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Text: Actual results may differ materially.
Today, we'll use certain non-GAAP financial measures.
It's great to have you on the team.
I'll start out with a summary of 2020 and some of our most notable accomplishments.
Dave will take you through at that point an update on our rapid progress that we're making on integrating Anixter.
And I'll take you through our fourth quarter and full year results and then give you an overview of our outlook for 2021.
So starting up, 2020 was an extraordinary year for WESCO.
We completed a transformational acquisition of Anixter, doubling our size of the Company and changing our trajectory for years to come.
We're off to an excellent start, and I'm more bullish than ever on delivering against our substantial value creation potential.
As most of you know, we announced our agreement to acquire Anixter International last January, and we were very pleased to close the transaction a little more than five months later.
The first six months of the integration have gone exceptionally well.
Our synergy capture has exceeded our expectations, both in terms of size of the opportunities as well as the rapid pace of our execution.
You'll recall, last quarter we increased our three year post merger cost synergy target from $200 million to $250 million.
In addition, the highly complementary nature of WESCO and Anixter, and our substantially larger scale has enabled us to build a cross-sell pipeline that's starting to show up in our top line results, and this is very encouraging.
At the same time that we're working toward closing the transaction and beginning integration, we're managing through an incredibly challenging macro environment driven by the COVID-19 global pandemic.
In response to this, we took quick and decisive actions centered really on three priorities, and we've talked about this in the past: first, protecting our employees; second, ensuring that our customer experience service and support was seamless and exceptional; and number three, taking the necessary actions to reduce our cost and efficiently manage our operations.
The diversity of our end markets, our differentiated service offerings, our global footprint and the attractive secular trends we support help temper the effects of COVID-19 on our business last year.
On the right-hand side of this page, you can see the attractive secular growth trends that are driving demand for electrical, communication, security and utility solutions, all of which will continue to drive demand in the years ahead.
All three of our strategic business units have the scale and capabilities to deliver growth associated with the increasing use of automation, machine-to-machine connections, the electrification of our infrastructure and the demand for faster bandwidth and data center capacity.
Emerging growth trends such as the relocation of supply chains back to North America and increased remote connectivity also drive additional growth opportunities.
In combining WESCO and Anixter, we have created the industry leader in electrical, communications and utility distribution and supply chain services just as these secular trends are poised to drive strong growth in all the markets we serve.
Now moving to page 5.
During our second quarter earnings call in August, we highlighted our priorities for the second half of 2020.
They were to take share, deliver synergies and focus on free cash flow generation and debt reduction.
In the fourth quarter, we saw improving sales momentum coming out of the COVID-19 trough and are successfully utilizing our increased scaling capabilities to take share.
Sales were up 4% sequentially in Q4 on a workday adjusted basis when typically our sales declined sequentially in the fourth quarter.
We closed the year with a record year-end backlog, which sets us up well to continue building on this positive momentum in 2021.
Even more importantly, January sales reflected return to year-over-year sales growth, with sales up low single digits on a comparable workday basis.
We've made great progress across the board on our synergy capture efforts.
Our team is laser-focused on driving synergies.
As we have combined into one organization, we've made great progress in recognizing the savings from duplicative corporate overhead and functional integration.
Adjusted gross margin was up versus -- pro forma prior year for the second consecutive quarter.
Our management team is now in place, and we've been able to streamline roles across functions for greater efficiency.
We're on track to meet the higher synergy targets that we announced last quarter, and have very high confidence in delivering upside to these targets.
Free cash flow was another major highlight for us in 2020.
We generated $586 million of free cash flow last year, close to the $600 million target that we set for three years out, and more than 250% of our adjusted net income.
This enabled us to reduce net debt by almost $400 million and leverage by 0.4 times in just the first six months since the Anixter closed.
And last month, we completed a debt refinancing of our 2021 notes that reduces our interest expense by $20 million per year, which will further enhance cash flow and support achieving our 2023 debt reduction and debt repayment target.
Overall, we are very pleased with the results we're delivering on all fronts.
We're entering 2021 from a position of strength, with an unwavering commitment to our strategies and growth plan and an extraordinary team of associates and outside partners.
