WESCO International, Inc. Aktie

Hello, and welcome to WESCO's 2026 First Quarter Earnings Call. [Operator Instructions]. Please note that this event is being recorded. I would now hand the call over to Scott Gaffner, Senior Vice President, Investor Relations, to begin.

Thank you, and good morning, everyone. Before we get started, I want to remind you that certain statements made on this call contain forward-looking information. Forward-looking statements are not guarantees of performance and by their nature, are subject to uncertainties. Actual results may differ materially.

Please see our webcast slides and the company's SEC filings for additional risk factors and disclosures. Any forward-looking information speaks only as of this date, and the company undertakes no obligation to update the information to reflect changed circumstances. Additionally, today, we'll use certain non-GAAP financial measures. Required information about these measures is available on our webcast slides and in our press release, both of which are posted on our website at wesco.com.

On the call this morning, we have John Engel, WESCO's Chairman, President and CEO; and Neel Dev, Executive Vice President and Chief Financial Officer. Now I'll turn the call over to John.

Thank you, Scott. Good morning, everyone. Thank you for joining our call today. We delivered an exceptional start to 2026, building on last year's market outperformance and accelerating business momentum.

In the first quarter, sales backlog, a operating margin, adjusted earnings per share and free cash flow all increased versus the prior year and exceeded our expectations. Record first quarter sales of $6.1 billion were up 14%, marking our third quarter in a row of double-digit sales growth. Booming data center demand remains a significant growth driver of our business. Data center sales of $1.4 billion were up approximately 70% versus prior year and represented 24% of total company sales in the quarter.

Overall, our business momentum continued to accelerate in the quarter with organic sales up sequentially, outpacing normal seasonality and reinforcing the strength and durability of demand across our end markets. This performance reflects broad-based strength across our entire portfolio, led by continued strong momentum in CSS and EES along with improving trends in UBS.

We again ended this quarter with a record backlog, up 22% versus prior year, reflecting the continued effectiveness of our cross-selling program and providing clear visibility of the secular growth trends on our business. Profit growth, margin improvement and free cash flow generation were also excellent in the first quarter.

Adjusted EBITDA grew 25% and adjusted EBITDA margin expanded 60 basis points, driven by gross margin expansion and strong operating cost leverage on our double-digit sales growth. Adjusted diluted earnings per share was up 52% versus the prior year. Free cash flow generation at 128% of adjusted net income was also very strong, underscoring our disciplined execution and continued focus on working capital management.

We're very pleased with our first quarter results. While we remain mindful of the volatility of the broader macroeconomic environment, we see positive momentum continuing across our business. As a result, we are raising our full year outlook for 2026.

As the market leader and with positive momentum building, I'm confident that WESCO will continue to outperform our markets through disciplined execution, our differentiated value proposition and the strength of our global platform. Our WESCO team remains focused on driving strong growth and margin expansion and delivering superior value to our customers and shareholders.

One final comment. As we announced earlier this year, [ Dave Schulz ] is retiring from WESCO and Neel Dev has joined our team as CFO. I would like to thank Dave for his outstanding leadership, his dedicated service and his tremendous contributions to WESCO and our overall success over the past 10 years. We wish Dave and his family are very best.

Neel is off to a great start as WESCO's new CFO, and I will now turn it over to him to take you through our excellent first quarter results and raised full year outlook in more detail. Neel?

Thank you, John, and good morning, everyone. I'd like to thank John and the board for the opportunity and I want to recognize Dave for his leadership and thank him for his partnership during this transition.

Before turning to our results, I'll take a minute to touch on my near-term priorities. I intend to focus on partnering with the leadership team to scale our business in attractive end markets, drive profitable growth, continued market outperformance and deliver strong cash flow with disciplined capital allocation. That mindset has been shaped by working across both public and private companies, often in complex, global, highly competitive technology and capital-intensive businesses.

John and I are aligned on the initial focus areas where we have the potential for taking our existing great capabilities to the next level. First, driving operating leverage and margin expansion as we scale, particularly in data centers and other high-growth end markets. This will be accomplished by a combination of partnering with our business leaders to ensure that our commercial and go-to-market strategy reflects our enhanced value proposition and partnering with our functional leaders on continuing to improve our cost structure. It's all about profitable growth.

Second, improving working capital efficiency and cash conversion through tighter processes, analytics and execution discipline. This is not just about back office. It's about optimizing our end-to-end capabilities from sales funnel to cash collection.

Transitioning to our results. Let me start with the highlights for the quarter. We delivered strong organic sales growth year-over-year, with sequential performance better than typical seasonality. Profitability improved with meaningful EBITDA margin expansion. EPS was up more than 50%, and free cash flow generation was strong at 128% of net income.

With that, let me turn to our first quarter results, starting on Slide 4. We delivered an excellent first quarter with reported sales of $6.1 billion, up 14% year-over-year, including 12% organic growth. We delivered volume growth across all 3 SBUs and realized an estimated price benefit of approximately 3 points. Gross margin was 21.2%, up approximately 20 basis points year-over-year, and SG&A operating leverage improved by 40 basis points. As a result, adjusted EBITDA increased 25% to $389 million, and adjusted EBITDA margin expanded 60 basis points to 6.4% of sales.

Turning to Slide 5. Adjusted EPS increased 52% year-over-year to $3.37. The year-over-year improvement was driven primarily by stronger operating performance in the quarter, reflecting higher sales and improved profitability. Additionally, growth benefited from a lower tax rate and from the absence of the preferred stock dividend following last year's redemption.

Turning to Slide 6. CSS delivered another excellent quarter with organic sales up 22% year-over-year and reported sales up 24%. This growth was driven by continued strength in WESCO data center solutions, which delivered a record quarter with sales up over 60%. Within the rest of the portfolio, security delivered high single-digit growth, while enterprise network infrastructure declined mid-single digits due to weakness in the service provider market.

However, including data center-related sales, enterprise network infrastructure grew high teens year-over-year. Overall, organic growth was driven primarily by volume up about 21% with price contributing approximately 1%. Backlog ended the quarter at a record level and was up approximately 40% versus the prior year, reflecting continued strong data center project activity and order rights.

Profitability also improved meaningfully and our focus remains on margin expansion as we scale the business, particularly in our data center markets. Adjusted EBITDA increased 41% to $223 million, and adjusted EBITDA margin expanded 110 basis points to 9%. Importantly, despite some modest pressure on gross margin from large data center projects, we generally see healthy and accretive EBITDA margins for WESCO data center solutions.

Moving to Slide 7. ESS delivered solid growth in the quarter with organic sales up 7% and reported sales up 9% year-over-year. Growth was driven by strong execution in OEM and construction. OEM was up mid-teens, driven by strength in the semiconductor and data center markets. Construction was up low double digits, supported by robust wire and cable demand and continued infrastructure project activity. Industrial was down low single digits, primarily reflecting project timing impacts.

However, our industrial stock and flow business grew mid-single digits in the first quarter, and backlog was up double digits, supporting an improving trend. Data center sales in EES were up over 100% year-over-year and represented about 10% of EES sales, highlighting the continued scaling of our exposure to this secular growth trend.

Overall, organic growth was driven by solid underlying demand with volume contributing approximately 3% and pricing contributing about 4%. Importantly, backlog ended the quarter at a record level, up 14% versus the prior year, supported by strong order activity and pipeline conversion.

Profitability improved meaningfully in the quarter. Adjusted EBITDA increased 30% to $185 million, and adjusted EBITDA margin expanded 130 basis points to 8.2%, driven by higher gross margins and strong operating leverage.

Turning to Slide 8. UBS delivered 6% organic sales growth in the first quarter, supported by improving demand and an increasing backlog. Utility delivered high single-digit growth, driven by strong double-digit growth in investor-owned utilities and continued positive momentum in grid services. Public power was flat year-over-year, which is encouraging. However, the market remains highly competitive and gross margins are expected to remain under pressure given weak sales and transformers and [ Warren Cable ], consistent with our prior commentary.

Broadband delivered mid-single-digit growth year-over-year, supported by strength in the U.S. Overall, organic sales growth reflected approximately 3% volume growth and about 3% pricing. Backlog increased 16% year-over-year. We are seeing increasing interest in our grid services enabled power capabilities from hyperscalers and other data center customers.

We have a growing funnel of sales opportunities and we are bullish that we will benefit from AI-driven data center investments and other major power-related infrastructure projects over the long term. Adjusted EBITDA was $131 million, down 5% versus the prior year, and adjusted EBITDA margin decreased 120 basis points to 9.6%.

Primarily driven by gross margin pressure and higher SG&A as a percentage of sales, recall that UBS is accretive to total company adjusted EBITDA margin given its higher margin profile and the improved growth rates will lead to even higher margins over time given the operating leverage.

Turning to Slide 9. I want to take a moment to further review the continued momentum we're seeing in the broader data center market and WESCO's role in that growth. Data center sales continued to scale in the first quarter, reaching approximately $1.4 billion, up about 70% year-over-year and representing 24% of total company sales in the quarter.

Notably, the data center end market is now WESCO's largest end market across all 3 SBUs and support a diverse set of customers with a diverse settle WESCO capabilities. On a trailing 12-month basis, data center sales are now approximately $4.8 billion or 20% of WESCO's total sales. This underscores both the strength of the secular demand environment and the expanding scope of what we provide customers across all business units and across the full life cycle.

Turning to Slide 10. This highlights our end-to-end data center offering and the role we play across the full life cycle. With exposure across CSS, EES and UBS, WESCO supports hyperscale, multi-tenant colocation and enterprise customers with a comprehensive portfolio of products, services and solutions that span power connectivity and ongoing operations. Our expanding capabilities and global ecosystem position us as a trusted partner as customers build, scale and operate increasingly complex data center environments.

Turning to Slide 11. We delivered strong free cash flow of $213 million in the first quarter. Free cash flow was 128% of adjusted net income. Despite sequential sales growth, net working capital was a source of cash in the quarter, largely driven by timing of inventory purchases and accounts payable.

Moving to Slide 12. During the quarter, we executed a highly successful $1.5 billion bond refinancing that was upsized relative to the initial launch, reflecting strong investor demand and record pricing. Notably, we achieved the lowest coupon WESCO has ever achieved on a senior notes offering and the lowest for a BB-rated 5-year note issued since 2021. The net proceeds will be used to redeem our 2028 senior notes, improve liquidity and further strengthen the balance sheet.

This refinancing meaningfully improves our debt maturity profile and is expected to generate more than $20 million in annualized interest expense savings. We exited the quarter at 3.2x net debt to adjusted EBITDA. Additionally, we repurchased $25 million of shares during the quarter towards offsetting dilution.

Moving to Slide 13. Within CSS, we have raised our 2026 outlook to low double-digit growth, reflecting the continued strength and visibility we are seeing in data centers. Data center sales are now expected to be up 20-plus percent for the year. Given the size of the market, we intend to continue to focus on healthy EBITDA margin business. Our outlook for EES and UBS remains unchanged.

Moving to Slide 14. We are increasing our outlook for the full year given strong first quarter results. Before I get into the details, I want to address our position relative to the current macroeconomic uncertainty. Through the first quarter and into April, we have seen no meaningful disruption to our revenue or profitability. But we continue to monitor the situation closely and kept this backdrop in mind for our outlook.

In the Middle East, I am pleased to report that all of our employees are safe. From a company perspective, we generate less than 1% of our sales in the region, with the majority of those sales related to our CSS business. The secondary impacts on transportation costs are more tangible, but have so far been manageable. Our teams are focused on passing these cost increases to our customers where appropriate and limiting the time that transportation quotes are valid to minimize overall risk.

On the tariff front, the overall impact to WESCO is not material. As a reminder, WESCO is the importer of record for a small percentage of our cost of goods sold, typically low single digits. We typically increase prices when needed to maintain margins. At this point, we don't expect any material recoveries from the [ IEPA ] decision.

Based on the strong start to the year, we are raising our full year 2026 outlook. We now expect reported sales growth of 6% to 9% with organic sales growth of 5% to 8%, which implies reported sales of approximately $24.9 million to $25.6 billion. Our assumptions around foreign exchange and pricing remain unchanged.

On profitability, we continue to expect adjusted EBITDA margin in the range of 6.6% to 7%, essentially increasing our EBITDA guidance in dollar terms. We are raising our adjusted diluted EPS outlook to $15 to $17 per share, reflecting earnings leverage demonstrated in the first quarter, as well as slight adjustments to the expected tax rate for the year.

There is no change to our outlook on interest expense based on our current view of no rate cuts this year and factoring in timing of the debt raise and subsequent pay down. Finally, we continue to expect free cash flow of $500 million to $800 million as we maintain working capital discipline, supporting higher growth. As a reminder, our historical pattern is typically about 70% of our annual cash flow is generated in the second half of the year.

Turning to Slide 15. While April is not entirely closed out, month-to-date, sales per workday are up about 10% year-over-year, with growth continuing to be led by CSS. For the quarter, we expect reported sales to be up high single digits. Recall that more than 50% of our sales are related to project activity and the mix of project sales is higher in the second and third quarter due to increased construction activity. The timing of project billings at the end of the quarter will determine where we land in the high single-digit range.

On margins, second quarter EBITDA margin is expected to be about flat year-over-year and within our full year guidance range. Higher incentive compensation, approximately 25 basis points accounts for most of the year-over-year pressure, and we continue to expect double-digit growth in adjusted EPS.

As you think about our outlook, keep in mind that we had strong sales growth and good EBITDA margins in second, third and fourth quarter of last year. On a 2-year stack basis, Growth is expected to remain strong and consistent with the outlook we've provided.

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. In summary, we delivered an excellent start to the year with double-digit sales growth, margin expansion and over 50% earnings per share growth. AI-driven data centers and related investments from our customers remain a key driver of growth across several product categories and verticals.

We generated strong cash flow and improved our leverage and debt maturity profile during the quarter. Despite macroeconomic uncertainty, we are confident in our positive business momentum and are raising our full year outlook. As we lean in to support organic growth, there is no change to our previously communicated capital allocation priorities and guiding principles. With that, operator, we can now open the call to questions.

[Operator Instructions]. Our first question today comes from David Manthey with Baird.

Yes, CSS doing amazing, so I'll focus on EES and UBS with my questions first thing here. First, on lead times, I know within the industrial business, you mentioned project timing as the reason for that small decline there. And with switch gear components stretching well over a year and medium voltage switch gears sometimes same 40, 60 week lead times. You're clearly navigating any shortages in the market out there well overall. But could you just talk about the specific issues? Where are the pinch points? And is that what you mean by project timing?

Well, great question, Dave. And your lead times comments are accurate. We're still seeing extended lead times in a couple of critical categories. But honestly, we've been facing those extended lead times since the pandemic, and we've been managing the business well. I think this is just more of a very specific intra-quarter project timing issue.

I'll give you my views of industrial. I've mentioned this before, I know. I really believe we're at the beginning of an industrial super cycle. In the U.S., in particular, it's driven by AI-driven infrastructure investments. Clearly, the need for increased power generation, not just for AI data centers but for all these mega projects and a fundamental secular trend that I think is becoming more apparent every day regarding reshoring. And these secular trends are going to play out over many years, and they really expand WESCO's opportunity set.

Specifically, for your -- relative to your question in Q1, I'd ask you to look at kind of our short-cycle business. Neel highlighted it in his commentary. Our industrial stock inflow, the short-cycle business, MRO supplies and such. That was up in line, mid-single-digit growth with recent recovery in industrial production. And so that's really a good important leading indicator.

It was offset for us with some project timing issues relative to the project timing issues, however, our book-to-bills were exceptionally strong in EES and particularly in industrial in the first quarter. And we have double-digit backlog growth in the industrial portion of EES. So that supports a future improving trend for industrial, again, consistent with my overall view of the cycle.

I agree. Maybe I could ask Neel from the first conversation that you and I had, I get the impression that you're a deal guy at heart. And could you just discuss, as you settle in here, how do you find the WESCO M&A process and what you think about the pipeline, your general thoughts on consolidation going forward?

Yes, Dave. So I think from WESCO perspective, as I've spent a lot of time on the operations, one thing I would mention, I'm more of an operations guy than a deal guy, first of all. But I do like to get into the operations side of deals. And so I would say we have a great team here evaluating deals and we're going to be very active, but also very, very disciplined, right?

We want to make sure that there is step in terms of our strategy and where we want to take the business. And we want to play into a lot of the mega trends that we are seeing in the marketplace, right? So it's all about how a deal accelerates our overall growth and profitability and not just something that we would buy to leave stand-alone.

And like we've talked about, Dave, like the margin profile is another real important driver for us. We're very focused on it. We've launched a number of initiatives on that front and M&A will be another level.

Dave, just one thing back on your earlier question, not specific to EES and UBS, but I came from the infrastructure side, building a lot of infrastructure. And one of the things that right now we see prior to my role here, and we will see some of the secondary FX here is the tracking factor for building infrastructure really are 2 things: lead time and skilled labor. And that's been true for a number of years. and will continue to be true going forward, right? So it's not the appetite for investment. It's not the allocation of capital. It's really those 2 things that's calibrating the spend quarter-over-quarter from a customer's perspective, not our perspective.

The next question comes from Deane Dray with RBC Capital Markets.

This is [indiscernible] on for Dean today. I did want to ask you about data center. Can you unpack the data center strength given you're clearly outperforming the peers here? Where are you gaining share of wallet? How is the growth rate different across the great space, white space and services? And maybe a related question to that is what's driving the step down in data center growth rate in the back half in your guidance?

The -- we've outlined white space gray space growth rates. Again, white space extensively supported and provided by our CSS business, deep roots go back into legacy [indiscernible] and they've been in a data center business for decades. That grew north of 60% in the quarter, very -- is the driver of the backlog growth in CSS a major driver. So very strong growth rates in white space services are embedded in that. We don't break that out separately.

For the gray space extensively served by EES, that was up over 100% in the quarter. And again, services are baked into that. So yes, we're very confident that we're outperforming the market meaningfully. And again, we're uniquely positioned with our portfolio because we have the [ datacom ] related solutions allow white space with CSS. We have the core Electrical Infrastructure Solutions and Connectivity Solutions supported by our EES business, and we have the power solutions supported by our UBS business, which is our grid services in particular, that's tucked in under our UBS business.

So relative to the outlook, look, we took investors through that when we provided our full year guide. We think it was appropriate. Originally, we obviously have stepped it up meaningfully now given this exceptional start to Q1.

I appreciate that. And just on sticking with CSS, another really good double-digit incremental margins for this segment this quarter. Just curious what needs to happen for this double-digit incremental margins to be sustainable and potentially move towards the mid-teens in you're still executing on these large projects?

Yes. Look, we've been very clear on how we're managing that business. And first, let me say, and I've got to say this, we have a new CSS leader. He's been at the helm now kind of 4 quarters. It took the business that had positive momentum, clearly, Four quarters ago, and he's accelerated that momentum and stepped up the performance meaningfully. I think you see that in the results.

We are very aggressively managing our gross margins, and you can see that they remain stable. Obviously, we're trying to expand gross margins, too. And we'd love to do that over time. But we've got stable gross margins in CSS, and we have outstanding operating cost leverage. And that's what I really wanted to highlight to you to be at 9% EBITDA for Q1, we're thrilled with that, quite frankly. It's a huge step up. Now we've been north of a 9 handle on EBITDA margins more than 1 quarter in a row. We had it in Q4 as well.

And so I think you're seeing the power of our portfolio, our execution and the inherent operating leverage in our business model showing up in the EBITDA expansion for CSS. And it's very consistent with how we run the business. So again, I'll summarize, very focused on gross margins. If we can get every single basis point matter. So we'd love to get to increase it by as many basis points as we can.

We absolutely will ensure the operating cost leverage, and we've got very good strong top line momentum. And I'll also say that the backlog is an all-time record level, growing at 40%, that's well in excess of our first quarter sales growth rate. As a side note, the backlog growth for all 3 businesses and segments was well in excess of our first quarter sales rates for each of the 3 SBUs.

The next question comes from Sam Darkatsh with Raymond James.

Two questions, and I apologize if this was covered since I got temporarily dropped there for a second. It looks like Slide 15, it looks like April is coming in maybe better than March. The comparisons year-on-year are pretty similar and you're saying April is up 10. Can you give a little color maybe in terms of what you're seeing, John, in April? And I'm really getting at the fact that are you seeing it in stock and flow improving over the last month or 2? Or is that just timing of projects?

Yes. Good question, Sam. First, I'd say kind of mix, we're seeing a consistent mix of what we've had in the first quarter. I do want to highlight, we still have 2 days to go. We actually are in the last day, but by the time we see the final numbers for yesterday, I'm sure they're out now, but we're in the middle of our goal.

And then we have today, which will close the quarter. I will say that we are a very strong book-to-bill rates continuing, again, mix consistent with Q1. And then if you look at Q1, we had very nice stock-based sales momentum. It isn't -- obviously, projects kicked in very nicely. But as I -- relative to my comments on ES Industrial, we actually had very good stock and flow momentum there. It was the project timing that resulted in that not being a net growth in Q1. So I feel good about our stock momentum, Sam. I'll just -- I'll make that comment. I know you're kind of poking at that a bit.

And then the second question, I think there was a recent presidential determination that authorizes federal purchasing and financing for the electrical grid. How material might this be for you? And when or where would it materialize first?

