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<p>Employees say:</p><p>"One of the most unique and meaningful aspects of our organization is how deeply we care about our people. There's a strong focus on education and self-improvement, which empowers employees to better themselves and not just professionally, but personally. This isn't just a place of employment; we spend more time here than we do with our own families, and that makes it more important to feel heard and valued. I've always appreciated the culture we've built, one where connection, respect, and genuine support resonate through every level, from coworkers to leadership. I truly hope we never lose that."</p>

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The Pittsburgh-based company provides electrical, industrial, and communications maintenance, construction materials, and supply chain management and logistic services to about 70,000 clients.

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Headquartered in Pittsburgh, Wesco provides electrical, industrial and communications maintenance, and supply-chain management and logistics services. The company’s clients include commercial and industrial businesses, government agencies, telecommunications providers, and utilities. WESCO was founded in 1922 as a distribution arm of Westinghouse Electric and Manufacturing Co., itself launched in the late 1880s by George Westinghouse as a competitor to Thomas Edison’s electric company. John J. Engel has served as Wesco’s president and CEO since 2009 and joined the company’s board in 2011.

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WESCO International (WCC): Company Profile, Stock Price, News, Rankings

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WESCO International

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Hello, and welcome to WESCO's twenty twenty five Second Quarter Earnings 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.

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 or 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 Ingle, WESCO's Chairman, President and Chief Executive Officer and Dave Schultz, Executive Vice President and Chief Financial Officer. Now I'll turn the call over to John.

Well, 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 $1,000,000,000 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 to investor owned utilities return 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 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, EPS 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 for this preliminary number, this reflects growth in all three 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 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 at 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 and 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?

Thank you, John, and good morning, everyone. Turning to Page four. 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 $1,000,000,000 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 2024. Adjusted SG and A increased approximately 8% year over year, in line with our expectations, driven by higher employee and facility costs. SG and 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 five.

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 US and Canada. Industrial was up low single digits with improved day to day demand in The US 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 and 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 six. 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 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. DSS 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 seven, 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 lifecycle. From a total company perspective, data center sales surpassed $1,000,000,000 in the quarter. Data center sales represented approximately 18% of West Coast sales in Q2 twenty twenty five and sixteen percent on a trailing twelve 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 four to seven years to become operational. Our solutions now span the full spectrum of the data center lifecycle, 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 lifecycle.

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 twelve month basis were approximately $3,500,000,000 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 eight. In the second quarter, organic and reported sales in UBS declined 4% year over year.

As we've discussed since early twenty twenty four, 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 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 nine. In the second quarter, we delivered $87,000,000 of free cash flow, representing approximately 45% of adjusted net income. On a trailing twelve month basis, we've generated $644,000,000 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 increase to support customer projects and to ensure supply chain disruptions are limited. On the right side of the page, you can see that networking capital intensity has steadily improved over the past three years. This quarter, we saw a 60 basis point year over year improvement with networking 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 $540,000,000 Series A preferred stock in June, the first opportunity to do so at face value. This high cost instrument carried a 10.58 dividend rate, and its redemption marked a significant milestone in our capital structure optimization. To fund the redemption, we utilized proceeds from our $800,000,000 issuance of six and three eighths senior notes due 02/1933, 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 $32,000,000 or $0.65 per diluted share. Note that you will see in the press release that we recognized a 28,000,000 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 2025. Third, transitional benefit from inventory gains. Inventory is 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 US and from The US 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 twenty twenty four, 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 in the 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, UBS, given a 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 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 move 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 $600,000,000 to $800,000,000 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 2024 and the acceleration in the 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 $1,000,000,000 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.

Our first question today is from Nigel Coe with Wolfe Research. Please go ahead.

Thanks. Good morning, everyone. Good Good morning. Just yes, 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 is July mainly easier comps?

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.

With respect to July, Nigel, we're really encouraged with the start. For CSS, the beat goes on. For EES, we 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 July today.

So tonight's sales will close out the month, but UBS is now tracking as a as positive growth. So, again, that's accelerating momentum. The vector continues.

Okay. That's that's clear. Thanks, John. 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 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?

