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Text: Information required by Regulation G of the Exchange act with respect to such non-GAAP financial measures can be obtained via WESCO's website at wesco.com.
Replays of this conference call will be archived and available for the next seven days.
I'd like to start out by saying on behalf of WESCO, I hope that all of you have been staying safe and healthy.
I'll start with the third quarter highlights, then I'll provide an introduction to our three new strategic business units.
And I'll be emphasizing their strong positioning to deliver above-market sales, margin and profit growth.
Dave will then take you through our third quarter results.
The excellent progress we're making on our second half commitments and synergy capture efforts and our increased synergy targets for the transformational combination of WESCO and Anixter.
So let's first start with an update on our business and third quarter results.
WESCO's new era is off to an absolutely exceptional start.
As our results exceeded our expectations across the board for sales, cost, margins, profit, EPS, free cash flow generation and reduced financial leverage.
This was our first full quarter of results after completing the acquisition of Anixter in June and clearly highlights the substantial value creation potential of this transformational combination.
Our management actions and strong execution were effective in this COVID-driven environment.
We expanded margins, reduced costs and grew profits, both sequentially and versus prior year.
Business momentum improved through the quarter as we took market share and built an all-time record third quarter backlog.
Our positive momentum has continued into the fourth quarter with October Workday adjusted sales down just 3% versus prior year and a book-to-bill ratio remaining above 1.0.
Free cash flow generation was exceptional at over 300% of net income and demonstrates our resilient business model and strength through the cycle.
Notably, net debt was reduced by $280 million, consistent with our capital allocation priorities.
More importantly, financial leverage was reduced to 4.8 times at the end of the third quarter, marking a reduction of about 1.5 turns over the four-month period since closing the Anixter acquisition.
Now turning to Anixter.
We accelerated our integration planning execution and synergy realization efforts and made outstanding progress in the third quarter.
The strong cultural alignment between WESCO and Anixter is proving to be a key driver in our initial success.
And as Dave will explain in more detail momentarily, just four months since closing the acquisition on June 22, we have already initiated actions that will deliver 100%, 100% of our year one cost synergy target of $68 million.
I could not be more pleased with the team's execution of our integration plan.
As a result, we are raising our year one, year two and year three cost synergy targets to $100 million, $180 million and $250 million, respectively.
Our initial integration progress gives us confidence that we will revisit our synergy targets as we build success upon success.
We're also realizing initial sales synergies through leveraging our expanded global footprint and cross-selling our broader product and services portfolio.
We believe our sales synergy efforts will support incremental -- important incremental sales growth in the years ahead.
As we build on these early successes, we are increasingly confident in our ability to achieve significant upside potential and exceed our three-year cost savings sales growth, margin expansion and cash synergy targets.
So let's turn to Page four.
We're reporting our results for the first time under our organizational structure that we announced in June.
And these are our three strategic business units or SBUs as we call them -- outlined on this page.
So first is Electrical and Electronic systems, or EES, which is a little more than 40% of our company's total business.
Second, Communications and Security Solutions, or CSS, which is roughly 1/3 of our company's total business.
And then third, Utility and Broadband Solutions or UBS, which represents the remaining 1/4 of our overall combined company business across the enterprise.
The respective industries and types of customers that these SBUs serve are outlined on this page.
Yesterday, we also filed an 8-K with pro forma operating performance for each SBU on a quarterly and annual basis for 2019 and for the first two quarters of 2020.
As I mentioned last quarter, one of the most meaningful and positive discoveries post close is how complementary the WESCO and Anixter portfolios are.
The pie charts on this page depicts the legacy WESCO and legacy Anixter composition for each of the three businesses.
EES is comprised of WESCO's leadership and deep roots in electrical coupled with Anixter's depth and breadth and leadership position in wire and cable solutions.
And EES brings the complete electrical package and best-in-class solution offers to customers.
CSS includes Anixter's leading global position, capabilities and scale in communications and security.
And that's coupled with WESCO's Datacom, AV and Safety portfolio.
Combined, CSS is exceptionally well positioned in high-growth markets with very attractive secular growth trends.
And finally, UBS which combines WESCO's and Anixter's leading Utility and Broadband businesses is also very well positioned to outperform the market with a strong execution track record and unmatched supply chain capabilities.