So first, let me say, I think there the various associations were part of have all been working across the industry and with their industry partners and association members of which we're a participant and really working proactively with the federal government on addressing the core issues around supporting this infrastructure build-out in the U.S. And the biggest driver really is power and the power chain piece of that.

So we would see that, Sam, being supportive of what I see as fundamentally secular growth trends in utility. I've made a strong statement that utility was classically a cyclical industry and has now moved secular growth. Even though we're not seeing that manifest in all the numbers yet, we would see it in our UBS business, we would see it in our EES business. Again, supportive of the secular trends.

The next question comes from Guy Hardwick with Barclays.

I wanted to just click on that point you brought up earlier about backlog growing faster than sales in Q1. So organic sales up 12% backlog up 22%. At what point does do sales catch up or backlog or does backlog really underpin 2027 revenues to what I think you said that they're lengthening somewhat.

Yes. It's a great question. I think, again, backlog only represents a piece of our business, and we've said this before, long-term multiyear alliance agreements for utility customers, multiyear national account, global account agreements in industrial. There's also some in CSS. They don't all get loaded in the backlog because we're loading in the actual POs. We may have a multiyear agreement. We're only loading in the POs when we get the POs.

With that said, we always -- we've been reporting consistently the trend on backlog. So the fact that, that growth rate is materially higher than our sales growth rate, that bodes well. For the balance of 2026, but it's also a look into 2027, which is the heart of your question, because we have -- when you look at the projects that are in the backlog, a number of them also ship in 2027. And there's some longer lead items that we're quoting for '27 like some transformer business and utilities. So it's -- I'd ask you to kind of think about that just as the trend, the relative growth rate of that versus sales and it speaks to kind of the rising demand curve that our portfolio is capturing.

And just a follow-up, the 14% backlog growth in EES. Just wonder which is the fastest for 3 years. So I was just wondering how much of that was driven by data center projects.

We don't -- we haven't disclosed that number. We haven't shared it, but think about the math here for a minute, data centers for the gray space EES exposure to data centers was up 100% year-over-year, but it's only 10% of EES sales. So I would -- you should think about that 14% as being a very to your point, Guy, a very healthy number for EES overall.

And here's a case where -- and I got to make the comment now, it's actually pretty important. Two of our SBU leaders are new in their jobs in the last year. CSS, we promoted from within 4 quarters ago. EES, we went outside and hired a leader. He returned to the electrical industry. He's now been at the helm for 3 quarters, and he is off to an outstanding start as is our CSS leader, as I mentioned earlier, and look at the momentum vector and the profit quality improvement of EES starting in Q3 last year, Q4 and now Q1, this is its third quarter since he's joined us. So it's a big deal to have 2 of your 3 business leaders, new in the saddle in the last year, I think we're seeing stepped-up execution in both of those businesses.

The next question comes from Christopher Glynn with Oppenheimer.

Exciting start to the year here. Just wanted to feed off that last topic. You were going into the ES margin trends and some of the execution there. So the gross margin, clearly sequentially has been a really strong trend and now year-over-year standing out and nice outperformance on the EBITDA margin this quarter, particularly from a normal kind of sequential seasonal pattern that was long seen.

I think the normal seasonality of profitability ramp from EES is sort of downplayed in the suggested enterprise margin for the second quarter. So just curious if kind of the seasonal margin swings if you're seeing those level off and that's sort of moderating the kind of 2Q forecast over the first quarter, given that the baseline shifted upward in the first quarter.

So first, let me comment on EES specifically. And again, we're not guiding gross margins or up margins by SBU for Q2. we don't guide at that level. And then Neel will make a comment on EBITDA margins overall for Q2 because I think that's what you're kind of poking at.

But again, back to the new leader effect, when you have a new leader, takes a look at the business, looked at every potential lever. So there is a very strong focus on profitable growth, stepping up the top line growth rate. I think we're seeing that in [indiscernible], that's priority 1 and priority -- the other priority 1 or 2 equal #1 priorities is to make sure we're getting inherently good margin expansion.

We're confident we'll get the operating cost leverage, Chris, you know how our business model works. When we get the sales growth, we're very disciplined around managing the SG&A leverage and ensuring the pull-through on the sales growth. So there's been a particular emphasis and focus on looking at all margin improvement levers ES over the last 3 quarters by our new leader and his team, and we're making very good progress. This was a very encouraging start in terms of the profit quality of the ES. Relative to our overall outlook of flattish EBITDA margins for the enterprise in Q2, there's some interesting timing dynamics when you look at sequentials then I'll hand it to Neel to take you through.

Sure. Thanks, John. So Chris, I think a few things to highlight. One is, I said it in my prepared remarks, if you look at our incentive comp and performance last year versus this year, that was about 25 basis points of overall 25 to 30, call it overall headwind in terms of EBITDA margin at an enterprise level. So that's one of the drivers.

If you think about it sequentially, typically, we see step-down in revenue in fourth quarter to first quarter. So we had a lot of the operating leverage that you see in the business in terms of sequential improvement in EBITDA margin, that was accelerated into first quarter of this year. So sequentially, the improvement is a loan unit.

A couple of other things to highlight. One is we are in an inflationary environment, but I would say we're doing a pretty good job managing that and we're trying to pass that along to customers where appropriate, where the market will bear. That's a factor. And one other thing is that if you look at the growth of our data center business, we are making some investments, very disciplined in facility expansion and capability expansions that shows up on our cost side.

But those are -- think about it as small step function investments but we'll see the benefit for those over several quarters, and we'll see the operating leverage from that investment. That also mutes a little bit of the margin expansion year-over-year.

Great color. Yes, I think I'll leave it there. Well, actually, one on [ WDCS ]. I think you mentioned that's now mix accretive in CSS. Just kind of curious, maybe double-click on that. And I imagine if we look at your historical top 5 to 10 suppliers for WESCO enterprise that there's probably been some swapping there as WCS has ramped so prolifically. I'm wondering if there's anything kind of interesting in that bank.

So yes, Neel had in his prepared remarks, we thought it was very important for our investors to understand that WDCS, this exceptional growth we're getting and the way we're managing the margin profile of the business we're taking on, we're being very judicious in terms of what we bid and then we're applying our value proposition to these customer opportunities that we are getting very good margin hold, it's "accretive," as Neel outlined, to CSS which is very encouraging because that's, again, the strong secular growth trend and the exceptional growth we're getting there. So it's a very positive driver.

Chris, we have had some movement in the top 5, 10, 5 to suppliers for overall WESCO. I'm not going to go through that in this call. But clearly, we have and you just look at the growth rates of CSS. So a number of those suppliers are experiencing meaningfully greater growth than some of our other suppliers. With that said, because -- look at our overall momentum vector as the company the third quarter in a row for the overall WESCO enterprise of double-digit growth. That's really terrific to see. And I think the rising tide we're creating with our suppliers is raising a number of their boats.

The next question comes from Ken Newman with KeyBanc Capital Markets.

Maybe just for my first question. Just thinking about the pricing side that you had this quarter, the 3% net price, can you help us just quantify just how much of that was from carryover benefits from last year versus incremental pricing that I know wasn't baked into the outlook? And then just any color that you're seeing from supplier pushes on pricing as we exited the quarter.

Yes. So again, I think most of that is carryover benefit because if you think about the timing of when we get the notices and the actual yield and what flows through into the financials. I would say most of that is carryover benefit. A couple of things to keep in mind is as you think about the business going forward, CSS is our largest business unit right now, right, in which the price impact has been small compared to the other 2 business units. And increasingly, we're doing a lot of projects where the pricing is negotiated with special pricing agreements. So just a comment to keep in mind as you think about our outlook going forward.

Understood. And then for my follow-up, obviously, really strong growth in data center, particularly in the white space side. I'm trying to maybe contextualize what you saw in the gray space versus the white space? And if you could just talk about how much of the white space growth this quarter you saw was maybe a translation or a transition from projects you won in gray space a few years ago? And then how do we think about the potential of that 100% growth in gray space this quarter maybe transitioning for white space activity over the next 12 to 18 months?

That's a very good question. So I would tell you that we're working the [ One WESCO ] solution, which is obviously on all future bid opportunities. And maybe there's for a portion of the white space or maybe a for a portion of the gray space, it could be uniquely for a piece of the power solution with UBS, we're pulling in all 3 SBUs and even irrespective of what the RFP is for.

We're going in with our full value prop saying, "Look, okay, we'll bid the [ ]RP look at all the other things we can do with you do for you." And I think that has excellent momentum, Ken. But in terms of your specific question, the EES growth we got, the majority of that we got in Q1 was not linked to a prior CSS or white space win, not.

If you look at how the market fundamentally works today, the natural market procures gray space and white space at different part times of the build cycle and power altogether is addressed differently, much earlier in the build cycle and by different people making those decisions.

So what does that mean for our mix? What that means for our mix in the real-time basis is we're not seeing a lot of that linkage yet. But we clearly are putting shots on goal with our broader value proposition, and we're very confident that, that has huge needle-moving potential for the overall WESCO going forward as we go after -- aggressively go after this secular trend.

And again, I couldn't be more pleased with the 100% growth in gray space in Q1 for EES. That just shows that we're putting an awful lot of shots on goal. Now again, it's again just roughly 20% of our overall sales mix but still a very encouraging growth rate.

Just one minor point, Ken, to add to John, as a new guy coming in, I've been super impressed in terms of the coordinated effort that we have across all 3 SBUs in terms of our go-to-market effort on the data center side. So we really go to market as One WESCO across all 3 SBUs across the white and gray space. But every customer buys differently. And so then we let the customer decide in terms of where our value proposition resonates or not.

The last today will be from Pat Baumann with JPMorgan.

I had one quickly -- well, maybe not quickly. I don't know it's up to you on digital transformation. So it seems like those costs are stepping up here in the first quarter in terms of what's outside the P&L. So I guess a couple of questions here.

What are you spending that on? Like what are those costs for? What's the path and timing of the ERP rollout? Can you talk to your confidence and execution on that? And then what happens to those costs on day 1 when those ERP systems turn on? And then how long does it take you to realize the benefits of this plan? I know there's a lot there. So I'll leave it to you to see how you want to answer it.

Well, let me first say that our last fulsome update was at our Investor Day a year before last, we outlined that program and we laid out still, at that point, extensive activities remaining for design build. We had not really begun deployment in any form or fashion at that point. We've not given a fulsome update, which we will do next time we have our -- at our next Investor Day, but at least I'll address your question by saying outstanding progress on the design build. We continue to grind away at that.

Our resources are focused on that. And we've begun deployment. And so this is a really important point. We have a very small number of locations in each of the 3 businesses that have been deployed, and that's been part of our agile design and build process and increasing capabilities being brought to bear in our design build that we're releasing and deploying in those various locations.

We had a notable milestone in the first quarter where we have 1 operation, 1 P&L operation, end-to-end P&L operation as part of CSS. It's been fully deployed on our new digital platform and that occurred literally at the very end of the first quarter. And so now we have an end-to-end operation with the latest instance that has the most capabilities deployed to date. We still have design-build activities that continue through this year and in the beginning part of next year, but then our deployment starts to phase in and accelerate, completely consistent with what we outlined at our Investor Day.

It's a phased deployment. And unlike an ERP transition where it's a knife edge switch and you put the enterprise at risk. We control the phasing of the deployment to make sure that we don't disrupt the business and we can manage the change management associated with the deployment. In addition, it's the -- our utmost priority that we do not disrupt our current business momentum. We have excellent improving positive business momentum and we want to make sure that we execute against that as evidenced by our first quarter results.

So let's just be very clear, that's our priority. And again, we'll have a phased deployment. So no change to kind of program design build deployment schema, huge milestone in Q1 where we have one end-to-end [indiscernible] operation now deployed, and we're seeing how that's operating. And the benefits will phase in over a multiyear period, similar to what we outlined at our Investor Day where we said it's a 2-speed margin improvement profile going forward, EBITDA margin profile. We're grinding away to get operating margin expansion as we complete design, build and deployment. But once that's complete, there's a step function increase in the margin expansion because all the onetime investments are done. So very much looking forward to those benefits again, they're not hitting our P&L at all yet. So that's all futures. That's to come.

Pat, on your question on like the disclosures, obviously, we provide fair amount of disclosure in terms of what's excluded from EBITDA going from EBITDA to adjusted EBITDA. And just like most companies, the objective is to really give you visibility to things that, like John mentioned, are onetime in nature. And yes, we'll reevaluate that every year when we do our reporting, but you've got full visibility.

And my last question, I just wanted to touch on, which was asked earlier in the call, but just bear with me on this. Is -- so your data center revenue in the quarter was $1.2 billion you annualize that, you're at $5.6 billion. I think that's -- that would be up kind of 30% versus what you reported last year.

But in the quarter, you're up 70%. You have hyperscaler CapEx that's going up 70% this year. So help us kind of understand what tails off? Is it some big projects or jobs that top out in the first quarter because the 20% growth just seems like it's great. But in context of what you've been putting up, something seems like maybe it's project timing. I don't know if you could help us understand that.

We addressed it earlier in the call, and you gave it the answer in the last part of your question.

Project timing.

That is the answer. Yes. And again, look, we had a lot of questions when we gave our initial outlook for 2026 when we reported our Q4 results. And we've taken all of you through that kind of our views on this, and it was project timing then. It's project timing now. With that said, it's an exceptional start to Q1. We're thrilled with the start.

This concludes ...

Yes. Thank you. I think we've addressed all your questions. So we're going to bring the call to a close. There's no one left in the queue, which is great. We've got a lot of calls lined up for today and tomorrow. We look forward to speaking with you in the follow-ups. Thank you all for your support. It's very much appreciated. We expect to announce our second quarter earnings on Thursday, July 30. So have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Hello, and welcome to WESCO's 2025 Fourth Quarter and Full Year Earnings Call. [Operator Instructions] Please note, this event is being recorded. I will now hand the call over to Scott Gaffner, Senior Vice President, Investor Relations. Please go ahead Scott.

Thank you, and good morning, everyone. Before we get started, I will remind you that certain statements made on this call contain forward-looking information. Forward-looking statements are not guarantees of performance, and by their nature, are subject to uncertainties. Actual results may differ materially. Please see our webcast slides and the company's SEC filings for additional risk factors and disclosures. Any forward-looking information speaks only as of this date, and the company undertakes no obligation to update the information to reflect changed circumstances.

Additionally, today, we will use certain non-GAAP financial measures. Required information on these measures is available on our webcast slides and in our press release, both of which are posted on our website at wesco.com.

On this call, we have today John Engel, WESCO's Chairman, President and Chief Executive Officer; and David Schulz, Executive Vice President and Chief Financial Officer. And with that, I'll turn the call over to John.

Thank you, Scott. Good morning, everyone, and thanks for joining our call today. So I'd like to open up today's call with our organization change we announced earlier this morning. WESCO's CFO, David Schulz, will be retiring from WESCO in May 2026. Dave will serve as Executive Vice President, Special Adviser to me until his retirement. Dave has done an absolutely excellent job since joining our company in 2016. On behalf of our Board of Directors and entire WESCO team, I'd like to thank Dave for his outstanding and dedicated service. and tremendous contributions to our WESCO success over the past 10 years. The utmost respect for Dave and greatly appreciate our business partnership that we had in building out the new WESCO. We extend our very best wishes to Dave and his family.

I'm pleased to announce the appointment of Neil Dev as Executive Vice President and CFO. Dave and Neil will work together to effectively transition CFO responsibilities. Neil will join WESCO later this month to support a smooth transition. For a brief introduction to Neil, he's a seasoned CFO with extensive financial, commercial and operational experience in multiple WESCO-served end markets. In his leadership roles for both public and private companies, he's demonstrated an ability to navigate complex financial environments and deliver superior growth and value creation. Neil is an excellent addition to our executive management team and will help us as we continue to accelerate our strategy, execute our growth initiatives, deliver our financial targets and create value for our stockholders.

Now moving to our WESCO results. We closed out 2025 with positive momentum and again outperformed the market with our leading portfolio of product services and solutions. In the fourth quarter, we delivered record sales of $6.1 billion, up 10% year-over-year, including 9% organic growth, and set another record in data center sales of $1.2 billion, up approximately 30% year-over-year.

At the business unit level, Communications & Security Solutions and Electrical & Electronic Solutions both delivered excellent results. This all occurred while Utility and Broadband Solutions results continue to reflect the ongoing sales and margin challenges with public power customers. However, we saw a clear inflection back to growth with our investor-owned utilities in the second quarter of last year. And that marks the first of 3 consecutive quarters of IOU sales growth that strengthened in the fourth quarter.

Overall, we finished the year with strong momentum, continued to take share and build a record backlog, which was up 19% year-over-year, providing another proof point that WESCO is benefiting from the enduring secular growth trends of: number one, digitalization, and that includes AI-driven data centers and automation; number two, electrification, that includes increased power generation and reliability; and number three, supply chain resiliency. That includes re-shoring.

Looking ahead in 2026 and into this year, we expect to continue to outperform the market and deliver mid- to high single-digit organic sales growth, strong operating leverage and margin expansion, double-digit EPS growth and improved free cash flow generation. Recall that our midterm growth targets outlined at our last Investor Day called for organic sales growth of 3% to 5%, but given our market share gains and exposure to secular trends, we have exceeded our midterm growth targets.

As we've done consistently, we're maintaining a disciplined approach to capital allocation. In the near term, our priorities remain focused on debt reduction and share repurchases to offset the annual equity award dilution. And we continue to invest in our tech-enabled business transformation and manage an active M&A pipeline.

I'm also pleased to announce that we plan to increase our annual common stock dividend by over 10% to $2 per share.

Now I'll briefly touch on our enterprise-wide digitalization efforts in 2025, and this is an increasingly important differentiator for WESCO. We made excellent progress in our digital transformation throughout 2025. We advanced our technology and capabilities build, and we've deployed our new tech stack in pilot locations in each of our 3 business units. The centerpiece of our new tech stack is a world-class data lake, where we're working to apply AI to improve the efficiency and effectiveness of our business. Recently, we were pleased to be recognized by Fortune in their inaugural AI ranking of Fortune 500 companies with a #10 ranking. Once our digital transformation is completed, we expect to accelerate our earnings growth through even greater cross-sell, expand our margins through improved pricing and operating cost leverage and increase our working capital turns by leveraging our single global IT instance.

In closing, as the market leader and with positive momentum building, I'm confident that WESCO will continue to outperform our markets and deliver exceptional value to our customers and shareholders in 2026 and beyond. Finally, I continue to be very proud of our talented and dedicated WESCO team, whose relentless focus on serving customers advancing our digital transformation agenda and driving superior execution across our businesses is producing notable results. This is all occurring as we realize our vision of becoming the best tech-enabled supply chain solutions provider in the world.

With that, I will now hand it over to Dave to take you through our fourth quarter and full year 2025 results as well as provide a more detailed outlook on our 2026 outlook. Dave?

Thank you, John, and thank you for the kind words. Good morning, everyone. I'll turn you to Page 4. Sales in the fourth quarter were in line with our expectations, driven by strong performance at EES and CSS. Revenue was $6.1 billion, an increase of 10% year-over-year, with organic sales up 9%. Growth was driven by approximately 6 points of volume and an estimated 3 points of price, including 1 point from commodities.

CSS delivered 17% organic growth, EES grew 8% and and UBS organic sales increased by 3%. The increase in adjusted EBITDA was driven by higher sales. SG&A as a percentage of sales was essentially flat versus the prior year. Gross margin was 21.2%, in line with the prior year. Adjusted EBITDA margin was 6.7% of sales, and adjusted EBITDA was $409 million, up 10% year-over-year. Adjusted EPS grew 8% to $3.40.

Turning to Page 5. For the full year, sales were $23.5 billion, an increase of 8% with organic sales up 9%. Volume contributed approximately 7 points while price provided an estimated 2-point benefit, including about 1 point from commodities. Volume growth was strong across CSS and EES, with UPS momentum returning in the second half. Adjusted EBITDA increased 2% to $1.54 billion or 6.5% of sales. Gross margin was 21.1%, down 50 basis points versus 2024. The decline in gross margin reflects project and product mix, along with public power competitive pressures. Adjusted EBITDA margin also benefited from 10 basis points from operating leverage versus the prior year.

Turning to Page 6, I'll provide you the bridge on EPS versus the prior year. In the fourth quarter, adjusted EPS increased 8% to $3.40. The year-over-year improvement was driven primarily by strong operational execution as well as the benefit from the preferred stock redemption. Interest expense was higher than the prior year due to the issuance of the 2033 notes, which funded the preferred equity redemption and a onetime adjustment to interest on taxes payable of approximately $10 million. In addition, the effective tax rate in the prior year period included several benefits from favorable adjustments, creating a tougher comparison. Versus our expectations heading into the quarter, nonoperating items were approximately $10 million higher due to the onetime interest expense that I just mentioned. There are also 2 unanticipated tax items in the quarter, but they netted to an immaterial impact.

For the full year, adjusted EPS increased 6% to $12.91. The key drivers were consistent with the fourth quarter, including the absence of the preferred dividend, favorable FX impact and a lower share count, all of which contributed positively to EPS growth. Contributions from operations were slightly negative year-over-year, reflecting pressure from lower gross margin. Interest and tax remained relatively stable contributors for the year.

I'll walk you through our business unit results, beginning with CSS on Slide 7. In the fourth quarter, CSS, again delivered very strong results, with organic sales up 14% and reported sales up 16% year-over-year. This growth was driven by continued strength in WESCO data center solutions where sales were up over 30%, driven by strength across our hyperscale customer base.

