WESCO International, Inc. Price & Performance (WCC)

Thank you, Scott, and good morning, everyone. Thank you for joining our call today. We're pleased with our return to sales growth in the fourth quarter. It was sparked by accelerated growth in our global data center business, which was up more than 70%. In addition, we had 20% growth in our broadband business and we had renewed positive sales momentum in our electrical and electronic Solutions business. I think it's important to note that for EDS, this marks our first quarter of growth since early twenty twenty three. Now this sales growth momentum was partially offset by a slowdown with our industrial customers, especially in the last two weeks of December. And what we expected, the continued weakness in our utility business. With that said, our positive momentum overall has carried into January and our preliminary sales per workday adjusted for M and A is up 5% versus prior year. Our opportunity pipeline remains at a record level. Our backlog remains healthy and our bid activity levels remain very strong. On a full year basis, organic sales were roughly flat with the prior year and gross margin was stable. Although we experienced some pressure in communications and security solutions, as sales ramped to data center customers on project deployments.

Consistent with our past practice and experience, we expect to improve CSS margins as we move through the data center lifecycle. Dave will address this in more detail shortly, including the Now turning to free cash flow. Our continued focus on effective working capital management yielded strong benefits again in the fourth quarter as we generated $268,000,000 of free cash flow and drove net working capital intensity down significantly versus the prior year. On a full year basis, we exceeded our expectations and delivered record free cash flow of more than $1,000,000,000 or 154% of adjusted net income. Overall, key developments in 2024 set us up very well future margin expansion and outgrowth relative to our market and to our peers. First, we made excellent progress on our enterprise wide digitalization efforts in our overall business transformation last year. We're more than halfway complete on our technology and capabilities build, which once deployed is expected to accelerate our earnings growth through greater cross sell. It's expected to expand our margins to improve pricing and operating cost leverage and it's expected to dramatically increase our speed to value on the integration of future acquisitions. Second, we materially strengthened our Wesco portfolio through both divestitures and acquisitions.

Early in 2024, we divested We also acquired three service based businesses, including Ascent, which closed in December. I think you'll all recall that Ascend is a premier provider of data center facility management services, and it enables us to provide additional value throughout and across the entire data center lifecycle. These strategic portfolio moves that is divesting a low margin business and adding higher margin services businesses are integral to achieving our 10 plus percent EBITDA margin goals. Third, in addition to generating record free cash flow in 2024, we we also reduced our net debt by $431,000,000 repurchased $425,000,000 of shares and increased our common dividend 10% in 2023. Now moving to 2025 and our outlook. We expect organic sales to grow 2.5% to 6.5% and operating margin to expand as all three business units are expected to deliver profitable growth this year. We expect to generate $600,000,000 to $800,000,000 of free cash flow. And I'm pleased to announce that we plan to increase our common stock dividend by 10% again this year to $1.82 per share while continuing our share buyback program. We also expect to strengthen our balance sheet by fully redeeming our outstanding cash flow and our earnings per share.

As we outlined in our recent Investor Day, we are committed to substantial value creation from operational improvements our digital transformation and our overall capital allocation strategy, including As we look to 2025, our pipeline of strategic acquisitions remains strong and it's aligned with our goal to increase our service offerings to our customers. We're well positioned to deliver out sized growth due to the secular trends of AI driven data centers increased power generation, electrification, automation and reassuring. And importantly, we remain laser focused on our enterprise wide margin improvement program, which has been a historical strength for Wesco WESCO. I'm confident that Wesco will outperform our markets again this year. And we're well positioned to deliver improved sales growth and continue toward our long term EBITDA margin expansion goal. Finally, I continue to be very proud of our talented and dedicated WESCO team. Who remain steadfast in executing our strategic plan, to capture the significant value creation opportunity in front of us. And we're doing this as we realize our vision of becoming the best tech enabled supply chain solutions provider in the world. So with that, I will now hand it over to Dave to take you through our fourth quarter and full year 2024 results as well as provide a much more detailed look at our 2025 outlook.

