WESCO International, Inc. (NYSE:WCC) Q2 2025 Earnings Call Transcript

WESCO International, Inc. (NYSE:WCC) Q2 2025 Earnings Call Transcript July 31, 2025

WESCO International, Inc. beats earnings expectations. Reported EPS is $3.39, expectations were $3.31.

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

Scott Louis Gaffner: 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: Well, thank you, Scott. Good morning, everyone. Thanks for joining our call today. We’re pleased to report that our sales momentum accelerated in the second quarter, and that’s building on our strong start to the year. This marks 3 consecutive quarters of accelerating sales momentum. After growing 6% in Q1, organic sales grew 7% in Q2. Preliminary July sales per workday have accelerated even further and are up approximately 10% year-over-year. Our second quarter performance was led by 17% organic growth in CSS and 6% organic growth in EES. Setting a new record and a new mark, our total data center sales eclipsed $1 billion. That’s for the entire WESCO enterprise in the second quarter, and they were up 65% versus the prior year.

This is a clear indication of our leading value proposition and the enduring secular growth trends of AI- driven data centers. Utility, as expected, had declining sales in the first half but has begun to show signs of improvement as sales 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 3 business units.

July, as I mentioned earlier, is off to a very strong start with preliminary sales up approximately 10% versus prior year. Importantly, in July, for this preliminary number, this reflects growth in all 3 SBUs and that obviously is including our UBS segment. We raised our full year outlook for organic sales growth based on our positive trajectory while maintaining our EPS range at the midpoint. As always, we remain focused on what we can control, and that’s executing our cross-sell initiatives, managing margins to ensure we get operating leverage on our sales growth and delivering operational improvements enabled by our technology-driven business transformation. As the market leader, we’re seeing — we’re clearly seeing the growth potential of our WESCO portfolio.

And that’s supported by the enduring secular growth trends of AI-driven data centers, increased power generation, electrification, automation and reshoring. All this underpins my confidence that WESCO will continue to outperform our markets this year. Before I turn it over to Dave, I wanted to take a brief moment to thank Bill Geary for his service to WESCO. Bill ran our CSS business through June and has left WESCO to assume a CEO position in a privately held company. We wish Bill well in his new endeavors and thank him for positioning the business for continued success. In line with our succession management plan and reflective of our deep talent bench, we appointed Dirk Naylor as EVP and GM to run our Communications & Security Solutions business.

Dirk is an accomplished and proven leader within WESCO, and he has been instrumental in developing our growing data center business. With that, I’ll turn it over to Dave to walk you through our Q2 results and our outlook for the remainder of the year. Dave?

David S. Schulz: Thank you, John, and good morning, everyone. Turning to Page 4. Organic sales in Q2 were up 7% year-over-year, at the high end of our expectations. This growth was driven by approximately 5.5 points of volume and 1.5 points of price. Reported sales increased 8% with sequential growth of 10%. The strong top line performance was led by continued momentum in our data center business, which surpassed $1 billion in sales and grew 65% year-over-year. CSS delivered 17% organic growth and EES grew 6%. UBS sales declined 4%. Adjusted EBITDA margin was up 90 basis points sequentially on strong operating cost leverage and stable gross margin. Adjusted EBITDA margin was down 60 basis points year- over-year, driven by gross margin.

Gross margin was 21.1%, flat sequentially but down 80 basis points year-over-year due to project and product mix in CSS and EES that started in Q4 of 2024. Adjusted SG&A increased approximately 8% year-over-year, in line with our expectations, driven by higher employee and facility costs. SG&A as a percentage of sales improved due to operating leverage on our sales growth. Adjusted EPS was $3.39, up 6% from the prior year. I’ll walk you through our business unit results beginning with EES on Slide 5. In the second quarter, EES reported and organic sales both increased 6% year-over-year. This improvement in growth was led by strong performance in OEM and Construction, along with a return to growth in Industrial. Construction grew mid-single digits, supported by strong wire and cable sales tied to data center and infrastructure projects across the U.S. and Canada.

