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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.
Replay of this conference call will be archived and available for the next seven days.
On behalf of WESCO, I hope that all of you have been staying healthy and safe in these challenging times.
We prepared a very thorough update for you today.
I'll lead off with a few introductory remarks, and then Dave will take you through our second quarter results, and then we'll provide a review of the excellent progress we're making on the Anixter integration, as well as the outstanding value creation that our transformational combination of WESCO and Anixter will create.
So first for an update on our business in the second quarter.
Results exceeded our expectations across the board; that is for sales, operating margin, operating profit, earnings per share 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.
We're very encouraged by that, with quarter-to-date sales through workday 28, that's quarter-to-date, down 8% versus prior year, but up a 11% sequentially, with a book-to-bill ratio above 1.0.
As we have done in prior economic cycles, we aggressively managed our business and took significant cost reduction and cash management actions, which enabled us to achieve a decremental margin of only 10%, and generate exceptionally strong free cash flow of $140 million or 250% of adjusted net income.
As you know, we increased debt to complete the Anixter combination.
We expect our consistently strong and counter-cyclical free cash flow generation to enable us to rapidly delever and get back within our financial target leverage levels within three to six [Phonetic] months.
Now turning to Anixter.
The second quarter will prove to be a watershed period in our WESCO's history, as we've successfully closed on our industry-shaping merger of WESCO and Anixter.
In combining few industry-leading Fortune 500 companies was successful track record.
We are creating the premier electrical communications and utility distribution and supply chain solutions company in the world.
In May, we completed a well oversubscribed and highly successful capital raise of approximately $5 billion in bonds and bank debt, all with very favorable terms.
We satisfied the remaining closing condition when the waiting period for the Canadian Competition Bureau expired on June 18th, and then successfully closed the Anixter transaction on June 22nd.
This timing met our commitment to close this transaction in the second or third quarter.
Against the challenges imposed by the global pandemic, the extraordinary determination of our WESCO and Anixter associates to execute a flawless day one closing, just five months after signing the merger agreement was very impressive.
I could not be more proud or more appreciative of the entire team and their extraordinary efforts in achieving this noteworthy milestone.
As I mentioned before, we've been executing a detailed rigorous and process -oriented integration planning effort over the last several months.
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.
We have also begun to realize our first sales synergies through leveraging our expanded global footprint and cross-selling what is now our broader product and services portfolio.
The strong cultural alignment between WESCO and Anixter is proving to be a key driver of our initial success.
We are both building on this early successes, and we remain highly confident in capturing the significant upside potential and exceeding our three-year cost savings, sales growth, margin expansion and cash generation synergy target.
He is going to walk you through our second quarter results and then discuss our integration, execution and synergy capture plan in more detail.
I'll start with an overview of results beginning on Page 4.
This slide presents our second quarter walking you from our reported GAAP results to the legacy WESCO results.
The column on the left shows our reported GAAP numbers and to the right of that column are the various adjustments to our reported results to remove the transaction-related impacts.
The third column subtracts the merger-related adjustments from the reported results to show the underlying results of the business adjusted for all deal-related cost and activities.
To the right of that are the Anixter and WESCO components of these adjusted results, respectively.
Reported sales in the quarter were down 3% and down 12% organically, driven by lower demand due to the COVID-19 pandemic.
I'll walk you through our sales results in more detail in a moment.
The legacy WESCO business generated approximately -- operating profit of $70 million [Phonetic], approximately $28 million lower than the prior year and a sales decline of approximately $285 million, representing a decremental margin of 10%.
SG&A was down $33 million compared to the prior-year quarter, reflecting COVID-related cost actions and lower volume.
Legacy WESCO adjusted operating margin was 3.8% for the quarter and adjusted earnings per share was $1.04.
The legacy adjusted Anixter results for the period following the merger at gross margin of 20.3% and operating margin of 8.3%.
This exceptional result was driven by the strong Anixter sales during the nine-day ownership period in the second quarter, continued gross margin expansion and cost reduction actions initiated by Anixter in response to COVID-19.
On an adjusted basis, the combined WESCO and Anixter business generated operating margin of 4.2% and diluted earnings per share of $1.36.
