Participants

Scott Gaffner; SVP - IR; Wesco International

John Engel; Chairman, President and CEO; Wesco International

Dave Schulz; EVP and CFO; Wesco International

Sam Darkatsh; Analyst; Raymond James

Tommy Moll; Analyst; Stephens

David Manthey; Analyst; Baird

Deane Dray; Analyst; RBC Capital Markets

Christopher Glynn; Analyst; Oppenheimer

Stephen Volkmann; Analyst; Jefferies

Ken Newman; Analyst; KeyBanc Capital Markets

Patrick Baumann; Analyst; J.P. Morgan

Presentation

Operator

Yes. Hello, and welcome to Wesco's 2024 fourth quarter and full year 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.

Scott Gaffner

Thank you, and good morning, everyone.
Before we get started, I want to remind you that certain statements made on this call contain forward-looking information. Forward-looking statements are not guarantees of performance and by their nature, subject to uncertainties. Actual results may differ materially. Please see our webcast slide in 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 use certain non-GAAP financial measures. Provided 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 Officer; and Dave Schulz, Executive Vice President and Chief Financial Officer.
I'll turn the call over to you, John.

John Engel

Thank you, Scott. And good morning, everyone. Thank you for joining our call today.
We're pleased with our return to sales growth in the fourth quarter. It was sparked by accelerated growth in our Global Data Center business, which was up more than 70%. And in addition, we had 20% growth in our Broadband business, and we had renewed positive sales momentum in our Electrical Electronic Solutions business.
It's important to note that for EDS this marks our first quarter of growth since early 2023. Now, this sales growth momentum was partially offset by a slowdown with our industrial customers, especially in the last two weeks of December, and what we expected, the continued weakness in our utility business. With that said, our positive momentum overall has carried into January and our preliminary sales per workday adjusted for M&A is up 5% versus prior year. Our opportunity pipeline remains at a record level. Our backlog remains healthy and our bid activity levels remain very strong.
On a full-year basis, organic sales were roughly flat with the prior year and gross margin was stable. Although we experienced some pressure in Communication and Security Solutions and sales ramped at Data Center customers on project deployments. Consistent with our past practice and experiences, we expect to improve CSS margins as we move through the Data Center lifecycle. Dave will address this in more detail shortly, including the actions we're taking to improve CSS margins in 2025.
Now, turning to free cash flow. Our continued focus on effective working capital management yielded strong benefits again in the fourth quarter. We generated $268 million of free cash flow and drove net working capital intensity down significantly versus the prior year. On a full-year basis, we exceeded our expectations and delivered record free cash flow of more than $1 billion or 154% of adjusted net income.
Overall, key developments in 2024 set us very well for future margin expansion outgrowth relative to our market and to our peers.
First, we made excellent progress on our enterprise-wide digitalization efforts and our overall business transformation last year were more than halfway complete on our technology and capabilities build, which once deployed, is expected to accelerate our earnings growth through greater cross-sell. And you expect to expand our margins through improved pricing and operating cost leverage and is expected to dramatically increase our speed the values on the integration of future acquisitions.
Second, we materially strengthen our Wesco portfolio through both divestitures and acquisitions. Early in 2024, we divested our integrated supply business, which drove a positive mix shift for UBS. We also acquired three service-based businesses, including Ascent which closed in December. I think you all recall that Ascent is a premier provider of data center facility management services, and it enables us to provide additional value throughout and across the entire data center lifecycle. The strategic portfolio moves, that is divesting a low margin business and adding a higher margin services businesses are integral to achieving our 10 plus percent EBITDA margin goals.
Third, in addition to generating record free cash flow in 2024, we also reduced our net debt by $431 million, repurchased $425 million of shares and increased our common dividend 10% after initiating it in 2012.
Now, moving to 2025 and our outlook. We expect organic sales to grow 2.5% to 6.5% and operating margin to expand as all three business units are expected to deliver profitable growth this year. We expect to generate $600 million to $800 million of free cash flow, and I'm pleased to announce that we plan to increase our common stock dividend by 10% again this year to $1.82 per share while continuing our share buyback program. We also expect to strengthen our balance sheet by fully redeeming our outstanding preferred equity in June, which will improve both our cash flow and our earnings per share.
With that, we outlined in our recent Investor Day, we are committed to substantial value creation from operational improvements, our digital transformation and our overall capital allocation strategy, including additional M&A. As we look to 2025, our pipeline of strategic acquisitions remains strong and it's aligned with our goal to increase our service offerings to our customers.
We're well positioned to deliver outsized growth to do the secular trends of AI driven data centers, increased power generation, electrification, automation and reshoring. And importantly, we remain laser-focused on our enterprise-wide margin improvement program, which has been a historical strength for Wesco. I'm confident that Wesco will outperform our markets again this year, and we're well positioned to deliver improved sales growth and continue toward our long-term EBITDA margin expansion goal.
Finally, I continue to be very proud of our talented and dedicated Wesco team who remain steadfast in executing our strategic plan to capture the significant value creation opportunity in front of us. And we're doing this as we realize our vision of becoming the best tech-enabled supply chain solutions provider in the world.
So with that, I'll now hand it over to Dave to take you through our fourth quarter and full year 2024 results, as well as provide a much more detailed look at our 2025 outlook. Dave?

