Hello and welcome to Wesco's First Quarter 2023 Earnings Call. I would like to remind you that all lines are in a listen-only mode throughout the presentation. 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 inherent 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 relayed on this call 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 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. On this call today, we have John Engel, Wesco's Chairman, President, and Chief Executive Officer; and Dave Schulz, Executive Vice President and Chief Financial Officer. And now I'll turn the call over to John.

Thank you, Scott, and good morning, everyone. It's a pleasure to be with you today. We're off to a strong start this year and set a new first quarter company record for sales, backlog, margin, and profitability. The power of our increased scale, our industry-leading positions, and our expanded portfolio of products, services, and complete solutions is evident in our continued strong performance. We delivered double-digit organic sales growth driven by secular demand trends, share gains, and ongoing improvements in the supply chain. All three of our business units set new records for first quarter sales as well as gross margin. We delivered another impressive quarter of cross-sell results, which continue to exceed our expectations. We're confident that 2023 will be another transformational year for Wesco. We're making excellent progress on our digital transformation and expect our strong sales growth and margin expansion to continue. As you saw in our release earlier this morning, we reaffirmed our full-year outlook, and we expect to generate significant free cash flow in 2023. As Dave will discuss in more detail later in the call, we are focusing our cash generation on debt reduction in the near term. As a result, we expect to reduce our leverage below 2.75 times, which is the midpoint of our target range by year-end. That creates increased capital allocation optionality for us in the second half and entering next year. Now turning to page 4. The strength of our business model and the success of our integration efforts since closing the Anixter acquisition in mid-2020 have established a track record of superior results for our company. This page highlights our first quarter record results compared to the pro forma pre-pandemic results of legacy Wesco, plus legacy Anixter in the first quarter of 2019. As you can see, we have clearly outperformed the market, delivering impressive sales growth and margin expansion, and we've achieved record profitability, all while rapidly deleveraging our balance sheet. Most importantly, our dedicated team of Wesco associates continues to provide resilient and critical supply chain solutions for our customers around the world, capturing the benefits of our deep exposure to sustainable secular growth trends that drive our future sales and profitability. So with that, I'll now turn the call over to Dave.

