John Engel: Thank you, Scott. Good morning, everyone. Thanks for joining our call today. We’re pleased that our positive sales momentum in the fourth quarter last year carried into 2025 and that’s with posting 6% organic sales growth in the first quarter. This was ahead of our expectations coming into the year. Our total data center business was again a strong driver of our growth and was up 70% along with high single-digit growth in our OEM and Broadband businesses. This was partially offset by continued temporary weakness in utility end markets, which is what we expected. We continue to expect our utility business to return to growth in the second half of the year. Gross margin was relatively stable on a sequential basis versus the fourth quarter and improved sequentially in CSS also as we expected.

We continued to focus on effective working capital management as we do always in the first quarter and delivered positive free cash flow that exceeded our expectations at the start of the year. Our increased inventory will help us manage the potential supply chain impact of global tariffs. We also issued $800 million of new senior notes to redeem our preferred stock in June and repay a portion of our revolving credit facility. This refinancing along with the preferred stock redemption strengthens our balance sheet, it extends our debt maturities, it increases our financial flexibility and it significantly improves our earnings and cash flow run rates. Dave will take you through those details shortly. Following this preferred stock redemption, we have strong liquidity to address our capital allocation priorities reinforcing what we outlined at our last Investor Day.

After supporting our common stock dividend payments and continuing stock repurchases to offset the dilution of our annual management equity awards, we have well over 75% of our free cash flow remaining and that provides us with significant optionality. In the near-term, our capital allocation priorities are focused on debt reduction and stock repurchases and we continue to invest in our tech enabled business transformation and actively manage our M&A pipeline in parallel. So now let’s shift to the second quarter and as we’ve begun the second quarter, I’m very encouraged that our positive momentum is building. Backlog is up from the prior year and it’s up sequentially in all three of our business units, CSS, EES and UBS. Our positive sales momentum has continued into April and is building with preliminary sales per workday up 7%.

We are reaffirming our full year outlook based on our positive momentum through the first four months of the year. While we recognize the uncertainty of tariffs and their impact on the global economy, we continue to focus on what we can control, that is our cross sell initiatives, our enterprise wide gross margin expansion program and operational improvements resulting from our tech enabled business transformation. Like all companies, we’re operating in the current rapidly evolving global trade environment and I want to emphasize what we are doing. First, Wesco is well equipped to address the potential impact of tariffs and changes in the global supply chain. We have successfully addressed global supply chain challenges in the past, including tariffs and managing through cycles of increased inflation.

This was most recently demonstrated during the global pandemic. We’ve shown the ability to successfully manage and expand margins during these periods while delivering growth. We’re executing our well-developed playbook to manage our margins and our business and we’re maintaining daily communications with our supplier partners, our customers and our entire sales force to ensure that we’re taking all the required actions. Dave will take you through our playbook in much more detail shortly. One final comment on tariffs. Supply chain reengineering and reshoring back to the U.S. and overall USMCA markets was initiated during the global pandemic. I’ve spoken about this at length. The global pandemic effectively put a spotlight on a significant risk associated with the extended global supply chains that were in place and were established over the last three to four decades.

And in many cases, these extended global supply chains were single sourced representing significant risk. Supply chain reengineering and reshoring has become a secular growth trend and tariffs are already beginning to provide a potential accelerant for even higher reshoring growth. With that, I’ll hand it over to Dave to take you through our first quarter results and our outlook for the rest of the year. Dave?

Dave Schulz: Thank you, John, and good morning, everyone. Turning to Page 4, I’ll walk you through our first quarter results. Organic sales in the first quarter were up 6% at the upper end of our outlook for growth of low to mid single-digits. Price was approximately 1.5% and volume was up about 4%. Reported sales were flat as a strong organic growth was offset by the impact of our integrated supply divestiture, foreign exchange rates and one fewer work day. Recall that we divested the integrated supply business on April 1 of last year, so this will be the last quarter where we see an impact on reported year-over-year growth rates. In the first quarter, our data center business continued to grow rapidly and was up 70% versus the prior year.

Additionally, we delivered high single-digit growth in our OEM and Broadband businesses. As expected, utility remained soft as customers continue to work through inventory destocking. On the lower half of the page, you can see that adjusted EBITDA margin was down 60 basis points. Gross margin was stable sequentially and down 20 basis points year-over-year, primarily due to project and product mix, which I’ll cover in more detail later. SG&A was up about 2% year-over-year due to normal inflationary pressures, particularly within transportation and facility costs. However, the higher cost on relatively flat reported sales was about a 40 basis point headwind to EBITDA margin in the quarter. Adjusted earnings per share of $2.21 was down 4% from the prior year.