Coupled with our strong execution and accelerating progress on the integration, we have very high confidence in our ability to deliver sustainable, long-term value creation.
2021 will be another positive and important stepping stone in our transformational journey.
Before getting into the results for the fourth quarter, I'd like to address where we are with cost synergies from the integration with Anixter.
When we announced the merger with Anixter back in January of 2020, we anticipated a mid-2020 close and provided investors with our view on synergies for the first three years post close.
On slide 7, you'll see that we've converted our synergy timeline to align with our fiscal year-end.
This chart on the left side of the slide shows the cumulative realized cost synergies that we expect to generate by fiscal year.
Realized synergies are those that are reflected in our income statement.
In the first six months post close, we have realized $39 million of cost synergies, $15 million in Q3 and $24 million in Q4.
In 2021, we expect to realize an additional $90 million of synergies, bringing our total to $130 million by the end of the year.
Consistent with the expectation we provided on our last earnings call, we still anticipate realizing $100 million of cost synergies in the first 12 months of the merger through June of 2021, with a cumulative cost synergies of $130 million by December.
In addition to the cumulative cost synergies, we have shown the cumulative one-time operating expenses to achieve the synergies below the bar chart.
As you can see, we have spent $37 million in one-time operating costs in the first six months, and expect to spend an incremental $78 million on one-time operating expenses to generate the incremental $90 million of synergies in 2021.
By June of 2023, we expect to generate $250 million of realized cost synergies on a trailing 12 month basis.
In total, this $250 million target is comprised of initiatives that are approximately 20% related to cost of goods sold and approximately 80% related to reducing operating expenses.
This is consistent with the sources of synergies we previously discussed, and we expect the synergies related to corporate overhead, G&A and field operations will drive the SG&A synergies, with the majority of the supply chain synergies impacting cost of goods sold.
Turning to slide 8.
In Q4, we delivered another quarter of strong free cash flow that represented more than 160% of net income.
For the full year, free cash flow was $586 million or more than 250% of adjusted net income.
This level of free cash flow generation highlights WESCO's ability to generate strong cash flow throughout the economic cycle, and especially during down cycles like the one related to COVID-19.
This resilient model, coupled with our execution on the integration with Anixter gives us very high confidence that we will successfully reduce leverage below 3.5 times adjusted EBITDA over the next two and a half years, consistent with our commitment when we announced the merger.
Our capital allocation priority remains unchanged.
We will allocate capital to support the integration, invest in our business and rapidly delever the balance sheet.
We made substantial progress on this goal in 2020 as we reduced net debt by $389 million and leverage by 0.4 times trailing 12-months adjusted EBITDA since closing the Anixter acquisition in June.
Net debt was reduced by $109 million [Technical Issues] 2028 notes.
Liquidity, which is comprised of invested cash and borrowing availability on our bank credit facilities, is exceptionally strong and totalled $1.1 billion at the end of the fourth quarter.
In early January, we increased the size of two bank credit facilities by a combined $275 million.
We utilized this higher capacity and existing availability to retire our $500 million 2021 notes.
Turning to page 9.
This summary table compares our fourth quarter adjusted income statement results to the pro forma for the prior year period and our adjusted results in the third quarter.
Because Anixter and WESCO had different fiscal reporting periods, there was an extra week of Anixter sales in the fourth quarter of 2019, making comparisons to that period less meaningful.
For that reason, most of my comments today will be on the sequential comparison against the third quarter.
On a reported basis, sales were flat versus the third quarter.
It is important to note that the fourth quarter had three fewer workdays compared to the third quarter.
When adjusting the results to a comparable workday basis, sales were up more than 4%.
The momentum has continued into January with workday adjusted sales up low single digits versus the prior year.
Adjusted gross margin, which excludes the effect of merger related fair value adjustments to inventory and an out of period adjustment related to inventory absorption accounting was 19.6%, in line with the prior quarter and up 10 basis points versus the prior year.
We are seeing continued traction from our margin improvement initiatives, including early results from deploying Anixter's proven gross margin improvement programs across the combined business.