Dave, Thank you, John, and good morning, everyone. Turning to Page four, I'll walk you through our fourth quarter results. Sales were below our expectations with a considerable drop off in the latter half of December. Organic sales in the quarter were up mid single digits through the November, Sales per Workday were trending positive in December before dropping high single digits versus the prior year in the last two weeks of the month to finish down low single digits. In the fourth quarter, market weakness continued in utility, industrial and enterprise network infrastructure, while we saw strong growth in Canadian broadband, and again delivered exceptional growth in our West Coast data center solutions business, Reported sales in the fourth quarter were flat year over year organic sales were up 2%. Brands contributed approximately 1.5% versus the prior year, with volume growth just under 1%. In addition, reported sales were negatively impacted by approximately 300 basis points from the divestiture of Integrated Supply and foreign exchange rates. These headwinds were partially offset by the benefit of an additional workday. On the lower half of the page, you can see the adjusted EBITDA impacts of higher sales, offset by lower gross margin and slightly higher SG and A. Gross margin was down 20 basis points from the prior year including a headwind of approximately 30 basis points from lower supplier volume rebates.

Adjusted earnings per share of $3.16 was up 19% from prior year. Turning to Page five. On a full year basis, sales were down 2.5% on a reported basis and down 0.5% organically. Price contributed about 1.5%, which was offset by lower volume, and a 190 basis point cumulative impact from acquisitions and divestitures differences in foreign exchange rates, is the benefit of two additional work days compared to 2023. On the lower half of the page you can see that adjusted EBITDA was down from the prior year into lower sales. Gross margin was flat at the prior year level as the benefit of the integrated supply divestiture Jim, was offset by lower supplier volume rebates. SG and A was up slightly reflecting inflation employee related costs and warehouse leases. Turning to Page six. On the left side of this page, you can see that gross margin in 2024 was flat with the prior year. At 21.6% This reflects an increase of more than 200 basis points over the past five years and we believe there is opportunity for further margin expansion. The right side of the page shows that gross margin in 2024 varied by business unit. While EES and UBS margins increased from prior year and were up ten and eighty basis points respectively.

A contributor to the 80 basis point increase at UBS is the direct result of our strategic portfolio shift which resulted in the divestiture of the integrated supply business. In addition, the increases at DES and UBS reflect the positive impact of our enterprise wide margin improvement program. As John mentioned in his opening remarks, the exceptional growth that we have experienced within our data center business, has included participation in numerous large scale data center projects. Some of these projects are direct ship, which have a lower gross margin. We believe that over the course of the data center web cycle, we will improve margins with these customers as we provide additional products and services consistent with past experience. Let me walk you through our business unit results beginning with EES on Slide seven. Note that we have provided additional disclosure on gross profit and SG and A for each of our segments as this information will be provided in our annual and quarterly SEC filings starting in 2025.

CES organic sales rose 1% in the fourth quarter, Reported sales were up 2%, which reflected the benefit of an extra workday compared with the prior year. We are pleased with the return to growth in our EES business. Construction sales were up low single digits in the fourth quarter driven by a higher level of project activity that drove growth in Canada, [indiscernible] offset by continued weakness in solar in The United States. Industrial sales were down low single digit We delivered growth in Canada, offset by a weaker U. S. Market reflecting the broad based industrial slowdown experienced across the market in the OEM sales were up low single digits for the second consecutive reflecting improved momentum in the second half of twenty twenty four. Backlog was down 1% from the prior year, and down 2% sequentially in line with normal seasonality. Then the table on the right side of this page, you can see that EES, the EES adjusted EBITDA margin was up 10 basis points from the prior year reflecting improved operational efficiency and cost controls, with SG and A as a percent of sales favorable by 30 basis points. For the full year, organic and reported sales were down 1% due to low single digit growth in construction, flat industrial sales, and a low single digit decline in OEM.

Gross margin was up 10 basis points and full year adjusted EBITDA margin was flat with the prior year. Turning to Slide eight. CSS saw accelerating momentum in the fourth quarter with sales up 11% year over year on an organic basis and up 14% as reported. The growth was driven by Westco Data Center Solutions which was up more than 70% with double digit growth across all three end use customer types. Hyperscale, multi tenant data center and enterprise. This growth has significantly increased the mix of data center within both CSS and West Coast TrollSense. Within CSS, data center represented nearly 40% of sales, up from about 25% of segment sales in the prior year quarter. From a total company perspective, data center, which includes sales across all three business units, was approximately 16% of Westco sales in the quarter, and approximately 13% on a full year basis. Note, this is an increase from the comparable 10% of WESCO sales we shared at Investor Day which was based on trailing twelve month sales through June. Security sales were approximately flat in the fourth quarter and enterprise network infrastructure was down in the quarter reflecting continued softness in the wireless and structured cabling partially offset by strength in our service provider business.

