Release Date: May 02, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Record free cash flow generation of $731 million in Q1, with a trailing 12-month total of over $1.4 billion, demonstrating strong cash management and operational efficiency.
- Successful reduction of net debt, improving financial leverage to 2.6x EBITDA, nearing the target range of 1.5 to 2.5x, enhancing financial stability.
- Robust backlog and healthy bid activity levels support expectations for sequential growth throughout the year, indicating strong market demand.
- Strategic divestiture of the Integrated Supply business, with plans to use the $300 million proceeds for share repurchases, reflecting a proactive approach to capital allocation.
- Reaffirmation of full-year outlook for organic sales growth, adjusted EBITDA margin, and adjusted EPS, providing a positive outlook and confidence in continued operational performance.
Negative Points
- Organic sales were down approximately 3% versus the prior year, reflecting challenges in certain end markets and a tough comparison to a strong previous year.
- Gross margin declined by about 60 basis points due to lower billing margins and inventory adjustments, indicating pricing and cost management pressures.
- Increased SG&A expenses driven by higher salaries and operational costs, which could impact profitability if not offset by revenue growth and cost management strategies.
- Continued weakness in the CSS segment, particularly in enterprise network infrastructure and security sales, which may affect overall performance if not addressed.
- Potential challenges in inventory management and optimization, as indicated by the need for better visibility and management of branch inventory levels.
Q & A Highlights
Q: On the SG&A, you mentioned the pickup sequentially on comp. But are we still in the kind of the framework where SG&A growth for the full year will be sort of below revenue growth, we still get a little bit of SG&A productivity? And maybe just talk about some of the kind of measures to that inflation.
A: Yes, Nigel, let me start with the expectations for our SG&A. As we mentioned, we do have a $100 million headwind related to not only the merit increase, which is effective in the second quarter, that will be a low single-digit increase to our people costs but we also do have the restoration of the incentive compensation. And we called out that, combined, that's about a $100 million headwind. So when you think about how we're looking at the cost actions, we do have some carryover benefit of the cost actions that we had taken in 2023, we're doing -- we did $20 million of additional structural cost takeout as part of the first quarter actions. So from our perspective, if you take a look at those bread crumbs, part of our issue that we have is, we mentioned with the Integrated Supply divestiture, we will see the gross margin benefit. There's not a lot of SG&A benefit with that business coming out. So from that perspective, we are expecting to have efficiency on SG&A. But given the sales growth, it will be more difficult.
Q: On the free cash flow, obviously, a strong performance on accounts payable. I'm assuming that's more of a timing issue, that you might have some headwinds from accounts payable over the remainder of the year. So we should think about offsets from accounts receivable and inventory to offset maybe some of that over the balance of the year. Any help there, David?
A: That is the case. So yes, just going back to the cash flow expectations for 2024, we did have that temporary benefit of accounts payable. That will normalize over the course of the next couple of quarters. While we do still expect that the accounts payable balance will be a source of cash for 2024, we are laser-focused also on reducing our inventory days. So again, we would expect our accounts receivable will grow sequentially with our sales, and then we will continue to stay focused on reducing our inventory levels.
Q: So first, a couple of clarification and quick questions, and then most of my -- thrust of my questions have to do with your inventory management. So the $200 million bump in free cash flow guidance, Dave, is that entirely coming from payables? Since I think you originally were thinking about taking 3 days out of inventory and sales organically doesn't change much. Is that the way to read that?
A: It is a combination of the net working capital. So it is benefits on inventory and the accounts payable source of cash, offset by the accounts receivable.
Q: Maybe we can start with some color, John, on the kind of tone of business. You mentioned bidding activity, but anything specifically around stock and flow, quote activity, any kind of context there for starters?
A: Yes. The overall bid activity levels, the quoting, the types of quotes we're getting, seeing, in many cases, either for larger, more complex solutions and sometimes megaprojects, it's very strong. So our backlogs are holding at historically high levels overall. And when you think about that and compare that against where supplier lead times are now versus 6 months ago, 12 months ago, 18 months ago, that shows even greater strength in the backlog because most of the SKUs across our supplier partner base were back to pre-pandemic levels in terms of lead times.
Q: I want to make sure I heard correctly on the sales trajectory and then unpack some of the assumptions there. But I think I heard you say, Dave, from a sequential standpoint, sales improved from 1Q to 4Q. So maybe you could just clarify if I heard that correctly. And if so, are you assuming the typical sequential improvements there just through the months? Or is there some haircut you're applying at some point along the way?
A: Yes, Tommy. So we do have the expectation, more sequential increases in our sales. So when you take a look at the typical seasonality by quarter, on a sequential basis, we typically see our first quarter down that low to mid-single digits, which we just delivered. For the second quarter, we anticipate a mid-single-digit increase sequentially. That ties out with about the last 5 years of the history.
Q: Just picking up on Tommy's question. Within the second quarter, relative to the down 2% April versus flattish 2Q guide, what's the visibility confidence? Any particular nuances with May and June that we should be aware of?
A: There's no particular nuances with May and June off of what we saw in the month of April. The 1 thing that I'll just remind you is that, that divestiture occurred on April 1, so you've got to pull out the $700 million of sales on a reported basis in Q2 through Q4. But we are essentially anticipating that the second quarter shapes up in line with typical seasonality versus Q1. In the months within the second quarter, we're expecting that typical seasonality as well.
Q: Forgive me if I missed it, but just focusing on that down 2% in April. Are we already seeing a rebound in the CSS business, just kind of given what the outlook is for the year here? Or is it more of a back half kind of dynamic when we're thinking about the volume rebound in CSS, specifically?
A: So year-over-year, CSS and EES for April, these are preliminary sales results, are down low single digits. But UBS, which is now without WIS, so it's utility and broadband, was flattish. So compared to Q1, we're seeing UBS is kind of a little better year-over-year.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