Organizing our company around these three global businesses enables us to leverage their industry-leading scale and highly complementary portfolios and super serving our customers.
Each of these SBUs does between $4 billion and $7 billion of business annually, and they offer hundreds of thousands of products and industry-leading services, which makes them highly valued partner to both our suppliers and our customers.
In what remains a highly fragmented distribution value chain, the combined company benefits from a step change in scale and capability.
And we're leveraging that to sell more products and more services to more customers in more locations all around the world.
Finally, the leadership teams of these three businesses are comprised of the best of the best from each company and all possess decades of experience in our industry.
Nelson Squires who was previously WESCO's Chief Operating Officer and Head of the Canadian and International businesses is leading our ESS business.
Bill Geary leads our global CSS business, and he previously was Head of Anixter's network and security business.
And Jim Cameron leads our UBS business after running WESCO's utility business since 2014 and WESCO's broadband business since 2016.
I'm very pleased that each of these leaders is off to a great start in delivering strong results in our first full quarter of WESCO plus Anixter.
Now let's move to Page five.
Our SBUs, each and every one of them are extremely well positioned to benefit from the numerous secular trends that will drive future growth for WESCO.
We shared these 12 evolving secular growth trends we do previously, but today, we wanted to specifically highlight that they will drive growth across all of our businesses.
As we see an increase in automation, machine-to-machine connections, electrification of our infrastructure and demand for faster bandwidth and data center capacity, along with or coupled with the positive impact of the emerging trends, such as relocation of supply chain back to North America and increased remote connectivity, all three of our strategic business units have the scale and the capabilities to capture the resultant secular growth.
We've created the industry leader in electrical, communications and utility distribution and supply chain services just as these trends are poised to drive secular growth in the markets we serve.
Finally, moving to Page six.
We first communicated our three year cost savings sales growth, margin improvement and cash generation synergy targets back in March.
Since that time, we've been executing a detailed, rigorous and process-oriented plan to integrate WESCO and Anixter.
Against the backdrop of a challenging COVID-driven economic cycle, this strategic combination is even more compelling as we have doubled the size of our company and are transforming our new global enterprise.
With the benefit of what we have learned since the closing in June and our strong initial execution of our integration plan, we are increasingly confident in our ability to achieve these financial goals, including our updated synergy targets.
And most importantly, we're increasingly confident that we'll ultimately deliver the substantial value creation associated with this transformational combination.
As the industry leader, we are now larger and more diverse with differentiated scale and capabilities in what remains a highly fragmented industry.
We're evolving into a growth company and are exceptionally well positioned to lead the digital transformation of our business and our industry.
Turning to Slide seven.
During our second quarter earnings call, we outlined six second half priorities, and we want to provide you with an update on the substantial progress on each of these goals.
Starting with sales, demand continued to improve, and we believe we've taken share.
Sales in the quarter were down versus prior year due to COVID and up 8% on a pro forma basis from Q2.
We maintained our focus on cost management and exceeded expectations.
Prior to completing the merger with Anixter, we laid out our expectation to deliver $50 million of COVID-related cost actions.
Between Q2 and Q3, we exceeded this target.
On a pro forma basis, operating expenses were down $44 million in the third quarter versus the prior year.
On gross margin, we discussed the success Anixter had expanding gross margin through a targeted improvement program, and we are deploying it to the legacy WESCO business.
Gross margin was up 20 basis points on a pro forma basis, with broad-based improvement across the combined company.
We are extremely pleased with the progress made on the integration.
As John mentioned, we have already initiated actions to achieve the full year one synergy cost target of $68 million in the first four months of the integration and are increasing our cost synergy target.
One of the areas we are most pleased with is cash generation.
Free cash flow was extremely strong at $307 million in the quarter, and we reduced net debt by $280 million.
Our leverage, including year one synergies, improved to 4.8 turns on an adjusted EBITDA basis.
Lastly, we have fully transitioned our reporting structure to our new strategic business units that John walked you through a moment ago.
We issued an 8-K yesterday, providing you with the historical WESCO-only results, recast to the new segment reporting structure as well as a pro forma, combining the historical WESCO and Anixter results, including the reconciliation of adjusted EBITDA.
Again, we're very pleased with the results in the quarter against a difficult operating environment due to COVID.
Moving to Slide eight.
