Earnings Call Transcript
WESCO INTERNATIONAL INC (WCC)
Earnings Call Transcript - WCC Q2 2025
Operator, Operator
Hello, and welcome to WESCO's 2025 Second Quarter Earnings Call. Please note that this event is being recorded. I will now hand the call over to Scott Gaffner, SVP, Investor Relations, to begin. Please go ahead.
Scott Louis Gaffner, SVP, Investor Relations
Thank you, and good morning. Before we begin, I want to remind you that certain statements made on this call contain forward-looking information. Forward-looking statements are not guarantees of performance and by their nature are subject to uncertainties. Actual results may differ materially. Please see our webcast slides and the company's SEC filings for additional risk factors and disclosures. Any forward-looking information speaks only as of this date, and the company undertakes no obligation to update the information to reflect changed circumstances. Additionally, today, we will be using certain non-GAAP financial measures. Required information about these measures is available on our webcast slides and in our press release, both of which are posted on our website at wesco.com. On the call this morning, we have John Engel, WESCO's Chairman, President and Chief Executive Officer; and Dave Schulz, Executive Vice President and Chief Financial Officer. Now I'll turn the call over to John.
John J. Engel, Chairman, President and CEO
Well, thank you, Scott. Good morning, everyone. Thanks for joining our call today. We're pleased to report that our sales momentum accelerated in the second quarter, and that's building on our strong start to the year. This marks three consecutive quarters of accelerating sales momentum. After growing 6% in Q1, organic sales grew 7% in Q2. Preliminary July sales per workday have accelerated even further and are up approximately 10% year-over-year. Our second quarter performance was led by 17% organic growth in CSS and 6% organic growth in EES. Setting a new record and a new mark, our total data center sales eclipsed $1 billion. That's for the entire WESCO enterprise in the second quarter, and they were up 65% versus the prior year. This is a clear indication of our leading value proposition and the enduring secular growth trends of AI-driven data centers. Utility, as expected, had declining sales in the first half but has begun to show signs of improvement as sales of investor-owned utilities returned to growth in the second quarter. We continue to expect a return to growth in Utility in the second half of the year. So all in all, we're off to a good start in the first half of 2025. Shifting to profitability, adjusted EBITDA margin was up 90 basis points sequentially as we generated strong operating cost leverage and stable gross margin. And finally, adjusted EPS was up 6% versus the prior year. Turning to our balance sheet and capital allocation priorities. As planned, we completed the redemption of our preferred stock in June. This refinancing strengthens our balance sheet. It also extends our debt maturities and it significantly improves our earnings and cash flow run rates. Following this redemption, we have strong liquidity to support our capital allocation priorities. As you'll recall and as we outlined at our last Investor Day, after funding our common stock dividend and offsetting equity award dilution through stock repurchases, over 75% of our free cash flow generation is targeted to debt reduction, additional stock buybacks and acquisitions. As we begin the second half of the year, I'm very encouraged by our positive and increasing momentum that we're seeing across our business. Backlog is at record levels, up both year-over-year and sequentially across all three business units. July, as I mentioned earlier, is off to a very strong start with preliminary sales up approximately 10% versus prior year. Importantly, in July, this preliminary number reflects growth in all three SBUs, and that obviously includes our UBS segment. We raised our full year outlook for organic sales growth based on our positive trajectory while maintaining our EPS range at the midpoint. As always, we remain focused on what we can control, and that's executing our cross-sell initiatives, managing margins to ensure we get operating leverage on our sales growth and delivering operational improvements enabled by our technology-driven business transformation. As the market leader, we're clearly seeing the growth potential of our WESCO portfolio, which is supported by the enduring secular growth trends of AI-driven data centers, increased power generation, electrification, automation, and reshoring. All this underpins my confidence that WESCO will continue to outperform our markets this year. Before I turn it over to Dave, I wanted to take a brief moment to thank Bill Geary for his service to WESCO. Bill ran our CSS business through June and has left WESCO to assume a CEO position in a privately held company. We wish Bill well in his new endeavors and thank him for positioning the business for continued success. In line with our succession management plan and reflective of our deep talent bench, we appointed Dirk Naylor as EVP and GM to run our Communications & Security Solutions business. Dirk is an accomplished and proven leader within WESCO, and he has been instrumental in developing our growing data center business. With that, I'll turn it over to Dave to walk you through our Q2 results and our outlook for the remainder of the year.