Industrial was up low single digits with improved day-to-day demand in the U.S. and increased large infrastructure project activity in Canada. OEM sales were up double digits. Backlog increased 6% year-over-year and was up 1% sequentially. We continue to see strong quoting activity and a healthy pipeline of opportunities, particularly in data center and electrification-related projects. Adjusted EBITDA margin for EES was 8.1%, a sequential improvement of 120 basis points, reflecting strong operating leverage on higher sales volume, improved gross margin and disciplined SG&A management. Adjusted EBITDA margin was down 80 basis points year-over-year, primarily due to lower gross margin, which declined 100 basis points. This was driven by a higher mix of large, lower-margin projects, particularly in wire and cable, as well as competitive pricing pressures discussed last quarter.

Looking ahead, we remain confident in the long-term growth trajectory of EES, supported by secular trends in electrification, data center expansion and infrastructure modernization. Turning to Slide 6. In the second quarter, CSS delivered strong performance with organic sales up 17% and reported sales up 19% year-over-year. This growth was driven by continued strength in WESCO data center solutions, which was up over 60% year-over- year, fueled by large-scale project activity with hyperscale customers. The Ascent acquisition completed in December of 2024 added about 1.5 points to CSS growth this quarter. Data center sales represented nearly 40% of CSS revenue in Q2, up from approximately 30% in the prior year quarter. Importantly, we have not seen any slowdown in customer demand.

Based on discussions with our end-user customers, capital budgets remain intact, and customers are expanding their scope of products and services with WESCO. Security sales were also a positive driver of our CSS results and were up double digits. When including security-related data center sales, the business grew high teens year-over-year. Enterprise network infrastructure declined high single digits, primarily due to reduced demand from service providers. Enterprise network infrastructure, including sales for WESCO data center solutions projects grew in the quarter. CSS backlog increased 36% year-over-year and 11% sequentially, reflecting continued strength in data center project activity and strong order momentum across our global accounts.

On profitability, CSS delivered an adjusted EBITDA margin of 8.8%, up 60 basis points year-over-year and 90 basis points sequentially. This improvement was driven by strong operating leverage on higher sales, partially offset by lower gross margin, which declined 80 basis points year-over-year due to mix from large hyperscale data center projects. Turning to Slide 7. I want to take a moment to discuss the continued momentum we’re seeing in the broader data center space and WESCO’s role in that growth. Customers continue to rely on WESCO and our supplier partners to meet their evolving needs, including an expanding portfolio of services we provide across the data center life cycle. From a total company perspective, data center sales surpassed $1 billion in the quarter.

Data center sales represented approximately 18% of WESCO’s sales in Q2 2025 and 16% on a trailing 12-month basis, up from 10% TTM through June 2024. This growth was driven by strong performance by CSS in the white space and by EES in the gray space, with CSS representing the majority of the sales contribution. As shown across the top of the slide, we first introduced this framework at our Investor Day last September. It outlines the 2 key stages of the data center construction cycle, time to power and the construction period. The key takeaway remains: projects announced and funded typically take 4 to 7 years to become operational. Our solutions now span the full spectrum of the data center life cycle, from power and electrical distribution systems and advanced IT infrastructure to on-site services that support ongoing operations.

This ensures we can deliver value throughout every phase of the data center life cycle. On the lower left side of the slide, you can see the substantial and accelerating growth in our total data center business over the past 5 quarters. Data center sales on a trailing 12-month basis were approximately $3.5 billion. This growth has been driven by organic initiatives and strategic acquisitions that have expanded our service capabilities. We remain committed to partnering with our suppliers to service our customers from cradle to cradle, supporting everything from initial builds, on-site services, ongoing upgrades and modernization. Turning to Slide 8. In the second quarter, organic and reported sales in UBS declined 4% year-over-year. As we’ve discussed since early 2024, the utility market continued to face headwinds from customer destocking and slower project activity, driven in part by the current interest rate and regulatory environment.