Enterprise network infrastructure also contributed to growth, with sales up low single digits over the prior quarter. Security sales were up low double digits, and including data center-related sales, the business grew mid-teens. Growth was driven by customers and accelerating the shift from analog to digital systems with AI-enabled data center deployments amplifying demand for our next-generation security solutions.

CSS backlog increased nearly 40%, ending the year at a record level and highlighting the continued strength of our data center business. Adjusted EBITDA for the CSS segment grew approximately 30% with adjusted EBITDA margin of 9.1%, up 90 basis points versus the prior year. This year-over-year expansion reflects higher gross margin and improved operating leverage on strong top line growth.

Gross margin was 21%, up 20 basis points year-over-year. Adjusted SG&A improved by 70 basis points to 11.9% of sales. For the full year, CSS reported sales were up 18% with organic sales up 17%.

Growth was driven by exceptionally strong demand in our WESCO data center solutions business, up over 50% for the year, along with solid growth in security. adjusted EBITDA margin expanded 50 basis points year-over-year, reflecting strong operating leverage on higher sales.

Turning to Slide 8. I want to take a moment to discuss the continued strength we're seeing in the broader data center market and WESCO's expanding role in supporting this growth. Customers continue to rely on WESCO and our supplier partners to meet their evolving requirements, and our capabilities now span an increasingly broad portion of the data center life cycle. From a total company perspective, data center sales were $4.3 billion for the full year, up approximately 50% and represented roughly 18% of WESCO 2025 sales. This growth was driven by strong performance of both -- across both gray space and white space environments, with CSS once again delivering the majority of the contribution.

WESCO's capabilities now support every major phase of the data center life cycle, from power and electrical distribution infrastructure, to advanced AI and compute environments to on-site services that support construction, commissioning and ongoing operations. This allows us to deliver value across the full investment cycle and to support our customers as their needs rapidly evolve.

Looking ahead, we expect this momentum to continue as investment in digital infrastructure accelerates. With our comprehensive capabilities and deep customer partnerships, WESCO is well positioned to capture additional share and support the next wave of data center growth.

Turning to Slide 9. This page highlights the breadth of WESCO's data center product, services and solutions offerings. Our capabilities span both gray space and white space, enabling us to serve hyperscale, multi-tenant, colocation and enterprise customers with a comprehensive portfolio. In the gray space, which represents roughly 20% of our total data center sales through our EES business, we provide the critical power, electrical, mechanical, automation and MRO products required to support the construction and operation of high-performance scalable facilities. The white space, representing approximately 80% of our overall data center sales through CSS, includes our next-generation connectivity and IT infrastructure portfolio.

Beyond products, our services offering spans the full life cycle of the data center. We support customers from early planning and design through installation, commissioning and integration, all the way to ongoing operations, modernization programs, managed services and ultimately decommissioning. This end-to-end capability allows us to help customers adapt quickly and execute at scale in a rapidly evolving environment. With our global ecosystem of suppliers and partners, WESCO provides a single coordinated source for the solutions required across the data center life cycle. We enable seamless execution across the globe to support customer time lines and project requirements.

Taken together, our combination of products, services and solutions, deep technical expertise positions well -- WESCO exceptionally well to continue capturing the strong secular growth in data center demand driven by cloud, AI and edge computing. Together, these capabilities position WESCO as a trusted end-to-end partner for the world's leading data center operators. We remain well aligned to support the significant long-term growth in this market.

Moving to Slide 10. For the fourth quarter, EES reported an organic sales were up 9%, driven by growth across construction, industrial and OEM and marking our third consecutive quarter of growth in these end markets. We are very pleased with the strong results in our EES segment as we exited the year. Construction sales were up low double digits in the fourth quarter supported by strong wire and cable demand and continued infrastructure project activity. Industrial sales were up low single digits year-over-year with notable strength in Canada. OEM sales increased mid-teens.

EES backlog was up 6% year-over-year, reflecting healthy underlying demand across the portfolio. EES adjusted EBITDA grew 16% versus the prior year, with adjusted EBITDA margin expanding 50 basis points to 8.5%. This improvement reflects higher sales, favorable gross margin, up 50 basis points year-over-year, and solid SG&A performance.

For the full year, reported sales were up 7%, with organic sales up 8%, led by strong OEM and construction growth and improving industrial performance. Full year adjusted EBITDA was up 3% and adjusted EBITDA margin was down 30 basis points, reflecting modest gross margin pressure, driven by project activity and product mix, primarily in the first half, which was partially offset by disciplined SG&A management.

Turning to Slide 11. For the fourth quarter, UBS reported and organic sales were up 3% year-over-year. Utility grew mid-single digits, driven by strong double-digit growth at IOU customers, including higher sales from grid services, partially offset by continued softness with public power customers. Broadband declined high single digits versus the prior year due to a difficult prior year comparison.

Growth within our IOU customer base returned in Q2 and has now continued for 3 straight quarters. As we've discussed throughout the year, we continue to see softness with our public power customers, driven by inventory normalization and competitive pressures. Consistent with our commentary last quarter, we continue to expect public power customers will return to sales growth by the end of 2026.

UBS backlog increased 23% year-over-year, supported by IOU project activity, and improving broadband trends, providing a strong setup for 2026. Adjusted EBITDA margin was down approximately 120 basis points year-over-year, primarily reflecting lower gross margin, driven by headwinds in public power. On a full year basis, reported sales in UBS declined 5% with organic sales down 1%. Utility was down low single digits over the prior year, driven primarily by lower public power activity. Broadband grew mid-single digits on continued network investments.

Full year EBITDA margin in UBS declined 90 basis points, primarily reflecting competitive pressures in the public power market. We expect stronger UBS results in 2026 driven by IOU customers and grid services applications as our utility customers respond to the rising power demand curve.

Turning to our grid services business on Slide 12. We want to provide you with additional insight on a growing part of our UBS business. Grid services provides end-to-end execution, technical depth and supply chain strength to help utilities and heavy power operators build, modernize and reliably power critical grid infrastructure. This business generated over $300 million of revenue in 2025 and grew at a mid-single-digit rate. In 2026, we expect growth to accelerate to double digits.

Our grid services team supports project across distribution, medium voltage, transmission and substation systems through a unified model that coordinates materials, logistics and engineering services. In distribution, we supply conduit, poles, protective equipment and other essentials needed to ensure reliable and resilient last mile power delivery.

In medium voltage, we provide power cable, connectivity and switching equipment, including pad-mount cabinets and turbination kits to help customers operate medium voltage systems safely and efficiently. In transmission, we deliver the critical components required to build, harden and modernize high-voltage networks, such as cable and conductor, insulators, poles and structures. And in substations, we provide high-voltage apparatus, steel structures, grounding systems, power and control cables and other equipment that enhance grid reliability and support growing electrification demands.

Behind these product offerings is a set of execution capabilities that enable us to deliver them reliably and at scale. Our program and project execution teams coordinate planning, scheduling and field execution to keep critical work on track, even amid industry-wide labor shortages and rising project complexity.

Our supply chain and materials management organization helps to ensure reliable material availability through centralized sourcing, staging, kitting and logistics to reduce scheduling risk for utilities, developers and data center operators. Our technical and field support team provide product application and design support, qualified resources to help manage complex project portfolios and in support of safe, efficient installation and startup across complex grid and large load [indiscernible]. Collectively, we believe these capabilities give WESCO a durable competitive edge, reflected in 4 core strengths that shape how we execute for our customers.

Our end-to-end model integrates program management, supply chain logistics and technical support into a single solution, reducing complexity, reducing handoffs and accelerating power readiness and timeliness for utilities, data centers and large load interconnects. Our scale and infrastructure provide reliable material availability, faster mobilization and stronger security certainty, advantages that materially improve project outcomes.

We bring comprehensive high- and medium-voltage capabilities, including apparatus management, prewired assemblies and specialized advisory services, enabling us to help deliver complex grid modernization programs in large load interconnects, and we execute with exceptional speed leveraging dedicated partners, proven logistics and staging processes.

Our grid services business plays a critical role in enabling power delivery readiness across the markets we serve, including data centers and digital infrastructure, emerging markets, renewables and electrification and utilities. In the data center market, specifically, these same capabilities come together in a powerful way to our holistic power to compute model. This begins at the grid connection where our UBS team enables high-capacity utility side power readiness. It continues through the building gray-space electrical infrastructure delivered through our EES business, and it concludes inside the white space, where our CSS business provides the network infrastructure, connectivity and compute-ready solutions that support cloud, enterprise and hyperscale environments.

Turning to Page 13. Let me wrap up our discussion of 2025 with some comments on free cash flow. For the full year, we delivered $54 million of free cash flow. As a reminder, our distribution model naturally requires investment in working capital, particularly in periods of elevated activity and strong sales growth. Fourth quarter results reflect higher accounts receivable as well as a meaningful inventory build to support this growth. As shown in the waterfall chart on the left, accounts receivable and inventory increased during the year as we continue to drive organic sales growth well ahead of our midterm Investor Day target of 3% to 5%.

In 2025, organic sales were up 9%.

Turning to the right side of the slide, net working capital intensity remained under control. Net working capital as a percentage of sales was 20.1% compared to 19.8% in 2024 and 21.4% in 2023. While the year-over-year comparison shows a modest increase, this movement was largely attributable to higher accounts receivable levels.

Looking ahead to 2026, we expect net working capital to grow at roughly half the rate of sales, which will further reduce net working capital as a percentage of sales and support stronger free cash flow conversion.

Moving to Slide 14 and our 2026 outlook. Let me begin with the growth drivers by strategic business unit and the individual operating groups. As John mentioned, we expect reported sales growth to be in the range of 5% to 8% in 2026, with organic sales between 4% and 7%. Starting with CSS. Which now represents approximately 39% of WESCO's revenue, we expect 2026 sales to be up high single digits plus. Data center remains the primary growth driver, and as highlighted on this slide, we expect data center sales to be up mid-teens in 2026. We also expect security to contribute to growth, supported by continued healthy end market demand.

In enterprise network infrastructure, we expect improvement versus 2025 as market conditions stabilize and order activity continues to improve.

Looking at our EES segment, we expect 2026 sales to be up mid-single digits. The improvement is expected to be broad-based across the segment, with construction, industrial and OEM each positioned for growth as demand trends continue to improve and project activity remains strong, driven by the secular growth trends.

Lastly, looking at UBS, we expect 2026 sales to be up low to mid-single digits. This reflects an improvement from the headwinds we experienced in 2025 with better momentum in utility, particularly with investor-owned utilities, along with double-digit growth in grid services. We expect sales to public power customers will return to growth by the end of the year, and we expect continued solid performance in broadband. And as we've discussed previously, the long-term fundamentals remain attractive, given the significant underlying demand for grid modernization investment and increased generation, transmission and distribution spending to support rising power needs.

Moving to Page 15. Let me walk you through the details of our outlook for 2026. Starting at the top of the page, as mentioned, our full year 2026 outlook calls for reported sales growth of 5% to 8%, with organic sales up 4% to 7%. We currently anticipate a 1 point benefit from foreign exchange with no impact from M&A or workdays. Our outlook reflects the continued strength we are seeing in most end markets, highlighted by robust data center demand and supported by improving trends across electrification and other project-related activity.

Looking at the sales drivers, our outlook includes approximately 2 to 5 points of volume and 2 points of carryover pricing. As a reminder, our outlook does not include the impact of future pricing actions, including tariffs. This is consistent with our past practice, given the timing lag between supplier notifications and revenue realization. Q4 price increase notifications were up over 125% in count year-over-year, with the average increase in the mid-single-digit range. Through January, we continue to field a higher-than-average number of price increase notifications with the average increase in the mid-single-digit range.

We expect adjusted EBITDA margin to be in the range of 6.6% to 7%. The midpoint of this range reflects progress on operating leverage and gross margin execution balanced with ongoing investments in our technology-enabled business transformation and the mix dynamics inherent in large project activity. We continue to see opportunities to expand margins to include pricing discipline better cost leverage and the benefits of scale as volume grows.

Moving down the page to EPS. Our outlook range for adjusted diluted EPS is $14.50 to $16.50, a growth rate of 20% at the midpoint, driven primarily by improved operating performance. We have also provided key assumptions underlying our outlook. Consistent with historical results, cloud computing amortization and stock compensation are recognized as SG&A expense for the calculation of adjusted EPS and not included in adjusted EBITDA.

Lastly, turning to free cash flow. We expect to deliver free cash flow of $500 million to $800 million in 2026. This reflects our expectation for improved cash generation versus 2025 as we continue to make progress on working capital initiatives with working capital growth at approximately half the rate of sales in 2026.

Regarding capital allocation, our top priority remains investing organically in the business to drive growth and operational efficiency, including continued progress on our tech-enabled transformation. After funding these organic investments, we will focus on reducing debt. Beyond that, we will allocate remaining free cash flow to the highest return opportunities, including disciplined and opportunistic share repurchases to offset annual equity dilution and selective strategic M&A that expands our capabilities in high-growth end markets.

Finally, consistent with our commitment to shareholder returns, we plan to increase our annual common stock dividend by more than 10% to $2 per share or approximately $100 million on an annualized basis.

Turning to Slide 16. This slide shows the year-over-year monthly and quarterly sales growth comparisons over the past year, along with our expectations for the first quarter. You can see the continued momentum in our business through 2025, with steady improvement across the year and a strong finish in the fourth quarter. As highlighted, preliminary January sales per workday are up approximately 15%, reflecting continued positive demand trends across all business units, with growth rates by SBU similar to what was experienced in Q4. Storm-related activity had an immaterial, albeit negative impact to sales in January, which we expect to recover later the quarter -- in the quarter.

For the first quarter, we expect reported sales to be up high single digits with growth across all 3 business units. Recall that January is the lowest revenue month for the quarter and the year, and that marks the highest revenue month in the quarter. Organic sales are expected to be up a similar amount as there is no meaningful difference in workdays year-over-year and FX impacts remain modest.

We expect adjusted EBITDA margin to be up versus the prior year, driven by a combination of improved gross margin and operating leverage on the higher sales growth rate.

In line with historical seasonality, Q1 sales are expected to be down low single digits sequentially. In addition, we experienced a reset in benefits costs and payroll taxes in Q1 versus Q4, which drives slightly higher costs sequentially.

One last item to note is that the expected tax rate for the first quarter is approximately 25%. Historically, we see a favorable tax rate in Q1 versus the balance of the year.

Moving to Slide 17. We've covered a lot of material this morning, so let me briefly recap the key points before opening the call to your questions. We closed 2025 with strong top line performance, driven by exceptional data center growth and strong results across EES, CSS and improving trends in UBS.

While free cash flow came in below expectations, we are acting decisively and we expect meaningful improvement in 2026 as working capital initiatives take hold.

Looking ahead, we entered the year with record backlog, healthy demand across our most attractive end markets, and a 2026 outlook that calls for above-market growth, margin expansion and stronger cash generation.

With that, operator, we can open the call to your questions.

[Operator Instructions] Our first question comes from David Manthey with Baird.

My first question is on the price that you mentioned. You've talked about this before. I'm a little unclear on why you describe it in terms of the number of increased letters, and you said the average increase is mid-single digits, but you're not including anything in the outlook here. So I just -- if you could talk us through that. But more importantly, if you should happen to get a few points of incremental price in 2026, with -- and this is -- it's a hypothetical, of course. But would that take you to the high end of the EBITDA margin guidance range alone just if you picked up a couple of points of price? Could you just walk us through that?

Yes, certainly. So this is -- the way that we've outlined 2026 is very consistent with how we've always provided you with our future-looking projection. Given the uncertainty of when the price increases that are issued to us by our suppliers. When they will actually hit our revenue, we don't include it. We are highlighting the number of increases, just to provide you with some context around the inflationary environment that we're dealing with. And many of our suppliers have historically taken 1, maybe 2 price increases a year, we're seeing the number of price increases announced by them accelerate. And you're seeing what used to be a low single-digit announced price increase has now been trending up to mid-single digits. It's moderated a little bit here in the month of January, but we're just providing that as a perspective as to what the current market environment is dealing with.

From our perspective, if we are seeing those price increases continue to get pushed through from our suppliers, and you're seeing the market accept those higher prices, you would see some transitory benefit on our gross margin. So that would put us -- give us a couple of extra basis points on the gross margin line. And then as our sales increase behind those price increases, we should get better operating leverage. So there is some benefit of these price increases that do come through. But I will caution everyone that last year at this time, we were talking the same item.

So we did not see the benefit of that mid- to high single-digit price increase notification translate through to our results. We only saw a 2% benefit for the full year 2025 on pricing. And a point of that was commodity driven. So that's why we don't include it in our outlook. But if it does come to fruition, we're prepared to pass it through and ensure that we get the margin capture behind it.

That's a great explanation, Dave. Second, as I look at contribution margins here in the fourth quarter, I know it's maybe a little bit wrong to look at just 1 quarter in a vacuum. But CSS and EES came in around 14.5% year-over-year, which looks great. But the UBS is what dragged things down overall. And so the question is, you outlined a little bit about the complexion of the year and what UBS should look like. I just want to make sure that what's going on in UBS right now is a solvable issue in that this is just mix of business or transitory competitive situation. Could you talk about that? Or are the bad contracts in here that you can walk away from, can you just talk us through sort of what that looks like through '26?

Yes. Dave. The -- it's really driven exclusively in utility, the utility portion of UBS by public power customers. So this is an extension of what's been occurring. And we've talked about the dynamics of the public power, that value chain versus investor on utilities for a number of quarters in a row now. Inventories still normalizing, so they're still running with excess inventories at the public power customer level and pricing is very competitive. What we're seeing is this pricing challenge, which translates to a margin challenge, and we did take a significant -- saw a significant impact in utility margins due to public power specifically with respect to transformers that product category and a little bit of wire and cable, but principally transformers.

This did not affect overall kind of line construction materials. So it's a really important point. In terms of your other part of your question, how do we see this, does it extend? We're very clear that our outlook for 2026 expects to return to growth in public power by year-end. So I'll highlight that IOUs are a bright spot. They have improving momentum. We have 3 quarters in a row now of IOU growth, and that IOU growth has been picking up. If you look at what's happened in Q2 of last year, grew low single digits, Q3, high single digits Q4 was up double digits. And so we've got a nice momentum vector with investor-owned utilities.

Grid services that we highlighted in this earnings release, it's important. Now we did talk about it at first at Investor Day, but that is a an aggressively growing piece of our utility business, and that was up single digit growth in 2025, but double-digit growth in the fourth quarter. Very important point. And utility backlog was up 23% at year-end, which provides a strong setup for 2026. So here's the bottom line, Dave, on the second part of your question. We do expect sales growth and margin expansion for UBS in 2026, and that's built into our outlook.

Our next question comes from Samuel Darkatsh with Raymond James.

Dave, best wishes on your next chapter. It's been absolutely terrific working with you over the past decade. Just a terrific stuff. So a couple of just clarification questions, if I could. You're guiding for data center growth mid-teens. Can you give a sense of what you're anticipating first half versus second half? Or what kind of exit rate in fiscal '26 you're seeing at a data center within the guide?

Yes, Sam, the comps were pretty tough back in the first half of 2025. So in terms of our activity levels, we see relatively consistent activity levels by quarter on a dollars basis in 2026, but against the comp that was continuing to increase throughout the year. So we've got a -- we were up 70% in Q1 of 2025. So again, the dollars have continued to increase sequentially through 2025. We would expect that the dollars will be relatively consistent by quarter in 2026.

It is a project-based business, so there's always some things that could move a week or 2 within a quarter, but generally, that's how we're viewing the opportunity in '26.

So January is like running that mid-teens spend?

We would comment that our results from the fourth quarter seem to have continued about the same way from a growth perspective by business unit. And so...

In January. Let's be clear, in January, Sam.

Are up 15% per workday in January. The mix of that sales growth is consistent with our fourth quarter.

Got you. My second question, and I apologize, I clicked off at a point during the call. So if you mentioned this, I apologize. You obviously missed the fourth quarter free cash flow expectations. It sounded like it was primarily on the receivables side. You're guiding for only roughly 10% free cash flow of net income in '26. I would have thought that with the timing of the receivables and maybe the improving vendor lead times that free cash flow might have been above net income for '26. Can you help reconcile perhaps some of those areas, Dave?

Yes, certainly. And so you're right, the fourth quarter free cash flow was impacted primarily by a higher receivables balance, just given the trends by month within the fourth quarter of '25. We also had a higher inventory balance than we were anticipating. As we think about the free cash flow generation, we've given you a range of $500 million to $800 million. That does include some of that carryover benefit of the receivables that we are collecting here in Q1, but the other thing that we would highlight is that 100% historical free cash flow generation generally occurs when you're in that 3% to 5% organic growth range.

And so while we do anticipate that we will have in further investments in working capital to support what we provided you as an organic sales range of 4% to 7%, we do see the opportunity to better collecting cash in 2026. So from our perspective, this is the right view to start the year with on a free cash flow basis, given the continued strength in organic sales and what we're anticipating in terms of sales by quarter in 2026.

Our next question comes from Guy Hardwick with Barclays.

It was good to see the pickup in the order book at EES. So just wondering if you could comment on just the order book trends by end markets and particularly if you excluded the data center business?