David S. Schulz, Executive Vice President and CFO
Thank you, John, and good morning, everyone. Turning to Page 4. Organic sales in Q2 were up 7% year-over-year, at the high end of our expectations. This growth was driven by approximately 5.5 points of volume and 1.5 points of price. Reported sales increased 8% with sequential growth of 10%. The strong top line performance was led by continued momentum in our data center business, which surpassed $1 billion in sales and grew 65% year-over-year. CSS delivered 17% organic growth and EES grew 6%. UBS sales declined 4%. Adjusted EBITDA margin was up 90 basis points sequentially on strong operating cost leverage and stable gross margin. Adjusted EBITDA margin was down 60 basis points year-over-year, driven by gross margin. Gross margin was 21.1%, flat sequentially but down 80 basis points year-over-year due to project and product mix in CSS and EES that started in Q4 of 2024. Adjusted SG&A increased approximately 8% year-over-year, in line with our expectations, driven by higher employee and facility costs. SG&A as a percentage of sales improved due to operating leverage on our sales growth. Adjusted EPS was $3.39, up 6% from the prior year. I'll walk you through our business unit results beginning with EES on Slide 5. In the second quarter, EES reported and organic sales both increased 6% year-over-year. This improvement in growth was led by strong performance in OEM and Construction, along with a return to growth in Industrial. Construction grew mid-single digits, supported by strong wire and cable sales tied to data center and infrastructure projects across the U.S. and Canada. Industrial was up low single digits with improved day-to-day demand in the U.S. and increased large infrastructure project activity in Canada. OEM sales were up double digits. Backlog increased 6% year-over-year and was up 1% sequentially. We continue to see strong quoting activity and a healthy pipeline of opportunities, particularly in data center and electrification-related projects. Adjusted EBITDA margin for EES was 8.1%, a sequential improvement of 120 basis points, reflecting strong operating leverage on higher sales volume, improved gross margin and disciplined SG&A management. Adjusted EBITDA margin was down 80 basis points year-over-year, primarily due to lower gross margin, which declined 100 basis points. This was driven by a higher mix of large, lower-margin projects, particularly in wire and cable, as well as competitive pricing pressures discussed last quarter. Looking ahead, we remain confident in the long-term growth trajectory of EES, supported by secular trends in electrification, data center expansion and infrastructure modernization. Turning to Slide 6. In the second quarter, CSS delivered strong performance with organic sales up 17% and reported sales up 19% year-over-year. This growth was driven by continued strength in WESCO data center solutions, which was up over 60% year-over-year, fueled by large-scale project activity with hyperscale customers. The Ascent acquisition completed in December of 2024 added about 1.5 points to CSS growth this quarter. Data center sales represented nearly 40% of CSS revenue in Q2, up from approximately 30% in the prior year quarter. Importantly, we have not seen any slowdown in customer demand. Based on discussions with our end-user customers, capital budgets remain intact, and customers are expanding their scope of products and services with WESCO. Security sales were also a positive driver of our CSS results and were up double digits. When including security-related data center sales, the business grew high teens year-over-year. Enterprise network infrastructure declined high single digits, primarily due to reduced demand from service providers. Enterprise network infrastructure, including sales for WESCO data center solutions projects grew in the quarter. CSS backlog increased 36% year-over-year and 11% sequentially, reflecting continued strength in data center project activity and strong order momentum across our global accounts. On profitability, CSS delivered an adjusted EBITDA margin of 8.8%, up 60 basis points year-over-year and 90 basis points sequentially. This improvement was driven by strong operating leverage on higher sales, partially offset by lower gross margin, which declined 80 basis points year-over-year due to mix from large hyperscale data center projects. Turning to Slide 7. I want to take a moment to discuss the continued momentum we're seeing in the broader data center space and WESCO's role in that growth. Customers continue to rely on WESCO and our supplier partners to meet their evolving needs, including an expanding portfolio of services we provide across the data center life cycle. From a total company perspective, data center sales surpassed $1 billion in the quarter. Data center sales represented approximately 18% of WESCO's sales in Q2 2025 and 16% on a trailing 12-month basis, up from 10% TTM through June 2024. This growth was driven by strong performance by CSS in the white space and by EES in the gray space, with CSS representing the majority of the sales contribution. As shown across the top of the slide, we first introduced this framework at our Investor Day last September. It outlines the two key stages of the data center construction cycle, time to power and the construction period. The key takeaway remains: projects announced and funded typically take 4 to 7 years to become operational. Our solutions now span the full spectrum of the data center life cycle, from power and electrical distribution systems and advanced IT infrastructure to on-site services that support ongoing operations. This ensures we can deliver value throughout every phase of the data center life cycle. On the lower left side of the slide, you can see the substantial and accelerating growth in our total data center business over the past five quarters. Data center sales on a trailing 12-month basis were approximately $3.5 billion. This growth has been driven by organic initiatives and strategic acquisitions that have expanded our service capabilities. We remain committed to partnering with our suppliers to service our customers from cradle to grave, supporting everything from initial builds, on-site services, ongoing upgrades and modernization. Turning to Slide 8. In the second quarter, organic and reported sales in UBS declined 4% year-over-year. As we've discussed since early 2024, the utility market continued to face headwinds from customer