We are increasing our three year cumulative cost synergy target to $250 million.
two drivers to the increase.
First, we set internal goals that are higher than we announced publicly, and our teams are delivering.
Second, there were specific areas where detailed information and analytics could not be completed until after we close the transaction.
We are finding upside to our initial estimates in all four buckets of synergies and are particularly excited about the incremental synergy opportunities in the areas of supply chain and SG&A, giving us confidence to take up our target.
In Q3, we realized $15 million of cost synergies and expect to achieve $100 million in the first year of the merger.
We still believe there is additional upside, and we plan to build upon our success to drive additional value capture in the areas of cost, cross-selling and net working capital synergies.
I'll also mention that we continue to make progress with the divestiture of the legacy WESCO Canadian Utility and Datacom businesses, which represent less than $150 million in revenue.
We engaged an investment bank and are working with potential buyers and are on track to complete the divestitures on a timely basis.
Turning to our third quarter results on Page nine.
This summary table compares our third quarter results to the WESCO plus Anixter pro forma results for the prior year period and sequentially, against the second quarter of this year.
Sales were down 5% versus the prior year and up 8% sequentially.
These sales improvements represent substantial growth above pierce and indicate we are taking share.
October Workday adjusted sales were down just 3% versus prior year.
And as John mentioned, our book-to-bill ratio remains above 1.0.
Sequentially, October Workday adjusted sales versus September were better than typical seasonality.
Adjusted gross margin, which excludes the effect of merger-related fair value adjustments of $28 million, was 19.6%, up 20 basis points versus prior year and sequentially.
We are clearly seeing traction from our margin improvement initiatives and are just beginning to deploy Anixter's proven gross margin improvement programs across the business.
Adjusted earnings before interest and taxes was $200 million in the quarter.
Reported EBIT was adjusted to remove the effect of merger-related cost of $14 million, the merger-related fair value adjustments on inventory of $28 million and a gain on the sale of an operating branch in the U.S. that was unrelated to the integration of $20 million.
Regarding the branch sale, we divested a single location that primarily sold Rockwell Allen-Bradley automation equipment in a specific geography.
Compared to the prior year, adjusted EBIT margin was up 30 basis points, reflecting the benefits of synergies and cost management actions in response to COVID-related demand declines.
On a sequential basis, adjusted EBIT was up 60 basis points.
As I mentioned on the prior slide, the legacy WESCO business expected to generate $50 million in total COVID-related cost savings in the last three quarters of the current year.
This quarter, we delivered approximately $28 million of these savings.
Adjusted EBITDA, which excludes the effects of the adjustments I just mentioned as well as stock-based compensation in both the current and prior year periods and other net adjustments was $252 million, 5% higher than the prior year and 19% higher sequentially.
As a percentage of sales, adjusted EBITDA margin was 6.1%, 60 basis points higher than the prior year and sequentially.
These exceptional results, reflecting both year-over-year and sequential improvements of both adjusted EBIT and adjusted EBITDA, reflect our continued strong execution, disciplined cost management, market share gains, industry-leading value propositions across all of our business units and the acceleration of our synergy capture.
Our leading position and participation in the many secular trends discussed earlier as well as our track record of operational excellence, sets us up exceptionally well to drive substantial value creation.
Adjusted diluted earnings per share for the quarter was $1.66.
Turning to Slide 10.
Our EES segment delivered sales that were down 10% versus prior year and up 13% sequentially.
The sequential growth reflects construction demand that continues to improve in North America, and which was up double digits in the U.S. and Canada.
Our backlog, which primarily reflects construction activity was a third quarter record, consistent with the trend we have observed of project delays due to COVID-19 but not cancellations.
We continue to see increasing momentum in our OEM business as well as in many industrial verticals that we serve.
It is important to note that oil and gas, which previously represented approximately 7% of WESCO's business prior to the combination with Anixter, is now a low single-digit percentage of the combined company's revenue.
Adjusted EBITDA of $108 million was 6.5% of sales, approximately in line with the pro forma prior year results and 70 basis points higher sequentially, which is an excellent result given the lower sales versus the prior year.
During the quarter, we were pleased to be awarded multiple contracts to provide switchgear and electrical materials, including lighting for the upgrade of a water treatment facility in Ontario, Canada.
Turning to Slide 11.
Our CSS segment delivered an exceptional quarter.