A brief comment on the merger-related adjustments.
The $73 million of SG&A primarily represents investment banking, legal and integration management fees.
Additionally, we recognized a one-time expense associated with the change of control provisions of the transaction.
You will also note several impacts below the operating profit line, including interest expense of $45 million.
This includes interest paid on the bonds issued and non-amortized financing fees.
We also recognized preferred dividends expense of just over $1 million in the quarter related to the preferred stock consideration to Anixter stockholders.
We will provide a detailed update on the Anixter acquisition a bit later in the call as we have made substantial progress on the integration of the businesses and the generation of synergies.
Turning to Slide 5.
This summarizes the organic sales growth by end-market and geography for the legacy WESCO business and does not include any contribution from Anixter.
You can see on the right hand side that monthly organic sales in the quarter were down 16%, 10% and 13% in April, May and June respectively versus the prior year.
As John mentioned, sales improved sequentially through the quarter on a same workday basis with April down 13%, followed by increases of 9% and 5% in May and June respectively.
Differences in foreign exchange rates reduced growth by 90 basis points, primarily reflecting unfavorable Canadian dollar exchange rates.
Looking at the sales results by geography, the U.S., which is roughly 75% of legacy WESCO overall revenue, was down 12%.
Canada was down 17% organically.
Both the U.S. and Canada results were driven by declines in our industrial and construction end-markets, as many projects were delayed beginning in March.
Industrial sales were down 21% organically in the U.S. and 22% in Canada, as we saw broad-based weakness in market verticals we serve due to COVID-19.
Bidding and project activity remained strong, however, and a number of industrial markets improved sequentially from Q1.
Construction sales were down 16% in U.S. and 21% in Canada, reflecting the project delays due to COVID-19.
Our legacy WESCO backlog reached a new Company record and was up 17% versus the prior year and up 4% sequentially from Q1.
Consistent with what we saw through the end of April, construction projects have been delayed rather than canceled.
Utility sales continued to be exceptionally strong in the quarter with the U.S. up 6% organically and Canada up 36%.
Sequentially, U.S. utility sales were up 8% and Canada utility sales were up 27% versus Q1.
This was our 12th consecutive quarter of organic growth in the U.S. utility business.
Commercial, institutional and government or CIG, organic sales ended down approximately 5% for the quarter.
This end-market exhibited positive momentum in the quarter, and sales were up 13% and 11% sequentially from Q1 in U.S. and Canada, respectively.
Projects related to data center builds, security and cloud computing projects with large technology customers, continue to provide significant sales growth opportunities.
Moving to Slide 6, let me take a moment to remind you of our liquidity and some features of our new borrowing facilities that we closed on in June, as they position us to meet the challenges related to the economic impact of the coronavirus.
Our liquidity, which is comprised of invested cash and borrowing availability on our bank credit facilities, is strong at $819 million.
We have maintained sufficient cash on the balance sheet of $265 million.
Collections throughout the quarter and into August have performed at or above historical trends.
Bad debt reserves are also tracking consistent with historical levels.
In connection with our closing the Anixter merger, we raised new senior unsecured notes of approximately $2.8 billion, a portion of which was used to refinance Anixter's 2021, 2023 and 2025 notes.
We also entered into a new $1.1 billion ABL facility, and increased the AR facility commitment to $1.025 billion in June.
Our bank credit facilities are low-cost LIBOR-based agreements and mature in June 2023 and 2025.
We expected our ratio of fixed rate debt to variable rate debt to be approximately 70% at closing, and it ended up at 72% at the end of June.
Our credit facilities include limited operating covenants, and we easily passed some liquidity thresholds by which compliance is measured by a very large margin.
Having completed the Anixter merger, our capital allocation priority will be to support the integration, organic sales growth opportunities and to rapidly retire debt.
We do not expect to utilize any remaining amounts available under our Board authorized share repurchase program that expires on December 31st of this year.
Turning to Slide 7.
Let me recap our second half priorities.
Our first priority is to build on the improving sales momentum we experienced this quarter.