destocking and slower project activity, driven in part by the current interest rate and regulatory environment. These dynamics have weighed on both investor-owned and public power customers over the past six quarters. Utility sales were expected to be down year-over-year in Q2 but came in lower than what we thought at the beginning of the quarter. That said, we saw a return to growth in our IOU customer base, which was up low single digits in the quarter. We expect this improved momentum to continue, and preliminary July sales for UBS were up slightly, supporting our outlook for a return to overall utility growth in the second half of 2025. Broadband performance remained strong in the quarter, with sales up mid-single digits year-over-year, reflecting a return to growth in the U.S. and continued growth in Canada. Backlog increased both sequentially and year-over-year, reflecting improving order rates and new customer wins. Adjusted EBITDA margin for UBS was 10.4%, down 40 basis points sequentially from 10.8% in Q1 and down 160 basis points year-over-year. We remain highly confident in the long-term growth potential of our utility business, supported by and required for the secular trends of electrification, green energy and grid modernization. These drivers are expected to accelerate demand for our solutions over the coming years. Turning to Page 9. In the second quarter, we delivered $87 million of free cash flow representing approximately 45% of adjusted net income. On a trailing 12-month basis, we've generated $644 million of free cash flow, representing approximately 96% of adjusted net income. We've had strong accounts payable performance and disciplined receivables management throughout the first half of the year. Inventory increased to support customer projects and to ensure supply chain disruptions are limited. On the right side of the page, you can see that net working capital intensity has steadily improved over the past three years. This quarter, we saw a 60 basis point year-over-year improvement, with net working capital intensity declining from 20.5% to 19.9%. That follows a 40 basis point improvement in 2024 over 2023. We remain confident in our ability to drive stronger cash generation in the second half. Turning to Page 10. We redeemed our $540 million Series A preferred stock in June, the first opportunity to do so at face value. This high-cost instrument carried a 10.625% dividend rate, and its redemption marked a significant milestone in our capital structure optimization. To fund the redemption, we utilized proceeds from our $800 million issuance of 6.375% senior notes due 2033, which we completed earlier in the year. This refinancing action reduced our total financing costs and created a substantial benefit to our net income, EPS and cash flow run rates. The estimated annualized benefit from this transaction is approximately $32 million or $0.65 per diluted share. Note that you will see in the press release that we recognized a $28 million gain on the redemption, which is not included in our adjusted results. In addition, with the financing completed in the first quarter, we extended the maturities of our accounts receivable facility and revolver to 2028 and 2030, respectively. As a result, we now have no significant debt maturities until 2028, providing enhanced financial flexibility and stability. Turning to Page 11. On this slide, we provide an overview of the actions we've taken to manage the potential impacts on our business from the recent tariff announcements. The left side of the chart lists the potential impacts, including supplier price increases. We received a significant number of price increase notifications in the second quarter with a continuation of increased notifications in the third quarter. Second, the potential for lower customer demand due to higher costs. We continue to monitor overall demand and have not seen any significant demand destruction through the first half of 2025. Third, transitional benefit from inventory gains. Inventories valued using average costs, meaning in an inflationary environment, our inventory is below market price. We will see a temporary gain to gross margin, assuming higher supplier price increases are absorbed in the market. Note, this is a temporary benefit as we turn our inventory every two to three months. And lastly, our direct tariff exposure on purchases for which WESCO is the importer of record into the U.S. and from the U.S. to Canada represents less than 4% of our cost of goods sold. In response, we took the following actions to mitigate these impacts and protect our margins. We're passing supplier increases through, including our margin. We're working with suppliers so that minimum lead times between announced price increases and effective dates are adhered to, according to our standard purchasing terms. We're leveraging our global scale to identify opportunities to purchase locally sourced products or products less impacted by tariffs, and we're reducing imports from those countries with the highest tariffs. Finally, we're optimizing our supply chain logistics and reengineering our global supply chains to mitigate risk and manage tariff exposure. I want to provide an update on the tariff environment during the second quarter and what we've seen in July. In the second quarter, the number of price increase notifications was up 300%, with an average price increase announcement of a mid- to high single-digit rate. Through July, price increase notifications are up 30% in count versus all of Q3 2024 with an average mid-single-digit rate increase. This continues to be an evolving and dynamic situation based on the timing of tariff implementation and negotiations. WESCO has a long operating history of successfully navigating similar global supply chain challenges. We're executing our playbook to effectively manage our business in the current volatile environment. Turning to Slide 12. This slide shows our updated 2025 outlook by strategic business unit and the individual operating groups. As John mentioned, we are revising our 2025 outlook and increasing our expected organic sales growth rate to up 5% to 7% versus 2.5% to 6.5% previously. Sales into data centers continue to exceed our initial expectations as do broader electrical sales trends. These strong positive tailwinds are only partially offset by the timing of the utility recovery. For EES, we are benefiting from data center growth, along with broader positive trends in electrical end markets. We now