All 3 of the businesses grew their backlog in Q4. So that's -- it's a really important point. And so -- and you should really think about that in the backdrop of, over the longer term, normal seasonality we would not have expanding backlog or growing backlog in the fourth quarter. And so positive momentum vector is the answer. CSS obviously, was the strongest of the 3 with a backlog of 40% at a record level. As we said, UBS is up 23%. EES grew as well. I will say what's really encouraging with EES is just the overall momentum vector. When you're looking at opportunity pipeline, the bid activity level, plus backlog, plus the increased sales growth rate, as we move throughout in 2025 and particularly the second half, it really kicked into gear. And so -- and I'll remind you, we got a new EES leader who joined in the third quarter, and so off to absolutely a terrific start as evidenced by the strong Q3 and even stronger Q4 results.

And what's really encouraging is we're getting the operating cost leverage with EES plus gross margin expansion in Q4. Same with CSS. We're getting the operating cost leverage plus the gross margin expansion in Q4.

UBS, we already talked about those drivers, but I'm very bullish on UBS' sales and profit expansion opportunities in 2026.

Our next question comes from Deane Dray with RBC Capital Markets.

I also will add my thanks to Dave and congratulations.

Thank you, Dean.

Thanks, Dean.

Maybe we can start with some further clarification on the UBS shortfall. Because last quarter, we there was a sense that it had turned the corner broadly within the segment on the public power side, but it looks like that recovery is now getting pushed into year-end, and you referenced competitive pressure. So how much of a dynamic is that in, or is it really core demand?

And then just broadly, before you answer that, just the idea is, you've got IOUs doing better. So maybe just educate us, if that is moving, how much confidence does that give you about the public power side? Is there a lead? Is there a lag? How correlated are they? So a lot to unpack there, but maybe we can start there.

Yes. So Dean, look, the public power challenges were all throughout 2025, and in fact, in 2024 as well. And I'll just take a few seconds and just we've talked through the dynamic of what the pandemic did to the utility value chain and that IOUs benefited first versus public power. So I'm not going to go back through that, but we've gone through that a few times. That's important to understand. The momentum improvement we experienced in 2025 started in the second quarter, and it was with the return to growth of IOUs in that quarter, not public power. Then as we moved through Q3, IOUs stepped up their growth rate to high single digits versus prior year, but public power still remained significantly challenged. And that challenge just extended and continued throughout Q4. And it's a combination of 2 things. One is there's still an excess inventory position at the public power customer level on specific categories, principally being transformers and distribution transformers, I'll call them.

And so that's coupled with the fact that they have that excess inventory position, any RFPs they're putting out that kind of do some minimal stock replenishment is under extreme competitive bidding pressures. So we experienced that negative mix effect on the category of transformers, principally to public power. It was -- and it occurred throughout the year, but it was also continued in Q4.

Look, I think the public power market has -- still has the same challenges as we started this year. And as Dave mentioned, our January sales results were really encouraged with the plus 15%. That's a really terrific start of the year given December's close. And the mix of the businesses in terms of the all 3 are growing, it's similar to Q4. But public power has not returned to growth. We're now stating that we expect that the return to growth will be not through the end of the year. But the very good news is, and this is why it's a critical point, we included grid services in this deck. I know it's a lot to unpack. And we had a lot of script commentary around grid services. I'll remind you that we did tee that up back at Investor Day in 2024, has been an increasing part of our business. It grew mid-single digits last year, double digits in Q4. It's a $300-plus million business that we built organically, not via acquisition. This thing is really kicking into gear. So when you start thinking about utility and UBS in 2026, particularly if IOUs was, 3 quarters in a row, a very positive momentum, we expect IOUs to carry the day. Public power will remain -- public power will remain challenged. That is our view for 2026, but grid service is increasingly kicking in and providing strong growth because we've got an outlook for grid services of double-digit growth for 2026. So it was a lot to unpack. Hopefully, that helps kind of stitch it together.

John, that was really helpful. I appreciate that. And just as a follow-up question, there's been so much focus across the electrical equipment sector on these North America mega projects. There's over 800 that are over $1 billion of spending. Just -- have you all looked at what that opportunity is? How many projects of the 15% that have started, do you think you're engaged in? Is that part of your backlog and visibility?

Yes, great question, Dean. First of all, we're aware of all of them. I think we've got a rigorous process wrapped around the front end of our opportunity pipeline. We've got some terrific tools in place. We scrape all public data. We obviously have the relationships with our customers that we're leveraging. That's end user customers where we have particular strength because the percentage of our customer as end user is disproportionately higher than any of our competitors, but also where we serve big contractors and all the way up to global EPCs. So that process I'll call it, the front end of the opportunity pipeline is something we've spent a lot of time and attention on, it's robust, it's operational. We don't size our opportunity pipeline externally, but it's been growing at a very large clip, and it's an all-time record level. And each of the 3 SBUs has their piece of the opportunity pipeline. We've got a rigorous process that manages those opportunities because for every opportunity, we're looking for the cross-sell and the One WESCO complete what's the total on WESCO scope for every opportunity. And obviously, what's in that pipeline is the mega project. So we've not provided further detail, Dean, in terms of what percent we've won thus far, but I will remind all of investors that remember, upon announcement of a mega project, these are longer cycle time in general. And depending on the package that we're bidding, it comes into play at different parts along the construction cycle.

So that, to me, is -- that's part of my bullishness on the future growth trajectory that we'll be able to capture and continue to deliver again for WESCO because it is what feeds this secular growth trend of the infrastructure build-out, and it's obviously driven by heavy reshoring and nearshoring as well. So an outstanding question, Dean, but it's really one of the key elements that gives us great confidence about the rising demand curve for our business.

Our next question comes from Nigel Coe with Wolfe Research.

So just on the SG&A, obviously, up, I think, by 11% year-over-year in the fourth quarter. You called out a long list of factors there. So maybe just talk about what caused that? And were these year-end accruals? And then just maybe break out the 30 basis points in 2026. You called out gross margin expansion and SG&A leverage. I'd be curious how that looks between the 2 categories?

Yes, certainly. So Nigel, let me start on the SG&A front versus the prior year in the quarter. This is primarily a base period issue. Recall that we talked about as we came into 2026 -- or I'm sorry, 2025 that we would need to restore incentive compensation. In the fourth quarter of 2024, we had much lower spending on incentive comp, just given the trajectory of our sales and EBITDA relative to our plan. in 2025, the incentive compensation expense was more typical for the fourth quarter. So that was really the big driver of the year-over-year change in SG&A was really driven by incentive compensation.

Okay. And then just the January 15% growth is obviously exceptional high singles for the quarter. I mean I understand January is a low contribution for the quarter. But is it more considers I do think January is your toughest kind of comp month in the quarter -- is it just conservatism? Or was there anything lumpy in January that you called out?

January is always hard for us to pull a trend out of because we have so much activity during the month of December. A lot of it based on where we finished December, we thought that we would be off to a slower start in January. Then when you add on top of that, the issues with the weather, so we were pleasantly surprised by the strength of the business and the sales that we saw through the month of January. Again, we think that we've got the right way of thinking about this. I mean, February, we generally see obviously fewer workdays, but then March, we expect to see a recovery. So there's -- from our perspective, the right way to think about this is there could be some activity that occurred in January that was carryover from December that we didn't get out the door. But we think that thinking -- a high single-digit growth rate on reported sales is the way that we're viewing the first quarter.

Our final question today comes from Tommy Moll with Stephens.

John, I want to start on data centers, a heck of a year you had in 2025 there and you're now run rating well north of $1 billion in sales a quarter. So I want to see if you can situate us on the opportunity from here? Because I hear Dave talking about relatively consistent dollars across the quarters in 2016. I don't think you want the takeaway today to be that we've now peaked on run rate data center sales, but arguably, that's embedded in the guidance. So what would we need to see to drive another step change higher potentially in data center?

Thanks, Tommy. No, look, I'll -- Dave is not saying that we peaked with data centers, not even closed. I'll just -- I'll take you back to -- this is actually important. I'll take you back to, remember, even it wasn't a few quarters ago, it was actually 2 years ago when some of our supplier partners started to see the step-up in growth related to data centers, and they were seeing it in WESCO was not yet. And remember, we had a lot of questions from a number of investors on -- in our earnings calls and at conferences, why aren't you seeing the growth yet. And we were very clear that the limited number of suppliers that are in the public domain where you can see the results, and we all know who we're talking about, that this was direct ship parts to their business, and those packages went in at the very early stage of the total life cycle of the construction project for a new data center. And we said we are highly confident that we will see that growth rate, but it doesn't come 1 or 2 quarters later, it's 3, 4, 5, 6 quarters later. We clearly have seen that. And I would argue that the growth rates we're seeing are equal to, if not above market. So that time lag still occurs, Tommy, and it's an important point. It's why I'm so bullish over the mid- to long term. And I don't think we're anywhere near, not even remotely close to seeing a peak in the cycle for AI-driven data centers.

And with that time lag, that serves us exceptionally well. Second point I'll make is, look, we're engaged with our customers. We're getting feedback from them. And in some cases, we're getting longer and longer looks into their future plans because we're providing kind of a single one-stop shop that manage their global deployments, which is a great place to be in the value chain. But as they're driving this growth, their forecasts have been increasing. And you're all seeing that in the form of headlines of increased capital spending. So this is just -- this is -- I would characterize this as a great problem to have. We have a rising power demand curve driven by a rising set of capital investments around AI-driven data centers. Go back and look at the forecast for that, each and every month, it's been getting increased. So look, some headlines came out earlier this week in terms of total spending across the magnificent 7, and it resulted in a forecast that stepped up again. So I think we're chasing this rising power demand curve, we're exceptionally well positioned, and we think will disproportionately benefit. With all that said, it's very hard to forecast multiple quarters out when things are inflecting up.

So look, I think we're off to a great start. We manage 2025 well we gained momentum throughout the year, and we took data center -- our expectation for data centers up as we move through the year. Again, the market supported that because of the rather rising demand curve. So we think this is an appropriate guide to start the year with. But hopefully, that gives you a little sense.

Absolutely. As a follow-up, I wanted to ask about the free cash flow and specifically working capital comments you gave for 2026. Can you just give us an example or 2 of some of the initiatives that are in flight to improve that working capital in the next year?

Yes. Certainly, Tommy. We have continued to drive changes to digital applications that we are using to better plan inventory, working directly through a sales and inventory and operations planning process. We also have some various incentives, which are aligned to management and management incentives on our better management of accounts receivable. So that is another initiative. So not only do we want to work it from the inventory side and how we better manage our inventory days. And we did make progress on inventory days through the first 3 quarters. We saw a slight pop-up in the fourth quarter on our inventory days, and we had the same issue on receivables. So -- but we are incenting our team to better manage both inventory and receivables in 2026. So slight changes to the program that we had in 2025 from an incentive perspective.

Tommy, that's a very high priority for us, and we've got that -- we're driving that across the entire enterprise.

Well, thank you all. I think we've addressed your questions today. I know we have a number of follow-up calls scheduled, and we look forward to engaging with you on those. So I'll bring the call to a close. Thank you all for your support. It's very much appreciated. And I'll remind you, we expect to announce our second quarter earnings on Thursday, April 30, 2026. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Okay. We have the thumbs up. Thanks for joining us, everyone. Here in the Ritz Ballroom for the 55th Annual Baird Global Industrial Conference. My name is Dave Manthey. I'm the Senior Industrial Distribution analyst for Baird.

Great to have WESCO with us here today. And to speak with us about the company, we have Scott Gaffner, who's the Senior Vice President of Investor Relations; and John Engel, Chairman, President and CEO of WESCO. I'm going to ask John to give us a brief overview, and then we'll go right into Q&A. Large group today. So if you have any questions, you can obviously send them up to the iPad, which is [email protected], and I will field them from here or you can raise your hand and we'll call on you as well.

So with that, I will turn it over to John for a brief introduction.

Dave, thank you. Always a pleasure to be at your conference. We've had terrific meetings throughout the day. I'm only going to stay on this page, make a few opening comments and go to Q&A. So hopefully, you all know who WESCO is. So why invest in WESCO? It's a substantial value creation opportunity we have in front of us. We're outperforming the market by a good margin. We have accelerating business momentum vector and improved results, which I'll talk about.

And I think most importantly, we did a transformational combination with Anixter 5 years ago, took 2 leaders in our industry, put them together, creating the undisputed leader with 3 big businesses; electrical, data communications and IP security and utility and broadband. I think we're finally starting to see the beginning of good evidence on getting a multiple expansion as a result of putting these companies together, which is encouraging.

Our momentum vector is again very strong. We grew 6% organically in Q1, 7% in Q2, 12% organically in Q3. We just announced our results a couple of weeks ago. We have 3 big strong businesses, leaders in their own right. Our CSS business is Communications and Security Solutions, an undisputed global leader in Datacom and IP security. 40% of CSS' sales are data centers, the white space of the data centers, that grew 18% in Q3. Our Electrical and Electronic Solutions business, our EES business also has a global set of capabilities, undisputed market leader in core electrical distribution in U.S. and Canada down into Mexico. That grew 12% in Q3. I repeat 12%.

And in our last business, Utility and Broadband Solutions, again, absolutely undisputed leadership position in utility and broadband, especially utility with Anixter and WESCO, we brought together 1 and 2 to create the undisputed leader, 3 was a distant third. That grew 3% in the quarter. But I will tell you, and we may get into this a bit, as I look at our utility business, and this is an electric utility, power utility business, I look out mid-to-long term, it is an absolutely outstanding growth opportunities in that business. That industry historically has been cyclical, and I believe it shifted to secular growth fundamentally, and I know we can talk about that.

So our investor thesis is laid out on this page. We are the market leader. We think we're best positioned because of this portfolio that right now, none of our competitors have, the core electrical, electrification trend, the core Datacom and IP security, AI-driven data centers plus an amazing security business and our Utility and Broadband Solutions, so power generation, reliability down through the powertrain into the grid. And we're uniquely, I think, positioned because 85% of our sales are in U.S. and Canada to benefit from reshoring, nearshoring and the industrialization of U.S. -- reindustrialization of the U.S.

So very well positioned to drive outsized growth. We're committed to grow above the market and do that consistently. We got great cash flow generation across all phases of the economic cycle. 25% of our cash flow, we cordon off and focus on supporting our common dividend. We've raised it 10% every year since we put it in place several years ago and as well as doing buybacks to offset any management equity award dilution. The remaining 75% provides great optionality to do acquisitions, share buyback as well as work our leverage ratio or debt down.

And then finally, the third thing is we're in the midst of a true enterprise-wide digital transformation. I know every company talks about digital. I'm sure we'll talk about that today. But we embarked upon this journey 6 months post the Anixter acquisition. So it was in the beginning part of 2021. We closed Anixter in June of 2020. This is an enterprise-wide digital transformation of the entire enterprise. We're now ranked 200 on the Fortune 500 list, global company in 55 countries around the world. When we're done, brand-new tech stack, every system we're using to run this Fortune 200 company will be new. And this AI-enabled tech stack will be sitting on top of and exercising and accessing and leveraging one world-class data lake that houses all our proverbial big data, not just the WESCO big data, but our pieces of our customers and supplier data sets as well.

So the greatest asset a distributor has, and we're a business-to-business distributor. It's not on our balance sheet, is their big data. And so this architecturally will be positioned to unlock the power of our big data. This is not an ERP transition. This is not SAP or Oracle. This is very much a tech stack that looks like the tech companies, what they've built and how they operate. And again, the power that they have is the power of their big data. So again, pleasure to be here.

And with that, Dave, I'll turn it over to you to moderate.

Thank you, everybody. Drive safely. Everyone wants to talk about data centers. The data center growth has been phenomenal at WESCO. I think what was most interesting in the most recent quarter, and again, a reminder, CSS, roughly 1/3 of the overall business with data center now mid-teens.

For CSS, 40% -- of CSS. So for the company, total company, we were 19% of our Q3 sales were data centers, 17% on a trailing 12-month basis. We did $6.2 billion in sales in Q3, the first time we eclipsed $6 billion in a quarter.

It's really phenomenal. When I think about Anixter pre-acquisition and years prior to that being a premise cabling company transforming into this, just it's been phenomenal. But what I thought was interesting is in the last quarter, you -- there was obviously a lot of optimism around it. But you talked a lot about this time to power for data center applications and sort of that 3 to 5-year outlook, the lags in construction and so forth. I think there's a lot of handwringing out in the market today about like what happens with the cycle? Are we overbuilt, et cetera. Could you talk a little bit about where WESCO sits, what things look like over the next 3 to 5 years and why you're so optimistic that this goes up?

For us, exceptionally bright. I think everything that's catching the headlines today is the new data center builds, and these are larger and a more sufficient scale than ever has existed, whether it's 800 megawatts a gigawatt, 1.2 gigawatts. And it's obviously -- they're being built to support not just GenAI, but Agentic AI applications. And so we serve the hyperscaler data center companies direct as customers directly, not through an intermediary, not through a contractor or integrator. We serve the multi-tenant data centers, the MTDC customers directly.

We serve also enterprise class customers directly, like big banks have their own captive data center. Anixter has been doing data center business for more -- for 2 decades, quite frankly, more on the enterprise class side. But with the growth of the hyperscalers, it's been a big growth driver in MTDCs for us as well. We have an unmatched set of capabilities in the white space, which I'll call everything that's under HVAC control. That's Anixter's deep roots.

And our EES business is the gray space and our utility business is the power. So we have ability to serve across all 3. The white space, in particular, is where you're seeing tremendous amounts of design changes and evolution with high-powered compute capabilities being built in to support the GenAI and Agentic AI. And so what our unique capabilities are is none of our competitors have the white space for distribution. There's multiple gray space distribution players. And none of them, none, not a single player in the market other than us has the global execution capability. We're in 55 countries around the world. So we are working with our end-user hyperscaler customers and MTDCs to manage the supply chain and global deployment of their data centers.

And you can imagine, pick any one of the hyperscalers, I won't mention them by name, you know who they are, the Magnificent 7 Plus. They are looking 3 to 4 years out on what their global data center deployments are. We have insight into those schedules. We are working with them because they -- we are the one throat to choke on supply chain management and project deployment, again, centered around with the strength in the white space, and no one has that capability today.

So I think as far as we can see, Dave, it's exceptionally bright. The one thing I will introduce, which may be a little different wrinkle is -- all this -- what's capturing all the headlines is the new data center build. Again, very exciting. These are massive, very complex. But to really unlock the power of AI at a given company, we're going to need a lot more data center capacity that you cannot meet with just greenfield builds, mathematically impossible. So what does that mean? I think you're going to see a massive retrofit renovation upgrade market for data centers. And why is that important? The half-life of a data center before AI applications was 4 years. When you upgrade a data center pre-AI, you didn't change any the electrical, you just changed what's in the white space and the ROI was good. After 4 years, just Moore's Law has not reached its limits, there was good payback. AI is going to shorten that cycle.

So I think what you're going to find is you just look around the world at existing data center capacity, you're going to see a significant amount of growth coming from just -- let's upgrade and retrofit and renovate those to provide more data center compute capacity. That's what's going to support even further acceleration of AI applications. Again, you're not reading or seeing about -- seeing any of that yet. And the reason you're not is because the hyperscalers and MTDCs with the new builds are squeezing out all the capacity.

But I know there's all this talk about, oh my gosh, this is a bubble. I've seen no indications of that in the short to midterm. Again, the growth opportunities for AI long-term are staggering. I think what will kick in, though, as the new builds start to kind of slow down a bit and peak, you're going to see this retrofit renovation market really kick in. It's analogous to the non-resi construction market, where you got the new construction and retrofit renovation and upgrade for certain types of equipment.

It's very interesting. Thanks for sharing that. Let's talk about the EES business. As you mentioned, strong growth in the quarter, I think was surprising to a lot of folks. And talk about if this is a cyclical turn that you're seeing, some of it driven by maybe talk about the gray space as well. But just in general, EES, seeing that kind of strength is encouraging as it relates to just commercial industrial activity in general.

It exceeded our expectations. This is the deep roots of WESCO as a distributor, we're in electrical distribution and Anixter had wire and cable, marry this together, it's a complete electrical solution. We grew 12% in EES in the quarter. It's the fourth quarter in a row of higher growth rates successively. So we got momentum vector there.

What's interesting is we gave a new disclosure this quarter. I said 40% of CSS' sales were data center, 6% of EES' sales were data centers. So even if you strip data center out, it still grew double digits, which is really encouraging. It's basically got 3 businesses in it. It's a construction business, an industrial business and an OEM value-added distribution business. Construction grew mid-teens, and that includes data centers. Industrial grew mid to high single digits, really interesting because a lot of other industrial players aren't seeing that kind of growth. And OEM, which is really -- think of it as a value-added assemblies, it's more of the direct material stream, whereas industrial is indirect materials and capital projects. But it's -- for WESCO, it's always been a good leading indicator of industrial by a few quarters. That grew mid-teens.

So we had construction and OEM at mid-teens, and we had industrial in kind of mid-single-digit plus range. We were really pleased that all 3 parts of the business grew. And so I think we haven't given a guidance or full outlook for 2026 yet. We gave a little bit of a framework. And part of that was that we see electrical strengthening. Now to be fair, I'm not saying the market grew that. I think we do -- there's enough data points out there we can say with great confidence we significantly outperformed the market with our EES business.