These dynamics have weighed on both investor-owned and public power customers over the past 6 quarters. Utility sales were expected to be down year-over-year in Q2 but came in lower than what we thought at the beginning of the quarter. That said, we saw a return to growth in our IOU customer base, which was up low single digits in the quarter. We expect this improved momentum to continue, and preliminary July sales for UBS were up slightly, supporting our outlook for a return to overall utility growth in the second half of 2025. Broadband performance remained strong in the quarter, with sales up mid-single digits year-over-year, reflecting a return to growth in the U.S. and continued growth in Canada. Backlog increased both sequentially and year-over-year, reflecting improving order rates and new customer wins.

Adjusted EBITDA margin for UBS was 10.4%, down 40 basis points sequentially from 10.8% in Q1 and down 160 basis points year-over-year. We remain highly confident in the long-term growth potential of our utility business, supported by and required for the secular trends of electrification, green energy and grid modernization. These drivers are expected to accelerate demand for our solutions over the coming years. Turning to Page 9. In the second quarter, we delivered $87 million of free cash flow representing approximately 45% of adjusted net income. On a trailing 12-month basis, we’ve generated $644 million of free cash flow, representing approximately 96% of adjusted net income. We’ve had strong accounts payable performance and disciplined receivables management throughout the first half of the year.

Inventory increased to support customer projects and to ensure supply chain disruptions are limited. On the right side of the page, you can see that net working capital intensity has steadily improved over the past 3 years. This quarter, we saw a 60 basis point year-over-year improvement, with net working capital intensity declining from 20.5% to 19.9%. That follows a 40 basis point improvement in 2024 over 2023. We remain confident in our ability to drive stronger cash generation in the second half. Turning to Page 10. We redeemed our $540 million Series A preferred stock in June, the first opportunity to do so at face value. This high-cost instrument carried a [ 10 5/8% ] dividend rate, and its redemption marked a significant milestone in our capital structure optimization.

To fund the redemption, we utilized proceeds from our $800 million issuance of 6 3/8% senior notes due 2033, which we completed earlier in the year. This refinancing action reduced our total financing costs and created a substantial benefit to our net income, EPS and cash flow run rates. The estimated annualized benefit from this transaction is approximately $32 million or $0.65 per diluted share. Note that you will see in the press release that we recognized a $28 million gain on the redemption, which is not included in our adjusted results. In addition, with the financing completed in the first quarter, we extended the maturities of our accounts receivable facility and revolver to 2028 and 2030, respectively. As a result, we now have no significant debt maturities until 2028, providing enhanced financial flexibility and stability.

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

We will see a temporary gain to gross margin, assuming higher supplier price increases are absorbed in the market. Note, this is a temporary benefit as we turn our inventory every 2 to 3 months. And lastly, our direct tariff exposure on purchases for which WESCO is the importer of record into the U.S. and from the U.S. to Canada represents less than 4% of our cost of goods sold. In response, we took the following actions to mitigate these impacts and protect our margins. We’re passing supplier increases through, including our margin. We’re working with suppliers so that minimum lead times between announced price increases and effective dates are adhered to, according to our standard purchasing terms. We’re leveraging our global scale to identify opportunities to purchase locally sourced products or products less impacted by tariffs, and we’re reducing imports from those countries with the highest tariffs.

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

We’re executing our playbook to effectively manage our business in the current volatile environment. Turning to Slide 12. This slide shows our updated 2025 outlook by strategic business unit and the individual operating groups. As John mentioned, we are revising our 2025 outlook and increasing our expected organic sales growth rate to up 5% to 7% versus 2.5% to 6.5% previously. Sales into data centers continue to exceed our initial expectations as do broader electrical sales trends. These strong positive tailwinds are only partially offset by the timing of the utility recovery. For EES, we are benefiting from data center growth, along with broader positive trends in electrical end markets. We now expect growth across all 3 markets we serve: construction, industrial, and OEM, supporting our revised segment outlook of mid-single-digit growth, up from our prior growth expectation of flat to low single digits.

Due to the continuation of exceptionally high growth in our data center business, we are increasing our full year outlook for reported sales growth of WESCO data center solutions from up about 20% to up approximately 40%. Security momentum accelerated in Q2, and as a result, we now expect full year reported sales to increase, an improvement from our prior outlook of flat. These are the primary drivers of our CSS sales outlook, moving to growth of up low double digits from mid- to high single-digit growth prior. And lastly within UBS. Given the lower-than-expected sales performance in the second quarter and the evolving timing of the utility recovery, we are revising the segment sales to down low single digits to flat from our prior expectation of flat to up low single digits.