expect growth across all three markets we serve: construction, industrial, and OEM, supporting our revised segment outlook of mid-single-digit growth, up from our prior growth expectation of flat to low single digits. Due to the continuation of exceptionally high growth in our data center business, we are increasing our full year outlook for reported sales growth of WESCO data center solutions from up about 20% to up approximately 40%. Security momentum accelerated in Q2, and as a result, we now expect full year reported sales to increase, an improvement from our prior outlook of flat. These are the primary drivers of our CSS sales outlook, moving to growth of up low double digits from mid- to high single-digit growth prior. And lastly within UBS, given the lower-than-expected sales performance in the second quarter and the evolving timing of the utility recovery, we are revising the segment sales to down low single digits to flat from our prior expectation of flat to up low single digits. We continue to expect utility to inflect in the second half and return to growth. IOU customers returned to growth in Q2 and we anticipate public power customers will follow suit in the back half of the year. Broadband is still expected to be roughly flat for the full year. Moving to Page 13. We are increasing and narrowing our ranges for organic and reported sales growth, adjusting our EBITDA margin range and maintaining the midpoint of our prior ranges for adjusted EPS and free cash flow. We are revising our 2025 sales outlook based on the accelerating growth in the first half of the year and our expectation for continued strong top line growth in the second half of 2025. We acknowledge the uncertainty and volatility surrounding tariffs and the impact of the overall economy, but demand for data centers has been strong and our electrical end markets are improving. Backlog grew sequentially and year-over-year in all three businesses with CSS up 36%. I want to emphasize that our outlook does not include the impact of future pricing actions, including tariffs. This is consistent with our past practice, given the lag between when a supplier announces a price increase and when it begins to impact our revenue. While we have seen a significant uptick in price increase notifications as we moved through the second quarter, our outlook does not include any potential benefit to sales at this time. We recognize the potential risk of demand, given tariff-related pricing. Any future pricing would help mitigate any demand impact to our revenue outlook. In terms of free cash flow, we expect to deliver between $600 million to $800 million in 2025. At the midpoint of our outlook, this implies free cash flow of approximately 100% of adjusted net income. Our strategy for how we deploy cash flow remains unchanged. The use of available cash will be allocated to the highest return opportunity, and we will continue to make decisions in the best interest of shareholders over the long term. Our top priority is to invest organically in the business to drive growth and operational efficiency, including the completion of our business and digital transformation. In the near term, given the current economic environment, we expect to prioritize delevering the balance sheet. However, we will continue to be opportunistic regarding share repurchases and acquisition opportunities. We continue to seek acquisitions that expand our capabilities and better serve our customers, particularly those engaged in high-growth end markets. Turning to Page 14. This slide shows the year-over-year monthly and quarterly sales comparisons and our expectations for the third quarter. You can see the return to growth in the last quarter of 2024 and the acceleration in the first half of 2025. As mentioned, preliminary July sales per workday growth is up approximately 10%, and we expect third quarter reported sales will be up mid- to high single digits. We expect organic sales will be up a similar amount as there is no difference in workdays year-over-year and FX headwinds have moderated. We expect adjusted EBITDA margins will be approximately 40 basis points lower than the third quarter of the prior year, again primarily reflecting the project and product mix impacts to gross margin discussed earlier. Sequentially, we expect EBITDA margins to be up approximately 20 basis points. Moving to Slide 15, let me briefly recap the key points before we open the call to your questions. We delivered another strong quarter with organic sales up 7%, led by CSS up 17%, EES up 6% and data center revenue surpassing $1 billion, up 65% year-over-year. Utility was softer than expected but investor-owned utility sales returned to growth. EBITDA margin expanded 90 basis points sequentially, driven by stable gross margin and strong operating leverage. Momentum continues into Q3 with record backlog, strong July sales and an increased full year organic growth outlook. We redeemed our preferred stock in June and have no debt maturities until 2028. Finally, we're actively managing tariff impacts and global trade uncertainty, leveraging our proven playbook to protect margins and to support growth. With that, operator, we can now open the call to questions.
Operator, Operator
Our first question today is from Nigel Coe with Wolfe Research.
Nigel Edward Coe, Analyst
So very, very clear, Dave, about the policy around pricing. So just to be double clear, the gross margin benefit from any price increases in the second half of the year, not part of the guide, no price increases part of the guide, just want to make that double clear. And then within the third quarter, obviously, strong start in July. Have you seen a genuine demand increase, thinking about sequential trends here more than anything else or was July mainly easier comps?
David S. Schulz, Executive Vice President and CFO
Yes, let me start with the outlook. You are correct. So none of the tariff impact, whether on sales or gross margin, is included in our second half outlook.
John J. Engel, Chairman, President and CEO
With respect to July, Nigel, we're really encouraged with the start. For CSS, the beat goes on. For EES, we saw accelerating momentum really starting with the return to growth in Q4 last year, so that trend continues. And most notably, what's different is, and again, this is the last day of July today, so tonight, sales will close out the month, but UBS is now tracking, as a segment, as positive growth. So again, that's accelerating momentum. The vector continues.
