Good morning. Welcome to WESCO's Fourth Quarter 2021 Earnings Call. My name is Candice, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call, with a chance for questions and answers at the end. I would now like to hand the conference over to our host, Leslie Hunziker, Head of Investor Relations. Leslie, please go ahead.

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 inherent uncertainties. Actual results may differ materially. Please see our webcast slides as well as the Company's SEC filings for additional risk factors and disclosures. Any forward-looking information relayed on this call speaks only as of this date, and the Company undertakes no obligation to update the information to reflect the changed circumstances. Today, we'll use certain non-GAAP financial measures. Required information about these non-GAAP measures is available on our webcast slides and in our press release. Both of which are posted on our website at wesco.com. Also please note that all references to prior year comparisons reflect pro forma results as if the Company had completed the June 2020 merger with Anixter International on January 1, 2019. On the call this morning, we have John Engel, our CEO; and Dave Schulz, WESCO’s Chief Financial Officer. Now, I'll turn the call over to John.

Thank you, Leslie, and good morning, everyone. It's great to be with you this morning. WESCO's performance in 2021 was exceptional and laid the foundation for the extraordinary value creation opportunity that lies before us. We finished last year with another very strong quarter of market outperformance and achieved new company records for sales backlog and overall profitability. Importantly, we reduced our financial leverage to below 4x EBITDA in just 18 months since closing the Anixter acquisition. It's important to note that all of this has been done under the cloud of the pandemic and global supply chain challenges. I am truly proud of our team's commitment to our vision of the new WESCO and for their focus on providing our global customers with the products, services and supply chain solutions that they need. As the new WESCO emerges, our brand is evolving to align with our new vision, mission and values that reflect the unity, growth and ingenuity that now differentiate our company. We're carrying strong positive momentum into 2022, and the year is off to an excellent start. We strategically invested in our inventories last year to address the global supply chain challenges as well as support our strong pipeline of sales growth opportunities. We are very well positioned to meet increasing customer demand as supply chains are rebuilt this year. As a result, we expect to again deliver market outperformance in 2022, with both expanded margins and double-digit EPS growth. In addition, based on the strength of our continuing execution, we are again increasing the cost and sales synergy targets for a three-year integration program. We are only at the midpoint of our integration plan, but our progress is accelerating, as WESCO accelerates its market-leading positions, expanded portfolio, integration execution and digital transformation investments to build a growth engine that is both resilient and sustainable. Dave will walk you through our 2021 results and 2022 outlook in detail in a few moments. But before I turn the call over to him, I want to provide a few comments on our secular growth trends, a recent new product and services launch and our progress on ESG. Moving to Page 5. As we've outlined over the last several quarters, we are clearly seeing the upside benefits of our cross-selling initiatives and new service capabilities on our results. We're building on this positive execution momentum in 2022 as we begin to capture additional growth from the large-scale secular growth trends outlined on this page. Over the last few earnings calls, I've talked about how we're capitalizing on the increasing public and private investments in grid modernization, rural broadband and data center development. Another trend we're well positioned to benefit from is the rapidly expanding impact of digital and IoT applications on our customers' operations and supply chains. Automation and IoT represent one of the fastest growing set of applications and solutions across our customer base. Combined with other high-growth technologies, such as 5G and cloud computing, automation and IoT, improved operational efficiencies, minimized costs, improved decision-making and enhance the overall customer experience. The IoT applications market is forecast to grow at a 20-plus percent CAGR or compound annual growth rate through the end of this decade. And there's an ever-increasing business need to connect the physical and digital ecosystems to provide a frictionless customer experience. WESCO is very well positioned to capture these additional growth opportunities by combining our product and service capabilities in electrical, utility, data communications, broadband communications and security, and we combine those in the complete solutions for our customers. Now moving to Page 6. WESCO is developing IoT solutions that transform how our customers procure, deploy and utilize digital products and technologies. Highlighted on this page is an example of a new product with embedded services and cloud-based subscription model that we launched a few weeks ago in late January. Our new A/V conference room as a service addresses the growing need for our business customers to make changes to support a hybrid work environment. Employees returning to the workplace have become adept at running their home-based videoconference applications. Business conference rooms are commonly outfitted with displays, connectivity devices and equipment that are difficult to use or have no collaboration system at all. Our end-to-end A/V as a service solution provides customers with a robust conference room infrastructure, new applications, predictive maintenance, and advanced automation and analytics, all in one package. With our subscription-based model, customer labor costs associated with system maintenance are reduced without the typical upfront capital expenditures. And importantly, customers are provided access to the latest technology and 24/7 support. WESCO is committed to developing digital solutions that support data-driven decisions, improve operational efficiencies and provide flexibility for our customers. While still only in the early stages of our digital transformation, it's already very clear that our opportunities will be significant. We'll make sure that along the way. Now moving to Page 7. I'm confident that WESCO is investing in the right areas at the right time. We are deepening our competitive advantage and setting the foundation for long-term profitable growth. At the same time, we're committed to responsible ESG operating practices and a brief update is outlined on this page. As a B2B wholesale distribution and supply chain solutions company, we don't have the same environmental exposure as many of our supplier manufacturing partners. We do, however, assist our customers in meeting their environmental and sustainability goals, particularly in the areas of energy usage and conversion to higher efficiency products and services. We previously set and achieved our company targets regarding greenhouse gas emissions and waste reduction. And we are very proud of our commitment to safety and achieving best-in-class results. After combining with Anixter, we have now set new improvement goals for 2030, as we are fully committed to using our scale and our resources to drive a better, more sustainable future for all our stakeholders. I'm very pleased to highlight that last year, Forbes named WESCO as one of the world's best employers as well as one of America's best employers for women for the second year in a row. In addition, we were recently named to Fortune's list of the Most Admired Companies, in which we were ranked number two in the wholesalers' diversified category. Lastly, I'd also like to highlight that WESCO has been included in Bloomberg's Gender Equality Index for the fourth consecutive year in 2022. In summary, WESCO's newfound scale, expanded portfolio and industry-leading positions, when combined with the integration plan and digital transformation, represent our catalysts for market outperformance and lasting value creation for all our stakeholders. With that, I'll now turn the call over to Dave, who will take you through our financial results and outlook. Dave?