We continue to expect utility to inflect in the second half and return to growth. IOU customers returned to growth in Q2 and we anticipate public power customers will follow suit in the back half of the year. Broadband is still expected to be roughly flat for the full year. Moving to Page 13. We are increasing and narrowing our ranges for organic and reported sales growth, adjusting our EBITDA margin range and maintaining the midpoint of our prior ranges for adjusted EPS and free cash flow. We are revising our 2025 sales outlook based on the accelerating growth in the first half of the year and our expectation for continued strong top line growth in the second half of 2025. We acknowledge the uncertainty and volatility surrounding tariffs and the impact of the overall economy, but demand for data centers has been strong and our electrical end markets are improving.

Backlog grew sequentially and year-over-year in all 3 businesses with CSS up 36%. I want to emphasize that our outlook does not include the impact of future pricing actions, including tariffs. This is consistent with our past practice, given the lag between when a supplier announces a price increase and when it begins to impact our revenue. While we have seen a significant uptick in price increase notifications as we moved through the second quarter, our outlook does not include any potential benefit to sales at this time. We recognize the potential risk of demand, given tariff-related pricing. Any future pricing would help mitigate any demand impact to our revenue outlook. In terms of free cash flow, we expect to deliver between $600 million to $800 million in 2025.

At the midpoint of our outlook, this implies free cash flow of approximately 100% of adjusted net income. Our strategy for how we deploy cash flow remains unchanged. The use of available cash will be allocated to the highest return opportunity, and we will continue to make decisions in the best interest of shareholders over the long term. Our top priority is to invest organically in the business to drive growth and operational efficiency, including the completion of our business and digital transformation. In the near term, given the current economic environment, we expect to prioritize delevering the balance sheet. However, we will continue to be opportunistic regarding share repurchases and acquisition opportunities. We continue to seek acquisitions that expand our capabilities and better serve our customers, particularly those engaged in high-growth end markets.

Turning to Page 14. This slide shows the year-over-year monthly and quarterly sales comparisons and our expectations for the third quarter. You can see the return to growth in the last quarter of 2024 and the acceleration in the first half of 2025. As mentioned, preliminary July sales per workday growth is up approximately 10%, and we expect third quarter reported sales will be up mid- to high single digits. We expect organic sales will be up a similar amount as there is no difference in workdays year-over-year and FX headwinds have moderated. We expect adjusted EBITDA margins will be approximately 40 basis points lower than the third quarter of the prior year, again primarily reflecting the project and product mix impacts to gross margin discussed earlier.

Sequentially, we expect EBITDA margins to be up approximately 20 basis points. Moving to Slide 15, let me briefly recap the key points before we open the call to your questions. We delivered another strong quarter with organic sales up 7%, led by CSS up 17%, EES up 6% and data center revenue surpassing $1 billion, up 65% year-over-year. Utility was softer than expected but investor-owned utility sales returned to growth. EBITDA margin expanded 90 basis points sequentially, driven by stable gross margin and strong operating leverage. Momentum continues into Q3 with record backlog, strong July sales and an increased full year organic growth outlook. We redeemed our preferred stock in June and have no debt maturities until 2028. Finally, we’re actively managing tariff impacts and global trade uncertainty, leveraging our proven playbook to protect margins and to support growth.

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

Q&A Session

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

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

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

Thomas Allen Moll: 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: Yes, Tommy. Thanks for that question. So let’s step back and put Utility into context. Remember, let’s just — let’s look at this year, in particular. Utility was down mid-single — or was down high single digits in Q1, down mid-single digits in Q2. But overall, inside Q2, as you’ve outlined and as we’ve outlined, investor-owned utilities returned to growth inside Q2. And so far here in July, UBS overall is positive growth, which represents further improvement in Utility as a momentum vector. When you look at the composition of Q2, it’s really important to understand the pieces. For investor-owned utilities, which is the largest percentage of our utility sales, they grew low single digits in the quarter. That’s driven by new program wins and the new utility contracts that we started servicing that we had mentioned previously as well as resumed shipments to the IOUs. So it’s good to see that those sets of customers returning to growth.