Thanks, John, and good morning, everyone. I'll start on slide 5 with a summary of our first quarter results compared to the prior year. As John mentioned, we delivered first quarter record sales, gross margin, adjusted EBITDA margin, and adjusted EPS. Our cross-sell program again exceeded our expectations. Our ability to cross-sell Wesco and Anixter products and services contributed approximately $220 million of sales in the quarter. On an organic basis, sales were up 11% in the quarter driven by a combination of price and volume, along with share gains. We estimate pricing added approximately five points to sales growth with the benefit primarily in our UBS and EES segments. On a reported basis, sales were up 12% as additional sales from Rahi were partially offset by a headwind due to foreign exchange rates in the quarter. Backlog continues to be at historically high levels. In total, backlog was up 21% year-over-year and flat sequentially from the end of December, including backlog associated with the Rahi acquisition. Supply chains have started to heal and, in some instances, have returned to normal. However, we are still experiencing extended lead times in our EES and UBS segments for critical components such as switchgear, breakers, and transformers. While an improving supply chain is a positive for Wesco, our customers and suppliers, it has created some near-term timing issues around inventory. Specifically, we are adjusting our order patterns to reflect shorter lead times versus last year. Our current inventory levels support our record backlog and our expectation to deliver 6% to 9% revenue growth in 2023. As we start the second quarter, demand has continued to be resilient on top of a tough base period comparison. In the month of April, growth continues to be led by CSS and UBS, which were both up low double digits. Preliminary workday adjusted April sales were up approximately 6% year-over-year, including the impact of a stronger dollar and the Rahi acquisition. On a preliminary workday adjusted two-year stack basis, sales were up 28% in April. Recall that comparables in the first half of the year are particularly challenging. Gross margin was a first-quarter record at 21.9%, up 60 basis points versus the prior year and in line with the fourth quarter of 2022. This result was again driven by our margin improvement program and the effective pass-through of supplier price increases. Adjusted EBITDA, which excludes merger-related integration costs, stock-based compensation, and other net adjustments was a Q1 record and 16% higher than the prior year. Adjusted EBITDA margin was also a Q1 record at 7.6% of sales or 20 basis points above the prior year. Adjusted diluted EPS for the quarter was $3.75, another Q1 record, and $0.12 above the prior year. The primary driver of this increase was core operations as we recognized higher below the line items related to interest and other expenses. Turning to page 6. This slide bridges the year-over-year increase in sales and adjusted EBITDA. Organic sales increased 11% versus the prior year, including a 5% benefit from price in the quarter, along with volume growth in our markets. As expected, the contribution from price moderated in the quarter relative to 2022 as there have been fewer supplier price increases, and the magnitude of these increases has moderated. Adding to this growth was the impact of the $220 million we generated in cross-sell in the quarter as well as continued share gains. Adjusted EBITDA increased 16% versus the prior year. Higher sales and expanded gross margin drove the majority of the increase, along with the realization of cost synergies in the quarter. Consistent with 2022, we continue to experience higher volume related operating costs, including shipping and sales commissions. We also recognized higher expenses for employee compensation and benefits due to inflation and higher headcount as well as cost increases related to the operation of our facilities. SG&A came in above expectations, with the majority of the increase incurred in our EES business unit. Finally, in accordance with our plan, we continued our strategic investments in systems and digital tools. These cost increases were partially offset by the realization of integration cost synergies and lower incentive compensation expense. Turning to slide 7. Organic sales in our EES business were up 4% year-over-year and a first-quarter record. Recall that beginning in Q1, we transferred certain businesses from EES to CSS and UBS to better align our sales management of certain customer accounts. Excluding the impact of this transfer, EES organic sales would have been 6% above the prior year. The year-over-year growth primarily reflects continued double-digit sales growth momentum in our industrial markets, and solid construction sales up mid-single digits. OEM sales were down low single digits driven primarily by lower specialty vehicle and manufactured structures demand. Backlog was flat with the record December level and 14% higher than the prior year. In the first quarter, adjusted EBITDA was $183 million for EES, down approximately 5% from the prior year. Adjusted EBITDA margin was 8.6%, 60 basis points lower year-over-year. Segment gross margins were up over prior year. However, higher SG&A costs in the quarter, specifically related to higher headcount and transportation and logistics costs drove the decline in EBITDA. We expect EES profitability to improve in the second and third quarters driven by operating leverage on seasonally higher sales. SG&A reductions initiated in the second quarter will take effect in the second half of the year. Turning to slide 8. Sales in our CSS business were a Q1 record and up 13% versus the prior year on an organic basis. Excluding the impact of the inter-segment business transfer I mentioned a moment ago, CSS organic growth would have been 11%. Of critical importance was the strong sales growth in February and March, the two toughest comparables of the quarter. We saw solid growth in network infrastructure, up mid-single digits, driven by data center and cloud applications, as well as very strong growth in security, which was up low double digits, and professional audio-visual installations, which was up more than 30% from the prior year. Backlog, including Rahi, was up 10% over the prior year and decreased 2% sequentially as we were able again to release more projects from backlog due to improved availability of product and a return to more normal lead times across most product categories. Profitability was also strong with a record Q1 adjusted EBITDA and adjusted EBITDA margin of 9%, 40 basis points higher than the prior year, driven by operating leverage, integration cost synergies, and the continued successful execution of our margin improvement initiatives. Turning to slide 9. Record sales in our UBS business were up 18% versus the prior year on an organic basis in the quarter, marking the sixth consecutive quarter of organic growth above 15%. We experienced broad-based growth in our utility and integrated supply business with sales up over 20% and up low double digits, respectively. Broadband sales were down low double digits as certain customers work through higher levels of inventory that were built last year. Backlog was another record in the quarter, up 46% over the prior year and up approximately 1% sequentially. Profitability was exceptionally strong with an adjusted EBITDA margin of 11.3%, up 160 basis points versus the prior year, driven by operating leverage on higher sales, our margin improvement initiatives, and integration synergies. This was the fourth consecutive quarter of adjusted EBITDA margins above 10%. Now moving to page 10. The size of the cross-sell opportunity of combining Wesco and Anixter continues to exceed our expectations. In Q1, we recognized $220 million of cross-sell revenue, bringing the cumulative total to $1.45 billion since the beginning of the program. Our pipeline of sales opportunities remains healthy and expanded again in the quarter. We are capitalizing on the complementary portfolio of products and services, as well as the minimal overlap between legacy Wesco and legacy Anixter customers. As we look at the remaining nine months of the program in 2023, we are increasing our expected cumulative total to $1.8 billion, reflecting the strength of our value proposition against the backdrop of accelerating secular trends. Turning to slide 11. This is a slide that we've shown throughout the integration with the realized cumulative run-rate cost synergies of $188 million in 2021 and $270 