Thanks, John, and good morning. Starting on Slide 9. This summary table compares our fourth quarter results to the prior year. As John mentioned, fourth quarter sales exceeded our expectations. When we updated our outlook in early November, we anticipated sales would decline sequentially versus the third quarter, consistent with historical trends and considering the impact of supply chain disruptions. Sequential organic sales and backlog increased 6% and 14%, respectively. We knew that December would be a wildcard, and we're pleased by the strength of volume that continued through each month of the quarter. Overall, sales were at a record level and up 16% versus the prior year quarter on an organic basis, which excludes the benefit of an extra workday, favorable foreign exchange rates and the impact of the Canadian divestitures we completed in the first quarter of 2021. On a reported basis, sales were up 18%. Currency added 70 basis points to growth, which was partially offset by the divestitures, while the extra workday added 160 basis points. We estimate pricing added approximately 6 points to sales growth in the quarter. Notably, sales were up 11% versus 2019 pre-pandemic pro forma levels. Our backlog reached another record level this quarter, up 14% from the prior record in September. Each business unit posted backlog increases of more than 60% over last year. Heading into the first quarter, demand continues to be strong. Preliminary January results are encouraging, with sales up low teens year-over-year on a workday-adjusted basis and up high teens compared to the pre-pandemic 2019 level. Gross margin was 20.8% in the quarter, up 120 basis points versus the prior year. The strong gross margin performance reflected effective pass-through of supplier price increases, driven by the markets, supply-demand imbalance and the benefits of our value-based pricing program. Sequentially versus the third quarter, gross margin was approximately 50 basis points lower. Mix was a headwind sequentially of approximately 20 basis points, primarily driven by our UBS segments accelerated pace of growth and shipment type mix. UBS sales include a higher percentage of lower gross margin direct ship products than our other business units. The balance of the gross margin impact sequentially was due to a higher allowance for inventory adjustments, including additional write-downs of safety equipment and rising average inventory costs that are catching up with inflationary pricing. Adjusted EBITDA, which excludes the merger-related costs, stock-based compensation and other net adjustments, was 48% higher than the prior year and represented 6.6% of sales which was 140 basis points above the prior year and 130 basis points above the 2019 fourth quarter on a pro forma basis. Adjusted diluted EPS for the quarter was $3.17, a record quarter and up 160% from the prior year. As you may have seen in our press release, in the fourth quarter, we recorded a $37 million curtailment gain related to pension obligations in the U.S. and Canada. This is a one-time non-operating gain, and therefore, excluded from our adjusted results. Additionally, the effective tax rate for the quarter was 16%, lower than our implied guidance provided in November. The lower tax rate was driven primarily by the timing of tax benefits related to foreign-derived intangible income and favorable adjustments to valuation allowance of foreign tax credits as we estimate we now have a higher probability of using these credits in the future. Turning to Page 10. You can see that the higher sales, expanded gross margin and integration cost synergies drove the $104 million increase in adjusted EBITDA. As you'd expect in the strong demand in an inflationary environment, we also experienced higher volume-related operating costs, including shipping and sales commissions, as well as higher expenses for employee benefits and incentive compensation. Finally, we incurred higher expenses related to our investment in systems and digital tools that offset a portion of the growth of adjusted EBITDA. Overall, we delivered strong operating leverage as we generated a 48% increase in adjusted EBITDA on 16% organic sales growth. Turning to Page 11. This table compares our full year 2021 results to the 2020 pro forma results. You will recall that results prior to the merger completed in June were on a pro forma basis. For the full year, sales reached a record level of $18.2 billion and were up 14% compared to the 2020 pro forma level. The record backlog was up 88% over the prior year. Adjusted EBITDA was $1.176 billion, also a record level and 37% higher than 2020. As a percentage of sales, adjusted EBITDA was 6.5% and 120 basis points higher than the prior year. Compared to pre-pandemic 2019 pro forma results, 2021 sales were 6% higher, adjusted EBITDA was 30% higher and adjusted EBITDA margin improved by 120 basis points. Now let me walk you through the results by business unit beginning on Slide 12, note that references to full year 2021 results compare the change versus 2020 full year pro forma results. The sales and EBITDA results in the press release reflect the combination with Anixter as of the end of June in 2020. Turning to Slide 12. Sales in our EES segment were up 18% year-over-year in the fourth quarter on an organic basis, with double-digit growth in all operating groups. This growth reflects construction sales that continue to increase with the recovery of the non-residential market. We also continue to see increasing momentum in our industrial and OEM businesses, in line with the broader industrial recovery. Elevated bidding activity drove a further increase in our EES backlog from its record level in the prior quarter. We also made progress on our cross-sell initiatives and are capturing demand driven by the secular growth trends that John talked about earlier. In the fourth quarter, adjusted