Sales were down 2% versus prior year against a broader market that was down substantially more and up 10% sequentially.
We are clearly taking share in these markets.
As with EES, we saw continued positive momentum throughout the quarter.
Security sales were up low-single-digits versus a market that was down mid-single digits.
Our global accounts activity was up low-single digits, reflecting strong performance with hyperscale data centers, global security and system integrators.
Profitability was also strong.
Adjusted EBITDA of $121 million was up more than 8% versus prior year, and adjusted EBITDA margin improved 80 basis points above the prior year.
In the second quarter, we were pleased to be awarded a multimillion-dollar contract to provide a comprehensive solution of products and material management services for the construction of two data centers in Mexico.
Turning to Slide 12.
Sales in our UBS segment were flat sequentially and down 2% versus the prior year.
This result reflects strong growth from broadband sales, offset by weakness in the industrial-focused areas of our integrated supply business.
Broadband sales were up mid-single digits versus the prior year in high-single digits sequentially, driven by continued 5G build-outs and fiber-to-the-x deployments.
Utility sales were flat on a pro forma basis compared to the prior year.
Storm response activity contributed to this growth as there were a number of hurricanes and tropical storms that made a landfall in the U.S., especially in September.
Adjusted EBITDA of $86 million was up more than 11% versus prior year on a pro forma basis and represented 7.8% of sales, 100 basis points above prior year and 30 basis points above Q2.
As an example of our recent success, we were awarded a multiyear contract to provide electrical transmission and distribution materials and inventory management services for our public utility.
Moving to free cash flow and liquidity on Slide 13.
This quarter, WESCO generated $307 million of free cash flow or 315% of adjusted net income.
This exceptional result highlights our countercyclical cash flow generation, which is one of the many reasons we are highly confident in our ability to reduce leverage throughout all phases of the economic cycle.
Year-to-date, the company has generated $462 million of free cash flow or 292% of adjusted net income.
Our capital allocation priority remains unchanged.
We will allocate capital support the integration and invest in our business.
Our priority is to rapidly delever the balance sheet and be within our long-term target leverage range of two to 3.5 times net debt-to-EBITDA by the end of year three in June, 2023.
We made substantial progress on this goal in the quarter as we reduced net debt by $280 million.
Our leverage ratio, including the revised target of year one synergies was 4.8 turns, about half a turn below the comparable metrics in Q2 of 5.3 turns.
Our liquidity, which is comprised of invested cash and borrowing availability in our bank credit facilities is exceptionally strong and totaled, approximately, $1.1 billion at the end of the third quarter.
A reminder that we will remit the first cash interest payment on the 2025 and 2028 senior notes, and expect to pay the quarterly dividend on the preferred stock in December.
Exceptional free cash flow throughout the economic cycle remains a hallmark for WESCO.
That, along with strong liquidity supports our future growth.
Moving to Slide 14.
We've also provided additional information about the business units and the slide that answers some FAQs regarding the upcoming quarter.
This quarter was clearly an exceptional result in all fronts for WESCO against a COVID-driven economic backdrop.
We increased margin across the board despite the challenge of COVID-driven '19 sales weakness.
This was driven in part by decisive actions to reduce costs given the uncertainty of demand.
We see core demand continuing to improve across our businesses, noting that we typically see a seasonal effect to Q4 sales and have three fewer workdays sequentially in the current quarter.
We restored salaries and benefits effective October 1, and we are incredibly proud of how our team has responded to the crisis and has continued to service our customers.
In just four months since closing the transaction, we have initiated actions to meet the initial full year one cost synergies.
We have increased our year one target from $68 million to $100 million and are increasing our total cost synergy target from $200 million to $250 million.
In addition to the substantial cost synergies, we are already generating revenue synergies from our cross-sell pilot program.
As a result of this excellent position and continued integration of Anixter, we expect to exceed our value creation targets of sales growth, margin expansion and cash generation.
Our free cash flow was also exceptional, demonstrating our resilient business model and cash generation ability throughout the cycle.
Each of the new strategic business units that we reported on today are extremely well positioned to capitalize on several continued and emerging secular growth trends.

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q3 adjusted earnings per share $1.66.
raising our year 1, 2 and 3 cost synergy targets to $100 million, $180 million, and $250 million, respectively.

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