million in 2022. We remain on track to meet our expected target of $315 million by the end of 2023. Our focus through the balance of the year is on our supply chain network design and field operations to drive cost synergies. Turning to page 12. On this page, you can see a bridge of free cash flow in the first quarter, which was a draw of $266 million. The primary driver was working capital, which more than offset net income. Receivables increased sequentially in Q1 as some customers delayed payments from March into April. However, accounts receivable reserves and bad debt write-offs are at normal levels. The increase in inventory in the quarter was due to a few factors. As we continue to see supply chains normalize, certain suppliers are accelerating their pace of shipments to us. While the improved availability of product is a positive for our customers, recall that we do not typically ship product to our customers until their entire order is available. As we make progress shipping the backlog of projects, we expect to see a normalization of inventory levels, which will drive cash generation through the rest of the year. Payables were an $87 million use of cash following the $70 million cash generation in the fourth quarter, driven by the timing of purchases in Q1 and normal seasonal cash payments based on prior year accruals. Capital expenditures were approximately $14 million in the quarter, and other sources and uses of cash were collectively an $18 million use of cash in the quarter. Moving to Slide 13. Reducing our leverage has been a top priority since we announced the acquisition of Anixter. While leverage decreased for eight consecutive quarters through the end of last year, our leverage increased one-tenth of a turn in Q1 driven by the use of cash in the quarter. Leverage remains well within our targeted range of 2 to 3.5 turns, and we expect to generate full-year free cash flow of $600 million to $800 million. Given our current debt levels and the interest rate environment, our near-term capital allocation priority will be to pay down debt until we reach the midpoint of our target leverage range, which we expect will occur in the second half of the year. Now moving to page 14. This slide shows the uniquely strong position of our company to drive growth and profitability in the years ahead. The end-to-end solutions that we provide to our global customer base are directly aligned with the six secular growth trends shown on the left side of this page. Our participation in these trends, coupled with increasing public sector investments in infrastructure, broadband, and partnerships with the private sector, make Wesco positioned exceptionally well. As we outlined at our Investor Day last year, we expect to grow 2% to 4% above the market due to the combined benefit of secular trend growth and increasing share. In short, we view Wesco as a secular growth company. Moving to page 15. We are reaffirming our 2023 outlook today based on the demand trends and record results in the first quarter. In 2023, market growth is expected to contribute approximately 4% to 6% to the top line, which is a combination of volume and price. We expect US GDP to be flat in 2023 with our secular tailwinds providing one to two points of volume growth. Price carryover in 2023 will be three to four points based primarily on pricing actions in 2022. Recall that our guidance does not incorporate any impact of future pricing actions. In addition to market growth, we believe our scale and continued cross-selling efforts will contribute an additional one to two percentage points above the market, driving total organic growth of 5% to 8%. After factoring in the additional revenue from Rahi and the impact of working days and foreign exchange, we estimate our reported sales growth will be in the range of 6% to 9%. For our strategic business units, we expect EES reported sales increased by mid-single digits versus 2022, with both CSS and UBS up high single to low double digits. Please note that in the appendix, we have highlighted the account transfers from EES to CSS and UBS we discussed earlier and that began taking effect in Q1. In 2022, these accounts represented approximately $200 million of sales, with 85% moving to CSS and 15% moving to UBS. For adjusted EBITDA margin, our outlook is for a range of 8.1% to 8.4%, which represents approximately 20 basis points of expansion at the midpoint. We expect adjusted earnings per share between $16.80 to $18.30 and free cash flow of between $600 million and $800 million. This free cash flow outlook of $700 million at the midpoint would represent the highest free cash flow in our history. Through the cycle, we still expect the company will deliver free cash flow equivalent to net income. Consistent with the expectations we outlined during our Investor Day in September, we expect to generate $3.5 billion to $4.5 billion of operating cash flow during the period of 2022 through 2026. To note, we expect positive free cash flow in Q2 to return to a net-neutral cash generation for the first half and to deliver the rest of our targeted $600 million to $800 million of free cash flow in the second half of the year. We increased our expectation for interest expense for the year from a range of $330 million to $370 million to a range of $350 million to $390 million, primarily driven by higher variable rates and the timing of debt paydown in 2023. We have detailed our expectation for other expense, which captures certain non-operating expenses, primarily related to the impact of pensions and foreign exchange. In the first quarter, these expenses were approximately $10 million, and we expect $30 million to $40 million for the full year. This expense reflects the recent devaluation of certain foreign currencies, along with slightly higher pension expense. This outlook reflects a revised effective tax rate of about 25% to 26% for the year, lower than our prior expectation due to the benefit of certain discrete items in the first quarter. We still expect an effective tax rate of approximately 27% for the remaining three quarters of the year. This is slightly above our ETR over the past few years, primarily due to the implementation of certain rules in our Canadian business related to hybrid debt instruments. 2022 also benefited from certain one-time discrete items, primarily related to a change in US tax law regarding the valuation allowance on certain foreign tax credits and one-time discrete benefits in Canada. In 2023, we continue to expect to spend approximately $100 million on capital, with an additional $40 million on capitalized cloud-based computing arrangements related to our digital transformation. On the statement of cash flows, approximately $100 million will flow through capital expenditures and approximately $40 million will flow through changes in other assets. For the year, the lower tax rate that we experienced in Q1 will be more than offset by higher interest and other expenses, but we continue to expect adjusted EPS will be within the outlook range. Our outlook assumes an average diluted share count of 52 million to 53 million shares for the year. This outlook reflects our expectation that 2023 will be the third consecutive year of record results, record sales, gross and EBITDA margins, EPS, and a record free cash flow and is consistent with the long-term financial framework we presented at our Investor Day in September of last year. We will complete our integration with Anixter at the end of the year and expect the results in 2023 to substantially outperform the expectations we set and raised since the time of the transaction closed. Moving to slide 16 and before opening the call for questions, let me provide a brief summary of what we covered this morning. The first quarter was a great start to the year. We had record first quarter sales in all three of our business units, along with record gross margin, operating profit, adjusted EBITDA, and adjusted EBITDA margin. We again took share through sales execution in our cross-sell program, and we are again increasing our cross-sell synergies outlook for 2023. Profitability was also strong in the quarter as gross margin and EBITDA margin both expanded versus the prior year. We continue to expect 2023 will be a transformational year with continued execution of our digital initiatives, strong sales growth, and continued margin expansion. Lastly, we remain on track to deliver record free cash flow of $600 million to $800 million to support our capital allocation priorities. With that, we will open the call to your questions.