Yes. That's great to hear. I mean one of the themes that we've heard -- I've heard from investors here has been that [indiscernible] stable kind of markets in a lot of cases. We heard some of the core industrial companies say that the market is stable, which sounds kind of pretty lackluster. This sounds a little more exciting than that. And with those leading indicators looking better, gaining more share, mid-single-digit growth or better in that core electrical segment, it's certainly encouraging.

Yes. I think -- and I think Dave, and you know the company exceptionally well over a long period of time. Our mix is really helping us. I do think that the OEM business is the direct material stream, but it's industrial companies that are building stuff and building stuff on U.S. soil. So this reshoring secular trend feeds into that a bit. Clearly, that's secular, I think. Our industrial business is an MRO and capital projects business, direct with end-user customers, not through contractors. So where we have these end-user relationships, I think there's been a lot of supply chain reengineering and re-architecting going on behind the scenes post pandemic. You don't read a lot about it. Companies don't talk a lot about it, but there's a clear trend to kind of reengineer supply chains to make them shorter, more efficient, that feeds in nearshoring, reshoring kind of secular trend.

And in construction, we saw decent -- really decent results. Again, the mid-teens growth, but data centers helps with that. But still, it did exceed our expectations. Now with that said, we had improving growth rates in Q1 and Q2 as well. So we're getting an improving momentum vector, but it did outperform a bit versus what we thought.

Yes. Sounds good. And then finally, let's -- I want to touch on when you were talking about UBS, the utility business, you said that there are these elements that are turning secular as you see it. Could you talk about what those trends are?

Yes. I think it's all things power. Total electricity demand in the U.S. in 2024 was flat to 2007. Think about that. How could you have flat electricity demand over a 17-year period. Last time I checked, GDP wasn't flatter for 17 years.

More efficient.

It's all more efficient everything. If you look at the power demand curve 3, 5, 7, 10 years out from now, no way, you have a rising power demand curve. Everyone talks about data centers, rightly so. Data centers in 2024 consume 25 gigawatts in total across the U.S. There's all kinds of studies out there, but I'll give you a reasonable middle of the road. It will be 80 gigawatts in 2030. That alone, 1 gigawatt of additional generation is one brand-new nuclear power plant. So that's just data centers. Think about all the other infrastructure projects that are underway, the so-called mega projects. When is the last time we built a wafer fab, semiconductor wafer fab plant in the U.S., decades ago.

There's numerous ones underway now because how much power they demand. What I'm telling you is, for my entire life, utility has been a cyclical industry. It's GDP, plus or minus a small amount. 3, 5, 7, 10 years plus, no way. It is secular growth. It has to be -- if it's not, all this other stuff we're talking about will not happen. It's physics. We need that additional energy. It must be produced.

So I think the utilities now -- and again, we are, by far, the market share leading player in U.S. and Canada. We serve them direct. These investor-owned utilities, municipals, co-ops, 90% of our utility customer base is direct end-user customers, not contractors. So we have direct access. They're majorly challenged now because they could predict and plan their businesses with 3, 5-year time frames and had not much volatility. And now the demand and the demand curves they're getting calls up, hey, I need 700, 800 megawatts in this ZIP code. what? It's not like they have an extra gigawatt or [indiscernible] round of excess capacity.

So I just think this is a phenomenal opportunity for all of us. But make no mistake about it. For all this infrastructure build-out, I think there's 3 big constraints. It's power. There's still long lead times on certain equipment and it's skilled trades, the trade labor. Power, though, is the big determinant in my opinion. And I think by definition, we'll figure out how to solve the problem because we have to. But it does translate into meaning -- a very different growth equation than what we've had historically.

That sounds great. I got a question from the audience here. Companies are seeing component shortages in the data center. Are lead times extending with your vendors? I'm not sure exactly what that means, but...

So for what we do in the white space, because we're not distributing the electronics. We're not a value-added reseller like a TD SYNNEX or Ingram Micro. We're not doing the servers and switches. We'll do in the white space, we'll do the rack, the rack design, the fiber optic connectivity, the cooling solution, access control, part of our security business, IP cameras and a whole series of other things. So that's our business. We're not seeing shortages there, period. However, fiber capacity has limitations.

So you see a lot of interesting things being done all the way down with the fiber manufacturers to make sure -- now they've been expanding their manufacturing capacity, but you see a lot of work being done around let's make sure we have the right fiber capacity to support these build-outs. So that's inside the air conditioning space, the white space. If you go behind all the walls and to the foundation up, the gray space, the electrical distribution and control, again, not -- there's -- it's gotten back to more kind of standard lead times. Where you're seeing a significant challenge, however, is get outside that building, that data center and go into the power -- part of the utility part of the power chain, the power chain. Now you're talking about high-voltage transformers, high-voltage switches, those kinds of things still have very long lead times, not 1 year, 2 years to 3 years. So you see that stuff being worked very thoughtfully in terms of projects that will be multiple years out.

Okay. Fair enough. John, you've always been a proponent of consolidation in the fragmented industry that you compete in. And Anixter being a classic example of that worked out extremely well, better than I thought it would, for sure. But you've always been a major proponent of that. What do you see in the future? If we look out 3 to 5 years, are there additional opportunities for WESCO to continue to consolidate the market? And in what kind of areas would you be most focused?

So we have -- Dave, to your point, we've always believed and strongly, I believe that scale is what matters in distribution, and that's true no matter what type of distribution company in every -- across all the industries. And so what did Anixter do for us? They were 2 equally sized companies. So there's the scale-up advantage we got, which is an economy of scale. But we've not described it this way. This turned out to be the more powerful thing. We have economy of scope because what we did was the portfolio is only overlapped in utility. WESCO's utility capabilities went back to the Westinghouse days even before we were spun out, decades of utility experience. And Anixter had bought HD Supply's Power Solutions Group prior to merging with WESCO, prior to WESCO acquiring them, which -- and between the 2 of us, we were the leaders in U.S. and Canada. So the 2 leaders came together. That was an overlap.

But everything else, there was no overlap because what we had in electrical in WESCO, Anixter had in wire and cable. We had to switch gear and all the other ancillary stuff. Utility was the overlap. What Anixter had in data communications and IP security and the global capabilities, no one else had. So we both had some different stuff in broadband. So I just -- I touched on that because I think it's a case study of economy of scope. You couple that with our end-user relationships where we don't sell through a contractor, this has been our cross-sell.

So we've been leveraging cross-sell across the whole portfolio where we have end user relationship, let's pull the whole portfolio in. We committed to 1% of combined pro forma sales, both for $8.5 billion a year in sales [indiscernible] billion in sales per year companies. That's $170 million. Through 3 years, we did $2.3 billion of cross-sell sales. We stopped measuring at the end of 2023. So we still see a lot of runway on cross-sell.

So I only go through that because we clearly have seen the benefit of consolidation. With that said, our priority now is it would have to add to our portfolio or meaningfully scale us up in an area. And there's -- quite frankly, there's not a lot of big targets that would do that in a very overwhelmingly accretive way. We have this accelerating business momentum organically in our business. We're pedal to the metal on that, and we're looking at adding to our services capability.

So there is the answer, Dave. We did Rahi Systems post Anixter. That has been an outstanding acquisition in terms of giving us additional service capabilities to serve data centers. We've done a few others along the way. The most recent was Ascent, not large, the end of last year in December, no products -- no product distribution, pure services, they help run data centers and have people in data centers, making sure it stays operational. There's a lot more they do than that, but it's no product distribution. So we're really focused on adding these service capabilities.

And at the end of the day, when you look at our business models where they have the stickiest relationship with customers, where we're adding the most value add, there's a high services content, where we have that, we got better EBITDA margins. Of the 3 businesses we have, our UBS business has double-digit op margins. And it's really based on that business model with utilities that have a higher services content.

So there's the answer, Dave, directionally, kind of string of pearls for services. We're looking at some bigger stuff, too. But we're always considering the bigger deals because I think we would get the first call and probably the last call on many of them, if not all of them. And if it makes sense, we look at everything. But I just -- but as a priority matter, we feel really good about the portfolio, the global footprint, our position -- leadership position with UBS and CSS and EES in U.S. and Canada. And so the services play is really accretive and value add.

That's great to hear. Maybe in the last 2 minutes, you could talk about your own digital transformation and the progress. We're more than halfway complete now on a 6-year journey. We're in the deployment and scaling phase. Could you just talk about what that means and what we should watch for over the next year?

When we're done, we'll have -- I'll use the term AI-enabled tech stack that has full access and leverages and helps monetize our big data. So that's when we're done. It's a big statement. It's a huge statement. We're still designing and building all the capabilities into the system. We gave a brief update in our earnings call release 2 weeks ago. We now have all 3 businesses have one or just a few sites on the new platform. This new platform is end-to-end a new platform, doesn't tie to our legacy. So we're running transactions.

In the coming months and few quarters, we're finishing design and build into 2026 and bringing online more of our higher order business model capabilities that we have to get deployed in more complex sites. And then we start to scale the deployment. The deployment is a heavy lift through all of '26 and all of '27. So it's not until 2028 that we will be fully deployed and we see -- we realize full benefits.

Do we get any benefits ahead of that? Sure, we do. I mean, so we've been hydrating our big data, I'll use that term, our own big data, some customer supplier into this data lake. The data lake exists now, world-class data lake. We're hydrating the big data. We have AI and GenAI applications running right now. We have a long list of use cases that we want to get to, but we've got a number of them already running, giving us some productivity benefits in the company.

And so we will be -- I mean, as we deploy across the enterprise, our AI maturity will strengthen dramatically. We haven't talked a lot about it publicly because, quite frankly, I think we're in a leadership position with what we're doing versus our peers right now. I will make the note, and it was a pleasant surprise that Fortune came out with an AI ranking is just a few weeks ago. All companies in AI applications and such, and they looked at the Fortune 500, we were ranked #10. This is public. Now they did that without even talking to us. They went out and used AI to gather data from conferences and other engineering symposiums we're part of and stuff we're doing with our data scientists team and with other -- all kinds of stuff and knitted this together and came up and they have their own algorithm. But I thought that was an interesting, and we were pretty pleased with that.

So I -- look, AI is the game changer for all companies to varying degrees. And -- but for us, because the big data is the greatest asset we have, it's a breakout move.

We look forward to seeing it play out. Thank you.

Thank you, all.

Appreciate it.

Hello, and welcome to WESCO's 2025 Third Quarter Earnings Call. [Operator Instructions] Please note that this event is being recorded.

I will now hand the call over to Scott Gaffner, SVP, Investor Relations, to begin.

Thank you, and good morning, everyone. Before we get started, I want to remind you that certain statements made on this call contain forward-looking information. Forward-looking statements are not guarantees of performance and by their nature, are subject to uncertainties. Actual results may differ materially. Please see our webcast slides and the company's SEC filings for additional risk factors and disclosures. Any forward-looking information speaks only as of this date, and the company undertakes no obligation to update the information to reflect changed circumstances.

Additionally, today, we will use certain non-GAAP financial measures. Required information about these measures is available on our webcast slide and in our press release, both of which you can find on our website at wesco.com.

On the call this morning, we have John Engel, WESCO's Chairman, President and Chief Executive Officer; and Dave Schulz, Executive Vice President and Chief Financial Officer.

Now I'll turn the call over to John.

Thank you, Scott, and good morning, everyone. Thank you for joining our call today. We delivered very strong results in the third quarter, and we again outperformed the market with our leading portfolio of product services and solutions. Sales growth has accelerated throughout the year with organic sales up 6% in the first quarter, 7% in the second quarter and now 12% in the third quarter. And that marks 4 consecutive quarters of accelerating momentum.

Our positive business momentum has continued in October. We're happy to say with month-to-date preliminary sales per workday up approximately 9% year-over-year, and that's what 3 days left in the month. Our record quarterly sales and was an all-time record for any quarter sales of $6.2 billion were led by 18% organic growth in Communications and Security Solutions, 12% organic growth in our Electrical and Electronic Solutions business and a return to growth in utility and broadband solutions. And that was driven by strong high single-digit growth with investor-owned utilities and strength in broadband.

Also of note, all 3 SBUs delivered sales growth in this quarter, and that's the first time that's occurred since Q1 of 2023. Total data center sales were again very strong at $1.2 billion. They set another quarterly record. They were up 60% year-over-year and now represent 19% of our total Q3 company sales.

On a trailing 12-month basis, our data center sales are now close to $4 billion. Adjusted EPS, earnings per share grew 9.5% versus prior year and 16% versus Q2 sequentially, with both gross margin and EBITDA margin improving sequentially. We are building on our positive business momentum as we enter the fourth quarter and as we prepare for continued market-leading growth in 2026.

Now turning to our full year 2025 outlook. We are raising our full year outlook for organic sales growth, adjusted EBITDA and adjusted EPS based on our increasing business momentum in the third quarter. At the same time, we're reducing our full year free cash flow outlook to reflect an increase in working capital dollars. And that's associated with our rising demand curve and the increased sales growth rates we've been experiencing.

We're executing very well, and we remain firmly focused on accelerating our cross-selling initiatives. Continuing to drive our enterprise-wide margin improvement program and delivering operational improvements enabled by our technology-driven business transformation.

As the market leader, it's really the strength of our portfolio and the enduring secular growth trends of digitalization that includes AI-driven data centers and automation, electrification that includes increased power generation and reliability and supply chain resiliency, which includes reshoring. All of these secular trends fuel my confidence that WESCO will continue to outperform our markets and deliver exceptional customer and shareholder value in 2026 and beyond.

Looking ahead specifically to 2026, our midterm targets for annual sales growth and margin expansion that we provided at our Investor Day are the appropriate starting point for the outlook that we will provide in conjunction with our earnings release in February.

So with that, I'll turn it over to Dave to walk you through our Q3 results and our outlook for the remainder of the year. Dave?

Thank you, John. Good morning, everyone. Turning to Slide 4. Organic sales in Q3 were up 12% year-over-year. This growth was driven by volume gains across all 3 SBUs supported by an estimated price benefit of less than 3%. Reported sales increased 13% with sequential growth of 5%, which was better than historical seasonality. The strong performance was broad-based, with continued momentum in our data center business and solid contributions from all 3 business units. As John mentioned, CSS delivered 18% organic growth, EES grew 12% and UBS organic sales increased by 3%.

Adjusted EBITDA margin was 6.8%, down 50 basis points versus the prior year, but was up 10 basis points sequentially. Gross margin contracted 80 basis points to 21.3%, reflecting consistent project and product mix dynamics experienced over the last 4 quarters. Importantly, gross margin increased sequentially by 20 basis points, driven by mix, higher supplier volume rebates and execution of our enterprise-wide margin improvement program.

Adjusted SG&A increased approximately 11% year-over-year, driven by the higher levels of sales growth, along with higher employee and facility costs. Specifically, over 1/3 of the increase in SG&A dollars year-over-year was related to higher volume, with the balance coming from increased incentive compensation, merit increases, employee benefits and facilities costs. SG&A as a percentage of sales improved due to operating leverage on our sales growth.

Finally, adjusted EPS was up 9.5% year-over-year driven by the improved operating performance and the absence of the preferred stock dividend following the redemption in Q2. I'll walk you through our business unit results, beginning with EES on Slide 5. In the third quarter, EES delivered very strong results with organic sales up 12% year-over-year driven by growth across all 3 operating groups, construction, industrial and OEM.

Construction grew mid-teens, driven by robust wire and cable demand and ongoing infrastructure projects, including sales to data centers. Industrial was up mid-single digits, supported by improved day-to-day demand in the U.S. and increased project activity in Canada. And OEM sales grew mid-teens, reflecting strong momentum in both the U.S. and Canada.

Notably, data center sales were up 60% year-over-year now representing approximately 6% of EES sales. Backlog remained flat year-over-year with healthy quoting activity and a strong pipeline of opportunities. Profitability improved with adjusted EBITDA margin of 8.4%, up 30 basis points sequentially, driven by improved gross margin and stable operating cost leverage. Gross margin was 23.3%, down 100 basis points year-over-year, but up 30 basis points sequentially.

Lower gross margin year-over-year was primarily due to project and product mix. SG&A remained stable at 14.9% of sales and adjusted EBITDA increased to $198 million, up 9% year-over-year. Looking ahead, EES remains well positioned to capitalize on secular trends in electrification, data center expansion and infrastructure modernization.

Turning to Slide 6. In the third quarter, CSS, again delivered very strong results with organic sales up 18% and reported sales up 21% year-over-year. This growth was driven by continued strength in WESCO data center solutions, which was up over 50% from large project activity with hyperscale and multi-tenant data center customers. Enterprise network infrastructure also contributed to growth with sales up mid-single digits year-over-year. E&I growth was due partially to the timing of project activity during the quarter and a favorable year-over-year comparison.

Security sales were up low single digits, including data center-related sales, security growth was up mid-single digits. CSS backlog increased 17% year-over-year reflecting continued strength in data center project activity. Profitability improved with adjusted EBITDA margin at 9.1%, up 30 basis points sequentially, driven by improved gross margin and stable operating cost leverage. Gross margin was 21.2%, down 80 basis points year-over-year, but up 30 basis points sequentially. Lower gross margin year-over-year was primarily due to business and project mix, included elevating volume from large hyperscale projects.

Significant operating leverage year-over-year drove 90 basis points of EBITDA margin improvement and adjusted EBITDA increased to $221 million, up 22% year-over-year. Overall, CSS continues to demonstrate strong growth and profitability, supported by sustained demand in AI-driven data center projects and security markets, along with disciplined cost management. We remain focused on improving margins with our large customers by expanding the scope of services we provide to them throughout the entire data center life cycle.

Turning to Slide 7. I want to take a moment to discuss the continued momentum we're seeing in the broader data center space and WESCO's role in that growth. Customers continue to rely on WESCO and our supplier partners to meet their evolving needs, including our expanding portfolio of services we provide across the data center life cycle.

From a total company perspective, data center sales were about $1.2 billion in the quarter. Data center represented approximately 19% of WESCO sales in the third quarter and 17% on a trailing 12-month basis. This growth was driven by strong performance in both the white space and the gray space with CSS representing the majority of the sales contribution.

The top of the slide outlines the 2 key stages of the data center construction cycle, time to power and the construction period. The key takeaway projects announced and funded today typically take 4 to 7 years to become operational. Our solutions now span the full spectrum of the data center life cycle. From power and electrical distribution systems and advanced AI and IT infrastructure to on-site services and solutions that support ongoing operations. This ensures we can deliver value throughout every phase of the data center life cycle.

On the lower left of this slide, you can see the substantial and accelerating growth in our total data center business over the past 7 quarters. Total data center sales on a trailing 12-month basis were approximately $4 billion. This growth has been driven by organic initiatives along with tuck-in acquisitions that have expanded our services capabilities. We remain committed to partnering with our suppliers to service our customers from cradle to cradle. Supporting everything from initial builds, on-site services and solutions, ongoing upgrades, retrofits, life cycle upgrades and modernization.

Turning to Slide 8. This provides additional information of our data center products, services and solutions offerings. Our offerings span both gray space and white space delivering a comprehensive portfolio that positions WESCO as a trusted partner for hyperscale, multi-tenant colocation and enterprise data center customers.

In the gray space, which accounts for approximately 20% of our overall data center sales, serviced by our EES business, we deliver extensive power, electrical, automation and MRO solutions that support the build-out of high-performance, reliable and scalable data centers. Some of our product offerings include electrical infrastructure, such as medium voltage cables and cable trays, alongside mechanical and cooling products like automated switches and sensors.

Additionally, we supply MRO and safety products to help ensure safe, efficient and reliable data center operations. In the white space, which accounts for approximately 80% of our total data center sales through our CSS business, we deliver next-generation infrastructure and services for always-on connectivity. Our white space products include communications equipment, advanced IT infrastructure such as racks and enclosures, wireless technologies, access controls and video surveillance equipment.

Beyond products, we offer extensive services and holistic solutions spanning the entire data center life cycle from planning and design through installation and commissioning to ongoing operations through on-site services and decommissioning. We are there every step of the way, moving with speed to help our customers quickly adapt and thrive in a rapidly evolving environment.

With a global ecosystem of suppliers and partners, WESCO offers a leading portfolio and complete solutions, providing customers with a single source for their evolving data center needs. WESCO enables seamless global execution, moving products and solutions across borders to support our customers. We believe our combination of products, services, solutions and expertise uniquely positions WESCO to capture the accelerating demand for data center capacity, driven by cloud, AI and edge computing trends.

Turning to Slide 9. In the third quarter, organic and reported sales in UBS increased 3% year-over-year, marking a return to growth after 7 quarters of declines. This improvement was led by high single-digit growth in our investor-owned utility customer base, partially offset by continued softness in public power. We expect the utility market to continue to improve as greater clarity is obtained on tariff impacts and as interest rates are reduced. Additionally, we expect public power customers to return to growth in 2026.

Broadband performance accelerated in the third quarter with sales up over 20% year-over-year, driven by increased demand in the U.S. This marks a significant improvement from Q2 where broadband growth was up mid-single digits. Backlog increased 11% year-over-year, reflecting stronger customer order rates. Adjusted EBITDA margin for UBS was 10.4% flat sequentially, reflecting disciplined cost management and sustained profitability.

