By Jack Keough
Wesco International, the giant electrical/MRO distributor, eliminated 300 positions in the second quarter, consolidated or closed six branches and now expects further job cuts and closures during the second half of the year.
The company says the additional personnel reductions and branch closures and consolidations will be completed during the second half of 2015.
At the same time, the company said it might still do “selective additions” in some areas of the company, such as sales, where it would lead to further revenue growth.
Wesco executives made the comments on a conference call with financial analysts, following release of its second quarter earnings that showed flat organic sales and a 7 percent decline in Canadian organic sales.
The company reported total sales of $1.92 billion, down 4.4 percent from Q2 2014. Organic sales decreased 3 percent, with foreign exchange rates negatively impacting sales by 3 percent, offset by a 1.6 percent positive impact from acquisitions. Sales were up 5.5 percent from Q1’s $1.82 billion.
Total profit for the quarter was $51.8 million, down 28.0 percent from a year ago, and up 10.2 percent from Q1. Operating profit of $90.3 million was up 3.6 percent.
“Based on our second quarter results in this challenging market backdrop we’re reducing our financial outlook,” said John Engel, chairman, president and CEO of Wesco. Due to the year-to-date results and the underlying business trends, Wesco now expects full year sales to be flat or down a few percentage points for 2015. Its previous outlook called for 3 percent sales growth.
Wesco, like many distributors, has experienced a softening in its industrial business primarily driven by oil and gas, metals, mining, and OEM customers.
“Our industrial customers are responding to these challenging macro economic conditions by adjusting stocking levels. There is slowing down of capital and discretionary spending, both for projects and maintenance,” Engel said.
However, Wesco also saw bright spots in areas such as lighting and datacom, as well as a strengthening of its commercial construction business. And second quarter bid activity level for global accounts and integrated supply was strong. Specifically, June was an all-time record month.
Engel also commented on Anixter’s huge purchase of HD Supply’s power solution business for $825 million. That business has a geographical footprint of nearly 130 branches and four Canadian locations with fiscal 2014 sales of $1.9 billion. Anixter says the acquisition will help to expand its electrical wire and cable presence and growth in its utility business.
That division is a key competitor to Wesco for utility customers, as well as in electrical distribution, primarily in the southeastern part of the U.S. Many industry observers believed that Wesco, known for making successful acquisitions over the years, would make a bid.
“We respect the HD Supply’s utility business and their capabilities, we’ve been competing with them a long time,” said Engel. “We feel really good about our business. I would say in terms of Anixter taking them on, it’s going to be very interesting to see what Anixter attempts to do with them.”
He pointed out that WESCO has “high confidence in its [own] business, our capabilities and I think we’ve got a really strong track record in core utility over the last four plus years.”
In fact, during the quarter, Wesco’s utility business continued to deliver above market sales growth. Sales to its utility customers grew 6 percent, continuing the positive trend over the past four years. This marks the 17th consecutive quarter of year-over-year sales growth, which continues to be driven by new wins and expanding scope of supply with existing customers. In the second quarter, Wesco was awarded two transmission project contracts with an Investor Owned Utility.
One agreement was for a multi-year contract to provide transmission material and supply chain management services while the other was for transmission material procurement.
The Pittsburgh-based Wesco has achieved a high degree of success for its One WESCO program, an initiative that integrates products, services and supply chain management solutions for its customers, making it a one-stop shopping experience.
Wesco has a two-pronged approach toward growth: one to grow its business organically and the other through acquisitions.
Since 2010, Wesco has made 12 acquisitions that have helped the company to report record sales. Its most recent acquisition occurred in April when it acquired Hill Country, a commercial, construction, and electrical distributor with approximately $140 million in annual sales. Wesco says the acquisition is off to a solid start.
Engel said Wesco is always looking for strategic partners to acquire and continues to have a “robust pipeline.”
“We do have, very much, a disciplined approach where we will make the decision when a property is put in play and whether we want to play,” Engel said.
The acquisitions Wesco has made over the years were companies that wanted to become part of Wesco and thus it turned into a “win-win” position for both his company and the one acquired, Engel said. He also noted that none of those acquisitions involved investment bankers.
He said that the distribution industry is still highly fragmented but said it is now in a consolidation phase, both among suppliers and distributors. He said after the business downturn several years ago, acquisition activity has increased and will continue to do so.
“I’m not predicting in the next quarter or the next year but I think we’re in an industry consolidation phase as we look in the next multi-year time horizon,” Engel said.
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