We will now begin the question-and-answer session. Our first question today comes from Deane Dray with RBC Capital Markets. Please go ahead.

Thank you. Good morning, everyone. We're hearing lots of consternation about channel inventory and customer inventories and whether there's destocking going on. And I was hoping you could just take us through from your perspective, supply chain normalization is allowing companies and customers to be able to release buffer inventory. They're all talking about that. But any time you see or hear about destocking, it raises concerns, is that the early sign of a slowdown? So look, you're right in the ground zero of all of this because you're getting inventory from the suppliers, taking that in, you're seeing the pace with the customers as well. So please share with us what you're seeing with regard to that question. Thanks.

Thank you for the question, Deane. I believe we had a very strong quarter and successfully implemented our annual plan. The mix of our results was slightly different from our expectations, with UBS and CSS performing better than EES, which faced some challenges, yet we still saw growth during the quarter. There remains strong demand overall, and our backlog has remained stable. However, since our backlog is currently running at more than double the normal rate, accumulated over the past few years, combined with elevated inventories, we expect it to decrease. This adjustment will help return our business to a more normalized state, although we did not observe this in Q1, despite achieving 12% reported and 11% organic growth, a sign of strong demand. Bid activity is at an all-time high, and our opportunity pipeline is expanding. We capitalized on significant cross-sell synergies this quarter, achieving excellent results there. In terms of destocking, the most notable area at the customer level is broadband. Companies heavily involved in the broadband value chain are showing this in their results. Last year saw substantial growth, and customers maintained higher inventory levels due to strong secular growth trends and supply chain constraints experienced during the pandemic. We expect customers to take one to two quarters to reduce their inventory, but we anticipate broadband to return to growth in the latter half of the year. I have a positive outlook on broadband in the mid to long term, driven by robust growth factors, including continuous connectivity, automation, IoT applications, and government investments in both the US and Canada, particularly through programs like RDOF and ND. It's also crucial to remember that our purchases reflect our suppliers' sales. We've increased our inventories by over 30% in Q1 2023 compared to Q1 2022 because our suppliers are recovering rapidly, with rising production rates and reduced past dues, leading to faster shipments to us. This relationship is significant since our inventory growth corresponds to their sales figures. Our outbound sales have shown strong double-digit growth, while we maintain a record backlog. I am highly confident as we look toward the second quarter and the second half of the year, which is why we are reaffirming our guidance. I hope this provides clarity.