Half one was up 16% from the prior year reflecting the substantial growth of our data center business, and down about 5% sequentially given the timing of large project shipments in Q4. Adjusted EBITDA margin for CSS was down 150 basis points versus the prior year. Primarily reflecting the mix of large customer data center projects in the quarter with a lower gross margin that I mentioned at the moment ago. For the full year CSS sales were up 5% on a reported basis and up 4% organic This growth was due to the exceptional and strong growth in data center build outs in 2024. Turning to Slide nine, 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 first provided the information on the left side of this page at our Investor Day last It highlights the two stages of the data center construction site. Time to power in the construction period The key takeaway is that projects that are announced today have obtained funding will likely take about four to seven years before they will be up and running. The pipeline of data center projects continues to rapidly expand especially within the mega project space.

Based on data that we track, over the past two years, data centers have accounted for approximately 35% of the total megatrend investment the highest by far among the 16 categories we track.

Our solutions now encompass everything from the electrical systems to advance IT infrastructure, to services that support data center operations. Ensuring that our customers have comprehensive solutions throughout all phases of the data center cycle. On the right side of the slide, you can see the substantial and that our data center business delivered in 2024. This growth has been driven by organic initiatives along with substantial acquisition investments we've made to increase our exposure and service capabilities within the space. We continue to invest in capabilities and in 2024 at an interesting and a cent to expand capabilities to service data center customers from cradle to cradle, including on-site services, and data center technology upgrades. Moving to Page 10. As John mentioned at the top of the call, in December, we closed the acquisition of Ascent, provider of data center facility management services. Headquartered in St. Louis, Stent provides data center [indiscernible] Ascent strengthens our leading global data center solution portfolio for our customers by allowing us to further extend our end to end service offerings including advanced liquid cooling design and implementation solutions. Turning to Slide 11. Organic sales in UBS were down 6% in the quarter and reported sales were down 17%.

Which includes the divested integrated supply business in the base period. As we discussed previously, the utility market continues to and lower project activity levels, this is partly a function of the current interest rate and regulatory environment. We expect these impacts to continue into the first half of twenty twenty five. With a return to growth in the second half of the year. We remain highly confident in the future benefit from the secular trend of electrification, green energy, grid modernization, and believe these trends will support substantial growth acceleration in our utility business over the long term. We are pleased with our return to growth in broadband in the fourth quarter. Broadband sales grew within 20%, albeit against the prior year, that was down more than 30%, reflecting exceptionally strong growth in Canada. The Canada broadband business began showing signs of improving momentum in EBS backlog was down 25% from the prior year, and down 10% sequentially. Adjusted EBITDA margin was up 40 basis points over the prior year. On a full year basis, organic sales were down 5% from the prior year and reported sales were down 13% reflecting the divestiture. Gross margin was up 80 basis points as we discussed a moment ago.

Turning to Page 12. In the fourth quarter, we delivered $268,000,000 of free cash were 156% of adjusted net income. This contributed to our full year free cash flow of more than $1,000,000,000 of record for the company and representing 154% of adjusted net income. Which is substantially more than our previous cycle target of 100%. This has largely been driven by a reduction in working capital. I'd like to point out that cash flow in the fourth quarter benefited from the timing of payments for tax credit purchases that effectively moved the $45,000,000 cash payment from the fourth quarter of twenty twenty four to the first quarter of twenty twenty five. You can see on the right side of this page, we reduced net working capital intensity by 160 basis points in 2024. We are pleased with this result remain focused on making further progress including reducing inventory as a percent of sales. In 2025, we expect net working capital to grow in half a rate of sales growth which will further drive down net working capital as a percentage of sales. Turning to Slide 13. This slide shows our 2025 outlook for our strategic business unit and the individual operating group.

As John mentioned, we expect organic sales to be up 2.5% to 6.5% and reported sales in the range of flat to up 4%. With the difference driven by M and A activity, along with pendings from Board Exchange and Workday. Starting with EES, we expect 2025 reported sales to be flat to up low single digits. You can see that sales from all three operating groups were relatively flat in 2024. As we move into 2025, expectation is that construction will be approximately flat industrial will be up and OEM will grow as the positive momentum we experienced in the second half of twenty twenty four this year.

Looking at our CSS segment, we expect 2025 reported sales will be up mid single digits. We've already discussed the significant growth in data centers in 2024, which we believe will continue into 2025. With that operating group up mid teens.

We also expect security will be up driven by a recovery in U. S. Markets.