Despite weakness in certain markets in Q2, we capitalized on improving momentum within our business and are well-positioned to leverage our broad portfolio of products and services to drive sales ahead of the market.
We will maintain our cost discipline to meet or exceed the $50 million [Phonetic] in cost savings generated by the actions that we took in April in response to COVID-19.
We are planning to reinstate full compensation on October 1st for legacy WESCO employees that was temporarily reduced between 12% and 25% effective May 1st.
We will be deploying across the legacy WESCO business, Anixter's gross margin improvement programs that enabled Anixter to deliver seven consecutive quarters of year-over-year improvement.
We will continue to rapidly execute our integration plan and deliver the year-one merger synergies with a high confidence of delivering substantial upside.
As we generate cash, our priority will be to retire debt consistent with our objective to return to our target leverage of 2 times to 3.5 times debt to adjusted EBITDA within 36 months post close of the transaction.
Finally, beginning in the third quarter, we will begin reporting results for the three strategic business units announced as part of our new organizational structure in early June.
So I'd now like to reemphasize the outstanding value creation that our transformational combination of WESCO and Anixter will create.
There are seven key highlights regarding this industry shaping merger.
Number 1, the merger is a transformational combination that creates, as I said before, the industry leader in electrical, communications and utility distribution and supply chain services.
Number 2, the combined company benefit from a step change in scale and capabilities in what remains a highly fragmented electrical and communications distribution space.
On a combined basis, we're the industry leader in North America with approximately $17 billion in sales revenues and over $1 billion in adjusted EBITDA on a pro forma basis, including the identified cost synergies.
Number 3, the two businesses are highly complementary in terms of products, industries and geographies, which enables us to sell more products to more customers in more locations around the world, and more importantly, accelerate our sales growth by more than 100 basis points versus stand-alone projections.
I've said this before.
This is an extraordinary combination of two successful companies, where one plus one is equal to three.
Number 4, we're executing an integration plan to deliver well over $200 million worth of cost synergies.
And I mentioned previously, we're off to an excellent start, only six-weeks since closing this acquisition in late June.
And Dave will take you through our notable progress in much more detail shortly.
Number 5, the financial benefits of this combination that will be generated will be exceptional.
We expect our earnings per share growth rate to double and adjusted EBITDA margins to expand by more than 100 basis points through the cost synergies I just discussed.
Number 6, both companies benefit from a highly resilient business model to generate substantial free cash flow through all phases of the economic cycle.
The combined company is expected to generate free cash flow of more than $600 million annually by year three, which we expect will enable rapid deleveraging to within our target range within 36 months, as well as provide future capital deployment options to drive value creation.
And finally Number 7, the collective WESCO and Anixter management teams are result oriented and laser focused on driving an efficient integration and on generating these synergies to drive the substantial value creation.
In summary, with Anixter, the new WESCO will capitalize on the accelerating secular trends of electrification, increased bandwidth demand driven by higher voice, data, video and mobile usage and the digitization of our B2B value chain.
We are more bullish than ever in the substantial value creation that this transformational combination will create for our customers, our supplier partners, our employees, our investors and the communities in which we operate.
With that, I will now hand it back to Dave to provide additional details on the excellent progress we're making on the Anixter integration.
Moving to Slide 10.
The enhanced scale that this merger creates is clear.
It brings together two highly complementary companies.
Combining them benefits our customers and creates value through significant cross-selling opportunities, premier supply chain services, acceleration of our digital initiatives and improved operational and supply chain efficiencies.
On a trailing 12-month basis through June 30th, the business generated revenue of approximately $17 billion and adjusted EBITDA of over $1 billion on a pro forma basis, including the $200 million of cost synergies we are confident that we will deliver.
Turning to Slide 11.
The North American electrical distribution industry is very large and highly fragmented, with an estimated total size of $114 billion per year.
With the merger, the Company has a share of approximately 13%.
Even with this merger, the market remains highly fragmented and offers substantial opportunities for accelerated organic growth.
Both WESCO and Anixter have invested in supply chain services to differentiate our overall customer value proposition.
The combination of these two companies not only increases our overall scale, but also improves our ability to better serve our customers through an expanded product and services portfolio.