It's really helpful. I appreciate you taking us through all of that. And just if we could drill down a bit on EES, and I like hearing the expectations that second quarter and third quarter are projected to be better. We don't often hear about specialty vehicle and manufactured housing as verticals. But take us through to the extent that that's meaningful, but more importantly, what you're seeing in the construction markets. Thanks.

We've divided our EES business into three main areas: Industrial, Construction, and OEM. I'll begin with Industrial, which is experiencing significant growth, with rates in the mid-teens. We have a large number of major capital expenditure projects and a record backlog that includes both construction and substantial industrial projects with end-user customers. The long-term trends, particularly reshoring, are very strong. We have direct sales to 90% of Fortune 500 companies, and all of our customers are focusing on reshoring and nearshoring as supply chains are increasingly moving back to North America. I believe we’re at the beginning of a multi-year up cycle or even a super cycle in Industrial, reflected in our double-digit growth this quarter. In Construction, growth is in the mid-single digits for both the US and Canada, supported by a record backlog. The ongoing trends give us confidence. It's essential to note that we primarily deal with non-residential construction, with very little exposure to residential projects, but factors like electrification, IoT, and automation, along with reshoring, are positively impacting our business. Additionally, the significant infrastructure spending approved by Congress has not yet affected our numbers; its impact will be felt in 2024, 2025, and later. Overall, we've had a solid start in construction, even though it represents only 17% of our total sales. The cyclical nature of construction is limited when considering the overall strength and growth in other areas of our business. For OEM, which focuses on our value-added assemblies, the business has historically been somewhat inconsistent but is not facing any structural challenges. We remain optimistic about OEM and our value-added capabilities because the fundamental drivers of growth in Industrial also apply here. OEM provides value-added assemblies that serve various end markets, including Industrial. That's an overview of our segments.

Thank you.

Good morning, John. Good morning, Dave. How are you?

Good morning, Sam.

A couple – two, three questions, I suppose. First, I'm trying to reconcile your flat sequential backlogs with the commentary from some of your primary suppliers. Some, like Eaton, for example, were talking about their backlog sequentially being up high single digits. Are there certain mega products that your vendors are seeing that are not going through distribution per se that they're more vendor-direct, or what else might explain that delta?

The short answer is no, Sam. I would suggest looking across the entire electrical channel or value chain. There are several suppliers with varying performance levels, and many distributors as well. Comparing us to our competitors, we believe we had a very strong quarter and outperformed the market. The suppliers have a range of formats. It's essential to remember that our purchases directly correlate to our suppliers' sales. I'm not going to comment on a specific supplier regarding their order measurement methods. However, I can tell you that our pipeline is at record levels and continues to grow. Our bid activity is very strong, and we remain optimistic about the long-term growth trends affecting the construction sector, particularly our predominant non-residential mix.

And then my second question is, I guess, more high-level and piggybacks on, I think, what Deane might have been getting at. As it stands right now, are you expecting organic sales growth in 2024? I mean we're seeing, obviously, EES softening a bit, and that's your most economically sensitive segment, but your backlogs are obviously very large and stable. So what would have to realistically happen in '24 not to show organic sales growth?

We would need to enter a significant economic downturn. Although we're not providing guidance for 2024, I want to emphasize that the strong secular growth trends we're experiencing are persistent and not just short-term fluctuations. We believe these trends are long-term and structural in nature. Additionally, the transition of our company towards higher growth end markets reinforces our identity as a growth company. When you examine the evolution of our portfolio and our current business mix compared to before the Anixter acquisition, and even looking back 10, 15, or 20 years, you can see a clear shift towards higher growth markets. I remain very optimistic about these secular growth trends and our ability to outperform the market. We've made significant progress in cross-selling, which we continue to enhance this quarter. Achieving this after merging companies is particularly challenging, and it highlights the unique value of our combination. This serves as a key cost driver, along with the rigorous processes we've implemented in our operating model to better utilize our sales force. This allows us to provide more comprehensive solutions to our customers, maximizing our offerings. I have stated before that this represents the greatest opportunity for value creation stemming from the merger, and we are still generating momentum with significant potential for further improvement.

Dave, if I can sneak a real quick one in here. The April, up six. By my math or at least my notes, I think May and June are considerably easier comparisons, maybe like five or 10 points or so. Does that hold?

Yeah. Just to ground everyone on the call, when you take a look at our second quarter of 2022, we had organic sales growth that was up 21%. So again, as we've talked about, if you go back to what we said for April of 2022 on this call, a year ago, we were up 22% in the month of April. So by the math, yes, the comparisons get slightly easier as we progress through May and June.