Adjusted EBITDA margin was down 90 basis points year-over-year, primarily driven by lower gross margins due to competitive pressures within public power markets, partially offset by improved operating cost leverage. We remain confident in the long-term growth potential of our utility business. supported by secular trends in electrification, green energy and grid modernization. These drivers are expected to accelerate demand for our utility services and solutions and we anticipate further margin improvement in Q4 as mix improves and utility growth continues.

Turning to Slide 10. In the third quarter, free cash flow was a use of $89 million. Recall that our distribution model requires investment in working capital, especially in times of significant growth, which we have experienced year-to-date. The third quarter was the highest growth quarter of the year with organic sales up 12%. In addition, you will see later in the presentation that September organic sales were up mid-teens, which is the highest growth month of the year and represents an all-time record for monthly sales per workday.

Given the top line strength in the quarter and in September, we generated significant increases to accounts receivable, resulting in a use of cash of $270 million. I'll provide you with an update on our free cash flow outlook shortly.

Turning to accounts payable. We've had strong performance over the trailing 12 months and a third quarter period with cash generation of $526 million on a trailing 12-month basis and $100 million in the third quarter. Inventory has increased in 2025 to support customer projects and to ensure supply chain disruptions are minimized as we work to meet our customers' needs and a rising demand curve.

On the right side of this slide, you can see that net working capital intensity has steadily improved over the past 3 years. This quarter, we saw a 60 basis point year-over-year improvement on a trailing 12-month basis with net working capital intensity declining from 20.4% to 19.8%. That follows a 50 basis improvement in 2024 over 2023. We remain confident in our ability to drive stronger cash generation through the cycle.

Turning to Slide 11. We redeemed our $540 million Series A preferred stock in June, the first opportunity to do so at face value. This high-cost instrument carried a 10.5% dividend rate and its redemption marked a significant milestone in our capital structure optimization.

To fund the redemption, we utilized proceeds from our $800 million issuance of 6.38% senior notes due 2033, which we completed earlier in the year. This refinancing action reduced our total financing costs and created a substantial benefit to our net income, EPS and cash flow rates. The estimated annualized benefit from this transaction is approximately $32 million or $0.65 per diluted share. In addition, with the financing completed in the first quarter, we extended the maturities of our accounts receivable facility and revolver to 2028 and 2030, respectively. As a result, we now have no significant debt maturities until 2028, providing enhanced financial flexibility and stability.

Turning to Slide 12. On this slide, we provided an overview of the actions we've taken to manage the impacts on our business from tariff announcements. The chart lists the potential impacts in our response to protect our margins. An update on the tariff environment. In the third quarter, supplier price increase notifications were up over 100% in count, but the impact on results was limited due to the timing of notifications and effective dates. We estimate a price benefit of less than 3% for the quarter, and this includes about 1 point from commodity price increases.

Through October, supplier price increase notifications are up over 60% in count versus all of Q4 2024 with an average increase in the mid-single-digit range. This remains an evolving and dynamic situation with modifications to effective dates based on finalized tariff agreements and timing. WESCO has a long operating history and has successfully navigated similar global supply chain challenges. We're continuing to execute our playbook to effectively manage our business in the current volatile environment.

Turning to Slide 13. This slide shows our updated 2025 outlook by strategic business unit and the individual operating groups. As John mentioned, we are revising our 2025 outlook and increasing organic sales growth to up 8% to 9%. This is significantly higher than our prior guidance of up 5% to 7%. Sales into data centers continue to exceed our initial expectations as do broader electrical sales trends. For EES, we are benefiting from data center growth, along with broader positive trends in electrical end markets. We continue to expect growth in the fourth quarter across all 3 markets we serve. Construction, industrial and OEM supporting our revised EES outlook of mid-single-digit plus growth.

For CSS, due to the continuation of exceptionally high growth in our data center business, we are increasing our full year outlook for reported sales growth of WESCO data center solutions from up about 40% to up approximately 50%. This supports our revised CSS outlook of mid-teens growth, up from our prior growth expectation of low double-digit growth.

And lastly, within UBS. We expect further utility growth in Q4, driven by our investor-owned utility customers. We anticipate public power customers won't return to growth until 2026, which leaves our total full year outlook for the utility market unchanged. Broadband is now expected to be up for the full year versus our prior expectations for approximately flat sales versus 2024.

Moving to Slide 14. We are raising and narrowing our ranges for organic and reported sales growth, increasing adjusted EBITDA and increasing and narrowing the range for adjusted EPS. Our expectation for free cash flow has been lowered due to the significant top line growth in 2025, which requires net working capital investments, principally accounts receivable. We are revising our 2025 sales outlook based on the accelerated growth we are experiencing. Organic sales are expected to be up 8% to 9% versus our prior forecast of 5% to 7%.

I want to emphasize that our outlook does not include the impact of future pricing actions, including tariffs. This is consistent with our past practice, given the lag between when a supplier announces a price increase and when it begins to impact our revenue. While we have seen a significant uptick in price increase notifications as we move through the year, our outlook does not include any additional benefit to sales beyond what we realized in the third quarter and the rollover impact of those price increases.

Turning to EPS. We are raising our outlook by $0.10 at the midpoint to a range of $13.10 to $13.60. Improved operating results are the primary driver of the increased EPS outlook, which is partially offset by higher estimates for interest expense.

In terms of free cash flow, we now expect to deliver between $400 million to $500 million in 2025. As a percentage of adjusted net income, this implies a range of approximately 60% to 75%. Our strategy for how we deploy cash flow remains unchanged. The use of available cash will be allocated to the highest return opportunity, and we will continue to make decisions in the best interest of the shareholders over the long term. Our top priority is to invest organically in the business to drive growth and operational efficiency, including the completion of our digital business transformation.

In the near term, given the current economic environment, we expect to prioritize delevering the balance sheet. However, we will continue to be opportunistic regarding share repurchases and acquisition opportunities. We continue to seek acquisitions that expand our capabilities and better serve our customers, particularly those engaged in our high-growth end markets.

We have also included updated modeling assumptions on the right-hand side of the slide. Most notably, interest expense is now forecast to be about $10 million higher. This is largely driven by the reduction in free cash flow for the full year, along with increased borrowings intra quarter to support the current level of growth.

Turning to Slide 15. This slide shows the year-over-year monthly and quarterly sales growth comparisons over the past year and our expectations for the fourth quarter. You can see the return to growth in the last quarter of 2024 and the acceleration throughout 2025.

As mentioned, preliminary month-to-date October sales per workday are up approximately 9% with 3 days to go in the month. We expect fourth quarter reported sales will be up high single digits plus with growth across all 3 business units. We expect organic sales will be up a similar amount as there is no difference in workdays year-over-year and FX impacts have moderated. We expect adjusted EBITDA margins will be up approximately 30 basis points versus the prior year, with improved gross margin driven by higher supplier volume rebates and SG&A headwinds due to higher incentive compensation.

Moving to Slide 16. Let me briefly recap the key points before we open the call to your questions. We delivered another very strong quarter, with sales up 12% year-over-year marking 4 consecutive quarters of accelerating sales momentum. CSS went away, up 18%, EES grew 12% and UBS was up 3%. Utility returned to growth driven by investor-owned utilities and total data center sales were approximately $1.2 billion, up about 60% year-over-year. Adjusted EBITDA margins expanded 10 basis points sequentially, supported by improved gross margin and strong operating leverage.

Adjusted EPS was up 9.5% year-over-year. We've raised our full year organic growth outlook, adjusted EBITDA and adjusted EPS to reflect this strength. We remain very well positioned to benefit from secular growth trends including AI-driven data centers, power generation, electrification, automation and reshoring.

As John noted earlier, when looking ahead to 2026, our midterm targets for annual growth and margin expansion that we provided at our Investor Day are still appropriate and would be the starting point for any outlook that we will provide in February.

Based on the strength of the secular trends, we would expect mid-single-digit organic sales growth in 2026 with continued strength in our electrical markets, a return to full year growth in utility with a recovery in public power and mid-teens growth in data center. We are also targeting annual adjusted EBITDA margin improvement of 20 to 30 basis points, with the majority of the improvement being generated by operating leverage.

With that, operator, we can now open the call to questions.

[Operator Instructions]. And our first question today will come from David Manthey with Baird.

Just a quick question here on -- I think you mentioned it right at the end there, Dave, you said that you expect to see some EBITDA margin improvement into 2026. So I'll put that one on the side. Could you tell us approximately how much price contributed to growth by segment or at least ballpark to give us an idea?

Certainly. So overall, our pricing benefit in the third quarter was just under 3%. And that was primarily driven by our EES segment, which was about 4% and that's where we saw the largest benefit from commodity pricing on our pure commodity products. Our CSS business saw a price benefit of about 2% and UBS about 1%.

Okay. And then maybe on outside of data center, could you just talk about whether it's industries or applications where you're seeing some strength there. It's great to see a return to growth, nice growth in EES. And maybe you could just help with a little bit of color there.

Thanks for that question, Dave. This is John. Yes, we're really pleased. I think it's a highlight of the quarter, actually. I mean CSS, the beat goes on. That's clear. The strong performance due to AI-driven data centers. But for EES, this is the fourth consecutive quarter of improving sales growth. I'll just remind everyone, we returned to growth in the fourth quarter of last year, grew 3% in Q1, 6% in Q2. Now this is a significant step up to 12% growth in Q3.

All 3 operating groups in the business, Dave, as construction, industrial and OEM, all 3 grew particularly for construction, I'll double click. I mean that was up mid-teens. And it's not just growth in data center projects. There's also growth in other big projects, infrastructure related. We saw growth in water -- wastewater, hospitals, public transit. They're just a really nice step-up in construction. Very pleased with that.

In terms of industrial, also pleased with that performance, up mid-single digits. We had improved day-to-day demand in the U.S. We had increased project activity in Canada, and our stock sales increased each month of the quarter. That's our stock and flow business, which is a good indication of what kind of the daily demand in the market is. So we feel good about that.

And then OEM up mid-teens, really strong growth again across the U.S. and Canada. That's being driven by semiconductor and other infrastructure markets. So that's the business in EES that has our most semiconductor exposure. And that would be, again, you're seeing -- that's driven kind of the semiconductor expansion big mega projects and such. We have some terrific semicon relationships there.

So all in all, I think we feel good about EES' top line momentum. Also EBITDA margins are above 8% for the second quarter in a row. And I do want to mention, because I didn't mention it in my prepared remarks, we do have a new leader on board, Danny Castillo, terrific leader, returns to the electrical industry, has a long history and was part of Cooper when Eaton bought Cooper, worked for some other companies since -- post that combination. And he's off to a great, great start. Thanks for that question, Dave.

Your next question today will come from Sam Darkatsh with Raymond James.

I wanted to follow up on Dave Manthey's last question. I mean we're -- you're right. I mean, the 10% EES growth, excluding data center, just really notable. We're hearing a lot of reports about just general AI and tech spending by customers crowding out other sorts of CapEx. And it doesn't look like you're seeing that in your results. Are you not seeing that crowd out effect? Or is the EES growth, excluding data center, more so via share gains, John?

Sam, we're not seeing it crowd out based on our activity levels. But I do think it's pretty clear that this quarter's results there was overall market outperformance across our 3 businesses. And if we stay on EES in particular, there's enough other data points out there in terms of market surveys and competitors who have reported that this is a very strong outperformance versus market.

So I'll tell you, this did surpass our expectations. We did expect EES to pick up pace in Q3 and Q4, and we outlined that. And we did have improving momentum vector, but this was a more meaningful step up, Sam, to your point, getting north of -- get a 12% growth and double-digit growth ex data centers than we expected.

Yes. My last question, looking at data center itself. I know the margins are a little bit lower than fleet average because of all the large projects, but I'm also -- I imagine that since it's a lot of direct ship special order that asset velocity is also better than fleet average. Can you talk to that, put a little bit of clarification in terms of what your ROA is for that data center business?

Yes. So we haven't been public on that yet, Sam. I think at some point in the future, we may do that. So I appreciate the question. I will -- maybe I'll focus on it this way, which is another dimension of your question. DS, direct ship margins inherently have lower gross margin, but we have significant lower operating costs to execute those transactions. We've always said that it represents very good operating profit pull-through.

I'm really pleased that CSS has a third quarter in a row of sequential EBITDA margin expansion. And we're getting it with gross margin and operating cost leverage. This quarter, CSS' gross margins were up 30 basis points sequentially. And I'll remind everyone that -- we did have a big shift in our kind of margin mix in Q4 last year when CSS really started to drive outsized growth. Data centers grew 70% in Q4 last year.

And I mentioned that we're going to work margins up over time. If you look at that, CSS has -- their margins or gross margins are 40 basis points higher than they were in Q4. So we're walking those margins up and we're getting operating cost leverage on the growth. So I, at least, wanted to hit that point, Sam, on your question. In terms of ROIA, yes, it is much better asset velocity to your point. We just haven't put a number out there by SBU.

And your next question today will come from Guy Hardwick with Barclays.

With volumes so strong, I was wondering whether the -- as a company as a whole is hitting levels in terms of where volume rebates, which have been kind of declining as a percentage of EBITDA but may start to recover, whether this sets you up for them becoming a positive tailwind to margins next year?

Yes. Guy, thank you for the question. So year-over-year in the third quarter, some of the increase in our gross margin was driven by better supplier volume rebates. That does include the benefit we're getting this year from reaching some of those higher volume tiers, which is translating to a better rate with certain suppliers. We also expect that we will continue to see that in the fourth quarter. So year-over-year, we do expect to see supplier volume rebates contributing to gross margin expansion. I do believe it is a good setup as we go into 2026. We'll provide you more details on that in February when we do our next earnings call.

And just as a follow-up. I didn't hear you mentioned much about the digitalization investment. Are you beginning to see benefits in terms of cross-selling yet? Or is that more of a story for out years?

Guy, it's a great question. Thanks for asking. Look, I think that first, on cross-selling, I don't want to link that to our enterprise-wide digital transformation because that will help accelerate it and improve our execution across the global enterprise.

But I'll take all the investors back to this has been really one of the most significant value creation levers that we've been executing exceptionally well against since we put Anixter and WESCO together. And we had significantly overdelivered the sales synergies that we committed to. We had committed to 1% of pro forma sales, which would be $170 million a year. We ended up delivering over $2.3 billion cumulative of cross-sell sales.

So that process we put in place and the incentive structure supporting it that's deployed across our sales force and the way we're executing, we're gaining better traction every day on our cross-selling, and we're seeing that in our results.

The digital transformation, when it's done, will result in, I think, even further acceleration of improved execution there. With respect to the overall digital transformation since you touched on it, at least I'll make a comment. We're making very good progress. All 3 SBUs are running the initial build of our new digital platform and at least 1 location, that's call that baseline set of capabilities.

In the second half of 2025, we've been focused on continuing to build out additional capabilities while beginning deployment. And in 2026, deployment will really start to scale up. As we outlined at our last Investor Day, our check enabled business transformation is on track and with the time lines we outlined at our last Investor Day in 2024. More on that as we move into next year, we'll be providing more robust updates.

And your next question today will come from Deane Dray with RBC Capital.

I appreciate all the clarity on the revised outlook, especially the change in free cash flow guidance, which we consider to be a high-quality problem given all the growth.

Thank you, Deane. Yes, it's -- we don't like the printed number of free cash flow, but our sales for workday in September were the highest monthly sales per workday we've ever had in our history, in the 15-plus percent range. And all that AR result in growth of AR. AR grew $271 million. So this is -- you said it well, very high-quality problem because that AR will get collected.

Yes. And your working capital intensity continues to improve. So you're not losing anything on the receivables, payables, et cetera?

Yes. That's an important point, which is why we include that page, Deane, the net working capital as a percentage of sales, which is obviously AR plus inventory minus payables. We're showing improved efficiency. And so this is just a high-quality problem on the AR growth. And so we're doing that now still with all the various "ERP" instances we're running in the company. We do expect, as we outlined at Investor Day, when our digital transformation is done to get really substantial benefits in overall net working capital.

Exactly. All right. Just a couple of quick ones for me here. First, I'll echo all the previous comments about EES and I was a little surprised not to see some backlog build there. So was it all really short, quick turn business that was done? That would probably be the explanation, but would love to hear your color.

Yes. I think your backlog is still very healthy. We just didn't grow it, and it was just the exceptional step-up in sales growth, as I talked earlier, but versus normal historical seasonality, we're -- it's intact. It's very -- it's strong, it's high quality. The opportunity pipeline continues to increase. So we're seeing more opportunities. We're putting more shots on goal to use that analogy. And so that's what's encouraging.

And again, we're not giving a full guide for '26 yet. But we did make some commentary, Dave, did just around stronger electrical markets in '26. So I think that gives some indication of the confidence level we have given backlog plus sales execution.

That's really good to hear. And since you opened the door on the 2026 kind of data points that Dave shared, the one on data center, the mid-teens growth, that would be what we consider to be industry growth, the kind of footprint rollout given the multiyear backlog. You've been outgrowing that significantly for the past year plus and increasing your share of wallet, do you see where that ramps down? And just what's your visibility on this outgrowth in data center heading into '26?

All indications are the data center market remains incredibly strong. Again, we have a unique and very strong set of end-user customers. We're in dialogue with them. We get good insights into their multiyear investment and deployment plans for data centers. We're helping them execute globally. So the market is strong and robust, I will say it this way. I wouldn't get -- again, we're not giving the guide for '26 yet. We are focused and committed to and confident that we will continue to outperform the market in data centers.

And it's driven by the strength of -- we have this tremendous strength in the white space. It's extensive. We've added services. We have increasing strength in the gray space, and we talked about that the last several calls. We wanted to provide some more details on our mix. You see that in today's webcast materials.

And increasingly, too, our UBS business is getting pulled in and engaged on the front end because really the #1 driver of what's going to support data center growth is power. And so it's why I'm so bullish on utility turning into a secular growth industry because fundamentally, it's increased power generation that's going to be driven, required to support the data center build-out, and that bodes very well for us.

So a final point, our white space capabilities, our gray space capabilities, our power and utility capabilities, coupled with the global footprint and increasing services, we think, puts us in a very unique position. to continue to outperform the market for data centers.

Your next question today will come from Nigel Coe with Wolfe Research.

We covered a lot of ground already, but I'm just wondering, I'm sorry if I missed this, 30 basis points of margin expansion for 4Q. How should we think about that between gross margin and SG&A?

Nigel, the one thing I'll emphasize is that given the increase in our top line, part of that 30 basis points of expansion will be improvement to our supplier volume rebates. And so when you think about the 30 basis points, you should assume a modest increase in the supplier volume rebates, and we're confident we'll be able to get to the 30 basis points through a combination of that supplier volume rebate, other gross margin actions, but then also operating leverage.

Okay. Great. And then on the price increases, I think we understand how you're layering those in now for 4Q. Would that be gross margin accretive as well? Because normally, when you raise prices, you normally have a maybe a temporary benefit on inventory. So just wondering if that's having an impact as well.

It will have a slight impact because we are averaged with inventory. So as market prices increase, our inventory has not caught up to that market increase. What I would tell you what we experienced in Q3 was it was a very modest impact. We're not seeing that pricing translate from our suppliers into the market and into our sales yet. So we had rough round just under 3% pricing benefit, that's after seeing these high single-digit price increase notifications in Q1 and into Q2. So all of that pricing is not translating to the market yet. As we do get pricing traction, we should see a modest benefit to our gross margin.

Okay. And then a quick one on cash flow. If we do get into that mid-single-digit zone on growth in 2026, would you expect conversion to be, if not 100% pretty darn close?

Yes.

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

First, Dave, could you just talk about, obviously, the implied acceleration in UBS organic sales growth in fourth quarter. Just talk a little bit about the color and the confidence there. If there's any comment you have on how much of that revenue is already secured in backlog just versus an easier comparison math there?

Well, I'll start with the easier comparison. So if you take a look at our overall utility and broadband solutions business in the fourth quarter of 2024, we do have an easier comp, particularly within the utility space. So utility was down high single digits in Q4 2024. And given the acceleration that we've seen, particularly with the investor-owned utilities, we're confident that we will have significant growth here in the fourth quarter of 2025.

Again, some of that's just the trends that we're seeing, not only the backlog, but the day-to-day activity primarily, again, in those investor-owned utilities, some of the project work that we're doing, but we also are getting some benefit from an easier comp.

Got it. Okay. And then -- sorry if I missed it, but did you disclose how much gray space revenue was up this quarter versus white space? It was nice to see the stronger margins in both the ESS and CSS this quarter. I'm just trying to see if there's a way to think about the longer-term margin trend as we balance the mix impacts from growth in those 2 channels.

Yes. The data center sales in our EES business, those gray space sales were up approximately 60% in the third quarter.

And the white space was up over 50%.

Over 50%. Correct.

So we did mention that, Ken. So both 50% plus.

And then any comments on that -- how you think about mix kind of normalizing into '26?

I don't know that, that mix normalizes. Again, the dynamic there is we've talked about it at prior earnings calls and also at the investor conferences. We have deep and long-standing strength in white space, these end-user relationships. We're adding services and we're managing -- helping manage the global deployments for hyperscalers and global MTDC customers. So that -- think of the market and because of our unique value proposition and execution ability globally, we're outperforming the market with that white space strength.

The gray space, a big good portion that historically has been served direct. But we're now picking up pieces that are moving into distribution because we become the one overall supply chain management manager on behalf of our end-user customers. So that's what's driving some of that growth there. So I would expect we will continue to see very strong growth in both white and gray space, again, outperforming the market is our expectation.