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 and A went up sequentially. Like in all of our businesses, we do that merit increase effective April 1. And the Utility and Broadband Solutions business runs a very lean SG and A.

So on the aspect of declining sales versus the prior year plus that increase in SG and A was an impact to the margin.

Nigel, when you think about the structure of the P and 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 three business, all three reporting segments. So we're very well positioned as utility returns the growth and overall UBS returns the growth in the second half. As has 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.

The next question is from Deane Dray with RBC Capital Markets. Please go ahead. Mr. Dray, your line is open on our end, perhaps you have it muted on yours. Moving on, the next question is from Tommy Moll with Stephens. Please go ahead.

Good morning and thank you for taking my questions. Good morning, Tommy. 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. Thank you.

Yeah, Tommy. Thanks for that question. So let's step back and put utility in the context. Remember, let's just let's, you know, let's look at this year in particular, utility was down mid single or was high 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 return 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 percentage the 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 resume 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 was 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 IOU customers were being delivered all that material, the public power customers started building inventory in late 'twenty three and through 'twenty four 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 the public power segment of our utility business returns to growth in second half of this year. Again, we've 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.

Thank you, John. 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. Made some good comments just in terms of not seeing any slowdown in demand, expansion of scope, etcetera. 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

I pretty 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 through with and through contractors and specialty integrators. 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 seven 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 where we have teams lined up by customer with an overall leader. And whose customers are sharing their R and 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 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 into white 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 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 based 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. 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.

The next question is from Deane Dray with RBC Capital Markets. Please go ahead.

Thank you. Good morning, everyone. You hear me this time?

Yes. Maybe you want to send a CSS team to check out my vendor.

We will help you, Deane. It's great to have you back.

Okay. Appreciate it. So just to follow-up on the the data center growth and and unpacking, and I really find that, slide seven to be so helpful. Just is there been growth and difference in your opportunity in gray space versus white space? We talked about that at your Analyst Day. Just how has that played out?

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 five to ten years, was traditionally served direct. But because we are one what the one stop shop and complete supply chain solution customer for our end user data center customers, be it a hyperscaler or MTDC customer or enterprise class customer for that matter, they're increasing 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, Dean, 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 9090% rate. EES's sales in the data centers grew at 90% quarter over quarter q two over q two year over year in the second quarter, and the white space was, you know, still north of 60%. So we have we did foreshadow. We thought we'd be 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 one page that shows three to three to five years time to power, one to two 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 gonna get upgraded or retrofitted to support AI applications shifting from CPU based build to 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 and 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 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.

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 and L? And can you size it at all at this stage?

Yes, certainly. 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 nineteen percent 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.

The next question is from David Manthe with Baird. Please go ahead.

Yes. Hi. Good morning, everyone. Thanks for taking the question. First off, to clarify, when you say that you're not factoring in any incremental tariff pricing, you are factoring in known price increases that you've already taken from suppliers in your guidance. Is that correct?

That is correct. So those prices that we've already seen flowing through our P and L we have included, if you go back to our initial outlook for the year, we had assumed that we would see about a point and a half 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 you today.

Okay, and was the price benefit that you saw that 1.5, is that uniform across the segments? Or is it overweight or underweight one segment or the other? And then just to be clear here, 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, Dan?

That's correct. Let me go back to the buy 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 and our Utility and Broadband Solutions business. What we're seeing here in the 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 one 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, impacted more of our EES business.

I would say that UBS is consistent with EES, where they've seen about a point of pricing here in the first half of the year. So it's relatively consistent amongst the three SBUs.

Okay, thank you. 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 in gross margin. We should expect that in the third quarter. And then just to gauge that, I look back to 2022 and I think you got 80 or 90 basis points, but I think there was an extra benefits and other things in there. Could you just give us an idea of what you're thinking about that lift might be in the third quarter?

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.

Perfect. All right. Thanks very much. I appreciate it.

The next question is from Christopher Glynn with Oppenheimer. Please go ahead.

Hey, good morning guys. A couple on ESS, EES. So industrial had been down low single digits for some time, flipped to plus low single digits after maybe some deer in the headlight market dynamics going on. You talked about U. S.

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