Thank you both. Appreciate.

Hi. Thanks John. Thanks Dave. Thanks Scott. Good morning.

Good morning.

Yes, returning to your inquiry about the second quarter free cash flow, it appears we are back to neutral, similar to where we started. We generated approximately $3 million in free cash flow during the second quarter. I'm assuming that ARR will decrease throughout the second quarter, but what are your plans regarding inventory? Do you anticipate reducing inventory during this quarter, or is that more likely to happen in the second half?

We do anticipate making progress on inventory, primarily as the supply chains continue to heal and our order lead times return back to normal. Our expectation is that we're going to begin seeing our inventory reduce month-over-month. We actually did see the inventory in the month of March did come down sequentially versus February.

March.

Thank you for the information. Regarding SG&A, you mentioned an increase in investments, especially within EES. It appears you're adjusting in the second quarter for benefits in the latter half of the year. Could you elaborate on the spending in that area? It seems there might be some overstaffing or excess investment. What adjustments are being made, and what do you expect to be a reasonable SG&A run rate for the second half of the year? Thank you.

Significant SG&A increase in EES. We did have across the entire company. We did have both year-over-year and sequential increases. I think the issue that we saw across the entire company was a little bit more severe in EES primarily as we did have to increase some headcount to support the high sales growth. We've also been investing in some new capabilities as well, which has come through. And of course, across the entire company, we continue to invest in our IT and digital transformation. So, not necessarily at the EES level, but you're seeing that at the enterprise level. The other thing I'll highlight is in the first quarter, we did experience some unexpected costs, we would consider onetime in nature, particularly related to benefits. So, we're not expecting that to continue as we enter the second quarter.

Great, thanks, Dave.

Good morning and thanks for taking my questions.

Good morning, Tommy.

I don't want to make a mountain out of a molehill here on EES, but just I do want to clarify one point. I mean your full-year outlook on revenue is unchanged in the mid-singles. And then there was some commentary just around the margin compression and adjustments to the cost structure there. If we think about any change to the revenue trajectory, was it really limited to that weakness in the OEM piece of the business there, or was there anything else you would call out for us?

That was a topic in Q1.

Great. Thank you.

And one other point, Tommy, just to emphasize, I want to clarify that costs increased slightly more than anticipated compared to sales, which came in a bit lower. However, gross margins are at record levels across all three SBUs, including EES in Q1. This is a very important point. The margin expansion improvement program is company-wide, and I know there have been questions regarding potential over-earning. We are very pleased with our gross margin trajectory and are effectively executing this company-wide program.

And John, that's where I was headed for my next question, just on price/cost. It sounds like there's little or maybe even no incremental price assumed in your guide for the year. How would you characterize the environment there on price and then also on any inflationary pressures or lack thereof? What can you give us for an update on that side of the equation? Thank you.

Tommy, it's Dave Schulz. So, we did see the number of supplier price increase notifications came down in the first quarter, and the average percentage increase also came down substantially of what was published in the first quarter. So, as we took a look at how pricing impacted each of our business units, we mentioned both UBS and EES experienced most of the benefit, much less so within our CSS business, but I also want to highlight that the pricing benefit that we saw in the first quarter for EES moderated versus what we saw in 2022. Reporting 8s and 6s as a price benefit throughout the quarters in 2022, that came down to a 5, and that came down even more so within our EES business, which, of course, is impacting the sales growth. But overall, we continue to work closely with our suppliers to understand what is their expectation for price increases. There have been some of our large suppliers that have announced that they expect to take additional price increases. But again, we've not included that until we actually see it impacting our revenue. And we just didn't see a lot of incremental pricing in our first quarter results.

Thanks, Dave. I’ll turn it back.

Thank you. Good morning. So got a lot of demand questions. Just wanted to talk about some of the kind of non-operating cost items. On the $30 million to $40 million other expense range, sounds like foreign exchange is a big part of that. But my experience, non-operating FX adjustments are often very unpredictable, period-specific, and even end-of-quarter mark. So curious what's going on there with that $30 million to $40 million? And then on interest, with the quarter in the books and better view on the cash flow linearity, curious why that's still a $40 million range interest line item.