Enterprise network infrastructure which primarily sells into contractors, service providers, and communications end markets have faced softness throughout 2024 due to slower five gs build outs, and construction specific markets. Particularly in structured team. Expect overall enterprise network infrastructure will be flat in 2025. Lastly, looking at UBS, our utility business was down throughout 2024 due to customer destocking and lower project activity. While we expect that softness to continue through the first half of twenty twenty five, our expectation is that growth will return in the second half of the year. As we have discussed previously, there is significant underlying demand for as well as investments in new generation, transmission and distribution, to support growing power and electrical needs. Moving to Page 14, let me walk you through the details of our outlook for 2025. Starting at the top of the page, we expect organic sales to grow in between 2.56.5% for the year.

Reported sales are expected to be flat to up 4% including a foreign exchange headwind of approximately 1.5% due to rate differences primarily in Canon. Reported sales also includes approximately 1% impact from net divestitures one fewer Workday in 2025. Recall we divested integrated supply last April which is partially offset by acquisitions completed in the second half of twenty twenty four. We expect adjusted EBITDA margin to be in the range of 6.7% to 7.2%. Recall that we are facing a 20 to 30 basis point SG and A headwind from the restoration of incentive compensation. Given results in 2024, incentive compensation is below target and we have assumed a target payout in 2025. Without this headwind, we are on track with the 20 to 30 basis points of annual margin improvement that we highlighted at our Investor Day. The upper end of this EBITDA margin range reflects both gross margin expansion and operating leverage on higher sales While the lowering of the rate reflects the impact of flat volume on operating leverage. Regarding gross margin, we expect to deliver some level of gross margin expansion in 2025. And in part to a slightly higher level of supplier line rebates and improvement of CSS gross margin.

Our outlook range for adjusted diluted earnings per share of $12 to $14.5 reflects year over year growth of 8% at the midpoint. Note that we have also provided key modeling assumptions that I want to comment on [indiscernible] Our outlook assumes that cloud computing expense will be approximately $40,000,000 in 2025. Up from $14,000,000 in 2024. Consistent with historical results, cloud computing amortization is recognized as SG and A and not included in adjusted EBITDA. It is however included in adjusted operating income and adjusted earnings per share. Interest expense is expected to decrease in 2025 due to lower debt balances, and dividends on preferred equity will be reduced by half as we anticipate redeeming the preferred in June of this year. We expect to generate substantial expense savings by redeeming the preferred stock due to the difference between our expected borrowing rates and a 10.58% preferred dividend rate. Lastly, turning to free cash flow. We expect to deliver free cash flow of between $600,000,000 to $800,000,000 in 2025. As a percentage of adjusted net income, this implies a range of approximately 95% to 105%. Regarding capital allocation, our strategy is unchanged. 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.

After funding organic investments, our free cash flow being allocated to the highest return option. We will prioritize acquisitions to continue to expand our capabilities and better serve our customers Particular Wingbo is engaged in high growth end market We will continue to repurchase shares under our current authorization. Given our expectation to redeem the preferred stock, we would anticipate share repurchases will be opportunistic and well below the 2024 level of $425,000,000 Lastly, in 2025, we expect to increase our common stock dividend [indiscernible] or approximately an incremental $2,000,000 per quarter versus 2024. Turning to Page 15. This slide shows the year over year monthly and quarterly sales growth comparisons for the past two years and our expectations for the first quarter. Versus the prior year, we expect first quarter organic sales Excluding the net headwind of M and A and one fewer workday than the prior year, to be up low to mid single digits, meaning a reported basis, we expect sales to be approximately flat versus the prior adjusted for M and A up about 5% in the prior year.

Note that January of twenty twenty four is the easiest comparable of the year. We expect adjusted EBITDA margins will be slightly lower than prior year level of 6.4% as we continue to manage cost effectively in a mixed economic environment. Moving to Slide 16, We've covered a lot of material this morning, so let me briefly recap the key points before we open the call to your questions. Now with the fourth quarter, we're at the high end of our outlook. Growth momentum in data center continues to be exceptionally strong and we were pleased to mark the return to growth in both broadband and our EES business units. Full year free cash flow was more than $1,000,000,000 a record level for the company. In 2024, we repurchased $425,000,000 of common share and reduced net debt by $431,000,000 In 2025, we expect to deliver above market growth and improved profitability. With that, operator, we now open the call to questions.

We'll now begin the question and answer session. And our first question today will come from Sam Darkas with Raymond James. Please go ahead.