EBITDA was $151 million for EES, up 59% from the prior year. Adjusted EBITDA margin was 7.5%, 180 basis points higher year-over-year. This increase reflects effective price cost pass-through, strong cost synergy realization and operating cost leverage. Full year sales were up 19%, with adjusted EBITDA up 62%. As a percentage of sales, adjusted EBITDA was 7.9% for the year, representing an increase of 210 basis points. Turning to Slide 13. Sales in our CSS segment were up 9% versus the prior year on an organic basis. We saw high single-digit growth in network infrastructure, driven by data center and hyperscale projects, as well as continued investments in cloud-based applications and professional audio-visual installations. The security operating group sales were also up high single-digits in the quarter. Backlog was 114% higher than the prior year and increased 11% since September to another record level due to continued strong demand along with the impact of supply chain challenges on project timing. Profitability was also strong, with an adjusted EBITDA margin of 8.3%, 10 basis points higher than the prior year, driven by operating leverage, integration cost synergies and the execution of our margin improvement initiatives. I'd point out that most of the safety inventory write-down was recorded in CSS, which negatively impacted its adjusted EBITDA by approximately 28 basis points in the fourth quarter. For the full year, CSS sales were up 9% and adjusted EBITDA was up 13%, with an adjusted EBITDA margin of 8.4%, a 30 basis point increase over the prior year. This result includes the impact of the inventory write-down that reduced the EBITDA margin by 37 basis points for the full year. In addition to our cross-sell programs, CSS is positioned to benefit from numerous secular trends, the need for increased bandwidth, 24/7 connectivity, IP-based security solutions, and the capacity demands related to remote work and school applications. Turning to Slide 14. Organic sales in our UBS segment were up 22% versus the prior year. Utility demand has remained strong as both our investor-owned utility and public power customers continue to invest in grid hardening and modernization. In the quarter, we benefited from storm recovery sales in both the Gulf Coast and in the Northeast. However, year-over-year storm recovery sales were slightly below the prior year activity levels. Our broadband business was up double-digits again this quarter, driven by continued strong demand for data and high-speed connectivity as well as expansion and connectivity requirements for home-based applications. Additionally, we are benefiting from the sales activity related to Phase 1 of the federal government's Rural Digital Opportunity Fund project. Adjusted EBITDA in the quarter was up 63% for UBS, with margin 230 basis points higher at 9.6% of revenue versus the prior year. This growth was driven by the scale benefit of sales and gross margin expansion. For the full year, sales were up 12% and adjusted EBITDA was up 34%, with an adjusted EBITDA margin up 8.8%, a 140 basis point increase over the prior year. Now moving to Slide 15. We have an expanding pipeline of sales opportunities, and our cross-sell momentum is building. We're capitalizing on the strength of the complementary portfolio of products and services as well as the minimal overlap that exists between legacy WESCO and legacy Anixter customers. Customers are benefiting from our ability to be the one-stop shop for their products, services and supply chain solution needs. Opportunities exist across all three of our global business units. Recall that in June, we increased our target level of cross-sell synergies from $150 million to $500 million of cumulative sales by the end of 2023 due to a larger cross-sell opportunity and faster generation than we had originally anticipated. Based on the strength of our execution and our expanding pipeline, today, we are increasing that target again from $500 million to $600 million, and to date have generated approximately $365 million of cross-sell synergies. Recent cross-sell wins in the fourth quarter include our EES business, where we were able to expand WESCO's relationship with a multinational integrated energy company. Another example, CSS was awarded business to refresh wireless access points for 2,100 locations of a national DIY retailer. And finally, our UBS business is also growing through cross-selling, where we recently won a two-year project to provide materials and material management services for a broadband services provider. Turning to Slide 16. On the left side of the slide, you can see in the gray boxes that we realized cumulative run rate cost synergies of $188 million in 2021, beating our previous estimate of $182 million. Based on the strength of our execution as well as the accelerated pace of synergy realization, we are increasing our 2022 targeted cost synergies to $250 million in 2023 estimate to our cumulative $315 million. Recall that these savings are relative to the 2019 pro forma base. On the right side of the slide, we've outlined the $315 million of cost savings targeted by synergy type. And in the chart, you get a sense for the synergies that have been realized to date in each category. For example, the estimated $45 million in corporate overhead savings have now been fully realized. The largest remaining synergies are those that take longer to execute, including the supply chain and field operations buckets. Turning to Slide 17. On the left side of the page, you'll see a bridge from full year 2021 adjusted net income to free cash flow. Working capital was a $613 million use of cash for the year, which was substantially above normal levels. Offsetting this use of cash was a combination of depreciation and amortization, and other items, including payroll and benefits, interest and income taxes that were a net source of cash, and