Let me walk you through our business unit results, beginning with EES on Slide 5. First, please note that we transferred about $155 million in annual revenue of specialty wire and cable, including $35 million in the first quarter from EES to CSS to better align the customers we serve in that business. All prior year periods for EES and CSS have been recast to reflect that transfer, including those in the table on this page. For a reconciliation of the recast amounts by quarter, please see the appendix in today’s presentation. EES organic sales were up 3% in the first quarter. After the impact of foreign exchange headwinds along with one less workday, reported sales were flat. Our OEM business delivered particularly strong growth, up high single-digits organically reflecting strong growth in both the U.S. and Canada, including with our semiconductor customers.

Construction was down on a reported basis, but up low single-digits organically on increased project sales. And industrial was down low single-digits on a reported basis and roughly flat organically reflecting continued temporary softness with some customers. Backlog was up 3% from the prior year and up 4% sequentially supporting an encouraging start to 2025. EES adjusted EBITDA margin was down 90 basis points from the prior year with gross margin, a decrease of 60 basis points. This was primarily driven by an increase in project activity in the quarter and a higher mix of low margin products along with some competitive price pressures in our construction business. Turning to Slide 6. CSS sales growth accelerated in the first quarter with sales up 18% year-over-year on an organic basis and up 17% as reported.

The strong growth was driven by Wesco Data Center Solutions, which was up more than 65% with especially strong growth with hyperscale data center customers. This growth has significantly increased the mix of data center within both CSS and Wesco’s total sales. Within CSS, data center represented nearly 40% of sales in Q1, up from a little more than 25% of segment sales in the prior year quarter. Lastly, I’d like to mention that we have not seen any change in order or buying patterns with data center customers. Based on discussions with our customers, they have not reduced their capital budgets. We’re pleased to report that they have been increasing their level of spend and expanding their scope of supply with Wesco. Enterprise network infrastructure was up low single-digits in the quarter reflecting growth with service provider and wireless customers.

Security sales were down low single-digits, which excludes security sales that are part of Wesco Data Center Solutions. Including those sales, security was a strong performer in Q1 and up mid single-digits. CSS backlog was up 32% year-over-year and up 18% sequentially reflecting substantial growth of our data center business. Adjusted EBITDA margin for CSS was up 20 basis points driven by strong operating leverage on higher sales growth, partially offset by a decline in gross margin. Similar to Q4, the mix of large projects primarily in the data center space impacted gross margin versus the prior year. Sequentially, CSS gross margin was up 20 basis points consistent with our expectation that margins would improve from the fourth quarter level.

Turning to Slide 7. I want to take a moment to discuss the growth in the broader data center space that we’ve seen recently and how we participate. We have had several large customers announce changes to leases and proposed AI-driven data center builds. Based on conversations with these customers, these changes are impact to out year plans with spending to be allocated to other projects. In short, we have not seen any change to the level of activity in the data center space. Customers continue to partner with Wesco and our suppliers to meet their evolving needs, including an expanding portfolio of services that we can provide. From a total company perspective, data center was approximately 16% of Wesco sales in the quarter and up approximately 14% on a trailing 12-month basis, including sales across all three business units.

Note that this is an increase from the comparable 10% of Wesco sales for the trailing 12 months through June of 2024. We first provided the information on the left side of this page at our Investor Day last September. It highlights the two stages of the data center construction cycle, time to power and the construction period. The key takeaway is that projects that are announced today and have obtained funding will likely take about four to seven years before they are up and running. Our solutions now encompass everything from the electrical distribution systems to advanced IT infrastructure to services that support data center operations ensuring our customers have comprehensive solutions throughout all phases of the data center lifecycle.

On the right side of this slide, you can see the substantial and accelerating growth that our total data center business delivered over the past five quarters. This growth has been driven by organic initiatives along with impactful acquisitions we’ve made to increase our service capabilities within the space. We want to partner with data center customers from cradle to cradle, including the initial build, on-site services and data center technology upgrades. Turning to Slide 8. Organic sales in Utility & Broadband Solutions were down 5% in the quarter and reported sales were down 19%, which includes the divested integrated supply business in the base period. As we’ve discussed going back to the beginning of 2024, the utility market continues to experience softness related to customer destocking and lower project activity levels, which is partly a function of the current interest rate and regulatory environment.

We expect these impacts to continue through the first half of 2025 with a return to growth in the second half of the year. We remain highly confident in the future benefit from the secular trends of electrification, green energy and grid modernization and believe that these trends will support substantial growth acceleration in our utility business over the long term. We are pleased with the continued growth in broadband. The business was up high single-digits from the prior year reflecting particularly strong growth in Canada. UBS backlog was down 13% from the prior year, but up 13% sequentially due to improving order rates and new utility customer wins. Adjusted EBITDA margin was up 10 basis points over the prior year. The margin benefit from the integrated supply divestiture was partially offset by the impact of lower utility sales.