Nigel Edward Coe, Analyst
Okay, that's clear. And then just on the UBS margins in 2Q, they were down 40 basis points versus 1Q despite volumes being higher sequentially. So just wondering if you could just maybe touch on that. I understand utility margins are higher, but just wondering about the mix within the mix there. What are you seeing within the mix in utility?
David S. Schulz, Executive Vice President and CFO
Yes, Nigel. A couple of things that are driving that. There was some mix, different customer mix obviously coming through in the second quarter. But also sequentially, one of the big drivers is that the SG&A went up sequentially. Like in all of our businesses, we do that merit increase effective April 1. And the Utility & Broadband Solutions business runs a very lean SG&A. So on the aspect of declining sales versus the prior year plus that increase in SG&A was an impact to the margin.
John J. Engel, Chairman, President and CEO
Nigel, when considering the structure of the profit and loss for utility, as well as UBS as a whole, we have very good operating costs relative to sales. Although it operates with a lower gross margin, it boasts the highest EBITDA margin among all three businesses or reporting segments. We are in a strong position as utility begins to experience growth and UBS also returns to growth in the latter half of the year. Historically, we have seen significant operating leverage with that sales growth, leading to improved EBITDA margins for UBS.
Operator, Operator
The next question is from Deane Dray with RBC Capital Markets.
Thomas Allen Moll, Analyst
On utility, the insight you provided on the IOU trends was helpful and so I wanted to dig on that a little bit. What can you tell us about the rest of the business there ex IOU? Did things just slide to the right? Just any kind of insight you can provide there would be helpful.
John J. Engel, Chairman, President and CEO
Yes, Tommy. Thank you for your question. Let’s take a moment to put Utility into perspective, particularly regarding this year. Utility experienced a decline in the high single digits in Q1 and a mid-single digit decrease in Q2. However, within Q2, investor-owned utilities showed a return to growth. So far in July, we are seeing positive growth overall at UBS, indicating further improvement in Utility momentum. It's crucial to understand the components of Q2. Investor-owned utilities, which make up the largest portion of our utility sales, saw low single-digit growth during the quarter. This growth is attributed to new program wins, new utility contracts that we have started servicing, and resumed shipments to these utilities. It's encouraging to see these customers returning to growth. Generally, investor-owned utilities are further along in the destocking phase compared to public power customers, who still need larger work plans to complete. The lag in public power customers is mainly due to a slower recovery relative to the investor-owned utilities. To elaborate, public power customers are less capital-intensive than investor-owned utilities and usually do not own their own transmission and substation networks. In recent years, following the pandemic, public power customers fell behind in material acquisition compared to investor-owned utilities due to extended supplier lead times. Consequently, while investor-owned customers received their materials, public power customers began building inventory late in 2023 and into 2024 as manufacturers shifted their focus to public power customers. It's reassuring to witness the return to growth among investor-owned utilities. We are confident that the public power segment of our utility business will return to growth in the second half of this year. Additionally, we have a strong backlog in our transmission and substation business, and our grid services applications and solutions are expected to be much stronger in the second half than in the first, based on project timing. This provides us with solid confidence that the second half will see an overall return to growth for Utility, consistent with our outlook when we set the full year guidance earlier this year.
Thomas Allen Moll, Analyst
Yes, that's very helpful. On data center, another big move higher here in terms of the outlook for 2025 from up 20% to up 40%. You made some good comments just in terms of not seeing any slowdown in demand, expansion of scope, et cetera. I'm just curious with the moves as big as they are, what other kinds of metrics are you tracking, whether it's number of orders or size of orders? Or how much visibility do you have into these trends right now? I can appreciate it would be a bit difficult.
John J. Engel, Chairman, President and CEO
I believe we have excellent visibility because I want to remind everyone that we have a strong network of direct relationships with end-user customers in our WESCO data center solution business. We also collaborate with contractors and specialty integrators. However, the real strength of our business lies in our connections with end users, including major global hyperscaler customers and multi-tenant data center customers, many of which are also global, along with enterprise-class customers. We have organized our customer account teams by individual customers, with dedicated leadership, and these customers are sharing their research and development investment plans and construction schedules with us. Our established relationship and comprehensive solutions allow us to assist them in planning their global data center deployments and executing those plans. We possess unmatched capabilities for global deployment, and our customers are seeking to expand our role even further. To summarize, we build our forecasts based on individual customers, and a key indicator of our performance is the continuing strong momentum and exceptional sales growth we are experiencing. Growth remains robust in the white space, and the gray space is even growing at a faster rate than the white space. While the total dollar contribution from gray space is lower due to our extensive engagement in the white space, we are encouraged that it is growing faster than the expected 65%. We are also increasing our scope of supply, reflecting a positive momentum. Additionally, there's significant discussion around AI-driven data center builds, which greatly expands our supply scope. As our end-user customers shift from CPU-based to GPU-based builds, we see more opportunities for us, whether in new builds or in upgrades or renovations to support higher AI applications. Our strong position in the value chain, our relationships with end users, and our positive momentum are evident. Finally, it's worth noting that our backlog has grown by 11% sequentially and 36% year-over-year, providing insight into future demand trends.