Note that the out of period adjustment relates to the cumulative effect of the adjustment to inventory since WESCO was spun out of Westinghouse.
In no period was the adjustment material to our reported results.
Adjusted income from operations was $172 million in the quarter, after adjusting to remove the effect of merger related costs of $40 million, merger related fair value adjustments on inventory of $16 million and the out of period adjustment of $23 million related to inventory absorption accounting.
Adjusted income from operations was $28 million lower than the third quarter, which primarily reflects an increase in SG&A related to the discontinuance of temporary cost reduction measures we had taken in response to COVID-19.
As we had highlighted in our Q3 earnings call and reiterated in the 8-K that we filed on December 15, we reinstated the full salaries of legacy WESCO employees, instituted 2020 merit adjustments and resumed the retirement savings plan employer matching contributions effective October 1, 2020.
These measures, along with certain other actions, had generated more than $50 [Phonetic] million of savings during the second and third quarters of 2020 relative to WESCO's Q1 SG&A run rate before the merger.
In total, adjusted income from operations was $13 million lower than prior year pro forma, on sales that were $223 million lower, representing a decremental margin of approximately 6%.
Adjusted EBITDA, which excludes the effect of the adjustments I just mentioned, as well as stock based compensation and other net adjustments was $216 million or 5.2% of sales, lower than the third quarter due to the higher SG&A I just discussed and approximately in line with the prior year.
Adjusted diluted earnings per share for the quarter was $1.22.
First, electrical and electronic systems, or EES, which is approximately 40% of our Company's total business.
Second, communications and security solutions or CSS, which is roughly one-third of the Company's revenue.
And then third, utility and broadband solutions or UBS, which represents the remaining 27% of the overall sales across the enterprise.
As we have said previously, one of the most meaningful and positive discoveries post close is how complimentary the WESCO and Anixter portfolios are.
The pie charts on this page depict the legacy WESCO and legacy Anixter composition for each of the three businesses.
It is this very highly complementary suite of products and solutions that enables us to offer even more end-to-end solutions for our customers and supports the cross-sell programs John mentioned.
Additionally, we found that customer overlap between the legacy companies was more favorable than expected.
Turning to slide 11.
Reported sales in our EES segment were up 1% versus the third quarter on a reported basis and up 6% on a comparable workday basis.
This growth reflects improving construction demand in North America in the second half of the year as well as the first sales from our cross-sell initiatives and our ability to offer a complete electrical package to our customers.
We have continued to see some project delays, primarily driven by COVID-19, but still no cancellations.
EES backlog was a fourth quarter record, consistent with the trend we have observed since last March as some projects are delayed, and we continue to be awarded new projects.
We also continue to see increasing momentum in our industrial and OEM business.
In the fourth quarter, MRO and project activity levels improved in all of the verticals we serve.
Adjusted EBITDA of $94 million represented 5.6% of sales, about $14 million lower than the third quarter.
The decrease primarily reflects higher SG&A due to the reinstatement of the temporary COVID-19 cost reductions discussed earlier.
Turning to slide 12.
Our CSS segment closed out a strong year, in part driven by an increased focus on bandwidth needs stemming from COVID-19 as well as our global scale, which offers greater value to our customers.
On a reported basis, sales were 1% lower than the prior quarter, but were up 3% on a comparable workday basis.
We are taking share in all geographic regions and especially in areas outside the United States.
As with EES, we saw continued positive momentum throughout the quarter.
Specifically, we experienced growth in our network infrastructure markets that was driven by increasing global accounts and continued strong demand in data centers, including [Phonetic] wireless and professional audiovisual applications.
Sequentially, security sales were up low single digits on a comparable workday basis, driven by expanding demand for secure network and IP security applications.
CSS is uniquely well-positioned to benefit from several of the secular growth trends that we have highlighted as the pace of technological innovation, demand for data and reliance on security are all driving an accelerated pace of both new installations and upgrades to existing systems.
Adjusted EBITDA was $112 million or 8.2% of sales.
This was 50 basis points higher than the prior year, but down sequentially from the third quarter, primarily reflecting the reinstatement of temporary cost reductions.
Turning to slide 13.