capital expenditures and other IT-related costs of approximately $85 million. Free cash flow was $94 million representing 16% of adjusted net income below our outlook for the year. We call our implied outlook for the fourth quarter, assumed a reduction in sales sequentially with networking capital as a source of cash in the quarter. The higher than expected sales led to a higher receivable balance and continued strategic and inventory to ensure we maintain our customer service levels and support projects in our growing backlog. While the fourth quarter is typically a source of cash, and 2021 net working capital was a use of cash of $210 million in the quarter, including $100 million for inventory. The timing of inventory purchases also led to a lower accounts payable balance, resulting in a cash draw of $100 million in the quarter. On the right side of this page, you can see that we are gaining efficiencies in working capital. Using a five-quarter ending balance sheet average calculation, net working capital improved approximately six days versus 12/31/2020, driven by lower inventory days outstanding and days payable. Moving to Slide 18. Reducing our leverage is a top priority. In the fourth quarter, we reduced leverage by 0.2x trailing 12-month adjusted EBITDA and brought our leverage ratio to 3.9x. This accelerated pace of de-levering reflects the strength of our B2B distribution model and our ability to quickly return to our target leverage range. Total debt was reduced by $205 million in the fourth quarter, with net debt down by $32 million. Since closing the Anixter acquisition 18 months ago, our leverage is 1.8 turns lower. We remain on track to return to our target leverage range of 2x to 3.5x during the second half of 2022. Moving to Slide 19, you can see our 2022 outlook. This year, we estimate low to mid-single growth. We are encouraged by the market indicators and expect the demand environment to continue to be strong. However, we recognize that supply chain constraints and the pace of inflation present some uncertainties this early in the year. We continue to expect to outperform our markets as a result of our capabilities and cross-sell programs, which we estimate will deliver incremental sales of 2% to 3% above the market. Lastly, keep in mind that 2022 has one more workday than 2021, which we estimate will add 0.5 point of growth in 2022. We expect foreign exchange to be neutral. Also embedded in our outlook is a contract with a utility customer that will shift from a full revenue model to a service fee model. This will negatively impact sales by approximately 0.5 point, with no impact on EBITDA. So in total, we expect sales to grow 5% to 8%. For adjusted EBITDA margin, our outlook is for a range of 6.7% to 7%. We expect our effective tax rate to be approximately 25% for the year and adjusted earnings per share in the range of $11 to $12. When it comes to free cash flow conversion, we expect to generate free cash flow of at least 100% of adjusted net income. This outlook reflects a handful of assumptions I'd like to walk you through. Our short-term compensation structure is reflected in our margin outlook at a target payout. This is a tailwind of approximately 30 basis points compared to 2021, where we paid out short-term compensation above target. This accrual could change as we move through the year depending on how our performance compares to target plan. We expect transportation and logistics costs will be an incremental headwind to margin in 2022 of approximately 20 basis points. Reported depreciation and amortization will be lower than 2021, primarily due to the accelerated trademark amortization of certain brands. We recorded $32 million of accelerated amortization in 2021 and expect to record approximately $10 million in 2022. On an adjusted basis, depreciation will be about flat with 2021. On cash flow, we expect to spend approximately $120 million in combined capital expenditures and IT digital investments. On the statement of cash flows, approximately $45 million will flow through capital expenditures and approximately $75 million will flow through changes in other assets. We will realize the full $18 million of annual interest savings related to the redemption of our 2024 notes that we completed in June of last year. Recall that in 2021, we realized approximately $2 million of the full $18 million benefit. Our outlook does not incorporate the potential benefit of any further refinancing activity this year. Our outlook assumes an average diluted share count of just below 53 million shares for the year. And lastly, this outlook does not reflect any potential changes to tax law in any locations that we serve. Moving to Slide 20. Before opening the call for questions, let me provide a brief summary of what we covered this morning. 2021 was an exceptional year for WESCO. We delivered very strong financial results as we finished the first 18 months of integration following the combination with Anixter. Sales were up in every segment both year-over-year and compared to 2019 pre-pandemic levels. EBITDA margins expanded substantially, driven by our gross margin improvement program as well as value-based pricing execution and an accelerated pace of synergy capture. We increased our market share through sales execution and cross-selling programs. We increased our targets for both cost synergies and cross-sell synergies twice in 2021, representing both the larger opportunity and faster execution than we originally anticipated. We reduced our leverage by 1.8 turns since closing the acquisition 18 months ago and are on track to return to our target range in the second half of this year. Lastly, we're making excellent progress on our IT and digital roadmap and are exceptionally well positioned to benefit from the secular growth trends that John discussed earlier. With that, let's open the call to your questions.