Operator, Operator
The next question is from Deane Dray with RBC Capital Markets.
Deane Michael Dray, Analyst
Can you hear me this time?
John J. Engel, Chairman, President and CEO
Yes, Deane.
Deane Michael Dray, Analyst
Maybe you want to send a CSS team to check out my vendor.
John J. Engel, Chairman, President and CEO
We will help you, Deane. It's great to have you back.
Deane Michael Dray, Analyst
Thank you for the information. I would like to ask a follow-up regarding the growth in the data center sector. I found Slide 7 particularly informative. Can you explain if there has been a difference in growth opportunities between gray space and white space, as we discussed during your Analyst Day? How has that situation evolved?
John J. Engel, Chairman, President and CEO
We have a strong position in the market, as we've stated for a long time, with significant opportunities in both white space and gray space. Historically, over the past five to ten years, gray space was typically managed directly. However, as we serve our end-user data center customers—a mix of hyperscale and enterprise clients—they are increasingly requesting us to oversee the entire global deployment, including gray space. To address Tommy's question from earlier, gray space experienced substantial growth, with a 90% increase in sales. EES's sales to data centers rose 90% quarter-over-quarter and year-over-year in the second quarter, while white space growth exceeded 60%. We anticipated some expansion into gray space, and while most sales are still attributed to white space, gray space is expanding at a faster rate compared to our white space segments. It’s important to note that when considering the timeline for data center power and construction, this reflects the new builds or renovations. Existing data centers will also be upgraded to support AI applications, transitioning from CPU to GPU setups. This will require increased power, contributing significantly to white space rather than adding much to gray space. The higher power density needed for GPU setups and liquid cooling designs opens up more opportunities for us. I want to emphasize that our strong position in white space, coupled with our involvement in the design phase with our clients, enhances our ability to capitalize on gray space growth, which we anticipate will continue.
Deane Michael Dray, Analyst
That's fabulous color and insight and definitely the kind of context that I wanted to hear because you get mesmerized by the big number, but when you break it out into the individual components and the sectors within data center, that makes sense. So congrats there. And just a follow-up question for Dave. Is there a target on net working capital intensity because you've made really good progress there? And then can you just clarify on the inventory gains, you say they're temporary but will that be hitting the P&L? And can you size it at all at this stage?
David S. Schulz, Executive Vice President and CFO
Yes. Let me begin with net working capital. We have been operating with higher days, and we aim to improve this, especially concerning inventory. While we have not disclosed a specific target, we would like to return to our pre-COVID levels, which are around 19%. This is influenced by the current business mix, particularly with large projects that require us to bring in inventory earlier to provide more services on site. This inventory then gets delivered to our customers. Regarding inventory gains related to tariff price increases, as prices rise, our average inventory costs will also increase over time. Our objective is to price our products according to the market, which will reflect these higher prices, and as our average inventory catches up, this creates margin opportunities. However, we have not planned a specific timeline for this, which is why it is not included in our outlook. It is challenging to predict due to the current volatility surrounding price increase notifications and how they will be perceived in the market.
Operator, Operator
The next question is from David Manthey with Baird.
David John Manthey, Analyst
First off, to clarify, when you say that you're not factoring any incremental tariff pricing, you are factoring in known price increases that you've already taken from suppliers in your guidance, is that correct?
David S. Schulz, Executive Vice President and CFO
That is correct. So those prices that we've already seen flowing through our P&L, we have included. If you go back to our initial outlook for the year, we had assumed that we would see about 1.5 points of carryover pricing. And as you think about what we've included in our expectations going forward, that's relatively consistent in our outlook that we just provided to you today.
David John Manthey, Analyst
Okay. And was the price benefit that you saw that 1.5%, is that uniform across the segments or is it overweight or underweight 1 segment or the other? And then just to be clear, it sounds like you have seen more price increases, but what you're saying is the guidance did not move for the price increases that was sort of as you expected. Is that right, Dave?
David S. Schulz, Executive Vice President and CFO
That's correct. So let me go back to the SBU question first and then provide some more color on the pricing that's included in our outlook. If you take a look at how we've reported pricing over the last couple of years, CSS had generally flat impact due to price. We saw more of the increases in our EES, in our Utility & Broadband Solutions business. What we're seeing here in the first half of 2025, we've actually seen some pricing benefit primarily here in the second quarter for CSS, just given some of the price increases that were taken either last year or earlier this year prior to the tariff announcements beginning to hit. In EES, we saw about a 1 point impact in both the first and second quarter. And a lot of that impact in the second quarter was some of the commodity-driven price increases, particularly as you saw copper pricing and other commodity prices go up. It impacted more of our EES business. I would say that UBS is consistent with EES, where they've seen about 1 point of pricing here in the first half of the year. So it's relatively consistent amongst the three SBUs.