Sales in our UBS segment were down slightly versus the third quarter on a reported basis, but up 4% on a comparable workday basis.
Strong utility demand continued this quarter as our utility customers continued to invest in grid hardening and modernization projects as well as LED lighting and automation projects.
The broadband business was also resilient to COVID-19, driven by 5G deployments, last mile fiber installations and increasing broadband projects.
The global demand for data and high-speed connectivity has never been greater due to the step change in requirements driven by remote work and school environments.
Adjusted EBITDA of $79 million was in line with the prior year and up 10 basis points as a percentage of sales.
Adjusted EBITDA margin was down sequentially on slightly lower sales and the restoration of COVID-related cost actions.
Turning to slide 14, I'll walk you through our outlook for 2021.
On a pro forma basis, sales were $16 billion in 2020.
In 2021, we estimate market growth of roughly 3% to 5%.
We recognize that COVID and the timing of broad scale vaccinations may create volatility and influence the overall demand pattern of our business.
We are encouraged by the economic indicators and expect the demand environment to continue to improve as we progress through 2021.
On top of that, we expect that the combination of the continued outperformance and our cross-sell programs will grow sales 1% to 2% above the market.
Lastly, keep in mind that 2021 has one fewer workday than 2020, and we will have the impact of the US brand sale completed in Q3 of 2020 as well as the expected completion of the Canadian divestitures in the first quarter.
[Technical Issues] are approximately $125 million.
The impact of these will be a headwind of approximately 1%.
So in total, we expect sales to grow 3% to 6%.
We expect differences in foreign exchange rates to be neutral to slightly favorable for the full year.
On the right-hand side of the page, we have provided a bridge for our 2020 pro forma adjusted EBITDA margin of 5.3% to our outlook for adjusted EBITDA margin of 5.4% to 5.7%.
We expect to benefit from improving mix, market outperformance and operating leverage, which we expect to collectively drive about 50 to 80 basis points of margin expansion.
In addition, as you saw on the prior page, we expect to generate an incremental $90 million of realized cost synergies in 2021, which will contribute approximately 55 basis points of additional EBITDA margin.
Partially offsetting these two margin drivers will be the restoration of the employee compensation benefit costs discussed previously and the restoration of a full accrual for incentive compensation, the aggregate amount of which is approximately 90 basis points.
Continuing down the income statement, we expect our effective tax rate to be approximately 23% and adjusted diluted earnings per share in the range of $5.50 to $6.
We assume a diluted share count of approximately 51.5 million shares.
We expect to spend between $100 million to $120 million on capital expenditures in 2021, much of which will be invested in the early stages of aligning our systems and investing in digital tools.
We expect to continue generating substantial free cash flow, which we're forecasting to be at least 100% of adjusted net income.
As we look at the drivers of the first quarter of 2021, we expect to benefit from $28 million of realized cost synergies in the quarter.
Please keep in mind that the first quarter has two fewer workdays than the first quarter of 2020, as shown in the table.
Before opening your call to questions I'd like to walk you through a quick summary.
Again, 2020 was a transformational year for WESCO and highlighted many of the Company's strengths.
First, we responded with quick and decisive actions, as I mentioned earlier, in response to the global COVID-19 pandemic and delivered excellent performance through the downturn.
Number two, our integration with Anixter is off to an excellent start and it is accelerating.
We made substantial progress on the integration in just the first six months, and we're very pleased to be able to increase our synergy targets.
Our new leadership team is the strongest management team in our history and is driving our high performance culture.
We have launched our cross-sell programs in all three of our business units and are already seeing positive results.
And three, and most importantly, the business is uniquely well-positioned to capitalize on the highlighted secular growth trends that will drive demand for our full spectrum of end-to-end solutions for years to come.
2020 marked a watershed year and the beginning of a new era for WESCO.
As the industry leader, we are now larger and more diversified with differentiated scale and capabilities in what remains a highly fragmented industry.
We're exceptionally well-positioned and intend to lead not only a digital transformation of our business, but also of our industry.

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compname posts q4 adjusted earnings per share $1.22.
q4 adjusted earnings per share $1.22.

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