Turning to Page 9. In the first quarter, we delivered $9 million of free cash flow or 8% of adjusted net income as accounts receivable and inventory increased due to growth, offset by an increase in accounts payable. This exceeded our expectation as we anticipated a use of cash in the quarter. You can see on the right side of this page that we reduced net working capital intensity by approximately 50 basis points year-over-year in the first quarter. We remain focused on making further progress including reducing inventory as a percentage of sales. Turning to Page 10. Yesterday, we formally announced our intention to redeem our $540 million Series A preferred stock on June 22, which is the first opportunity to redeem it at face value. We issued $800 million of senior notes in the first quarter in anticipation of this redemption.

This will strengthen our balance sheet and reduce our total financing costs. The estimated net income and cash flow benefit of this refinancing is approximately $30 million on an annualized basis or roughly $0.65 per diluted share. In addition to the refinancing, we also extended the maturities of our accounts receivable facility and revolver to 2028 and 2030, respectively. As a result, we have no significant maturities on our balance sheet until 2028. Turning to Page 11. On this slide, we provide an overview of the actions we are taking to manage the potential impacts to our business from the recent tariff announcements. The left side of the chart lists the potential impacts. First, supplier price increases including the significant number of price increase notifications we have already received over the past few weeks.

To put this into perspective, in the first quarter, the number of price increase notifications was down 11% versus the prior year, but it is up 150% in the second quarter to date. The average price increase announcement in the first quarter was at a mid-single-digit rate, while in the second quarter, it’s averaged a high single-digit rate. Second, we recognize the potential for lower customer demand due to higher costs. And third, in an inflationary environment, we recognize a transitional benefit from inventory gains. Our inventory is valued using average cost, meaning in an inflationary environment, our inventory is below market price. We will see a temporary gain to gross margin assuming higher supplier price increases are absorbed in the market.

Note, this is a temporary benefit keeping in mind we turn our inventory every two to three months. Lastly, Wesco is the importer of record on less than 4% of our cost of goods sold, primarily on goods received into the U.S. and Canada. In response, we are taking the following actions to mitigate these impacts and protect our margins. We are passing supplier price increases through to customers and working with our suppliers to ensure that minimum lead times between announced price increases and effective dates are adhered to. We will continue to leverage our global scale to identify opportunities to purchase locally sourced product or products less impacted by tariffs and we will reduce imports from those countries with the highest tariffs in place.

Lastly, we will optimize our supply chain logistics and reengineer our global supply chains to mitigate risk and manage tariff exposure. In short, Wesco has a long operating history and has successfully navigated similar global supply chain challenges. We’re executing our playbook to respond to the current volatile and uncertain environment. Turning to Slide 12. This slide shows our 2025 outlook by strategic business unit and the individual operating groups. As John mentioned, we are reaffirming our 2025 outlook and in general, expect the same sales patterns within our strategic business units that we walked through last quarter. However, we’ve made two adjustments to this slide. First, due to the continuation of exceptionally high growth in our data center business, we are increasing our full year outlook for reported sales growth from up mid-teens to up about 20%.

Second, and related to this change, we increased our CSS growth expectation for reported sales growth from up mid single-digits to up mid to high single-digits. We continue to expect that within EES construction will be flat and both industrial and OEM will be up. And lastly, in UBS, we continue to expect utility will inflect in the second half of the year and deliver growth in 2025, partially offset by broadband, which we expect to be flat. Moving to Page 13, we are reaffirming our 2025 outlook. We acknowledge the uncertainty and volatility surrounding tariffs and the impact of the overall economy. As mentioned earlier, organic sales in the first quarter were up 6% and sequential sales were better than our historical trends. Backlog grew sequentially in all three businesses with CSS up double-digits.

Momentum continued in April with estimated sales growth up 7%. We have not experienced significant pre-buying from customers to get ahead of proposed tariffs. We are maintaining our ranges for organic and reported sales growth, adjusted EBITDA margin, adjusted diluted earnings per share and free cash flow. However, based on our first quarter results, we would expect the full year to be above the midpoint of the sales range and below the midpoint of the EBITDA margin range as the project and product mix headwinds we experienced in the first quarter continue in the second quarter. I want to emphasize that our outlook does not include the impact of future pricing actions, including tariffs. This is consistent with our past practice given the lag between when a supplier announces a price increase and when it begins to impact our revenue.

While we have seen a significant uptick in price increase notifications here in the second quarter, our outlook does not include any potential benefit to sales at this time. We recognized a risk of an impact to demand given tariff related pricing. Any future pricing would help mitigate any demand impact to our revenue outlook. In terms of free cash flow, we expect to deliver between $600 million to $800 million in 2025. As a percentage of adjusted net income, this implies a range of approximately 95% to 105%. Our strategy for how we deploy cash flow remains unchanged. The use of available cash will be allocated to the highest return opportunity and we will continue to make decisions in the best interest of the shareholders over the long term.