Our first question comes from Deane Dray from RBC Capital. Your line is now open. You may go ahead.

Thank you. Good morning everyone and congrats on the strong finish to the year. So maybe you start with the demand outlook for '22. Dave commented on the strength in January. Can you rank order your end markets by expected strength? And really talk about the pricing power. The 6 percentage points you realized in the fourth quarter, how much does that carry into '22? And then if I can also have you address backlog, how much do you expect to be able to work that down, in what time frame?

Yes, I'll begin by saying that the execution momentum and positive results we achieved in Q4 were exceptional. We finished much stronger than anticipated in December. What's even more encouraging is that following that strong close in December, we started off very strong in January. This strength is evident in the sequential backlog build and sales growth in Q4, along with impressive preliminary year-over-year results for January. We're observing a good balance across all end markets, indicating a demand recovery phase, though it remains slightly supply constrained. That's why we strategically invested in our inventories, positioning ourselves well for 2022. Demand is strong across all markets, even though we don't operate in residential markets, so fluctuations there do not impact us. The industrial sector is in recovery and showing continued strength, as reflected in the EES results. However, there are some supply chain challenges affecting certain categories within CSS, which hindered sales growth in Q4. Nonetheless, backlog growth in that area remains exceptional and is outpacing our other two businesses. We expect strong growth driven by favorable secular trends. UBS had an outstanding performance in Q4, and the positive momentum continued into the new year. Dave and I are proud of the team’s execution and the positive outlook for this year. Regarding pricing, we are still in the early stages of our enterprise-wide margin improvement program. Anixter performed well over the past few years, and we’ve refined that program across the enterprise. I’m very pleased with how we have managed price/cost dynamics leading to gross margin expansion in 2021, and that momentum is building. We are in an inflationary cycle, as we mentioned in the last call, and it continues to grow, but it's still supply constrained with acute challenges in certain categories, which is why we invested in inventory. We plan to keep executing our gross margin expansion strategy. With significant top-line growth, we're also achieving margin expansion and strong operating cost leverage. I'll conclude by saying we've increased our three-year synergy targets considerably for both cost and cross-sell. The cross-sell synergies, in particular, have proven to be a critical growth engine for us. Lastly, we did not expect to see our backlog grow sequentially every month in 2021, which has never happened during my tenure. This gives us confidence in the inventory build we have implemented. As supply chains rebuild and we continue to drive sales, we will start to reduce that backlog.

That's all really helpful, and I realized I asked a multipart first question. So just to clarify, regarding the backlog, you mentioned you would be converting it. It was up 88% year-over-year. How much earnings visibility do you have from that backlog? Is it linear or front-end loaded? Could you provide a sense of how that converts?

All three businesses grew above 50%, and our backlog is over 60%, which is well-balanced. It includes a good mix of short, mid, and long-cycle orders, with longer cycles primarily consisting of larger projects, aligning with our typical composition. We don’t frequently discuss this, but the margins in our backlog are at a higher level than before, a trend that started as we built the backlog in 2021. This is a positive indicator of our ability to navigate within a supply-constrained environment. As we convert these backlogs into sales and shipments, we will continue to benefit from these elevated margins compared to last year.