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

I wanted to start off on utility, if we could, and to focus a little bit on the public power side. I think that's, I guess, 1/3 of your utility sales, correct me if I'm wrong. Wondering what -- how much it was down in the quarter? And then what gave you confidence that it returns to growth next year? And along those lines, you mentioned something about, I guess, competitive price in that side of the world and maybe that led to some of the gross margin compression quarter-on-quarter. Maybe if you could flesh that out a little bit.

Yes. So maybe just the level set, again, if you think of our utility business, the U of UBS, 90% of that is U.S., 10% Canada. So when you take the U.S. now, that 90%, 60-plus percent investor-owned utilities, 10% or so is direct to specialty utility contractors that leaves about 30% in public power. Our sales to our IOU customers, our investor-owned utility customers were up high single digits in the third quarter, and we're very pleased with that momentum. Our strength in IOUs is really carrying the day with -- for the utility return to growth.

Public power softness continued. And I mentioned this last quarter, and I'll just go back and double-click on it because it's the same situation. When you look at what occurred across the pandemic, it really was the IOU customers that were prioritized and they were delivered material as the supply chain started coming on back online and the public power customers started building inventory much later than the IOU customers. Those inventory builds for public power continue through 2024. And that's as the manufacturers switched from serving the IOUs to building up for the public power customers.

So that's really what we're seeing. We're seeing that kind of customer stocking issue. And it's not across the board. Categorically, it's distribution transformers and wire and cable for public power, but not for line construction materials. So we're seeing it getting healthier. We've got overall improving customer order rates. That's a positive leading indicator.

And public power, we do expect will absolutely return to growth in 2026. I think the thing I'd focus investors on are the breadth and strength and diversity of the rest of our utility business. And obviously, the IOUs and those multiyear agreements we have in place where we are essentially the supply chain management partner, solutions partner for them is exceptionally strong and good to see them with high single-digit growth.

But we're also seeing very strong opportunities and growth not just in the D of transmission and distribution, but transmission and substation portions of the market. And that we're seeing kicking in this year. We've got a strong set of capabilities there. And we expect that to be a very strong growth driver in 2026. So there's the public power story.

It is more competitive. Because, again, of the current stocking situation, that's more locally market-driven. Some of our competitors are also not for profits, the so-called cooperative distributors. So -- but that's been the nature of the beast for decades, quite frankly.

Got it. Helpful. On the 2026 margin outlook, the 20 to 30 basis points of expansion on, I guess, mid-single-digit organic top line growth. Can you walk through us like the confidence you have in getting leverage. And I ask just in respect to 2025 when you're growing high single-digit organically and not getting leverage. Maybe remind us of the moving parts on why you're not getting leverage in 2025 and why that turns in 2026?

Yes, Patrick, one of the things I'll highlight is relative to incentive compensation. We still have about a 20 basis point headwind to adjusted EBITDA margin with the expected payouts for incentive compensation in 2025. So that's a headwind in 2025. Obviously, we've been able to drive significant sales growth but that's also come with some product mix and project mix impact on the gross margin line.

The other thing I'll highlight is like many companies, we're also continuing to invest in our IT capabilities. And so we've made significant investments in that area. We do believe that, that is part of our continued investment into our digital transformation and new capabilities to service our customers. And one of the other things that we'll highlight is we've made sequential improvement as we progress through the year. That leaves us to a good setup for 2026. We'll provide you the full outlook for 2026 when we do our call in February.

Understood. So it's a better jumping off point at the end of the year, combined with less incentive comp headwind, maybe less project mix year-over-year. Those are some of the factors. I'd imagine you're going to keep investing.

Correct.

That concludes our question-and-answer session. I'll now turn the conference back over to John Engel for any closing remarks.

Well, thank you for your questions and support today. I think we've addressed all the questions that were in the queue. I'll bring the call to a close. Again, thanks for your support. It's much appreciated. We look forward to speaking with many of you over the

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Hello, and welcome to WESCO's 2025 Second Quarter Earnings Call. [Operator Instructions] Please note that this event is being recorded. I will now hand the call over to Scott Gaffner, SVP, Investor Relations, to begin. Please go ahead.

Thank you, and good morning. Before we begin, I want to remind you that certain statements made on this call contain forward-looking information. Forward-looking statements are not guarantees of performance and by their nature are subject to uncertainties. Actual results may differ materially. Please see our webcast slides and the company's SEC filings for additional risk factors and disclosures. Any forward-looking information speaks only as of this date, and the company undertakes no obligation to update the information to reflect changed circumstances.

Additionally, today, we will be using certain non-GAAP financial measures. Required information about these measures is available on our webcast slides and in our press release, both of which are posted on our website at wesco.com. On the call this morning, we have John Engel, WESCO's Chairman, President and Chief Executive Officer; and Dave Schulz, Executive Vice President and Chief Financial Officer. Now I'll turn the call over to John.

Well, thank you, Scott. Good morning, everyone. Thanks for joining our call today. We're pleased to report that our sales momentum accelerated in the second quarter, and that's building on our strong start to the year. This marks 3 consecutive quarters of accelerating sales momentum. After growing 6% in Q1, organic sales grew 7% in Q2. Preliminary July sales per workday have accelerated even further and are up approximately 10% year-over-year.

Our second quarter performance was led by 17% organic growth in CSS and 6% organic growth in EES. Setting a new record and a new mark, our total data center sales eclipsed $1 billion. That's for the entire WESCO enterprise in the second quarter, and they were up 65% versus the prior year. This is a clear indication of our leading value proposition and the enduring secular growth trends of AI-driven data centers. Utility, as expected, had declining sales in the first half but has begun to show signs of improvement as sales to investor-owned utilities returned to growth in the second quarter. We continue to expect a return to growth in Utility in the second half of the year. So all in all, we're off to a good start in the first half of 2025.

Shifting to profitability. Adjusted EBITDA margin was up 90 basis points sequentially as we generated strong operating cost leverage and stable gross margin. And finally, EPS -- adjusted EPS was up 6% versus the prior year. Turning to our balance sheet and capital allocation priorities. As planned, we completed the redemption of our preferred stock in June. This refinancing strengthens our balance sheet. It also extends our debt maturities and it significantly improves our earnings and cash flow run rates. Following this redemption, we have strong liquidity to support our capital allocation priorities.

As you'll recall and as we outlined at our last Investor Day, after funding our common stock dividend and offsetting equity award dilution through stock repurchases, over 75% of our free cash flow generation is targeted to debt reduction, additional stock buybacks and acquisitions. As we begin the second half of the year, I'm very encouraged by our positive and increasing momentum that we're seeing across our business. Backlog is at record levels, up both year-over-year and sequentially across all 3 business units.

July, as I mentioned earlier, is off to a very strong start with preliminary sales up approximately 10% versus prior year. Importantly, in July, for this preliminary number, this reflects growth in all 3 SBUs and that obviously is including our UBS segment. We raised our full year outlook for organic sales growth based on our positive trajectory while maintaining our EPS range at the midpoint.

As always, we remain focused on what we can control, and that's executing our cross-sell initiatives, managing margins to ensure we get operating leverage on our sales growth and delivering operational improvements enabled by our technology-driven business transformation. As the market leader, we're seeing -- we're clearly seeing the growth potential of our WESCO portfolio. And that's supported by the enduring secular growth trends of AI-driven data centers, increased power generation, electrification, automation and reshoring. All this underpins my confidence that WESCO will continue to outperform our markets this year.

Before I turn it over to Dave, I wanted to take a brief moment to thank Bill Geary for his service to WESCO. Bill ran our CSS business through June and has left WESCO to assume a CEO position in a privately held company. We wish Bill well in his new endeavors and thank him for positioning the business for continued success. In line with our succession management plan and reflective of our deep talent bench, we appointed Dirk Naylor as EVP and GM to run our Communications & Security Solutions business. Dirk is an accomplished and proven leader within WESCO, and he has been instrumental in developing our growing data center business.

With that, I'll turn it over to Dave to walk you through our Q2 results and our outlook for the remainder of the year. Dave?

Thank you, John, and good morning, everyone. Turning to Page 4. Organic sales in Q2 were up 7% year-over-year, at the high end of our expectations. This growth was driven by approximately 5.5 points of volume and 1.5 points of price. Reported sales increased 8% with sequential growth of 10%. The strong top line performance was led by continued momentum in our data center business, which surpassed $1 billion in sales and grew 65% year-over-year.

CSS delivered 17% organic growth and EES grew 6%. UBS sales declined 4%. Adjusted EBITDA margin was up 90 basis points sequentially on strong operating cost leverage and stable gross margin. Adjusted EBITDA margin was down 60 basis points year-over-year, driven by gross margin. Gross margin was 21.1%, flat sequentially but down 80 basis points year-over-year due to project and product mix in CSS and EES that started in Q4 of 2024. Adjusted SG&A increased approximately 8% year-over-year, in line with our expectations, driven by higher employee and facility costs. SG&A as a percentage of sales improved due to operating leverage on our sales growth. Adjusted EPS was $3.39, up 6% from the prior year.

I'll walk you through our business unit results beginning with EES on Slide 5. In the second quarter, EES reported and organic sales both increased 6% year-over-year. This improvement in growth was led by strong performance in OEM and Construction, along with a return to growth in Industrial. Construction grew mid-single digits, supported by strong wire and cable sales tied to data center and infrastructure projects across the U.S. and Canada. Industrial was up low single digits with improved day-to-day demand in the U.S. and increased large infrastructure project activity in Canada. OEM sales were up double digits. Backlog increased 6% year-over-year and was up 1% sequentially.

We continue to see strong quoting activity and a healthy pipeline of opportunities, particularly in data center and electrification-related projects. Adjusted EBITDA margin for EES was 8.1%, a sequential improvement of 120 basis points, reflecting strong operating leverage on higher sales volume, improved gross margin and disciplined SG&A management. Adjusted EBITDA margin was down 80 basis points year-over-year, primarily due to lower gross margin, which declined 100 basis points. This was driven by a higher mix of large, lower-margin projects, particularly in wire and cable, as well as competitive pricing pressures discussed last quarter. Looking ahead, we remain confident in the long-term growth trajectory of EES, supported by secular trends in electrification, data center expansion and infrastructure modernization.

Turning to Slide 6. In the second quarter, CSS delivered strong performance with organic sales up 17% and reported sales up 19% year-over-year. This growth was driven by continued strength in WESCO data center solutions, which was up over 60% year-over-year, fueled by large-scale project activity with hyperscale customers. The Ascent acquisition completed in December of 2024 added about 1.5 points to CSS growth this quarter. Data center sales represented nearly 40% of CSS revenue in Q2, up from approximately 30% in the prior year quarter.

Importantly, we have not seen any slowdown in customer demand. Based on discussions with our end-user customers, capital budgets remain intact, and customers are expanding their scope of products and services with WESCO. Security sales were also a positive driver of our CSS results and were up double digits. When including security-related data center sales, the business grew high teens year-over-year. Enterprise network infrastructure declined high single digits, primarily due to reduced demand from service providers. Enterprise network infrastructure, including sales for WESCO data center solutions projects grew in the quarter.

CSS backlog increased 36% year-over-year and 11% sequentially, reflecting continued strength in data center project activity and strong order momentum across our global accounts. On profitability, CSS delivered an adjusted EBITDA margin of 8.8%, up 60 basis points year-over-year and 90 basis points sequentially. This improvement was driven by strong operating leverage on higher sales, partially offset by lower gross margin, which declined 80 basis points year-over-year due to mix from large hyperscale data center projects.

Turning to Slide 7. I want to take a moment to discuss the continued momentum we're seeing in the broader data center space and WESCO's role in that growth. Customers continue to rely on WESCO and our supplier partners to meet their evolving needs, including an expanding portfolio of services we provide across the data center life cycle. From a total company perspective, data center sales surpassed $1 billion in the quarter. Data center sales represented approximately 18% of WESCO's sales in Q2 2025 and 16% on a trailing 12-month basis, up from 10% TTM through June 2024. This growth was driven by strong performance by CSS in the white space and by EES in the gray space, with CSS representing the majority of the sales contribution.

As shown across the top of the slide, we first introduced this framework at our Investor Day last September. It outlines the 2 key stages of the data center construction cycle, time to power and the construction period. The key takeaway remains: projects announced and funded typically take 4 to 7 years to become operational. Our solutions now span the full spectrum of the data center life cycle, from power and electrical distribution systems and advanced IT infrastructure to on-site services that support ongoing operations. This ensures we can deliver value throughout every phase of the data center life cycle.

On the lower left side of the slide, you can see the substantial and accelerating growth in our total data center business over the past 5 quarters. Data center sales on a trailing 12-month basis were approximately $3.5 billion. This growth has been driven by organic initiatives and strategic acquisitions that have expanded our service capabilities. We remain committed to partnering with our suppliers to service our customers from cradle to crate, supporting everything from initial builds, on-site services, ongoing upgrades and modernization.

Turning to Slide 8. In the second quarter, organic and reported sales in UBS declined 4% year-over-year. As we've discussed since early 2024, the utility market continued to face headwinds from customer destocking and slower project activity, driven in part by the current interest rate and regulatory environment. These dynamics have weighed on both investor-owned and public power customers over the past 6 quarters. Utility sales were expected to be down year-over-year in Q2 but came in lower than what we thought at the beginning of the quarter. That said, we saw a return to growth in our IOU customer base, which was up low single digits in the quarter. We expect this improved momentum to continue, and preliminary July sales for UBS were up slightly, supporting our outlook for a return to overall utility growth in the second half of 2025.

Broadband performance remained strong in the quarter, with sales up mid-single digits year-over-year, reflecting a return to growth in the U.S. and continued growth in Canada. Backlog increased both sequentially and year-over-year, reflecting improving order rates and new customer wins. Adjusted EBITDA margin for UBS was 10.4%, down 40 basis points sequentially from 10.8% in Q1 and down 160 basis points year-over-year. We remain highly confident in the long-term growth potential of our utility business, supported by and required for the secular trends of electrification, green energy and grid modernization. These drivers are expected to accelerate demand for our solutions over the coming years.

Turning to Page 9. In the second quarter, we delivered $87 million of free cash flow representing approximately 45% of adjusted net income. On a trailing 12-month basis, we've generated $644 million of free cash flow, representing approximately 96% of adjusted net income. We've had strong accounts payable performance and disciplined receivables management throughout the first half of the year. Inventory increased to support customer projects and to ensure supply chain disruptions are limited.

On the right side of the page, you can see that net working capital intensity has steadily improved over the past 3 years. This quarter, we saw a 60 basis point year-over-year improvement, with net working capital intensity declining from 20.5% to 19.9%. That follows a 40 basis point improvement in 2024 over 2023. We remain confident in our ability to drive stronger cash generation in the second half.

Turning to Page 10. We redeemed our $540 million Series A preferred stock in June, the first opportunity to do so at face value. This high-cost instrument carried a 10 5/8% dividend rate, and its redemption marked a significant milestone in our capital structure optimization. To fund the redemption, we utilized proceeds from our $800 million issuance of 6 3/8% senior notes due 2033, which we completed earlier in the year. This refinancing action reduced our total financing costs and created a substantial benefit to our net income, EPS and cash flow run rates. The estimated annualized benefit from this transaction is approximately $32 million or $0.65 per diluted share. Note that you will see in the press release that we recognized a $28 million gain on the redemption, which is not included in our adjusted results.

In addition, with the financing completed in the first quarter, we extended the maturities of our accounts receivable facility and revolver to 2028 and 2030, respectively. As a result, we now have no significant debt maturities until 2028, providing enhanced financial flexibility and stability.

Turning to Page 11. On this slide, we provide an overview of the actions we've taken to manage the potential impacts on our business from the recent tariff announcements. The left side of the chart lists the potential impacts, including supplier price increases. We received a significant number of price increase notifications in the second quarter with a continuation of increased notifications in the third quarter. Second, the potential for lower customer demand due to higher costs. We continue to monitor overall demand and have not seen any significant demand destruction through the first half of 2025.

Third, transitional benefit from inventory gains. Inventories valued using average costs, meaning in an inflationary environment, our inventory is below market price. We will see a temporary gain to gross margin, assuming higher supplier price increases are absorbed in the market. Note, this is a temporary benefit as we turn our inventory every 2 to 3 months. And lastly, our direct tariff exposure on purchases for which WESCO is the importer of record into the U.S. and from the U.S. to Canada represents less than 4% of our cost of goods sold.

In response, we took the following actions to mitigate these impacts and protect our margins. We're passing supplier increases through, including our margin. We're working with suppliers so that minimum lead times between announced price increases and effective dates are adhered to, according to our standard purchasing terms. We're leveraging our global scale to identify opportunities to purchase locally sourced products or products less impacted by tariffs, and we're reducing imports from those countries with the highest tariffs. Finally, we're optimizing our supply chain logistics and reengineering our global supply chains to mitigate risk and manage tariff exposure.

I want to provide an update on the tariff environment during the second quarter and what we've seen in July. In the second quarter, the number of price increase notifications was up 300%, with an average price increase announcement of a mid- to high single-digit rate. Through July, price increase notifications are up 30% in count versus all of Q3 2024 with an average mid-single-digit rate increase. This continues to be an evolving and dynamic situation based on the timing of tariff implementation and negotiations. WESCO has a long operating history of successfully navigating similar global supply chain challenges. We're executing our playbook to effectively manage our business in the current volatile environment.

Turning to Slide 12. This slide shows our updated 2025 outlook by strategic business unit and the individual operating groups. As John mentioned, we are revising our 2025 outlook and increasing our expected organic sales growth rate to up 5% to 7% versus 2.5% to 6.5% previously. Sales into data centers continue to exceed our initial expectations as do broader electrical sales trends. These strong positive tailwinds are only partially offset by the timing of the utility recovery.

For EES, we are benefiting from data center growth, along with broader positive trends in electrical end markets. We now expect growth across all 3 markets we serve: construction, industrial, and OEM, supporting our revised segment outlook of mid-single-digit growth, up from our prior growth expectation of flat to low single digits. Due to the continuation of exceptionally high growth in our data center business, we are increasing our full year outlook for reported sales growth of WESCO data center solutions from up about 20% to up approximately 40%.

Security momentum accelerated in Q2, and as a result, we now expect full year reported sales to increase, an improvement from our prior outlook of flat. These are the primary drivers of our CSS sales outlook, moving to growth of up low double digits from mid- to high single-digit growth prior. And lastly within UBS. Given the lower-than-expected sales performance in the second quarter and the evolving timing of the utility recovery, we are revising the segment sales to down low single digits to flat from our prior expectation of flat to up low single digits.

We continue to expect utility to inflect in the second half and return to growth. IOU customers returned to growth in Q2 and we anticipate public power customers will follow suit in the back half of the year. Broadband is still expected to be roughly flat for the full year.

Moving to Page 13. We are increasing and narrowing our ranges for organic and reported sales growth, adjusting our EBITDA margin range and maintaining the midpoint of our prior ranges for adjusted EPS and free cash flow. We are revising our 2025 sales outlook based on the accelerating growth in the first half of the year and our expectation for continued strong top line growth in the second half of 2025. We acknowledge the uncertainty and volatility surrounding tariffs and the impact of the overall economy, but demand for data centers has been strong and our electrical end markets are improving. Backlog grew sequentially and year-over-year in all 3 businesses with CSS up 36%.

I want to emphasize that our outlook does not include the impact of future pricing actions, including tariffs. This is consistent with our past practice, given the lag between when a supplier announces a price increase and when it begins to impact our revenue. While we have seen a significant uptick in price increase notifications as we moved through the second quarter, our outlook does not include any potential benefit to sales at this time. We recognize the potential risk of demand, given tariff-related pricing. Any future pricing would help mitigate any demand impact to our revenue outlook.

In terms of free cash flow, we expect to deliver between $600 million to $800 million in 2025. At the midpoint of our outlook, this implies free cash flow of approximately 100% of adjusted net income. Our strategy for how we deploy cash flow remains unchanged. The use of available cash will be allocated to the highest return opportunity, and we will continue to make decisions in the best interest of shareholders over the long term. 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.

In the near term, given the current economic environment, we expect to prioritize delevering the balance sheet. However, we will continue to be opportunistic regarding share repurchases and acquisition opportunities. We continue to seek acquisitions that expand our capabilities and better serve our customers, particularly those engaged in high-growth end markets.

Turning to Page 14. This slide shows the year-over-year monthly and quarterly sales comparisons and our expectations for the third quarter. You can see the return to growth in the last quarter of 2024 and the acceleration in the first half of 2025. As mentioned, preliminary July sales per workday growth is up approximately 10%, and we expect third quarter reported sales will be up mid- to high single digits. We expect organic sales will be up a similar amount as there is no difference in workdays year-over-year and FX headwinds have moderated.

We expect adjusted EBITDA margins will be approximately 40 basis points lower than the third quarter of the prior year, again primarily reflecting the project and product mix impacts to gross margin discussed earlier. Sequentially, we expect EBITDA margins to be up approximately 20 basis points.

Moving to Slide 15, let me briefly recap the key points before we open the call to your questions. We delivered another strong quarter with organic sales up 7%, led by CSS up 17%, EES up 6% and data center revenue surpassing $1 billion, up 65% year-over-year. Utility was softer than expected but investor-owned utility sales returned to growth. EBITDA margin expanded 90 basis points sequentially, driven by stable gross margin and strong operating leverage. Momentum continues into Q3 with record backlog, strong July sales and an increased full year organic growth outlook.