Dave Schulz

Thank you, John. And good morning, everyone.
Turning to page 4, I'll walk you through our fourth-quarter results.
Sales were below our expectations with the concern of drop-off in the latter half of December foor organic sales in the quarter were up mid-single digits through the end of November. Sales per workday were turning positive in December before dropping high-single digits versus the prior year in the last two weeks of the months to finish down low-single digits. In the fourth quarter, market weakness continued in Utility, Industrial and Enterprise Network Infrastructure while we saw strong growth in Canadian Broadband and again, delivered exceptional growth in our West Coast Data Center Solutions business.
Reported sales in the fourth quarter were flat year over year, organic sales were up 2%. Price contributed approximately 1.5% versus the prior year with volume growth just under 1%. In addition, reported sales were negatively impacted by approximately 300 basis points from the divestiture of integrins line in foreign exchange rates. These headwinds were partially offset by a benefit of an additional workday.
On the lower half of the page, you can see the adjusted EBITDA impacts of higher sales, offset by lower gross margin and slightly higher S units. Gross margin was down one basis points from the prior year, including a headwind of approximately 30 basis points from lower supply volume regions. Adjusted earnings per share of $3.16 was up 19% from prior year.
Turning to page 5.
On a full-year basis, sales were down 2.5% on a reported basis and down 0.5% organically. Price contributed about 1.5%, which was offset by lower volume and a 109 basis points cumulative impact from acquisitions and divestitures, differences in foreign exchange rates in the benefit of two additional work days compared to 2023.
On the lower half of the page, you can see that adjusted EBITDA was down from the prior year due to lower sales. Gross margins is flat on the prior year level and the benefit of the integrated supply divestiture was offset by lower supplier volume rebates. SG&A was up slightly, reflecting inflation on employee-related costs in warehouse reasons.
Turning to page 6.
On the left side of this page, you can see that gross margin in 2024 was flat in the prior year and 21.6%, this reflects an increase of more than 200 basis points over the past five years and we believe there is opportunity for further margin expansion.
The right side of the page shows that gross margin in 2024 vary by business unit. For EES and GBS margin increase from the prior year and were up 10 and 80 basis points respectively. They contributed to the 80 basis point increase by EBS with the direct result of our strategic portfolio shifts. We've resolved the divestiture of the Integrated Supply business. In addition, the increases that EES and UBS reflects the positive impact of our enterprise-wide margin improvement program.
As John mentioned in his opening remarks, the exceptional growth that we have experienced within our Data Center business has included participation in numerous large-scale data center continents. Some of these projects are direction which have a lower gross margin. We believe that over the course of the Data Center lifecycle, we will improve margins with these customers as we provide additional products and services consistent with past experience.
(inaudible) want to do our business unit results, beginning with EES on slide 7. Note that we have provided additional disclosure on gross profit and SG&A for each of our segments, as this information will be provided in our annual and quarterly SEC filings starting in 2025.
EES organic sales were up 1% in Q4. Reported sales were up 2%, reflecting the benefit of an extra work day compared to prior year. We are pleased with the return to growth in our EES business. Construction sales were up low-single digits in the fourth quarter, driven by a higher level of funding activity that drove growth in Canada, [Cala], [in Aman], offset by continued weakness in solar in the United States.
Industrial sales were down low-single digits. We delivered growth in Canada, offset by a weaker US market, reflecting the broad-based industrial slowdown experience across the market in the fourth quarter. OEM sales were up low-single digits for the second consecutive quarter, reflecting improved momentum in the second half of 2024. Backlog was down 1% from the prior year and down 2% sequentially in line with normal seasonality.
And then again on the right side of this page, you can see that EES adjusted EBITDA margin was up 10 basis points from the prior year, reflecting improved operational efficiency and cost controls, with SG&A as a percent of sales favorable by 30 basis points. For the full year, organic and reported sales were down 1% due to low-single digit growth in construction, flat industrial sales and a low single-digit decline in OEM. Gross margin was up 10 basis points and full year adjusted EBITDA margin was flat in the prior year.
Turning to Slide 8.
CSS saw accelerating momentum in the fourth quarter with sales up 11% year-over-year on an organic basis and up 14% as rewarding. The growth was driven by Wesco Data Center Solutions, which was up 7% with double-digit growth across all three end these customer times: hyperscale, multi-tenant data center and enterprise. This growth has significantly increased the mix of Data Center within CSS (inaudible). Within CSS, Data Center represented nearly 40% of sales, up from about 25% of segment sales in the prior year quarter.
From a total company perspective, Data Center, which includes sales across all three business units was approximately 16% of Wesco's sales in the quarter, approximately 13% on full year basis. Note this is an increase from the comparable 10% less those sales that was shared at Investor Day, which was based on trailing 12-month sales through June.