IOUs in general are much further along in the destocking process than public power customers. They have larger work plans to complete. It really was the public power customers that were still down in the quarter. And that public power softness is driven by just a slower recovery versus the IOUs. Let me dig into that a little bit because I know that’s where your question was going, the drivers. The public power customers are less capital-intensive than the IOUs, and they typically — those customers typically don’t own their own transmission and substation networks. And if you look at over the last several years, the cycle coming out of the pandemic when we had extended supplier lead times, the public power customers were behind the IOUs in getting their materials in 2022 and 2023.

So as the IOU customers were being delivered all that material, the public power customers started building inventory in late ’23 and through ’24 as the manufacturers switched from the IOUs to building for the public power customers. So when you look at the phasing, it’s great to see the IOUs returning to growth. We have high confidence in the public power segment of our utility business returns to growth in the second half of this year. Again, and in addition to that, we have a very strong backlog for our transmission and substation business, and our overall grid services applications and solutions will be much stronger in the second half than the first half, given project timing. So that gives us really strong confidence that the second half represents an overall return to growth for utility.

Keep in mind that was consistent with our outlook when we entered the year and we gave the full year outlook and guidance back earlier in the year.

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

And those customers are sharing their R&D investment plans and build schedules with us. And in particular, with the relationship that we have with them and the complete solution, white space, gray space plus the power equation, we’re deeply embedded in helping them plan out the overall planning for their global deployment of data center build-outs as well as the execution. We have an industry-leading capability. It’s unmatched in terms of global deployment, and our customers are asking us to do a lot more. So we build up our forecast, to give you the short answer to this, by customer. And what’s a great leading indicator is you can see the strong momentum growth, the exceptional sales growth has been continuing. Very strong growth continues in the white space.

The gray space continues to grow faster than the white space. The total dollar contribution is smaller because of our breadth and depth in the white space, but we’re encouraged that the gray space is growing faster than the number that we’ve outlined in the materials, the 65%. And so — and we’re expanding our scope of supply. So we’re just really good momentum vector. I think the other thing that’s really important that I do want to mention is we’re also seeing a lot of discussion about — with the AI-driven data center build, that increases our scope of supply significantly. As our end user customers move from CPU to GPU base builds, that provides much more content for us. That’s true for new data center builds. It’s also true for those data centers that are getting upgraded or retrofitted or renovated, let’s say, to support the higher AI applications.

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

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

Deane Michael Dray: Can you hear me this time?

John J. Engel: Yes, Deane.

Deane Michael Dray: Maybe you want to send a CSS team to check out my vendor.

John J. Engel: We will help you, Deane. It’s great to have you back.

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

John J. Engel: So we have a tremendous position, as we’ve said, for a long time, white space, breadth and depth. The gray space, historically, if you look over a multiyear basis, let’s go back 5 to 10 years, was traditionally served direct. But because we are the one-stop shop and complete supply chain solution customer for our end user data center customers, be it a hyperscaler MTDC customer or enterprise class customer for that matter, they’re increasingly asking us to do more to manage the total global deployment, which extends into the gray space. So as I mentioned earlier, Deane, to the last — to Tommy’s question, the gray space grew at a materially higher rate. I’ll just give it now. The gray space grew at a 90% rate.

EES’s sales into data centers grew at 90% quarter-over-quarter, Q2-over-Q2 year-over-year in the second quarter, and the white space was still north of 60%. So we have — we did foreshadow. We thought we’d be picking up some gray space scope. In terms of dollar contribution, the majority of the sales are still in the white space, but the gray space is growing at a faster rate versus our white space mix at this point. I think what’s really important to understand on that 1 page that shows 3 to 5 years’ time to power, 1- or 2-year construction period, that implies a new greenfield or brownfield renovation of a data center build. What’s also going to happen is existing data centers are going to get upgraded or retrofitted to support AI applications, shifting from CPU-based builds to a GPU-based retrofit.