Moving to Page 12.
As we consider the future of the combined enterprise, there are numerous ongoing and attractive secular trends and growth opportunities.
The demand for increased bandwidth driven by higher voice, data, video and mobile usage, greater connectivity needs for remote work, home and school applications, and the increasing electrification of our infrastructure are just a few of the growing secular trends that are directly aligned with the core capabilities of our combined business.
The right hand side of this page outlines the financial benefits of this transformational combination.
We are highly confident in exceeding our three-year cost savings, sales growth and cash generation synergy targets communicated earlier this year.
With the challenging economic cycle we're facing near term, this strategic combination remains compelling, as we're doubling the size of our Company and will transform the new enterprise through execution of the integration plan and delivery of these synergies.
Moving to Slide 13.
We are focused on leading and exceeding the commitments we've made to our investors when we announced the merger in mid-January.
We raised approximately $5 billion in bank and bond debt with favorable terms and the bond offerings were substantially oversubscribed.
We closed the transaction near the end of Q2, in line with our initial commitments to close in Q2 or Q3.
We increased our liquidity to more than $800 million as of the end of Q2.
We are rapidly executing our integration plan and have already completed actions to deliver over 50% of our year one cost savings target of $68 million.
We're already generating sales synergies from the merger that are in addition to the minimum $200 million of cost synergies that we expect to generate.
Turning to Page 14.
Our top focus is executing a detailed, rigorous and process-oriented integration that delivers our committed synergies as well as the clear upside potential, while combining the best elements of each company.
The three objectives that our planning has encompassed are, first, executing a flawless Day 1 and first 100 days post closing that ensures business continuity and an effective on-boarding process.
Second, delivering the value of the combination through both the cost and sales growth synergies.
And third, implementing an operating model for the new enterprise, which deploys cutting-edge digital tools and applications, and is led by an organization that is staffed with the best leaders of each company.
Value delivery teams comprised of approximately 150 employees from both legacy organizations have identified more than 500 initiatives and 2,500 milestones to combine the best of our two companies.
The six value delivery work streams that we are working on in our integration planning and execution include commercial, digital and IT, supply chain, operations, marketing and the corporate functions.
We are also mindful of the critical importance that culture plays in the value creation opportunity of this combination.
We conducted a wide scale and thorough survey of all employees to understand the key attributes of the cultures and are developing a plan to combine the best of both.
The high degree of collaboration among and across these teams has been inspiring and underscores the strong cultural alignment between the two companies.
We are taking advantage of the opportunity to leverage the best talent and ideas of two successful organizations, as we create a new world-class enterprise.
Turing to Slide 15.
This slide highlights our progress against the three core integration objectives outlined on the prior page.
We achieved our first priority, which was to execute a flawless Day 1.
Our various value delivery teams have spent months preparing for Day 1, which I'm pleased to report was very successful.
We executed a detailed plan of communicating to our customers and suppliers, providing updates to our 18,900 colleagues and held multiple town hall events for our employees to get to know our new management team.
Our second critical objective is to complete all of our master planning and value capture initiatives.
Having generated more than half of our year one target of $68 million of run rate synergies, we're on track to exceed this target.
We have deployed commercial targets for sales growth, margin improvement and cash flow, and are already experiencing success with our first cross-sell pilot programs.
Our final critical objective is to build a new world-class company.
We have announced our three strategic business units and the first two levels of our senior management team.
Moving to Page 16, you can see the detail of the composition and expected timing of our synergies.
Of the 45% that is corporate and administrative, approximately two-thirds will come from the elimination of duplicative general and administrative costs and one-third will come from corporate overhead.
Of the 55% that will be generated from supply chain and field operations, the majority will come from supply chain efficiencies.
The field operations estimate includes the footprint rationalization of both companies' branch networks.
Approximately two-thirds of WESCO and Anixter facilities in the U.S. are within 20 miles of each other.
Additionally, with the combined $14 billion in total cost of goods, we have identified over $70 million of supply chain-related synergies.
Both the supply chain and field operation synergies are expected to begin in year one, but the bulk of these opportunities will be realized in years two and three.