David John Manthey, Analyst
Okay. And just to close the loop on this whole thought here as it relates to the price increases. Where you were referring to that inventory gain situation that you have inventory on the shelf, average cost and that the price increase gives you a lift towards gross margin, we should expect that in the third quarter. And just to gauge that, I look back to 2022 and I think you got 80 or 90 basis points, but I think there was extra benefits and other things in there. Could you just give us an idea of what you're thinking about that mix might be in the third quarter?
David S. Schulz, Executive Vice President and CFO
We expect to see an improvement in gross margin in the second half of the year. The uncertainty lies in how the pricing will be reflected in our income statement, which is why we prefer not to speculate on it. Looking back to 2022, we experienced pricing increases in the high single digits to low double digits across our business units each quarter. This was partly due to rapid inflation contributing to gross margin improvement, but other synergies from our merger with Anixter also played a role. Overall, we do anticipate some sequential improvement in gross margin for the second half, and with our increased sales volume, we should also see better supplier volume rebates.
Operator, Operator
The next question is from Christopher Glynn with Oppenheimer.
Christopher D. Glynn, Analyst
Industrial had been experiencing low single-digit declines for some time, moving to plus low single digits, possibly due to some market uncertainties. You mentioned that U.S. daily activity is slightly improving. Does this seem like just timing variations, or does it indicate a genuine shift in market sentiment?
John J. Engel, Chairman, President and CEO
Yes. If we reflect on the beginning of the year, we expected that the Industrial sector would improve as the year progressed. What we did not anticipate was the impact of the tariffs following Trump's inauguration, which has started to stabilize as international trade deals are being negotiated. This had a significant effect on the first half of Industrial. To consider the EES, we returned to growth in the fourth quarter of last year. The first quarter saw a 3% increase in organic growth, followed by 6% in the second quarter. In the latest quarter, all three operating groups experienced growth, with a notable increase in Construction driven by data center projects and heightened infrastructure activity. This is encouraging for the non-residential sector. The OEM segment continues to grow in double digits, following a trend from the past two to three quarters. In terms of Industrial, we noticed an uptick in daily demand in the U.S. and more project activity in both the U.S. and Canada. It’s great to see this positive momentum. Also, our backlog has increased year-over-year and sequentially for all of EES. One key takeaway for CSS is the exceptional growth in data centers, surpassing $1 billion in sales in the second quarter, a significant milestone. EES shows improving momentum reflected in our numbers. For UBS, we started to see improvements in Q2 with a return to growth for IOUs, and we shared insights from July. I hope that answers your question.
Christopher D. Glynn, Analyst
Yes, I would like to add that the growth in the gray space, beyond the overall data centers, could potentially accelerate from the current 6% level as we move into the third quarter for EES organic. If you have any thoughts on that, please share.
John J. Engel, Chairman, President and CEO
Yes. I think we are really pleased that gray space is growing faster than white space. I provided the numbers, and while it's on a much smaller base, it's definitely one of several positive growth drivers for EES. This has clearly been beneficial for us as we progress through Q1 and Q2. Looking ahead to the second half, there are several other growth factors as well. Overall, electrical demand is increasing, which is the main takeaway.
Operator, Operator
The next question is from Ken Newman with KeyBanc Capital Markets.
Ken Newman, Analyst
Maybe for the first question here, just a clarification on the pricing on the tariff comments not being built into the guide. When you say, Dave, that the average request, the average increase on some of these quotes is up mid-single digits, is that a blended impact from both book and ship and the project pricing? Or should we think about that ultimate price increase as something closer to half of whatever the nominal increase looks like from suppliers, just given your project mix?
David S. Schulz, Executive Vice President and CFO
Ken, you're correct. So the number that we quoted where we're seeing, on average, mid- to high single-digit price increase notifications, that's the increase coming from the suppliers. So in the letter that they send to us, they're generally giving us mid- to high single-digit increases on their products. As you mentioned, because of the type of business that we do, where half of our revenue is project-based, those are negotiated prices which aren't necessarily impacted by these price increases dollar for dollar. So generally, the other half of our business, which would go through our warehouse, our stock and flow business, that's where we'll see those suppliers increase the pricing to us. So we really want to recognize about half of that over the long term, half of the announced price increases over the long term, all things being equal.
Ken Newman, Analyst
When considering the usual time frame for customers to adjust to a price increase, which is typically 60 to 90 days, is there any change to that approach today? Or is there a greater focus on accelerating that process due to the current complexities?
David S. Schulz, Executive Vice President and CFO
We're trying to hold our suppliers to the contractual terms, which requires a lead time. Generally, it's 60 to 90 days, depending on the relationship and the individual supplier. So we are holding to that the best we can. It does take quite a bit of time and effort. We generally get a price increase notification letter. We need to see the buy SKU detailed list to ensure that it gets appropriately loaded into our systems. So that does take some time. We want to make sure that we do it appropriately. And from our perspective, our suppliers are dealing with the same volatility that we are. So this has been a very volatile situation that we're trying to manage as aggressively as possible.