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

Two quick questions if I could. Help us with what gives you confidence with respect to your visibility into the second half recovery of the utility vertical. I know that the first quarter is the seasonal low point but you also your primary KPI, as I recall, was most fill rates as opposed to perhaps forecasting demand levels. So what gives you confidence that the second half is the right time to assume a snapback in that business?

Good question, Sam. First, we do have a couple new customer wins that start their ramp up here in the first quarter, build through the second quarter and are reaching a much higher run rate of sales in the second half. So irrespective of the market, those wins occurred in second half of 'twenty four. So we enter the year with those and they're both very meaningful. So we're very much encouraged by that. Secondly, Jim Cameron and his team have had deep discussions with all our utility customers and I think that given given the secular growth trends we're seeing, the change in the administration, in The U. S. And the fact that we've been they've been customers on behalf and with us have been working down their inventory levels.

And we've been doing this customer by customer, Sam.

That it's our team's view that as we get through the first quarter, through the second quarter, moving into the latter part of the second quarter into the second half that materially that utilities will turn back the purchasing engine back on. I think overall, our view of there's overwhelmingly strong secular growth trends through the entire utility power chain remain intact. As I've mentioned quite a few times, all these other secular growth trends we're talking about require one thing, power. So we're going to have a kind of an overall increase in the power demand curve as far as we can see. And that's going to pull on capacity. It's going to mandate in the utilities invest in increasing their capacity for generation through transmission substations and then obviously through the distribution portion. Of the power chain.

Thank you. My second question Dave, you mentioned that you expect gross margins to be up slightly for the year. I'm guessing, especially because of the easy comparison in the first quarter, that you're anticipating gross margins to be up all year long. Is that a a fair representation?

It's a fair representation I would point you to we did have a peak in the third quarter Again, a lot of that will be predicated on what is the mix of the business and the impact on gross margin. As we think about the full year, one of the benefits we are expecting on gross margin is the higher supplier volume rebates Our supplier volume rebates in 2024 was at one of the lowest historical levels that we've had. So we do expect that to increase, particularly as we look at growth the higher end of our range. At the midpoint, we would still expect SDR benefits against gross margin in 2025. Thank you.

Your next question today will come from Tommy Moll with Stephens. Please go ahead.

Good morning and thank you for taking my questions. Morning, Tommy. John, thanks so much for the gross margin insight segment level. Maybe next quarter, we'll get it at the business unit as well. But for the moment, could you just give us some of the backstory here on what was the decision making process on going ahead and providing that disclosure and what you want to make sure we take away.

Yes. Hey, Tommy, it's Dave Schulz. So there is a new requirement from the SEC [indiscernible] key segment expenses. And when you take a look at the composition and the profit structure of our business, one of the key drivers of our profitability is obviously gross margin. So we are disclosing that. You'll see that in our 10 ks That will be released here probably the end of the week early next week. You'll see three years of detail within the segment footnote. Disclosing the gross profit and then the adjusted SG and A as well. So we do intend to continue to disclose the gross margin at the SPU level. From our perspective, it is complying with the SEC regulation.

Thank you. And Dave, a follow-up on your comments regarding redeeming the preferreds. It's really a two part question. As you laid out your EPS guidance range for the year, how many quarters are you assuming we'll have that roughly $14,000,000 headwind there?

And then as you redeem these in the June timeframe, is the expectation you'll be able to fully redeem with cash on hand or there would potentially need to be partial debt financing just given timing of cash flows.

Yes, Tani, we fully intend to redeem the preferred. That means that we'll pay the two quarters worth of the dividend on that preferred stock. We will evaluate how we fund that redemption, whether it's with a combination of cash on hand, borrowing against existing facilities, or depending on the market, whether we would go out and issue an additional note. One thing to keep in mind as we provided you with those key modeling assumptions, for 2025, We have assumed a range on interest expense which based on the current rate environment it's almost agnostic whether we use our existing facilities or we finance that with a new node.

And your next question today will come from David Manthey with Baird. Please go ahead.

Yes. Thank you. Good morning. Dave, just a question on SG and A. You've mentioned the reset of the incentive comp, but you also I believe have a 3% annual merit increase. And remind me does that hit April 1 And then in light of those two items, could you provide any color on how SG and A stepped from 4Q to 1Q and then from the first quarter then into the second quarter progressively?