We redeemed our preferred stock in June and have no debt maturities until 2028. Finally, we're actively managing tariff impacts and global trade uncertainty, leveraging our proven playbook to protect margins and to support growth. With that, operator, we can now open the call to questions.

[Operator Instructions] Our first question today is from Nigel Coe with Wolfe Research.

So very, very clear, Dave, about the policy around pricing. So just to be double clear, the gross margin benefit from any price increases in the second half of the year, not part of the guide, no price increases part of the guide, just want to make that double clear. And then within the third quarter, obviously, strong start in July. Have you seen a genuine demand increase, thinking about sequential trends here more than anything else or was July mainly easier comps?

Yes, let me start with the outlook. You are correct. So none of the tariff impact, whether on sales or gross margin, is included in our second half outlook.

With respect to July, Nigel, we're really encouraged with the start. For CSS, the beat goes on. For EES, we saw accelerating momentum really starting with the return to growth in Q4 last year so that trend continues. And most notably, what's different is, and again, this is the last day of July today, so tonight, sales will close out the month, but UBS is now tracking, as a segment, as positive growth. So again, that's accelerating momentum. The vector continues.

Okay, that's clear. And then just on the UBS margins in 2Q, they were down 40 basis points versus 1Q despite volumes being higher sequentially. So just wondering if you could just maybe touch on that. I understand utility margins are higher, but just wondering about the mix within the mix there. What are you seeing within the mix in utility?

Yes, Nigel. A couple of things that are driving that. There was some mix, different customer mix obviously coming through in the second quarter. But also sequentially, one of the big drivers is that the SG&A went up sequentially. Like in all of our businesses, we do that merit increase effective April 1. And the Utility & Broadband Solutions business runs a very lean SG&A. So on the aspect of declining sales versus the prior year plus that increase in SG&A was an impact to the margin.

Nigel, when you think about the structure of the P&L for utility, it's -- and UBS overall, that is, very good operating cost as a percentage of sales. It runs with lower gross margin but has the highest EBITDA margin of all 3 businesses, all 3 reporting segments. So we're very well positioned as utility returns to growth and overall UBS returns to growth in the second half. As it's been the case in the past, we'll get significant operating leverage on that sales growth, which will result in better EBITDA margins for UBS.

The next question is from Deane Dray with RBC Capital Markets. Moving on, the next question is from Tommy Moll with Stephens.

On utility, the insight you provided on the IOU trends was helpful and so I wanted to dig on that a little bit. What can you tell us about the rest of the business there ex IOU? Did things just slide to the right? Just any kind of insight you can provide there would be helpful.

Yes, Tommy. Thanks for that question. So let's step back and put utility into context. Remember, let's just -- let's look at this year, in particular. Utility was down mid-single -- or was down high single digits in Q1, down mid-single digits in Q2. But overall, inside Q2, as you've outlined and as we've outlined, investor-owned utilities returned to growth inside Q2. And so far here in July, UBS overall is positive growth, which represents further improvement in utility as a momentum vector.

When you look at the composition of Q2, it's really important to understand the pieces. For investor-owned utilities, which is the largest percentage of our utility sales, they grew low single digits in the quarter. That's driven by new program wins and the new utility contracts that we started servicing that we had mentioned previously as well as resumed shipments to the IOUs. So it's good to see that those sets of customers returning to growth.

IOUs in general are much further along in the destocking process than public power customers. They have larger work plans to complete. It really was the public power customers that were still down in the quarter. And that public power softness is driven by just a slower recovery versus the IOUs. Let me dig into that a little bit because I know that's where your question was going, the drivers. The public power customers are less capital-intensive than the IOUs, and they typically -- those customers typically don't own their own transmission and substation networks.

And if you look at over the last several years, the cycle coming out of the pandemic when we had extended supplier lead times, the public power customers were behind the IOUs in getting their materials in 2022 and 2023. So as the IOU customers were being delivered all that material, the public power customers started building inventory in late '23 and through '24 as the manufacturers switched from the IOUs to building for the public power customers.

So when you look at the phasing, it's great to see the IOUs returning to growth. We have high confidence in the public power segment of our utility business returns to growth in the second half of this year. Again, and in addition to that, we have a very strong backlog for our transmission and substation business, and our overall grid services applications and solutions will be much stronger in the second half than the first half, given project timing.

So that gives us really strong confidence that the second half represents an overall return to growth for utility. Keep in mind that was consistent with our outlook when we entered the year and we gave the full year outlook and guidance back earlier in the year.

Yes, that's very helpful. On data center, another big move higher here in terms of the outlook for 2025 from up 20% to up 40%. You made some good comments just in terms of not seeing any slowdown in demand, expansion of scope, et cetera. I'm just curious with the moves as big as they are, what other kinds of metrics are you tracking, whether it's number of orders or size of orders? Or how much visibility do you have into these trends right now? I can appreciate it would be a bit difficult.

Yes, I think we have outstanding visibility because I'll remind you and remind our whole investor base that we have this impressive array of direct end-user customer relationships for our WDCS, what we call our WESCO data center solution business. So we also sell with and through contractors and specialty integrators. But we -- but the real power of this business is where we're with the end user, and that includes the hyperscalers, the global hyperscaler customers, Magnificent 7 plus. It includes the MTDC customers, multi-tenant data center customers, many of which are global, as well as enterprise-class customers.

We have a customer account organization that -- where we have teams lined up by customer with an overall leader. And those customers are sharing their R&D investment plans and build schedules with us. And in particular, with the relationship that we have with them and the complete solution, white space, gray space plus the power equation, we're deeply embedded in helping them plan out the overall planning for their global deployment of data center build-outs as well as the execution.

We have an industry-leading capability. It's unmatched in terms of global deployment, and our customers are asking us to do a lot more. So we build up our forecast, to give you the short answer to this, by customer. And what's a great leading indicator is you can see the strong momentum growth, the exceptional sales growth has been continuing. Very strong growth continues in the white space. The gray space continues to grow faster than the white space. The total dollar contribution is smaller because of our breadth and depth in the white space, but we're encouraged that the gray space is growing faster than the number that we've outlined in the materials, the 65%.

And so -- and we're expanding our scope of supply. So we're just really good momentum vector. I think the other thing that's really important that I do want to mention is we're also seeing a lot of discussion about -- with the AI-driven data center build, that increases our scope of supply significantly. As our end user customers move from CPU to GPU base builds, that provides much more content for us. That's true for new data center builds. It's also true for those data centers that are getting upgraded or retrofitted or renovated, let's say, to support the higher AI applications.

So our position in the value chain, the end-user relationships, the momentum vector is strong. And then finally, I'll end with this. Look at the backlog growth, up 11% sequentially and 36% year-over-year. So that gives a good look into what the future demand profile looks like.

The next question is from Deane Dray with RBC Capital Markets.

Can you hear me this time?

Yes, Deane.

Maybe you want to send a CSS team to check out my vendor.

We will help you, Deane. It's great to have you back.

Okay, appreciate it. So just a follow-up on the data center growth and unpacking, and I really find that Slide 7 to be so helpful. Just has there been growth and difference in your opportunity in gray space versus white space, we talked that about -- about that at your Analyst Day, just how has that played out?

So we have a tremendous position, as we've said, for a long time, white space, breadth and depth. The gray space, historically, if you look over a multiyear basis, let's go back 5 to 10 years, was traditionally served direct. But because we are the one-stop shop and complete supply chain solution customer for our end user data center customers, be it a hyperscaler MTDC customer or enterprise class customer for that matter, they're increasingly asking us to do more to manage the total global deployment, which extends into the gray space.

So as I mentioned earlier, Deane, to the last -- to Tommy's question, the gray space grew at a materially higher rate. I'll just give it now. The gray space grew at a 90% rate. EES's sales into data centers grew at 90% quarter-over-quarter, Q2-over-Q2 year-over-year in the second quarter, and the white space was still north of 60%. So we have -- we did foreshadow. We thought we'd be picking up some gray space scope.

In terms of dollar contribution, the majority of the sales are still in the white space, but the gray space is growing at a faster rate versus our white space mix at this point. I think what's really important to understand on that 1 page that shows 3 to 5 years' time to power, 1- or 2-year construction period, that implies a new greenfield or brownfield renovation of a data center build. What's also going to happen is existing data centers are going to get upgraded or retrofitted to support AI applications, shifting from CPU-based builds to a GPU-based retrofit.

You'll have to increase the power to that facility, but that doesn't result in necessarily a lot of gray space additional content, but it's substantial white space content, substantial white space content because of the greater power density required for GPU-based builds and the liquid cooling designs, which is a lot more addressable application spend for us.

So I want to be clear, I think the strength in the white space, which puts us on a plane because of -- we're involved in even the design of these data centers with our end user customers is really the strength we've been pulling through the gray space, and we expect to continue to do that.

That's fabulous color and insight and definitely the kind of context that I wanted to hear because you get mesmerized by the big number, but when you break it out into the individual components and the sectors within data center, that makes sense. So congrats there. And just a follow-up question for Dave. Is there a target on net working capital intensity because you've made really good progress there? And then can you just clarify on the inventory gains, you say they're temporary but will that be hitting the P&L? And can you size it at all at this stage?

Yes. Sorry, let me start with the net working capital. So we clearly have been running higher days. We want to continue to improve our days, particularly on the inventory side. We've not shared publicly the specific target but we have referred back to -- we would like to return back to our pre-COVID levels, which would be closer to a 19% range. So again, part of this comes back to the mix of the business that we have in front of us, particularly with the large projects and how we're providing more services on our sites, which requires we bring inventory in earlier. And then we service that, we get that out to our customers. So that's what we're targeting.

In terms of the inventory gains on the tariff price-related increases, generally, what we will see is, as prices go up, our average with inventory costs will increase over time. Our goal is to use that opportunity to basically price our products at the market, which would reflect a higher price, but our average with inventory will be catching up to that, that creates the margin opportunity. We have not timed that out for you. It's one of the reasons why we don't include it in our outlook. Very difficult to project, given the volatility right now about these price increase notifications and how that will be accepted by the market.

The next question is from David Manthey with Baird.

First off, to clarify, when you say that you're not factoring any incremental tariff pricing, you are factoring in known price increases that you've already taken from suppliers in your guidance, is that correct?

That is correct. So those prices that we've already seen flowing through our P&L, we have included. If you go back to our initial outlook for the year, we had assumed that we would see about 1.5 points of carryover pricing. And as you think about what we've included in our expectations going forward, that's relatively consistent in our outlook that we just provided to you today.

Okay. And was the price benefit that you saw that 1.5%, is that uniform across the segments or is it overweight or underweight 1 segment or the other? And then just to be clear, it sounds like you have seen more price increases, but what you're saying is the guidance did not move for the price increases that was sort of as you expected. Is that right, Dave?

That's correct. So let me go back to the SBU question first and then provide some more color on the pricing that's included in our outlook. If you take a look at how we've reported pricing over the last couple of years, CSS had generally flat impact due to price. We saw more of the increases in our EES, in our Utility & Broadband Solutions business. What we're seeing here in the first half of 2025, we've actually seen some pricing benefit primarily here in the second quarter for CSS, just given some of the price increases that were taken either last year or earlier this year prior to the tariff announcements beginning to hit.

In EES, we saw about a 1 point impact in both the first and second quarter. And a lot of that impact in the second quarter was some of the commodity-driven price increases, particularly as you saw copper pricing and other commodity prices go up. It impacted more of our EES business. I would say that UBS is consistent with EES, where they've seen about 1 point of pricing here in the first half of the year. So it's relatively consistent amongst the 3 SBUs.

Okay. And just to close the loop on this whole thought here as it relates to the price increases. Where you were referring to that inventory gain situation that you have inventory on the shelf, average cost and that the price increase gives you a lift towards gross margin, we should expect that in the third quarter. And just to gauge that, I look back to 2022 and I think you got 80 or 90 basis points, but I think there was extra benefits and other things in there. Could you just give us an idea of what you're thinking about that mix might be in the third quarter?

We would anticipate that in the second half, we would begin to see sequential gross margin improvement. If you take a look at -- right now, the uncertainty is what will the pricing really be reflected in our income statement? Again, reinforcing one of the reasons why we choose not to include it because we don't want to speculate. But if you go back to the period that you were referring to back in 2022, we were getting pricing that was high single digit, low double digit in our business units in each of the quarters.

And so we were seeing that rapid inflation led to gross margin improvement, as you mentioned, Dave. Not all of that was related to pricing. There were other synergies that were being recorded as part of the merger with Anixter. But generally, we would expect to see some sequential improvement in gross margin in the second half. But I would tell you that primarily, what we're counting on now is, given the increase in our sales, in our volume for the second half of the year, sequentially, we should see better supplier volume rebates.

The next question is from Christopher Glynn with Oppenheimer.

A couple on ESS -- EES. So Industrial had been down low single digits for some time to plus low single digits after maybe some deer-in-the-headlight market dynamics going on. You talked about U.S. daily activity a little better. Does it feel like just kind of timing noise a little better here, a little worse there? Or does that feel like a real cadence pivot in terms -- even in terms of animal spirits type of thought process?

Yes. I mean, look, we -- if you step back to the beginning of the year, even our original outlook, we had expected that Industrial would improve as we move through the year. And then obviously, what was not foreseen was when Trump took office, all of the tariffs, that those announcements that's beginning to settle out as the deals are being struck by country and providing some more, I'll say, more stability, more certainty. But that clearly had an impact on the first half of Industrial, Chris.

So here's the way I'd ask you to think about EES. We returned to growth in Q4 last year. First quarter was up 3%, 3% organic growth, Q2 plus 6% organic growth. And now we have a second quarter where all 3 operating groups grew, a step-up in Construction now at mid-single-digit growth benefiting from data center projects, as I mentioned earlier, an increased infrastructure activity. So that's encouraging across the nonresi space.

OEM continues to be up double digits, and that's something that is a continuation of a trend that occurred over the last 2 quarters, 2 to 3 quarters, we're stepping up there, and in Industrial, where your question was. And look, we saw improved day-to-day demand in the U.S. and some increased project activity as well so in U.S. and Canada. So it's really good to see the momentum vector picking up and look at backlog. Backlog is up not just year-over-year but sequentially for all of EES.

So clearly, one of the takeaways should be for CSS, the exceptionally strong data center growth, the beat goes on, eclipsing $1 billion of sales in the second quarter, a huge mark. EES momentum is picking up, definitely improving, improving vector. We're seeing that show up in the numbers. And then for UBS, the improvement has begun, just started to begin in Q2 with the return to growth for IOUs. And then we gave you the July snapshot. So hopefully, that addresses your question.

Yes, yes. And just to add 1 more topic within that. It sounds like the gray space growth in excess of overall data centers certainly could potentially see further acceleration in -- from that 6% level into the third quarter for EES organic. If you'd care to comment on that bowtie.

Yes. No, I think -- look, I think we're really pleased that gray space is growing faster than white space. I gave you the numbers. Again, it's on a much smaller base, but that's clearly one of a number of positive sequential growth drivers for EES. So far, clearly has helped, Chris, as we move through Q1 and Q2. But as we look at the second half, there's a number of other drivers, too. I'd say generally, electrical demand at all is stepping up. That's the key takeaway.

The next question is from Ken Newman with KeyBanc Capital Markets.

Maybe for the first question here, just a clarification on the pricing on the tariff comments not being built into the guide. When you say, Dave, that the average request, the average increase on some of these quotes is up mid-single digits, is that a blended impact from both book and ship and the project pricing? Or should we think about that ultimate price increase is something closer to half of whatever the nominal increase looks like from suppliers, just given your project mix?

Ken, you're correct. So the number that we quoted where we're seeing, on average, mid- to high single-digit price increase notifications, that's the increase coming from the suppliers. So in the letter that they send to us, they're generally giving us mid- to high single-digit increases on their products. As you mentioned, because of the type of business that we do, where half of our revenue is project-based, those are negotiated prices which aren't necessarily impacted by these price increases dollar for dollar.

So generally, the other half of our business, which would go through our warehouse, our stock and flow business, that's where we'll see those suppliers increase the pricing to us. So we really want to recognize about half of that over the long term, half of the announced price increases over the long term, all of the things being equal.

Right. And then when you think about -- I think it's typically you give customers, what, 60 to 90 days to kind of realize a price push. Is that any different today or is there kind of more of an emphasis to kind of pull that forward, just given all the moving pieces?

We're trying to hold our suppliers to the contractual terms, which requires a lead time. Generally, it's 60 to 90 days, depending on the relationship and the individual supplier. So we are holding to that the best we can. It does take quite a bit of time and effort. We generally get a price increase notification letter. We need to see the buy SKU detailed list to ensure that it gets appropriately loaded into our systems. So that does take some time. We want to make sure that we do it appropriately.

And from our perspective, our suppliers are dealing with the same volatility that we are. So this has been a very volatile situation that we're trying to manage as aggressively as possible.

Yes, okay. And then just quickly for my follow-up here, John, I appreciate all the color on the utility activity this quarter. Maybe just 1 other question is, can you help us kind of think about what -- if there was any sales drag from the project-based activity versus the stock and flow headwind this quarter? And then maybe just how do we think about the margin cadence for UBS as it flips back to growth in the second and third quarter?

Nothing to really call out on project versus stock and flow because what we've got there is we got -- by and large, these end-user relationships with IOUs or public power and we have these utility alliance agreements for many of these customer relationships. And there's nothing meaningful to call out on mix, Ken.

In terms of margin, look, what's -- UBS overall has still got a [ 10 ] handle on the EBITDA margins. And just think about the overall WESCO reported results with utility -- UBS being down 4% year-over-year and being the highest EBITDA margin business. So the SG&A as a percentage of sales is the lowest of all 3 SBUs. Part of that is business model. When the sales growth kicks back in, we get exceptional operating cost leverage, and the EBITDA margin pull-through is outstanding. So that's why we were very clear that as the sales growth recovers and returns, which we appear to be at the front end of that, that the EBITDA margins will expand handsomely as we realize that growth.

The next question is from Patrick Baumann with JPMorgan.

First, clean-up one here on the July growth of 10%. Do you think that included any better than the 1.5% price you reported for the second quarter or is it too hard to discern at this point? And then related to that, given the wild swings we're seeing in copper, which I think was up a lot in July and is obviously down a lot today, we always get questions on the impact to WESCO. Can you remind us the percentage of your business exposed to that copper price movement and the lift maybe you got from that specifically in July? Just trying to kind of peel back the onion a little bit and understand why you assume sales slow in the rest of the quarter versus what you saw in July. Maybe that's a factor.

Yes, Patrick, good. Let me start with, are we seeing increased pricing benefit in July? Very hard for us to discern that at this point. We've got to go through our full close in the analysis. So I really can't comment on the overall pricing benefit in July relative to what we experienced in Q2. On copper, we've seen the swings on copper. So just to remind our investors that commodities are about -- pure commodity product, it's a mid-single-digit percentage of our revenue. And most of our commodities are repriced weekly.

So for example, copper is repriced weekly for what we inform our sales force, what they're going to cost on any bids or a stock and flow sale. And so we have seen that. Now going back to those fluctuations, we did see a copper benefit in the second quarter, but the overall EES pricing was only about 1%. So we didn't see a material impact from that copper volatility in Q2. You saw some of the tariff-based announcements were occurring back in June. There's been some changes to that already. But we have not seen any material impact from that copper volatility through Q2. And as I mentioned for the July pricing, we can't discern that at this point.

Helpful color. And then last 1 for me is just on -- a little bit obscure so we don't talk about it much, but the security market for you is up double digits. I'm just curious what drove the growth there. Is it any large projects? Was it more day-to-day flow type business? Just seemed like a big growth rate for what we generally consider to be a pretty low growth market.

Good question, Patrick. Look, it's up double digits without including the data center sales. If you include the data center sales, security is up high teens. So we've got a terrific security business. We've got the most advanced digital solutions, IP security-based solutions. It's more than just the cameras as well as analog and can support full analog to digital transition for many of our customers in retrofit renovation upgrades as well as new projects.

We've had an upswing in momentum in our security business over the last several quarters. So this is really good to see. Keep in mind, this category, we've got very strong supplier -- set of supplier relationships and it's a global business. So we are selling these applications to end user customers across the global markets. And again, it's being driven beyond not just data centers but kind of the overall core business. So we're really pleased. Security as a business, we have a very large business that operates with scale.

Helpful. And then along those lines, I mean, I think you compete with -- I think it's the ADI business from Resideo. It sounds like they're looking at alternatives for that business. Is that something that you would kind of look at from an acquisition perspective? Or do you already have too much market share in that particular area and it's not something that would work?

Yes. I mean, look, we don't comment on any particular combinations. So it's -- I know it was announced earlier this week and that separation transaction. And I guess just from a market perspective, we understand why those 2 businesses were separated. But we don't ever comment prospectively on potential combinations.

This concludes our question-and-answer session. I'll now turn the conference back over to John Engel for any closing remarks.

Well, thank you for your support today. We've addressed all the questions that were queued up so I'll bring the call to a close. And again, thank you for your support. It's much appreciated. We have a long list of follow-up calls already scheduled today, tomorrow, even into Monday and Tuesday so we're looking forward to engaging with you. And then we'll be speaking to many of you over the coming months as well. We expect to announce our third quarter earnings on October 30, 2025. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.