Our top priority is to invest organically in the business to drive growth and operational efficiency, including the completion of our business and digital transformation. In the near term, given the current economic environment, we expect to prioritize delevering the balance sheet and share repurchases. However, we will continue to be opportunistic regarding acquisition opportunities to expand our capabilities and better serve our customers, particularly those engaged in high growth end markets. Turning to Page 14. This slide shows ‘the year-over-year monthly and quarterly sales growth comparisons over the past year and our expectations for the second quarter. You can see the return to growth in the last quarter of 2024 and the acceleration in the first quarter.

As mentioned, we estimate April sales per workday will be up 7% and expect second quarter reported sales will be up mid to high single-digits. We expect organic sales to be about a point higher than reported sales, primarily due to foreign exchange rates. The second quarter has the same number of work days as the prior year. We expect adjusted EBITDA margins will be approximately 50 basis points lower than the second quarter of the prior year, again primarily reflecting the project and product mix impact to gross margin discussed earlier. Moving to Slide 15, let me briefly recap the key points before we open the call to your questions. Sales in the first quarter were up 6% organically at the high end of our outlook and driven by data center, broadband and OEM.

Utility weakness continued due to customer destocking. Gross margin was stable. We’ve taken a number of actions to manage the potential supply chain impacts of global tariffs, including increasing our inventory. We issued $800 million of 2033 notes in anticipation of redeeming our preferred stock in June, which we formally announced last night And we’re pleased with the April momentum we’ve experienced to date. Lastly, we reaffirmed our 2025 outlook based on the first four months of the year. With that, operator, we can now open the call to questions.

Operator: [Operator Instructions] Our first question comes from Stephen Volkmann of Jefferies.

Stephen Volkmann: Hi, good morning, guys. Thanks for taking the question. Hi, Dave, I just want to be clear on what’s in your revised outlook relative to a couple of things. One is the tariff stuff. all the announcements that you described in the first quarter, the up 11% mid single-digit, is that in your guide, but the 2Q stuff that you’ve seen so far is not? Is that the right way to look at it?

Dave Schulz: There are no tariff related price increases incorporated into our outlook. So our outlook assumes organic growth rate of 2.5% to 6.5%. Of that, about a 0.5% is carryover pricing from 2024. We have not incorporated any new pricing that was announced in either the first quarter or the second quarter to date into our outlook yet. And let me explain why. We generally see a two quarter lag between a price increase effective date and when it begins hitting our revenue. A couple of drivers of that. First, about half of our revenue was project based. Those projects have negotiated pricing. So these price increase notifications don’t impact those projects. Most of the impact would be to our stock and flow business. And again, as we’re seeing these price increase notifications, we’re managing that back to meet our commitments with our customers, working back with our suppliers.

So generally, when we see an announced price increase of, say, 8%, for our company, we generally see about half of that benefit flow through to the revenue line on a two quarter lag. So we have not incorporated any of that yet because we’re still seeing some of these price increase notifications come through. And again, that is consistent with our past practices over the years.

Stephen Volkmann: Understood. Okay. And is that 8% that you just threw out is that sort of ballpark where we would be today if everything was mark-to-market or was that just illustration?

Dave Schulz: That’s just illustration. Again, we would only be marking to market about half of our revenue that would be associated with our stock and flow business. The other half is negotiated pricing for specific projects with our suppliers.

Stephen Volkmann: Okay. And does your revised guidance include the $0.65 from the preferred? And then I’ll pass it on.

Dave Schulz: The guidance that we provided did assume that we would be calling the preferred halfway through the year. So when you go back to what we provided back in February and what we’ve reaffirmed, we did assume that there would be a benefit to earnings per share based on half of the year of the preferred dividend coming out, offset partially by the financing cost.

Stephen Volkmann: Got it. Thank you.

Operator: The next question is from Nigel Coe of Wolfe Research.

Nigel Coe: Thanks. Good morning.

John Engel: Good morning, Nigel.

Nigel Coe: I really hate — good morning. I hate to be sort of kind of come back to the tariffs here, but can you maybe just give us a flavor of the supplier price increases that you’ve seen so far? And I understand the project versus stock and flow conversation, but are you seeing any surcharging where you might have to kind of pass that up through quicker than normal? Any color there would be helpful.

John Engel: Yes. So let me expand a bit on Dave’s commentary. In Q1, the number of supplier increases that we saw ended up being down about 15% versus prior year Q1. And the average was mid single-digit plus — mid single-digit range, some were low single digits, some were mid, some a little bit higher, but it was in that kind of band, which is more — which is Nigel is more of a normal pricing increase as part of a normal cycle. I think what we saw was some effect where some of the suppliers delayed their normal price increase announcements as they were working through as the tariffs were getting announced working through what the impact was on the whole supply chain and their operations and figuring out what price increases they wanted to put.