Certainly. You're right that we've assumed the 20 to 30 basis point headwind that our typical merit increases effective on April 1. So as we think about the sequential impact to SG and A, moving from Q4 of 'twenty four to Q1, we wouldn't expect an uptick. And that uptick in the the sequential increase is primarily going to be driven by that incentive compensation. When we then move from Q1 to Q2, there will be the step up related to a low single digit increase in our people cost.

Okay. And then, so second, if we adjust for the WIS divestiture, I believe UBS segment EBITDA was one of the lowest rates that we've seen in many quarters.

Has there been any structural change in UBS profitability as we go forward or with growth as we accelerate into 2025, do you expect to return to more of that sort of 11% plus EBITDA margins we saw in 'twenty three and early 'twenty four.

Yes. Let me provide a little bit of background on the integrated supply divest [indiscernible] had a lower gross margin And when we strip out the impact of integrated supply on gross margin, There was favorability to the total company, but that was primarily offset by an increase in SG and A due to the lack of the operating leverage. So overall, the integrated supply divestiture at the company level [indiscernible] a slight favorable on adjusted EBITDA margin low single digit basis points. So really no meaningful impact. Within Utility and Broadband Solutions, yes, there was a benefit from WESCO coming up from a gross margin perspective, The business actually performed extremely well in managed gross margin of effectively well in twenty twenty four. The margin pressure was really coming from SG and A on the lower sales. So this is a very efficiently run business.

As those sales continue to decline, you can see from the slide that we just didn't get the op from the business within UBS. Would say that that's less from integrated supply coming out, more from the [indiscernible] throughout 2024.

Hey, Tom, it going forward with the return to growth think Dave had a comment question around operating leverage going forward.

Yes, absolutely. So this business runs very efficiently. So as we see a return to growth on the top line, we would fully anticipate that we will get the margin benefit on adjusted EBITDA. Great. You and good luck. Thanks, Dave.

Your next question today will come from Deane Dray with RBC Capital Markets. Please go ahead.

Thank you. Good morning, everyone. Good morning, Dave. Hey, can we put the spotlight on the good start to January? Just take us through the composition of the business, stock and flow, what kind of mix, direct ship, Any kind of pricing difference versus what you saw in the fourth quarter? Just some color there would be really helpful.

Yes, we're really pleased, Dean, with once the calendar turned, how January ended up I will mention that it actually started a bit soft. It was interesting. I don't know this has come out in any of the other companies that have had their earnings calls. But the softness that we saw kind of the two speed January, right, second half of Jan or December that is, that was soft. I kind of January started off a bit soft. For a week or so or a little longer than a week, but then kicked into gear. So it's really nice to the momentum As we exit January, it had a five plus percent growth rate that's ex M and A. So it's it's a good sense. Now there's some headwinds in January too because FX is stepped up has picked up substantially to start Q1 of twenty twenty five versus where this is in Q4 of twenty twenty four. So that just I think that counts calibrate the 5% of it. In terms of overall mix, Dean, it's really an extension of what we saw in the fourth quarter. So no material mix changes in January thus far. I will say the bookings were very strong So book to bill was above one point zero strongly above one point and margins were very stable.

So Very good start. We feel good about it.

That's great color. And then just as a follow-up, maybe we can [indiscernible] tariffs what the risks are You guys have a playbook. I know you've been through this before. So just what talk about preparation And then anything around the metals, I know this is all late breaking, you're just going to keep your spreadsheet open as these changes happen on the fly, but just if you could share with us your current thinking? [indiscernible] We do have a playbook. It's a well developed playbook. We've been through this before. I think take you back to the first Trump administration, look at what look at tariffs that were put in place, look at we took all the appropriate actions and able to manage our margins very well through that process. I'll just remind everyone that we have very, very low, I'll call it, first derivative direct exposure, because our private label business is a very small percent of our overall business So where we see the effect on the supply side of our business is on the is with our supplier partners. And that's the exposure we have. We work with them through and together with them to push the pricing through.

Net net for distribution, look, we don't want to have to put the price increases through to our customers. But we absolutely will and we'll do that and we'll protect our margins. We have a a strong history of doing that. So the way to really think about tariffs is to the extent it drives an inflationary effect on the supply side of our distribution business model, we take that, we work it through to our customers, continue to sell our value add capabilities and work that pricing through. So I think this will just speak to an environment where inflation stays higher than maybe some expected. And that is our outlook as we move through 2025.

That's great color. Thank you. And your next question today will come from Christopher Glynn with Oppenheimer. Please go ahead. Thanks. Good morning. So was curious about comparing the public power versus IOUs it utility, John. I think the slides called out public is kind of weak.