You’ll have to increase the power to that facility, but that doesn’t result in necessarily a lot of gray space additional content, but it’s substantial white space content, substantial white space content because of the greater power density required for GPU-based builds and the liquid cooling designs, which is a lot more addressable application spend for us. So I want to be clear, I think the strength in the white space, which puts us on a plane because of — we’re involved in even the design of these data centers with our end user customers is really the strength we’ve been pulling through the gray space, and we expect to continue to do that.

Deane Michael Dray: 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: Yes. Sorry, let me start with the net working capital. So we clearly have been running higher days. We want to continue to improve our days, particularly on the inventory side. We’ve not shared publicly the specific target but we have referred back to — we would like to return back to our pre-COVID levels, which would be closer to a 19% range. So again, part of this comes back to the mix of the business that we have in front of us, particularly with the large projects and how we’re providing more services on our sites, which requires we bring inventory in earlier. And then we service that, we get that out to our customers. So that’s what we’re targeting. In terms of the inventory gains on the tariff price-related increases, generally, what we will see is, as prices go up, our average with inventory costs will increase over time.

Our goal is to use that opportunity to basically price our products at the market, which would reflect a higher price, but our average with inventory will be catching up to that, that creates the margin opportunity. We have not timed that out for you. It’s one of the reasons why we don’t include it in our outlook. Very difficult to project, given the volatility right now about these price increase notifications and how that will be accepted by the market.

Operator: The next question is from David Manthey with Baird.

David John Manthey: 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: 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: 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: That’s correct. So let me go back to the SBU question first and then provide some more color on the pricing that’s included in our outlook. If you take a look at how we’ve reported pricing over the last couple of years, CSS had generally flat impact due to price. We saw more of the increases in our EES, in our Utility & Broadband Solutions business. What we’re seeing here in the first half of 2025, we’ve actually seen some pricing benefit primarily here in the second quarter for CSS, just given some of the price increases that were taken either last year or earlier this year prior to the tariff announcements beginning to hit. In EES, we saw about a 1 point impact in both the first and second quarter. And a lot of that impact in the second quarter was some of the commodity-driven price increases, particularly as you saw copper pricing and other commodity prices go up.

It impacted more of our EES business. I would say that UBS is consistent with EES, where they’ve seen about 1 point of pricing here in the first half of the year. So it’s relatively consistent amongst the 3 SBUs.

David John Manthey: 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: We would anticipate that in the second half, we would begin to see sequential gross margin improvement. If you take a look at — right now, the uncertainty is what will the pricing really be reflected in our income statement? Again, reinforcing one of the reasons why we choose not to include it because we don’t want to speculate. But if you go back to the period that you were referring to back in 2022, we were getting pricing that was high single digit, low double digit in our business units in each of the quarters. And so we were seeing that rapid inflation led to gross margin improvement, as you mentioned, Dave. Not all of that was related to pricing. There were other synergies that were being recorded as part of the merger with Anixter.

But generally, we would expect to see some sequential improvement in gross margin in the second half. But I would tell you that primarily, what we’re counting on now is, given the increase in our sales, in our volume for the second half of the year, sequentially, we should see better supplier volume rebates.

Operator: The next question is from Christopher Glynn with Oppenheimer.

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

John J. Engel: Yes. I mean, look, we — if you step back to the beginning of the year, even our original outlook, we had expected that Industrial would improve as we move through the year. And then obviously, what was not foreseen was when Trump took office, all of the tariffs, that those announcements that’s beginning to settle out as the deals are being struck by country and providing some more, I’ll say, more stability, more certainty. But that clearly had an impact on the first half of Industrial, Chris. So here’s the way I’d ask you to think about EES. We returned to growth in Q4 last year. First quarter was up 3%, 3% organic growth, Q2 plus 6% organic growth. And now we have a second quarter where all 3 operating groups grew, a step-up in Construction now at mid-single-digit growth benefiting from data center projects, as I mentioned earlier, an increased infrastructure activity.