There were a few suppliers that posted increases that actually pulled them back and have come back since. So interesting dynamic for Q1. As we got into Q2 and look, we’re only the first month is in the record books, April. Thus, the number of price increases have stepped up significantly. So far in April, what’s been announced for Q2 is up 150%, not in price, but in number of increases announced versus Q2 of last year. And I know we’ll expect to see some more get announced here in May and in and in June in second quarter. And the average price increase has moved up to mid-single-digit plus to high single-digit. There are some that are double-digit range depending on the particular SKU — set of SKUs in a given category. So that gives you a sense of the pricing dynamic.

We really believed as the tariffs are getting announced that we wouldn’t see a meaningful impact in terms of announcements in Q1. And we don’t see any meaningful impact of the tariffs at all in our Q1 results. We thought Q2 would really where we’d see the ramp and so far that’s come true. Relative to line item surcharges, there are some suppliers that do that, others do not. As a matter of process and as a matter of practice, I will tell you that we work aggressively with them to try to have them build that into the price increases. So we can provide complete transparency into our customers on how the prices are increasing based on the tariff impact. So that’s how we try to work it. Many of the suppliers support us in that, some want to have separate tariff line item pricing or line item surcharges as you described.

We typically push back on that. In some cases, we do have to show that separately with customers and we work that process. But by and large, we like to build it into the price.

Nigel Coe: Okay. Thanks, John. That was great color. And then my follow-on, I think this is maybe for David. So the materials referenced continued destocking at the utility customers. But the comments you made seems to suggest it’s a bit more rate sensitive, maybe projects pushing out to the right. So just want to understand kind of the wipe in the reference from what you’re seeing right now in the utility vertical and your confidence in that inflection of the growth in the back half of the year?

Dave Schulz: Yes. We’ve not seen a significant change from how we describe the utility market back in February to what we’re seeing now. We are seeing some customers begin to increase activity levels. We’re still seeing some customers that are behind that. But based on the discrete set of customers that we manage these large contracts with, we’re in contact with them every day. And based on their projected activity levels, we see a return to growth in the second half of the year. We have seen this end market over the past three years be tremendously impacted by higher product costs. Recall in some quarters, we were announcing double-digit price increases, which increased the cost of the day-to-day business, increased the cost of projects.

That cost has to be approved through the regulators, through the local utility commissions and then is part of a capital budget for each of these utilities. So we’ve not seen a dramatic change from February to now. The conversations we’re having, the activity levels that we’re seeing plus we’ve got some new accounts that we won that’s providing us with the confidence of a back half recovery.

John Engel: And I’ll add a bit again, this is exactly how we thought the year would start out. In Q1 and Q2, we expected a second half recovery. The budgets have been set now. They’re going to maintain their budgets. It’s a matter of do they have to reprioritize them in any form or fashion. I’ll also tell you that the extended lead times are still in place for transformers and high voltage apparatus. And we’re working numerous opportunities with our customers in securing supply chain and supply for shipments that are going to be impacting the out years in a major positive sense. So again, I think the overall secular growth trends around power generation, grid modernization, et cetera, that we’ve talked about at length are intact.

Nigel Coe: That’s great. Thank you.

Operator: The next question is from Deane Dray of RBC Capital Markets.

Deane Dray: Thank you. Good morning, everyone.

John Engel: Good morning, Deane.

Dave Schulz: Good morning.

Deane Dray: Hi. I appreciate all the color you’ve given on tariffs and pricing and so forth. So I’ll ask some questions related to data center, if I can. You put up some really growthy numbers the past two quarters, 70% last quarter, 65% this quarter. The market is not growing that fast. So maybe you can expand on your point that customers are increasing their scope of business they’re doing with Wesco. And as you flesh that out, maybe talk about the mix of products versus services that you are engaged in data center.

John Engel: Yes, Deane, great question. Look, we’re really pleased with the very strong and growing momentum in data centers, our data center business. Really strong I’ll say sales results. The backlog is up very strongly as well. Our bid activity levels are exceptionally strong. And you’ll see that we made a very clear disclosure this quarter. I want to point it out again that we’re now showing the EES related data center sales that’s into the gray space portion of the data center and that’s now approaching a $400 million trailing 12 month basis run rate. And that’s up in the same kind of 70% plus range in the quarter. So we are absolutely seeing — as we expected we would see, we targeted — we signaled this to you because our customers are looking to increase scope of supply with us.

In the white space, it includes I’ll call it rack power, everything around the rack, the rack installation and the services that we now have. Our acquisition of Rahi continues to contribute strongly. That was a number of years ago. And the recent ones of entroCIM and Ascent are having a very positive impact on our business. They’re strongly contributing. They’ve allowed us to grow up the value chain even further and provide solutions across the whole life cycle. Customers are absolutely asking us to do more as a one stop shop and include pulling in the gray space as well, which we foreshadowed. So I think we’re very encouraged with the trends. We’re not seeing any reduction in our booking or sales rates, not one iota. I think really this is important to understand.