Security sales were approximately flat in fourth quarter and Enterprise Network Infrastructure was down in the quarter, reflecting continued softness in the wireless and structured cabling, partially offset by strength in our service provider business. Backlog was up 16% from the prior year, reflecting the substantial growth in our Data Center business and down in the 5% sequentially, given the timing of large project shipments in Q4.
Adjusted EBITDA margin for CSS were down 150 basis points versus the prior year, primarily reflecting the mix of large customer Data Center projects in the quarter with a lower gross margin that I mentioned a moment ago. For the full year, CSS sales were up 5% on a reported basis and up 4% organicr. This growth was due to the exceptional strong growth in Data Center build-outs in 2024.
Turning to Slide 9.
I want to take a moment and discuss the growth in the broader data center space that we've seen recently and how we participate. We first provided the information on the left side of this page in our investor day last September. It highlights the two stages of the data center construction site, time of power in the construction period.
The key takeaway is that projects that are announced today and have obtained funding for life and paying about four to seven years before they would be up and running. Pipeline of data center projects continues to rapidly expand, especially in the mega-projects space. Based on data of the past two years, data centers have accounted for approximately 35% of the total mega-project investment, the highest by far among the 16 categories we track. Our solutions now encompass everything from the electrical distribution systems through advanced IT infrastructure, to services that's important in center operations, ensuring that our customers and comprehensive solutions throughout all phases of the data center side.
On the right side of the slide, you can see the substantial and accelerating growth that our data center business delivered in 2024. This growth has been driven by organic initiatives, along with substantial acquisition investments made to increase our exposure to certain capabilities within this space. We continue to invest in capabilities and in 2024 and an interest in a sense to expand our capabilities to service data center customers from cradle to grave, including on-site services and data center technology upgrades.
Moving to page 10.
As John mentioned on the top of the call, in December, we closed the acquisition of Ascent, provider of data center facility management services. Headquartered in St. Louis, Ascent provides data center operators, highly specialized facility management services. Ascent strengthens our leading global data center solution portfolio for our customers by allowing us to further extend our end-to-end service offerings, including advanced liquid cooling design and implementation solutions.
Turning to slide 11.
Organic sales in UBS were down 6% in quarter and reported sales were down 17%, with (inaudible) has invested integrated supply business in the base period. As we've discussed previously, the utility market continues to experience short-term softness related to customer destocking and lower project activity levels, which is partly a function of the current interest rate and regulatory environment. We expect these inputs to continue into the first half of 2025 for their return to growth in the second half of the year.
We remain highly confident in the future benefit from the secular trend of electrification, green energy and grid modernization and believe these trends support substantial growth acceleration in our utility business over the long term.
We are pleased with our return to growth in Broadband in the fourth quarter. Broadband sales were up more than 20%, albeit against the prior year that was down more than 30%, reflecting exceptionally strong growth in hand.
Canada broadband business began showing signs of improving momentum in Q3. UBS backlog was down 25% from the prior year and down 10% sequentially. Adjusted EBITDA margin was up 40 basis points over the prior year. On a full-year basis, organic sales were down 5% from prior year and reported sales were down 13%, reflecting the divestiture. Gross margin was up 80 basis points as we discussed a moment ago.
Turning to page 12.
In the fourth quarter, we delivered $268 million of free cash flow or 156% of adjusted net income. This contributed into our full year free cash flow of more than $1 billion, a record for the company, representing 154% of adjusted net income, which is substantially more than our through-the-cycle target 100%. This has largely been driven by a reduction in working out.
I would like to point out that cash flow in the fourth quarter benefited from the timing of payments for tax credit purchases that effectively moved to $45 million cash payment from the fourth quarter of 2024 through the first quarter of 2025.
You can see on the right side of this page that we reduced net working capital intensity by 160 basis points in 2024. We are pleased with this result and we remain focused on making further progress, including reducing inventory as a percent of sense. In 2025, we expect net working capital to grow a hot line of sales for which will further drive down net working capital as a percentage of sales.
Turning to slide 13.
This slide shows our 2025 outlook by strategic business unit in the individual operating groups. As John mentioned, we expect organic sales to be up 2.5% or 6.5% and reported sales in the range of flat to up 4%. With the difference driven by M&A activity, along with headwinds from foreign exchange and work days.