Ken Newman, Analyst
Yes, okay. For my follow-up, John, I appreciate all the details on the Utility activity this quarter. I have another question: can you help us understand if there was any impact on sales from the project-based activity compared to the stock and flow challenges this quarter? Also, how should we consider the margin trends for UBS as it transitions back to growth in the second and third quarters?
John J. Engel, Chairman, President and CEO
There isn't much to highlight regarding project versus stock and flow. What we have are primarily end-user relationships with IOUs that are public power, along with utility alliance agreements for many customer relationships. There’s nothing significant to emphasize about the mix. In terms of margin, UBS still maintains a 10% EBITDA margin overall. When reviewing WESCO’s reported results, utility was down 4% year-over-year, yet it remains the highest EBITDA margin business. Additionally, SG&A as a percentage of sales is the lowest among the three SBUs. This is partly due to the business model. When sales growth resumes, we achieve excellent operating cost leverage, leading to an impressive EBITDA margin pull-through. That’s why we emphasized that as sales growth recovers, which we seem to be at the beginning of, the EBITDA margins will significantly expand as we capitalize on that growth.
Operator, Operator
The next question is from Patrick Baumann with JPMorgan.
Patrick Michael Baumann, Analyst
First, clean-up one here on the July growth of 10%. Do you think that included any better than the 1.5% price you reported for the second quarter or is it too hard to discern at this point? And then related to that, given the wild swings we're seeing in copper, which I think was up a lot in July and is obviously down a lot today, we always get questions on the impact to WESCO. Can you remind us the percentage of your business exposed to that copper price movement and the lift maybe you got from that specifically in July? Just trying to kind of peel back the onion a little bit and understand why you assume sales slow in the rest of the quarter versus what you saw in July. Maybe that's a factor.
David S. Schulz, Executive Vice President and CFO
Yes, Patrick, let me start by saying that it's difficult for us to assess if we're seeing any pricing benefits for July at this moment. We need to complete our full analysis. Therefore, I can't provide any insights on the overall pricing benefits in July compared to what we observed in Q2. Regarding copper, we have experienced price fluctuations. It's important for our investors to know that pure commodity products make up a mid-single-digit percentage of our revenue and that most of our commodities are repriced weekly. For instance, copper prices are updated weekly to inform our sales team about the costs for bids or stock and flow sales. We noticed a benefit from copper in the second quarter, but the overall pricing for EES was only about 1%. Thus, the copper volatility did not have a significant impact on Q2. You might have noticed some tariff-related announcements in June, and there have already been some changes since then. However, we did not experience any significant effects from copper volatility throughout Q2. As for July pricing, we are unable to determine any impacts at this time.
Patrick Michael Baumann, Analyst
I appreciate the insight. My last question pertains to the security market, which has shown a significant increase. I'm curious about what contributed to this growth. Was it driven by large projects, or was it more related to everyday business transactions? It seems like a notable growth rate for a market that we typically view as having low growth.
John J. Engel, Chairman, President and CEO
Good question, Patrick. The security business is experiencing significant growth, up double digits not accounting for data center sales. When including data center sales, security growth is in the high teens. We have a strong security business featuring advanced digital and IP security solutions, which extend beyond just cameras. Our offerings support customers transitioning from analog to digital in both renovation upgrades and new projects. We've seen increasing momentum in our security business over the past several quarters, which is very encouraging. Our category benefits from robust supplier relationships and operates on a global scale, allowing us to sell these solutions to end-user customers worldwide. The growth is driven not just by data centers but by our overall core business, and we are very pleased with the scalability of our security operations.
Patrick Michael Baumann, Analyst
Helpful. Along those lines, I think you compete with the ADI business from Resideo. It seems like they're exploring alternatives for that business. Is that something you might consider acquiring, or do you feel you already have too much market share in that area, making it unfeasible?
John J. Engel, Chairman, President and CEO
Yes. We don't comment on specific combinations. I understand it was announced earlier this week regarding that separation transaction. From a market perspective, we recognize why those two businesses were separated. However, we do not provide comments on potential combinations in advance.
Operator, Operator
This concludes our question-and-answer session. I'll now turn the conference back over to John Engel for any closing remarks.
John J. Engel, Chairman, President and CEO
Well, thank you for your support today. We've addressed all the questions that were queued up, so I'll bring the call to a close. And again, thank you for your support. It's much appreciated. We have a long list of follow-up calls already scheduled today, tomorrow, even into Monday and Tuesday, so we're looking forward to engaging with you. And then we'll be speaking to many of you over the coming months as well. We expect to announce our third quarter earnings on October 30, 2025. Have a great day.
Operator, Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.