Again, look at the cycle of data center projects where we play in this space. We’re clearly expanding scope of supply and our customers are telling us the following. Their priority over the last few months has been on completing projects that have been running. As we look out to the next few months in the second quarter, into the third quarter and the balance of the year, you’re going to see increasing priority on the AI-driven data center builds versus the, I’ll call it, the more traditional CPU based builds and the AI-driven data center builds, GPU based versus CPU based that drives much greater power density and increased white space products, which is good for us. So I think that, look, it is the strong data center growth that drove CSS to deliver 18% growth overall as an SBU as a business unit and it’s having a very positive impact on our overall business.

And the final point I’d make, which you didn’t touch on, but I want to emphasize it. We think strategically we made the right move with how we’re focusing on data centers. We had a major uptick in Q4 and some of that was at a different margin level. We were committed and focused on improving both gross and EBITDA margins sequentially for CSS. We did both in Q1. Gross margin is up sequentially versus Q4, so is EBITDA margin. So we’re getting the operating cost leverage too. And we’re still at the front end of this cycle with increasing scope of supply in front of us. So as I said before, we see kind of the utility model that we’ve done such a great job with over the last decade plus playing out in data center sales now.

Deane Dray: Got it. Really appreciate all that color on the data center framing especially across the two segments. And then just a follow up, can you address mix in EES? You cited in the slide deck more project activity. Also is there direct shipments involved in that mix issue as well because that’s usually a high quality problem because it is fabulous returns on direct ship at just low margin? But just help us understand the mix issue.

John Engel: The short answer to your question is yes. I’ll ask Dave to expand in a minute, but let me give a little color to set the context. I think, look, it was fourth quarter last year that EES returned to growth. And now we’ve got organically low single-digit growth in Q1 and the backlog is up nicely, both year-over-year now and sequentially. So I think that’s an encouraging start to the year. Obviously, data centers are helping there. And the same data center margin impact on the front end of those project cycles that we saw in CSS is weighing on EES, but we will work those margins up over time as well as we provide the complete data center solution, white space, gray space and focus on services, including power. And again, I think when you look at EES, we’ve had a few quarters in a row now of strengthening OEM business.

That’s really a good indicator and then typically a leading indicator of what our industrial business will do in the coming quarters. And so I think we expect that OEM positive momentum to continue and we expect industrial to improve as we move through the year, which that will have a positive margin mix impacting. With that, Dave, probably good to double click again on EES in the quarter though.

Dave Schulz: Yes, certainly. So within the quarter two things that I’ll call out. As John mentioned, we had project mix, we also did have some product mix. So we had some large shipments of products that tended to be at a lower margin. That impacted the overall gross margin of the business. We also had year-over-year some higher provisions for inventory. As we’ve called out the last several quarters, the solar business within EES has been under pressure and there are technology changes within that. And so just given some of the inventory that we were holding, we took a higher provision for inventory within EES impacting the gross margin here in the first quarter.

Deane Dray: Did you just size that solar write-off?

John Engel: I would say that overall, some of the adjustments that we had both the write-off, differences in supplier volume rebates rough around about 25 basis points.

Deane Dray: Got it. Thank you very much for all that color.

John Engel: Thanks.

Operator: The next question is from Sam Darkatsh of Raymond James.

Sam Darkatsh: Good morning, John. Good morning, Dave. How are you?

John Engel: Good morning, Sam.

Sam Darkatsh: Back to price because of course. So is prospective pricing overweight in any of your verticals? I’m saying that in light of the fact that you obviously called out some pricing competition specific to EES and construction. I know Greybar was mentioning the same sort of thing. Just trying to get a sense of where the prices that you’re likely to push through. Is that overweight, underweight or pretty uniform across your businesses? That’s the first question.

John Engel: It’s an excellent question, Sam. And I don’t know that we’ve gone through this in the detail we historically. But to give you a little sense, when you think of the three business units and this is a generalization, CSS has as a large portion of the supplier base, at least some of the biggest supplier partners that have U.S. based operations, U.S. based manufacturing. One of our largest supplier partners announced yesterday. And so you get a good sense of what tariff impact is proportionally versus others that have greater offshore manufacturing, let’s say. And I would say that results in a different — and the value chain is working differently, just exceptional growth, exceptional demand pulling on that capacity.