Yes. Chris, let me address the other non-operating. So in the first quarter, we recorded $10 million, which was primarily related to the Egyptian pound, where we saw a significant devaluation occur in the beginning of January and then another devaluation 10 days later. So that is the balance sheet revaluation of the assets and liabilities that we have within that market. To put that into context, all of 2022, we had a $10 million other expense non-operating. So we've matched the full year 2022 in just the first quarter. It is an estimate at this point that we are going to continue to see additional devaluation, particularly upon that Egyptian pound currency. Again, it's our estimate at this point. That will be impacting. But as you mentioned, Chris, it is extremely volatile and very difficult to predict, but we at least wanted to call that out that if this continues, we have at least $10 million already in the first quarter. There could be additional risk. We've included that in our assumptions for the outlook. On the interest expense, when you take a look at where we were relative to the guidance we provided in February, we have borrowed more money here in the first quarter. We've also seen interest rates increased about 35 basis points. So from that perspective, we've assumed that we will be carrying higher debt levels in our initial assumption, but then also the interest rate environment continues to be volatile and has been increasing. So we've reflected that appropriately in our assumptions.

Thanks for that Dave. And just to stick with the other expense. Are you hedging against additional Egyptian pound devaluations during the year essentially?

At this point, we are not because it's extremely expensive in order to provide that. And in some cases, the instruments are not even available is our current view of the market.

Sorry. I meant the guidance hedge against that risk. I wasn't talking about a financial hedging instrument.

Yes. We've provided you with what we believe is the appropriate range given that risk. Obviously, the additional non-operating other expense is a headwind to our EPS guide at the midpoint, but we believe we've got the right outlook for EPS for the full year, not changing it this early in the year.

Good morning. Thank you. First, I was wondering if you could outline the puts and takes...

Good morning, David.

Could you outline the puts and takes relative to the 60 basis points year-to-year gross margin increase? And specifically, can you address, do you think there's any inflationary inventory benefit in the first quarter gross margin? And then secondarily, could you discuss the contribution there from rebates and what's the typical high-low range? I know that's a lot, but hopefully, you can touch on those.

Certainly. The 60 basis point improvement in gross margin year-over-year included a benefit of about 10 basis points from supplier volume rebates compared to the previous year. When we recorded our supplier volume rebates in the first quarter of 2022, our forecast for the full year was quite different, and that contribution from supplier volume rebates as a percentage of sales increased throughout the latter half of the year. As we look at the synergies we've built into 2023, especially regarding supply chain, we expect about a 10-point benefit compared to Q1 of 2022. The primary factor driving the enhancement in gross margin has been our gross margin improvement program, which we have actively pursued across our organization to refine how our field understands pricing for the value of our products and services. This improvement has mostly been driven by transactional margin enhancements. Addressing your question about whether inventory profits are influencing this, we do not see that to be the case. One reason our pricing decreased is that we noticed some commodity costs declined in the latter part of 2022 and the beginning of 2023. Therefore, we faced a headwind in some of our pure commodity categories, although they represent a small percentage of our business, likely in the mid-single digits. But this was a headwind for those commodity-based products due to the global market conditions. We do not believe this issue relates to profit from inventory; rather, it stems from the benefits of our margin improvement program.

Okay. Thank you for that. And then second, to hit on the cash conversion cycle here, but my calculation is something like 84 days. It looks like historically, they've been in the 60 to 70 range. I mean, how many days do you think you can take out by year-end? Is there a target? Do you suppose to get back to that previous range? And maybe you could just discuss where that might come from, whether it's DSO, DPO inventory days.

Yes. Let me address specifically on inventory. And depending on the calculation that you're looking at, we essentially saw our inventory days increased by 11 days in 2022. We don't believe it's prudent to assume that we can get all of that back in 2023, give some of the challenges with the supply chain. What we are expecting, though, is that we will get about half of that improvement back, and we will continue to grow net working capital at less than half the rate of sales. So our primary focus when it comes to net working capital is really on the inventory. When I take a look at our receivables and our payables days, they've been relatively stable. We know that there were some higher accounts receivable balances through the end of March, just looking at our collections the last two weeks of March versus the first two weeks of April, we saw a nice pickup in our collections in April. So our primary focus when it comes to net working capital is inventory.

I appreciate, Dave. Thank you.

Good morning. Thank you for taking my question. Regarding your comments about UBS, you are still anticipating high single-digit organic growth for the year, which started strong in the first quarter. However, it seems you are expecting a significant slowdown to mid-single digits for the remainder of the year. Could you provide more detail on the broadband segment and what you expect for UBS this year, as the deceleration appears quite pronounced?