We are confident in achieving the synergies and believe that they can be realized efficiently with minimal disruption to our day-to-day business.
To date, we have already executed more than 30 unique initiatives across the four synergy types, resulting in more than $35 million of run rate synergies.
We have eliminated duplicative public company related expenses of approximately $7 million, as well as C-suite and other duplicative roles that provide an additional $20 million in savings.
Moving to Page 17.
Both WESCO and Anixter have strong track records of generating free cash flow throughout the economic cycle.
Over the past five years, the business has generated an average of $370 million in free cash flow on a combined basis.
With the combination of earnings growth and the realization of cost synergies, we expect the annual cash generation of the combined company will expand to over $600 million per year, by year three.
This includes $75 million in free cash flow through the release of working capital.
As we mentioned earlier, the strong free cash flow and earnings growth will enable us to rapidly deleverage the balance sheet.
Our ratio of debt to adjusted EBITDA was 5.7 times, as of June 30th, 2020.
Including year one synergies of $68 million, our leverage ratio was 5.3 times.
We are expecting to return to leverage within our target range of 2 times to 3.5 times net debt to EBITDA within 36 months.
Moving to Slide 18, both WESCO and Anixter benefit from several dynamics that make our Company highly resilient to economic cycles.
First, our cash flow is counter cyclical as we release working capital during the downturn.
Second, a cost structure that allows for quick adjustments in response to changing demand levels.
And third, no [Phonetic] required capital expenditures, given the nature of the business model.
Over the past 10 years, WESCO and Anixter capital expenditures have averaged less than 0.5 point of sales.
In the current environment, this resilience has enhanced by WESCO and Anixter's high degree of diversification by customer, supplier, end market and geography.
Both WESCO and Anixter have proven abilities to delever through the economic cycle, as they both did from 2007 to 2011, when their net leverage was reduced to below two turns as a combined $1.9 billion of free cash flow was generated.
Additionally, both companies have demonstrated the ability to use their cash flow to rapidly pay down debt following a sizable acquisition.
In the case of WESCO, we reduced leverage from 4.5 turns to 2.7 turns following the acquisition of EECOL in 2012.
In Anixter's case, it reduced leverage from 4.1 turns to 2.8 turns in the two years following its acquisition of HD Power Solutions in 2015.
This quarter was an excellent example of our strong counter-cyclical free cash flow, as the combined company generated $142 million in free cash flow or approximately 248% of adjusted net income.
Moving to Slide 19.
We had closed the merger on June 22, 2020, as the waiting period for the Competition Bureau expired on June 18, 2020.
Under the terms of the agreement, WESCO agreed to divest the legacy WESCO Utility and Datacom businesses in Canada.
This includes the utility businesses of Brews, Trydor and LaPrairie acquired some years ago.
Combined, the WESCO Canadian Utility and Datacom businesses represent approximately $150 million in sales or less than 1% of the revenue of the combined organization.
The divestitures will have no impact to the overall outstanding value creation opportunity of this merger.
I'd now like to hand it back to John for a quick summary, before we open it up to Q&A.
We responded to a quick and decisive actions in response to the global COVID-19 pandemic.
We will continue to aggressively manage our business, as we have done in prior economic cycles and respond to this crisis as needed.
Just five months after announcing the definitive Anixter agreement in January, we completed a very successful and oversubscribed capital raise in May, and then we successfully closed the Anixter merger on June 22nd.
Most notably, all of this was done against the COVID-19 backdrop.
As I mentioned earlier, integration is off to an excellent start and execution is accelerating.
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.
And finally, it's the start of a new era for WESCO.
As an industry leader, we are now larger and more diversified with differentiated scale and capabilities and what remains a highly fragmented industry.
As a result, we are exceptionally well positioned to lead not only a digital transformation of our business, but also of our industry.
Overall, we are doing what we said we would do, and we will continue to transparently provide our progress versus our plan and our commitment.

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compname reports q2 adj. earnings per share $1.36.
q2 adjusted earnings per share $1.36.
q2 sales $2.1 billion versus refinitiv ibes estimate of $1.9 billion.

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