So that’s encouraging across the nonresi space. OEM continues to be up double digits, and that’s something that is a continuation of a trend that occurred over the last 2 quarters, 2 to 3 quarters, we’re stepping up there, and in Industrial, where your question was. And look, we saw improved day-to-day demand in the U.S. and some increased project activity as well so in U.S. and Canada. So it’s really good to see the momentum vector picking up and look at backlog. Backlog is up not just year-over-year but sequentially for all of EES. So clearly, one of the takeaways should be for CSS, the exceptionally strong data center growth, the beat goes on, eclipsing $1 billion of sales in the second quarter, a huge mark. EES momentum is picking up, definitely improving, improving vector.

We’re seeing that show up in the numbers. And then for UBS, the improvement has begun, just started to begin in Q2 with the return to growth for IOUs. And then we gave you the July snapshot. So hopefully, that addresses your question.

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

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

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

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

David S. Schulz: Ken, you’re correct. So the number that we quoted where we’re seeing, on average, mid- to high single-digit price increase notifications, that’s the increase coming from the suppliers. So in the letter that they send to us, they’re generally giving us mid- to high single-digit increases on their products. As you mentioned, because of the type of business that we do, where half of our revenue is project-based, those are negotiated prices which aren’t necessarily impacted by these price increases dollar for dollar. So generally, the other half of our business, which would go through our warehouse, our stock and flow business, that’s where we’ll see those suppliers increase the pricing to us. So we really want to recognize about half of that over the long term, half of the announced price increases over the long term, all of the things being equal.

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

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

John J. Engel: Nothing to really call out on project versus stock and flow because what we’ve got there is we got — by and large, these end-user relationships with IOUs are public power and we have these utility alliance agreements for many of these customer relationships. And there’s nothing meaningful to call out on mix, Ken. In terms of margin, look, what’s — UBS overall has still got a 10 handle on the EBITDA margins. And just think about the overall WESCO reported results with utility — UBS being down 4% year-over-year and being the highest EBITDA margin business. So the SG&A as a percentage of sales is the lowest of all 3 SBUs. Part of that is business model. When the sales growth kicks back in, we get exceptional operating cost leverage, and the EBITDA margin pull-through is outstanding.

So that’s why we were very clear that as the sales growth recovers and returns, which we appear to be at the front end of that, that the EBITDA margins will expand handsomely as we realize that growth.

Operator: The next question is from Patrick Baumann with JPMorgan.

Patrick Michael Baumann: 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: Yes, Patrick, good. Let me start with, are we seeing increased pricing benefit in July? Very hard for us to discern that at this point. We’ve got to go through our full close in the analysis. So I really can’t comment on the overall pricing benefit in July relative to what we experienced in Q2. On copper, we’ve seen the swings on copper. So just to remind our investors that commodities are about — pure commodity product, it’s a mid-single-digit percentage of our revenue. And most of our commodities are repriced weekly. So for example, copper is repriced weekly for what we inform our sales force, what they’re going to cost on any bids or a stock and flow sale. And so we have seen that. Now going back to those fluctuations, we did see a copper benefit in the second quarter, but the overall EES pricing was only about 1%.

So we didn’t see a material impact from that copper volatility in Q2. You saw some of the tariff-based announcements were occurring back in June. There’s been some changes to that already. But we have not seen any material impact from that copper volatility through Q2. And as I mentioned for the July pricing, we can’t discern that at this point.

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

John J. Engel: Good question, Patrick. Look, it’s up double digits without including the data center sales. If you include the data center sales, security is up high teens. So we’ve got a terrific security business. We’ve got the most advanced digital solutions, IP security-based solutions. It’s more than just the cameras as well as analog and can support full analog to digital transition for many of our customers in retrofit renovation upgrades as well as new projects. We’ve had an upswing in momentum in our security business over the last several quarters. So this is really good to see. Keep in mind, this category, we’ve got very strong supplier — set of supplier relationships and it’s a global business. So we are selling these applications to end user customers across the global markets.

And again, it’s being driven beyond not just data centers but kind of the overall core business. So we’re really pleased. Security as a business, we have a very large business that operates with scale.

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

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

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