I think we indicated high single to low double digits, and we're off to a solid double-digit start. It would have been stronger if we hadn't experienced a low double-digit decline in broadband. While broadband isn't a large segment of our portfolio, it does have attractive growth trends, and we remain optimistic about the mid to long-term outlook. I don't want to specify our guidance within those ranges, but I want to emphasize that we have strong momentum in our UBS business, particularly driven by the new part of UBS. We're very positive about the utility sector, which has become a growth market, unlike a decade ago. Broadband is also showing promise. Our integrated supply business within UBS, which serves the industrial market, has also been introduced to better support utility and public tower customers with a customized model. We're looking to extend this approach into the broadband value chain as well, which we believe has significant potential. Our integrated supply business achieved double-digit growth this past quarter, which reflects the industrial segment. So, while I'm not giving official guidance, I wanted to provide that context.

No, I really appreciate the color there. Thanks so much for that. And then just secondly, on the digital investment costs, it looks like yields were up $30-ish million year-over-year give or take. Can you just talk us through some of the key priorities on the digital investment side and where you're really focusing the investment there?

Yes, Chris. This is Dave Schulz. We are implementing several enterprise programs, some of which we've previously discussed. This includes updates to our financial and HR systems, as well as various digital applications we've been developing. These efforts not only aim to enhance our margin improvement program, which is largely digitalized, but also to provide our field representatives with tools to promote our value proposition more effectively. We are making a number of investments in this area. We provided a brief overview during Investor Day, and as we gain more insights and are ready to share further details on these initiatives as they launch, we will do so.

Hey good morning guys. Thanks for squeezing me in.

Good morning, Ken.

Good morning. Dave, can you share some insights about the margin profile of the new orders that were added to backlog? I'm interested in knowing if the orders taken in the first quarter meet or exceed the corporate margin average for that quarter.

Hey Ken. I would say that the margins in our backlog are consistent with how we just reported our results. So again, there's some volatility there depending on the end unit and the type of project. But for the most part, I mean, we're not seeing any significant change of the margin in the backlog.

Got it. And just to clarify on some of the inventory challenges you mentioned earlier. I'm curious if you could just dig into what you're seeing specifically relative to the backlog portion of your business versus the stock and flow portion. Any change in momentum across those, whether it’d be in the quarter or even on April to-date?

We haven't observed any major changes in the balance of our inventory between stock and flow and project categories. We anticipate that as supplier lead times get back to normal, we will need to hold less inventory for shorter periods to fulfill complete orders. Much of the increase in our inventory since late 2021 has been due to building our backlog, which consists of firm customer orders. As we increased that backlog and secured some larger projects, we needed to keep inventory longer to meet our customer service expectations. Once supply chains stabilize, we expect to hold inventory for fewer weeks, resulting in a decrease in our net inventory. We consistently assess the optimal mix of stock and flow inventory based on location and business needs, and we adjust this regularly. Currently, our inventory levels are elevated due to a substantial backlog of customer orders that we intend to ship, which is a major factor in our plan to reduce inventory days throughout 2023.

That's very helpful. If I could ask one more higher-level question, John, looking at slide 14 of the presentation, it's useful to see the factors from long-term trends. I'm wondering if you have analyzed or quantified the actual exposure or advantages you anticipate from these long-term drivers in either 2023 or 2024. You mentioned that there hasn't been any benefit from infrastructure yet. How do you view that opportunity moving forward?

Yes, Ken, that's a great question. I would refer you back to our Investor Day, where we presented our overall outlook regarding market growth and our expected market outperformance, which is influenced by secular growth trends and our cross-sell strategy. We provided a framework indicating that we anticipate increasing our market outperformance. Our internal efforts to assess this are ongoing, although we haven't shared specific details externally yet. This aligns with what we discussed during our Investor Day last year. It's also important to note that these trends are long-term and secular. As we progress into 2024, 2025, and 2026, these enduring trends will continue to strengthen, particularly as we see increased infrastructure investments not yet reflected in our value chain. When projects begin, typically our packages are implemented six, twelve, or eighteen months later, depending on the size and complexity of the project.

That’s helpful. Thank you.

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

So I think we're at the top of the hour. I'll bring the call to a close. Thank you all for your support. It's greatly appreciated. We do have a robust calendar this quarter in engagement. We look forward to speaking to many of you. We will be participating in the Oppenheimer Industrial Growth Conference, the Wolfe Research Global Transportation and Industrial Conference, as well as the KeyBanc Industrials and Basic Materials Conference during the second quarter. So with that, I know we've got a lot of follow-up calls scheduled. We look forward to engaging with you. Thanks. Have a great day.