We saw in fourth quarter, Chris, both public power and Investor Own Utilities, those two respective set of end user customers in utility were down mid single digits. So we actually saw Similar headwinds with both. As we As we take a look on a full year basis, I would say that probably a little stronger with industrial and utilities versus public power. In general, but look, I wouldn't really call out any major differences. The utility effects that we saw are really market driven and driven by customers, but it's kind of a market driven set of effects. Okay. Thanks.

And then on E and I, the decline quarter for E and I with some of the particular kind of December effects more acute in that business maybe? Was it kind of an air pocket or do you think the market's stepping down a bit more?

Yes. Look, I think your characterization is accurate. A little bit of softness in December there. Look, overall CSS really terrific momentum as we build across the year. Exit the year with very strong data center momentum, very strong improvement and a return to growth in security. It happened in the year, One thing I will call out, I don't want to get too because we are pulling all data center sales related to data centers and we're reporting that as data center sales. That includes security. Again, we're bundling other CSS products and it includes core enterprise network infrastructure, what ClassLink would be called that. So I think when you look at security like for like just as a category, we have mid single digit growth in Q4. It was a return to growth. So very good I'll call it broad based momentum across CSS. I would not call out ENI as being kind of a real weak spot. Again, if you look at some of the categories of products that were in classically in E and I before we broke out data centers, it would have looked much stronger in the quarter. I hope that helps, Chris, because I think [indiscernible] Yes.

Appreciate that. Thanks.

Your next question today will come from Stephen with Jefferies.

Please go ahead.

Great. Thank you guys. Dave, I wanted to dig into something you said, I think earlier when you were talking about data centers and large customer projects, which maybe come at a little bit lower margin and provide a little bit of a headwind, but maybe over time there's more service. So I'm curious as we continue to see data centers grow much faster than the rest of the business, is that still kind of a margin headwind as we go forward? Or do you get that service more quickly and it kind of normalizes.

It normalizes. And so just to provide a little bit more color on this one, particularly in the fourth quarter, we saw a lot more of the early phases of these data center builds and those were direct ships for many of those larger customers. So Just like the balance of our business, whenever we have a direct shipment, it never touches our warehouse, We don't service it.

It basically goes directly from the manufacturer to the job site So the gross margins on that always tend to be low. And that's one of the things that impacted our CSS margins in Q4. As we begin working with the customer to operate that facility, there is that opportunity for more at the higher margin, particularly if we can attach it to the services acquisitions that we completed in 2024. So So it is a margin story that we would expect to normalize. That's been our experience with other large customers in the past.

Got it. Okay. Thanks. And then just switching over to free cash flow. I guess I might have expect [indiscernible] we spent a couple of years well below the 100%. It's seems like we have some ground to work to get back. To sort of that five year average. So maybe the way to think about that is, is working capital to sales ratio is still quite a bit higher than pre COVID. Does that Does that get meaningfully lower from here? How do we think about that?

We would expect it to get meaningfully lower in 2025. And we've highlighted we do at the midpoint of our outlook, we do expect continued growth in 2025 consistent with what we provided to you. So if you take a look at just the midpoint of that, from where we started with networking capital at the end of twenty twenty four, we've highlighted that we would anticipate that our net working capital will grow half the rate of sales. So just looking at the midpoint of our outlook, a sign that 1% increase in net working capital that will drive further efficiency overall on net working capital. Also please keep in mind that from an overall inventory requirement, John mentioned we've got some new accounts in utility. So that will require us to fill inventory requirements earlier than we begin to see the sales. So there will be some lumpiness in net working capital, particularly in the first quarter as we begin building out some of those new customers. [indiscernible] But overall, we would expect continued efficiency to net working capital through the end of twenty twenty five. Okay.

Thank you.

And your next question today will come from Ken Newman with KeyBanc Capital Markets. Please go ahead.

Hey, good morning guys. Maybe first, I just wanted to get a quick clarification, Dave, from an earlier question.

First, is the earnings guidance that you outlined on Slide 15 or 14 that does include a full year of the preferred dividend or is that not the case?

That is not the case. So it assumes that we have half year of the dividend payout. So rough round $14,000,000 a quarter, we'll pay that for the first two quarters of twenty twenty five. That is included in our outlook.

Got it. Okay.