Thank you. Our next question comes from David Manthey of Baird. Your line is now open. Please go ahead.

I really like the new clean and green logo; it looks great on the slide deck. I apologize for always focusing on corporate expenses, but they were lower than we expected this quarter. Dave, could you explain why there was a decrease compared to the previous two quarters, especially given the strong sales and earnings performance this quarter? Looking ahead to 2022, considering the 100% target incentive compensation you're incurring, what can we anticipate for corporate expenses next year in light of technology and other costs?

Yes. The change in the incentive compensation accruals and some adjustments we made in the fourth quarter compared to previous quarters is mainly responsible for this. As we've mentioned, we are undergoing a digital and IT transformation. More expenses related to this will be reflected in the corporate segment, especially due to the enterprise-level hires we are making and the projects we are working on. Therefore, you will notice an increase in corporate segment expenses on a like-for-like basis, excluding the incentive accrual.

Okay. Could you scale that for us or just hirings what we're going to do?

It will be hires, and it's incorporated in our adjusted EBITDA outlook that we provided you.

Yes, it seems that supply is still limited and prices are rising. However, your inventory position is quite strong, so you should continue to benefit from inventory gains throughout 2022. As those factors eventually align, could you provide insight into the short-term inventory gains that distributors are currently experiencing as they utilize their balance sheets? What do you anticipate that will look like? Will it normalize? Are you thinking of it being around 50 basis points or 100 basis points? What magnitude should we expect?

It's very difficult for us to quantify that. However, we are clearly experiencing the advantage of prices rising faster than costs as reflected in our income statement. This is largely due to our average position with inventory. As we replenish our inventory, the average cost is increasing because of inflation. Overall, it has remained a positive factor for us. Over time, assuming everything else stays the same and there are no further increases in prices from suppliers, this favorable situation is likely to decline. Nonetheless, we still have a considerable period ahead regarding the improvement in our cost of goods.

And Dave, I want to highlight that before the acquisition, Anixter implemented an enterprise-wide margin improvement program, which we've discussed previously. The cost price environment back in 2018 and 2019 was different. However, they achieved ten consecutive quarters of core gross margin expansion prior to the acquisition. We have since refreshed and refined that program, taking it enterprise-wide, with a strong emphasis on value-based selling. The new WESCO differs significantly in that it is not merely about a cost plus markup in standard distribution; it focuses on the value we provide to customers and pricing accordingly. We still see significant potential in this enterprise-wide margin expansion program. As price costs evolve, we are fundamentally working on enhancing core margins and are experiencing excellent results. Additionally, our investments in digital applications are tapping into the power of our big data, presenting numerous opportunities to further increase margins. I mentioned some digital products in my last call, such as those focused on intelligent pricing and AI-enabled product search, which are currently being deployed across our company. Overall, we believe there is substantial potential ahead for core margin expansion.

Our next question comes from Sam Darkatsh from Raymond James. Your line is now open. Please go ahead.

A couple of questions. I suppose these are for you, Dave. And my first one, I apologize. I'm going to be throwing a bunch of numbers at you. I'm trying to reconcile the EBITDA guidance for '22. It's effectively $100 million to $200 million up on a year-on-year basis. But when I try to look at some of the line item guidances that you've been providing, I'm getting something much higher than that. So for example, you have $50 million in the variable comp reset. You've got $60 million or so in synergies. You've got, call it, I don't know, $25 million, $30 million in PPE write-downs in fiscal '21. I know you have the $30 million logistics cost as a headwind. But I'm still getting north of $100 million in good guys for '22. And then you have whatever you're going to get EBITDA from the 5% to 8% organic. So I'm trying to figure out why you're only guiding $100 million to $200 million up on a year-on-year basis. I know there's digital, but that can't be that dramatic. It doesn't sound like you're assuming any cost. So, I'm just trying to understand what the offset is that I might be forgetting, Dave.

Yes. I think the one thing that we've not provided any of the details behind it. We did hint to this in our fourth quarter discussion for 2021. But as we've talked about, we are investing in our transformation and in digital. That means expanding the capabilities and expanding the headcount that we have applied to our big data and our enterprise solutions. So right now, that is one of the drivers that we've not called out the specifics, but that would be a headwind as we think about the 2022 outlook that you've just discussed.

I wouldn't describe it as a challenge, Sam. Reflecting on the main strategic reasons for merging these two companies, it's important to remember what we shared during our Investor Day in 2019 regarding the consolidation happening in our value chain and the influence of digital transformation. We are just at the early stages of this process. I believe we could not be happier with the potential of this combination. We are seeing an expansion in core margins and exceptional operating cost efficiency. Additionally, as I mentioned earlier, the standout achievement is our top-line growth, which is exceeding market expectations. This also allows us to invest in our digital transformation while continuing to deliver significant year-over-year improvements. It’s truly rewarding when a strategy comes to fruition.

