WESCO International Earnings: Sales Good, Margin Disappointing

In an earnings season where other industrial-related companies such as Illinois Tool Works (ITW +0.00%), Dover Corp (DOV +0.00%) and CSX Corporation (CSX 0.01%) have reported strengthening conditions, WESCO International Inc.'s (WCC +0.00%) first-quarter earnings report and guidance were somewhat lackluster. Let's take a look at what happened in the quarter.

WESCO International first-quarter results: The raw numbers

Starting with the headline numbers from the quarter:

• Net sales of $1.77 billion declined 0.2% compared to the first quarter of 2016, where guidance was for a 3% decline to flat.
• Operating margin of 3.8% came in at the bottom end of the guidance range of 3.8% to 4.1%.

Construction contractors were particularly price-competitive in the quarter. Image source: Getty Images.

Clearly, sales help up well, but operating margin was disappointing. Moreover, management left its full-year headline guidance unchanged.

• Full-year sales guidance of growth of 0% to 4%, and operating margin in the range of 4.4% to 4.6% was maintained.
• Full-year diluted EPS guidance of $3.60 to $4 was also affirmed.
• WESCO gave second-quarter guidance for net sales in the range of a 2% decline to a 1% increase, and operating margin of 4.2% to 4.6%

Maintaining full-year guidance is possibly not a bad result, but given earnings elsewhere, investors might have expected a bit more.

For example, WESCO has strong exposure to the kinds of heavy industries that Illinois Tool Works' welding segment sells into, and there are signs of recovery in welding and heavy industries. Moreover, Dover Corp recently reported strong results in its oil and gas focused operations; WESCO has significant exposure to oil and gas, as well as metals and mining. Similarly, CSX Corporation reported volume increases in its metals and minerals related sales -- particularly in construction-related areas. 

What happened with WESCO in the quarter?

Overall organic sales declined 1.7% on a year-over-year basis in the quarter following a 3.6% year-over-year decline in the fourth quarter of 2016. However, there were signs of improvement:

• Organic sales increased 2% compared to the fourth quarter and marked "the second consecutive quarter of sequential improvement," according to CEO John Engel on the earnings call.
• There was a linear improvement in the quarter itself, with January organic sales declining 5% year over year, February seeing a 1% year over year decline, followed by March, which was flat.

However, a quick look at year-over-year organic sales growth by segment reveals that only the industrial segment moved into positive territory in the first quarter. 

What management said

While end markets appear to be improving and helping out revenue growth, WESCO didn't get much help from pricing in the quarter. Indeed, operating margin came in right at the bottom of the guidance range. CFO Dave Schulz discussed the matter on the earnings call by pointing out that pricing had "minimal impact on revenue in the quarter." He went on to say he'd seen "construction contractors being especially price-competitive in an effort to get projects started earlier in the year," but added he believed that pricing pressure would lessen through the year.

The question of pricing came up later on the earnings call, and Engel talked of a lackluster recovery and a "lag effect" before price increases push through. Essentially, he means that suppliers are starting to see inflation pick up (so WESCO's costs are rising), but the demand environment isn't strong enough to increase pricing just yet. That could change in the future, though.

Looking ahead

It's been a mixed industrial reporting season so far, with most companies reporting improved end market conditions. Dover and Illinois Tool Works have seen the benefits and raised guidance accordingly, but it might be a little while yet before others like WESCO experience the full benefits -- particularly with regards to pricing and operating margin.