And then for my follow-up here, I just wanted to run back to the 1Q organic growth guide and then just trying to square that against the 5% that you saw in January, given that it does look like the comps do step down sequentially in February and March, Do you think January is just a normalization from a snapback from that [indiscernible] back half of December, slower January or help us kind of understand the assumptions underlying that first quarter guidance?

Yes, certainly. So the 5% that we talked about for the month of January, preliminary sales growth it is against an easier comp It does not include the impact of M and A. So it's it's adjusted for the M and A impact in the month of January. As you think about how January shaped up relative to the fourth quarter the composition of our businesses was about to see. We continue to see strong growth from CSS, We're still seeing some challenges within UBS. We expect those challenges in UBS to recover in the second half of the year.

But in terms of where we're seeing the full quarter, as Joe mentioned, we've got a couple of new contracts within the utility space. We've got backlog that is still at a near a record high level. So from that perspective, yes, the comps get tougher in February and March, but excluding the M and A impact, the low to mid single digit outlook is appropriate.

Very good. Appreciate the color.

And your next question today will come from Patrick Baumann with JPMorgan. Please go ahead.

Hi, good morning.

My call here Good morning. I had a question first maybe on the sales cadence through the year. It looks to me like the first quarter you're guiding down about 1%. On a workday adjusted basis versus the fourth quarter.

And historically, my math says it's typically down 4% to 5% on a workday adjusted basis sequentially. So what this means I think is you'd need below seasonal trends for the rest of the year to get to the midpoint of your guide.

Are there any large projects maybe for data center or construction that are coming off from the first half to the second half that would cause this or any other color you could provide on why that would be? Certainly. So we provided you our expectations for Q1.

One of the key drivers to the phasing of the quarters throughout the year. Is the timing of the recovery on utility. And we've talked about that being more in the second half So that will influence The growth rates that we would expect to see in the first half of the year with an expansion in the second half of this year. So in terms of how the outlook would lay out, we would expect [indiscernible] from a reported sales perspective, will be light in Q1 as we've already provided you that information then we would begin to see an improvement through the Q2 through Q4 primarily driven by continued benefit from that data center growth the DES business for the full year being on a reported basis flat to up low single digit and that back half recovery on utility. Okay. Right.

On The U. S. Construction markets for 25%, can you talk about that flat outlook that you have maybe by vertical, you mentioned solar as a headwind in the fourth quarter.

Any other color you can offer in terms of vertical end markets? And then also with the E and I segment, I guess that's also related construction why that's flat. Maybe just flesh out kind of the construction outlook across the different segments, I guess?

Yes. We're still seeing and have an expectation for considerable growth in the data center space That will impact our EES business as well. In the office space. There are some pickup in non residential construction related to manufacturing.

And then also within the healthcare space.

So those are the verticals that right now we're targeting. And again, most of our business in that construction space comping, we've primarily finished the comparisons So we won't see that downdraft on solar in our construction business. As it relates to E and I, again, that business is influenced by both new construction plus renovation jobs. Some of it is office related, some of it's manufacturing related. So that's what's also informing our outlook for enterprise network infrastructure. Those same impacts to our EES construction business will be impacting our E and [indiscernible] Got it. And one more just really quick one housekeeping. On the the Ascent deal that you guys did, you booked, I guess, dollars 30,000,000 in the quarter, which for one month of ownership seemed like a big number.

What's like the right run rate of sales for this business And why would the fourth quarter have been so high in terms of sales contribution? From that business?

Yes. On the sense acquisition that was completed in December. One of the things that we had already talked about publicly was that when we acquired the business, it had run rate sales of about $115,000,000 per year, but it was growing at about a 30% rate. We did have a very strong December within our CSS business contributing with Ascend contributing to that growth rate We've not provided any other specifics. We do anticipate that that business will continue to grow consistent with what we've already shared. Think about it growing double digits with the capability that we are providing within the data center space.

Okay. Thanks a lot. Best of luck.

Concludes our question and answer session.

Thank you all again for your support. It's much much appreciated. We've addressed all the questions that they got teed up during the call. I know we have a lot of calls lined up through this afternoon and tomorrow and I think some after the weekend as well. So I'll bring the call to a close. In terms of future events, we look forward to speaking with many of you over the next two months as well. At the rate, we'll be attending the Raymond James Institute Investor Conference on March 4. We'll be attending the JPMorgan twelve and we'll be also attending the Distributed Tech Conference on March 25. So with that, and we will announce our first quarter earnings on Thursday, May 1. So with that, I'll bring the call to a close. Again, thank you and have a good day. Conference has now concluded.

You may now disconnect.