Yes. Two other things I'll highlight for you, Sam. The first is that we are seeing substantial pressure on our leases. So as you think about the demand for well-suited warehouse space, as we're going to renew leases, as we're looking for new opportunities to expand our footprint, to consolidate our footprint, we are seeing considerable pressure from our occupancy cost. The other thing is, we've been hiring people throughout 2021. As I'm sure you're all seeing in the press, I mean, there is substantial pressure on wage inflation. And so that is another headwind that we've got built into our outlook.

The good news is that when you put everything together, Dave, 2022 is set to be another year of significant value creation.

Agreed. Second question. The synergies for '22, the $60-some-odd million incrementally, I'm guessing a big chunk of that is going to be supply chain related. As such, because your vendor negotiations typically occur in the first quarter, might we then imagine that those synergies would be more front-end weighted this year as it works through your cost of sales?

So Sam, it's not just about the supply chain; it's important for everyone to understand that it's operations in addition to supply chain. I mentioned in the last earnings call that we are in the early stages of implementing a new WMS and TMS package. This is also a crucial factor when combined with our supply chain network optimization. We've tackled much of the straightforward tasks, but as we roll out the new WMS and TMS across our network, it will facilitate further streamlining and consolidation of our operations and our supply chain management down to our suppliers. It's crucial to recognize that we are currently in the integration phase, halfway through. This has always been part of our plan, which is divided into three phases over three years, and it remains a priority for us as we move through this year.

So, the synergies would be ratable as the year progresses then? Is that the takeaway, John?

I think, Sam, that's the right assumption.

Yes, they are not front-end loaded. That's the short answer, Sam. As we work on the supply chain network in the first 18 months, we are identifying numerous facilities. The optimization will take place in the second half of this integration program, and I am eager to see the benefits once everything is implemented.

Our next question comes from Nigel Coe of Wolfe Research. Your line is now open. Please go ahead.

Obviously, a really strong finish to the year, congratulations. I want to go back to the EBITDA margin bridge. Just do the end question on the price cost, because one of your competitors talked about a slight step back with the inflationary pressure. So just wondering, we're still expecting price cost to be a tail in '22. But really, my question is, how do you see the 20, 50 basis points shaking out amongst the segments? And the third of the question really that CSS was flattish in '21. Obviously, inventory was effect of it. Just wondering, if any of the three segments is pushing on putting that range more or less?

Yes, it's Dave Schulz. Aside from the adjustment related to inventory write-downs, we anticipate all of our business units to fall within the range of adjusted EBITDA that we've specified. There are no specific factors affecting one business unit differently from the others. The market opportunity appears to be relatively consistent across the three SBUs, and there are significant opportunities in each. All three are actively working on margin improvement programs. We are closely monitoring our cost structure, so there is nothing unique that would suggest one SBU faces less or more opportunity than the others for expanding their EBITDA margin percentage.

That's great. Very, very clear. And then on the inventory, good job on sort of like stocking up there. Would you expect to still build inventory for the first half of the year as to normal? So, we're sort of more back on a normal seasonality basis here. And then just any color on sort of how you're faring on stock outs and availability of product versus some of your competitors?

In response to the question about inventory and supply chains, I want to emphasize that as supply chains are rebuilt and our demand increases, leading to higher sales and a reduction in backlog, our strategic approach to managing inventories will support this. We anticipate scaling back on the inventory build we implemented in 2021. This is contingent on our continued strong performance in the market; if demand rises while our backlog also grows, we will ensure we have the working capital necessary to support that. We expect to see a return to normalcy as we progress through the year and supply chains stabilize. Regarding stock availability, we are focused on monitoring our product availability and sales rates closely. This vigilance has guided our working capital management and specifically our inventory levels. Despite the current supply chain constraints, we've successfully maintained strong availability and fill rates. We view ourselves as a reliable partner in challenging times, leveraging our scale and supplier relationships to ensure consistent supply for our customers. I'm very pleased with the team's performance and feel confident about our preparedness for 2022. Lastly, I want to highlight that supply chain integrity, resilience, and sustainability are central to our value proposition as we collaborate with our suppliers for the benefit of our customers.

Thank you. Our next question comes from Tom Moll of Stephens. Your line is now open. Please go ahead.

Wanted to circle back to the outlook you provided on the adjusted EBITDA margin for the coming year. So if I look at the midpoint of the 20 to 50 basis points improvement that you called out, and I tried to sum up everything we've heard thus far. I think you're communicating that both in terms of gross margin rate and on operating expense leverage, both of those should improve on a full year basis, but if you could just confirm or push back there? And then anything you would want to call out on the sequential progression on the SG&A line, even qualitatively, just to help us think about the quarters would be helpful as well.