So that creates a certain set of price dynamics. We’re not seeing anywhere near the same price increases in the — for our CSS business that we are for — that we expect to see for our EES business as these increases have been stepping up here in Q2. These are predominantly in the EES business, which also impacts our utility business. And those supplier partners have a mix of manufacturing that in U.S., Mexico, somewhat — sometimes Canada and other countries, including China. Some of those supply chain changes have been occurring. They’ve made some changes, meaningful changes over the last few years post pandemic. But I think now they’re taking a hard look at that as well given the current tariff environment and what expectations are for tariffs going forward to continue to optimize that footprint.

So I want to give you a little color of that. Dave, you may want to comment as well, but the weighting I would say is more electrical in utility versus CSS on an STU basis.

Dave Schulz: Absolutely. So if you think about just here in the first quarter, both CSS and UBS had essentially no pricing benefit to their top line. We talked about our pricing being about 0.5 that was primarily driven by EES. If you take a look at even 2024, CSS had essentially no pricing benefit to the top line and we saw low single-digit benefit into both EES and UBS. So again, it goes back down to how some of these supply chains are currently managed, the impact of tariffs. Obviously, that’s going to flow through to us as a price increase. And I just again want to reiterate that we are treating these tariff related price increases like we have always historically treated price increases. What we’re seeing now come through from our suppliers is a combination of their typical early part of the year price increase to recover inflation and other costs associated with their business, plus we’re seeing them pass through some of the tariffs.

It comes to us as one price increase. In the past, we never would include those price increase notifications in our outlook. That is the consistent approach that we’ve taken here in 2025.

Sam Darkatsh: So my follow up question to that would be, remind us how your order contracts are structured, especially when you have tariffs. I mean, do you end up repricing the backlogs? Do you — does your vendor eat that because you’ve already established price and cost? Do you eat that? I guess what I’m getting at is, is there some sort of a rule of thumb where if you get mid single or high single-digit pricing, how much of a gross margin benefit might be and how much of a potential risk might that be?

John Engel: Yes, certainly. So for our large projects, generally, we either have fixed pricing based on the duration that, that project has between order point and when it gets executed. If it’s a couple of months, generally, we’ve got locked in pricing from the supplier. If it is a longer lead time contract, many of those contracts have a cost escalator, which would include any tariff impact that the customer has agreed to take. So we would work back with our suppliers. We have that true-up clause within the contract that we would then be able to execute to protect our overall value on that particular project. We have not seen any suppliers reach out to us yet with a confirmation that they are repricing our backlog. So we have not seen that. So therefore, we don’t see any risk there at this point. That answer your question, Sam?

Sam Darkatsh: Thank you. And is there a rule of thumb then, Dave, in terms of if you get a mid-single, high single-digit price increase, how much of a short-term benefit that might be to gross margins in a basis point standpoint?

Dave Schulz: It varies so much. It would be hard for me to give you a rule of thumb. But just thinking from the context of you’re seeing price increases. Generally, there’s a two quarter lag at the company level. We only see about half of that published price increase impacting our revenue at some point in the future. So as we saw back in like 2022, particularly with some of the raw materials going into commodities and pure commodity products, we did get a slight benefit, but you’re talking tens of basis points is not hundreds of basis points for that phenomena with our inventory.

Sam Darkatsh: Very helpful. Thank you.

Operator: The next question is from David Manthey of Baird.

David Manthey: Thank you. Good morning, everyone. First question, a two-parter here. First off, when you say guidance doesn’t anticipate any future pricing and Dave, your commentary, it sounds like you’re excluding announced and even expected price increases as a hedge to any potential demand destruction. Am I reading that right?

Dave Schulz: You are. And again, that is consistent with our past practices. If this was a year ago and we were seeing price increase notifications from our suppliers, we would not be including those price increases into our outlook. So you are correct that we have not incorporated it until we begin to see it recognized in our income statement. And we understand that there could be some demand destruction given higher prices, particularly in some of our more price sensitive businesses. And we feel that if there is a tariff action that comes through to us, we would see a pricing benefit. We believe that pricing benefit would mitigate any demand destruction that we would see due to the higher price.

David Manthey: Okay. So logically, the second quarter guidance, if you take a 7.5% reported growth midpoint and 6.8% EBITDA, it’s right around $400 million EBITDA give or take, which is kind of where the street is. So within that, what you’re telling us is there may be some price increases that are hitting April, May, June that by convention you’re just not including in that outlook, correct?

Dave Schulz: That is correct.

David Manthey: Okay. Fair enough. Second question, flipping over to SG&A. I think you have a merit increase coming up in the second quarter and maybe you could talk about what that should add in dollars. I’m thinking maybe it’s $15 million or $20 million, but are there other puts and takes we should consider as we bridge from first quarter SG&A to second quarter?

Dave Schulz: The primary driver sequentially from Q1 to Q2 would be the merit increase. So to size that, I think it would be — you’re starting with our Q1 2025 adjusted EBITDA — I’m sorry, adjusted SG&A, which was right around $829 million. About two-thirds of that is people costs for which we saw about a 3% increase overall to our cost, both salaries, wages plus benefits. So that’s what you should assume for the sequential to the second quarter.

