Wesco Lowers Sales Guidance; Management Restructuring Ahead

By Jack Keough

Reflecting the economic slowness, Wesco, the giant electrical/MRO distributor, has eliminated 400 positions this year, closed or consolidated 13 branches and will reduce its management staff in the fourth quarter, company executives told financial analysts in a Q3 earnings call.

The 400 layoffs occurred at all levels of the organization, and now Wesco will be streamlining its management structure as well as possibly adjusting other headcount, dependent on sales volume.

In addition to the cost-reducing actions completed already, John Engel, chairman, president and CEO, said the company would continue to simplify and streamline its business, including de-layering of management.

“We expect these actions will be completed during the fourth quarter and will further improve our operational effectiveness and reduce costs in 2016,” he said.

The company also said it now expects consolidated sales for 2015 to be down 4 to 5 percent. Wesco had previously forecast sales this year to be flat to down 3 percent compared to 2014.

The Pittsburgh-based company is the latest distributor to reduce its sales outlook for the year. Dan Florness, the CFO of Fastenal, recently lowered his company’s guidance for the year and said that the “industrial environment” was in recession. Grainger also has reduced its sales outlook, eliminated 170 sales positions as well as cutting 100 jobs and closing four branches in Canada. 

Wesco, like many distributors, had a challenging quarter with organic sales down five percent reflecting a decrease in sales in the U.S. and Canada.

“We continued to see the significant decline in oil and gas that we discussed during our last call, which primarily impacted sales to our industrial and construction customers,” said Engel.

“We were able to partially offset this at the bottom-line with operating cost savings and more such actions are underway,” he added.

Ken Parks, Wesco’s CFO and senior vice president, said that although 13 branches were closed, some of those were consolidated into others already located in the same geographical area.

“So, we are not necessarily exiting markets, but leveraging our footprint in some markets while in some of the more challenged markets we are taking our branches out at this point in time,” he said.

In Q3, Wesco said sales declined more than 7 percent, driven by an accelerating slowdown across the overall industrial market, including continued weakness in the oil and gas sectors. The oil and gas business was down 30 percent for Wesco, although it only makes up a small percentage of its overall sales.

Parks said the economic slowdown has also resulted in customers delaying maintenance spending and capital projects.

Third quarter organic sales declined by 5 percent, and organic sales per workday were lower than the prior year in all three months including an 8 percent decline in September. Foreign exchange reduced sales by 4 percent, partially offset by the acquisition of Hill Country, which added approximately 2 percent to the top line.

Fourth quarter consolidated sales are now expected to be 5 to 8 percent below the same quarter last year, including a Canadian currency exchange rate roughly  $0.75 to the U.S. dollar. Month-to-date, October consolidated sales are approximately 6 percent lower than the prior year and down approximately 4 percent organically.

During the quarter, the company’s U.S. sales were down 10 percent and Canadian sales were down 16 percent in local currency.

Sales to Wesco’s utility customers grew 2 percent in the quarter, with the U.S. up 6 percent, marking the 18th consecutive quarter of growth.

Construction sales for Wesco declined 10 percent in the third quarter, with both the U.S. and Canada down 5 percent on a local currency basis. Similar to Q2, Wesco saw weakness in sales to contractors serving the industrial markets in the U.S. and Canada, while sales to commercial construction contractors fared better and actually grew in the quarter.

In Canada, construction comprises over half of Wesco’s business and the company expects to see continued challenges due to the oil and gas, metal and mining sectors. Wesco believes the outlook for non-residential construction market is modestly positive, although well below its prior peak.

Despite the economy, Wesco had some major wins in the quarter. It was recently awarded a contract to provide substation materials and supply management for a new utility scale wind farm project as well as a multi-year contract to supply electrical and safety MRO products across multiple plants for a global food manufacturer.

It also was given a contract to provide upgraded electrical equipment to four hydroplants in the U.S.

Engel said the company’s global accounts and integrated supply bidding activity levels remained strong in the quarter and its One Wesco value proposition for customers continues to yield wins.

Wesco also said it had invested $75 million in its share repurchase program in the quarter, bringing its year-to-date buyback to $150 million, or approximately 2.5 million shares.


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