Yes. We are not providing specific guidance on the gross margin versus the operating expense, but we did share the adjusted EBITDA margin. We have discussed our margin improvement program, which mainly targets gross margin, and we are committed to executing that plan. Our focus remains on giving you an adjusted EBITDA outlook. Concerning SG&A, we expect an increase from Q1 to Q2 due to the timing of merit increases effective April 1. This usual increase in SG&A will occur, and for the rest of the year, it will rely on our sales volume and patterns. We anticipate a typical seasonal trend in our sales, with a drop from Q4 to Q1 expected again in 2022 due to a strong Q4 performance. Based on our project backlog and seasonal factors, we expect sales to grow from Q2 to Q3, followed by a decline from Q3 to Q4. The SG&A pattern will similarly reflect this trend, apart from the significant merit increase impacting SG&A in the second quarter.

That's helpful. And as a follow-up, I wanted to talk strategically on your M&A pipeline here. With the visibility to hitting your target range on leverage by midyear, I think you said, and with several quarters now where both on the cost synergy side and the sales synergy side, you're performing above expectations on Anixter, so there is an argument to make that the better that integration goes, the more appetite and the more urgency there would be for continued consolidation. On the other hand, you've got your hands full with the transaction of that size even if it's gone well thus far, but could you update us there on the M&A appetite?

I believe that M&A is a crucial value creation strategy for us moving forward. Looking at WESCO's history since going public, we've effectively utilized M&A to drive value. The portion of the value chain we occupy remains highly fragmented. As we move ahead, M&A will definitely be a key lever for our overall value creation efforts. In the short term, however, we are focused on generating strong free cash flow to reduce our leverage. Originally, our goal was to reach our target leverage range by mid-2022, but we expedited that timeline to the second half of this year and are seeing positive momentum. The key value creation lever we have identified is that we can not only pursue smaller strategic acquisitions but also undertake large transformational ones. Merging two equal-sized companies is inherently challenging in any market, and doing so during a pandemic adds to that difficulty. We are pleased with the initial results. There is still significant potential to realize the integration benefits that we have identified, along with opportunities for digital transformation.

Thank you. Our next question is from Steve Barger of KeyBanc. Your line is now open. Please go ahead.

Thanks for to put me on the end here. I’m just trying to use the Slide 4 in front of the presentation. I'll ask about conference room as a service. Just how big is that market? What do you expect the CapEx is to stand that up? What's the return profile? And really, what's the objective here?

I'll start with the last part of your question. Steve, good morning. In our recent calls, we have discussed the initial applications that are part of our overall digital transformation strategy. The examples we provided over the past few quarters focused on applications that operate within our company. We have invested substantial effort in the first 18 months to integrate data from WESCO and Anixter into a new, world-class data lake and begin using that data to improve our operations. This effort is foundational. At the same time, we are looking at new digital products and applications for external use, one example being conference room as a service, which we launched this quarter. This shows our intention to offer customer-facing opportunities through new products and services. We have core capabilities in audio-visual solutions, a market that was appealing even before the pandemic, but the shift to hybrid work environments has increased its potential. This service operates on a subscription model where the customer does not own the product; we manage it instead. I encourage you to visit our website to see how we present ourselves and how we intend to offer this service. It's a new concept for both WESCO and Anixter. Those familiar with us can check our website for more information. This is just one example of the many new launches we will pursue in the coming years.

And to the first part of the question, how are you defining addressable market there? And how much are you spending on CapEx in terms of staffing that and then expanding it up?

The incremental investment is minimal. We did not need to allocate additional resources. It involved repurposing existing resources from our A/V operations and utilizing new resources that we were already adding as part of our IT and digital group for our transformation. Therefore, the incremental investment is considered minimal. We have not quantified it as it's related to an individual product rather than a market, so I won't provide specific sizing information. However, we included it today to illustrate that our digital investments will not only focus on applications within our facilities using our big data but will also encompass new customer-facing products and services. So, that is really the biggest question, and it's a phenomenal opportunity. That's what our digital transformation will enable. This cannot be fully discussed in an earnings call. So stay tuned for our Investor Day, which will start to provide more details on that. I think we're a little bit over time, but these are excellent questions. If there’s anyone else in the queue, we'll follow up with you after the call. I'd like to conclude our call and thank you all for your support; it is truly appreciated. We look forward to speaking with many of you in the coming days during investor events. The next two events we'll be participating in are the Raymond James Institutional Investors Conference and the JPMorgan Industrials Conference, which are coming up shortly. Have a great day.

This concludes today's conference call. Thank you for your participation. You may now disconnect your line.