David Manthey: Okay. And then, of course, volume escalators and that sort of thing. But any takeaways from that number we should be considering?

Dave Schulz: Nothing significant.

David Manthey: Okay. All right. Thank you.

John Engel: Thanks, Dave.

Operator: The next question is from Patrick Baumann of JPMorgan.

Patrick Baumann: All right. Thanks. Just following up on that question. The outlook for the year, I missed the beginning of the call, but have you changed the components of the margin guide. I think at the midpoint, you had assumed a little bit of gross margin benefit from supplier volume rebate initially for the year and that would be offset by some of the incentive comp headwind in SG&A. Now with the guide I think implying something below the midpoint, any thoughts on those components relative to how you initially guided them for the year?

John Engel: Yes, certainly. So on gross margin, we initially thought that the gross margin would be up slightly year-over-year. Given what we experienced in Q1 and our expectations for Q2, we do think that the gross margin would be down year-over-year. On an SG&A perspective, our SG&A assumptions are essentially still holding. We will, of course, have some additional variable costs as we see increases to sales. And we have highlighted that we expect sales would be in the upper end of the range. With that, we would see some operating leverage coming through on the SG&A margin line.

Patrick Baumann: And you just mentioned second quarter gross margin. What did you say on that? I guess I missed it at the beginning of the call.

Dave Schulz: For the full year, we would expect our gross margin would be down versus 2024. Recall that we did 21.6% in 2024. We initially guided back in February that we expected gross margin to expand slightly. That was part of our margin recipe that would be offset by some of these incremental costs due to incentive compensation on the SG&A line. So our expectation at this point is that gross margin would be down slightly versus the prior year. With the higher sales being in the upper end of the range, we will get some operating leverage though on that SG&A line.

Patrick Baumann: Right. I guess I was talking — I thought you had said something about second quarter gross margin.

John Engel: EBITDA margin in fact.

Dave Schulz: EBITDA margin, we’ve provided you our expectation that would be down 50 basis points versus the prior year.

Patrick Baumann: Understood. Okay. And then if you can maybe talk a little bit about what you’re seeing in the Canada market? Kind of a decent sized exposure for you guys and curious the macro out there, different end markets up there, what you’re seeing in your business and your expectations there for the balance of the year?

John Engel: Yes. To your point, we have a very strong Canadian business and we had a very strong quarter to start the year. Very pleased with our Canadian results. There is a separate market report that the industry publishes up there that both distributors and suppliers are part of that association and that report showed — our performance versus the market was very strong. We outperformed the market and took market share and felt very good about our start to the year. And so backlog grew very strongly as well in the first quarter. So I think we’re set up for a really strong year in Canada with our momentum vector. There is a new administration now in Canada. We’ll see what the impacts are across their various core industries, including oil and gas and we’ll see what happens there. But I feel very good about our momentum vector with how we started the year and our position.

Patrick Baumann: And what are the key verticals driving that up there?

John Engel: So when you look at the structure of the Canadian market and where we’re positioned, it’s more meaningfully more consolidated than the U.S. by a large margin. U.S. is significantly more fragmented. We are clearly the leader in the Canadian market and it’s our entire portfolio, Patrick. So we got a strong electrical business. It’s the legacy Wesco business. The big acquisition we did that was EECOL in the Western provinces and then Annexure with our leading wire and cable capabilities. So we have a tremendously strong I’ll call it EES value proposition, the full solution portfolio across really from the Pacific Ocean to the Atlantic Ocean, all the way up through the Northwest territories. We have a very strong utility business as well and serve all the major utility customers up there, equally strong, same value prop that we have in the U.S. and we have a very strong CSS business, very strong datacom, strong broadband.

Our broadband business grew overall in Q1 after growing very strongly in Q2. So seeing a little different dynamics of broadband in the U.S., but the Canadian broadband business is off to a very good start after a very strong Q4. So the short answer is our entire — all three SKUs are well-represented and overall, we have a very strong leadership position in Canada.

Patrick Baumann: Okay. Thanks for the color.

John Engel: Yes. Okay. I think we’ve wrapped up all the questions. Thank you for those. We’ll bring the call to a close. Thank you all for your support. It’s very much appreciated. We do look forward to speaking with many of you over the next couple of days with the follow-up calls. And then over the next two months, we’ll be attending the following conferences, Oppenheimer Industrial Growth Conference, the Wolfe Transportation and Industrials Conference. We’ll be participating in the Baird Industrial Distribution field trip. We’ll be attending the KeyBanc Industrials and Basic Minerals Conference and the Goldman Sachs Leveraged Finance and Credit Conference. And finally, we expect to announce our second-quarter earnings on Thursday, July 31, 2025. So with that, have a good day. Thank you.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.