Starting with the EES, we expect 2025 reported sales to be flat to up low-single digits. You can see that sales from all three operating groups were relatively flat in 2024. As we move into 2025, our expectation is that construction will be approximately flat, Industrial will be up and OEM will grow as the positive momentum we experienced in the second half of 2024 continues this year.
Looking at our CSS outlook, we expect 2025 reported sales will be up mid-single digits. We've already discussed the significant growth in data centers in 2024, which we believe will continue into 2025 with an operating group up mid 10s. We also expect security will be up driven by a recovery in US markets. Enterprise network infrastructure, which primarily sells and contractors, service providers and communications end markets has a softness throughout 2024 due to slower 5G build-outs and construction specific markets. Particularly in structured team, we expect overall enterprise network infrastructure will be flat in 2025.
Lastly, looking at UBS. Our utility business was down throughout 2024 due to customer destocking and lower project activity. While we expect that softness to continue in the first half of 2025, our expectation is that growth will return in the second half of the year. As we have discussed previously, there is significant underlying demand for modernization investment in grid, as well as investments in new generation, transmission and distribution to support the growing power and electrical needs.
Moving to page 14. Let me walk you through the details of our outlook for 2025.
Starting at the top of the page, we expect organic sales to grow between 2.5% and 6.5% for the year. Reported sales are expected to be flat to up 4%, including a foreign exchange headwind of approximately 1.5% due to rate differences, primarily in Canada. Reported sales also includes an approximately 1% impact from net divestitures in one (inaudible) work day in 2025. We call the best integrated supply last April, which was partially offset by acquisitions completed in the second half 2022.
We expect adjusted EBITDA margin to be in a range of 6.7% to 7.2%. Recall that we are facing a 20 to 30 basis point SG&A headwind from the restoration of incentive compensation. Given the results in 2024, incentive compensation is below target, and we have assumed a target payout in 2025. Without this handling, we are on track with the 20 to 30 basis points of annual margin improvement that we highlighted at our Investor Day. The upper end of this EBITDA margin range reflects lower gross margin expansion and operating leverage on higher sales, while lowering the range reflects the impact of flat volume on operating leverage. Regarding gross margin, we expect to deliver some level of gross margin expansion in 2025, due in part to a slightly higher level of supplier volume rebates and improvement of CSS gross margin. Our outlook range for adjusted diluted earnings per share on $12 to $14.50 reflects year-over-year growth of 8% of the midpoint.
Recently note that we have also provided key modeling assumptions, and I want to comment on specifics. For our outlook assumes that cloud security expense will be approximately $40 million in 2025, up from $14 million in 2024. Consistent with historical results, cloud computing amortization is recognized in SG&A and not included in adjusted EBITDA. It is, however, included in adjusted operating income and adjusted earnings per share.
Business expense is expected to decrease in 2025 due to lower debt balances and digital on preferred equity will be reduced by half as we anticipate redeeming the preferred in June of this year. We expect to generate substantial expense savings by redeeming the preferred stock due to the difference between our expected borrowing rates in of 10 and 5 days preferred dividend rain.
Lastly, turning to free cash flow. We expect to deliver free cash flow of between $600 million to $800 million in 2025. As a percentage of adjusted net income, this implies a range of approximately 95% to 105%.
Regarding capital allocation, our strategy is unchanged. Our top priority is to invest organically in the business to drive growth and operational efficiency, including the completion of our business in digital transformation.
After funding organic investments, our free cash flow being allocated to the highest return option. We will find more and find acquisitions to continue to expand our capabilities and better serve our customers, particularly those engaged in high-growth end markets.
We will continue to repurchase shares under our current authorization. Given our expectation to redeem the preferred stock, we would anticipate share repurchases will be opportunistic in well below the 2024 level of $425 million. Lastly, in 2025, we expect to increase our common stock dividend by 10% for approximately an incremental $2 million per quarter versus 2024.
Turning to page 15, this slide shows the year-over-year monthly important sales growth comparisons for the past two years in our expectations for the first quarter. Versus the prior year, we expect first quarter organic sales, excluding a net headwind of M&A and one fewer work day than the prior year to be up low to mid-single digits.
On a reported basis, we expect sales to be approximately flat versus the prior year from lasted for any problem, down 5% from the prior year. Preliminary, January sales per work day adjusted per M&A were about 5% in the prior year. Note that January of 2024 is the easiest comparable of the year. We expect adjusted EBITDA margins will be slightly lower than the prior year level of 6.4% as we continue to manage costs effectively in a mixed economic environments.
Moving to slide 16. We covered a lot of material this morning, so let me briefly recap the key points before we open the call to your questions.
Sales in fourth quarter were at the high end of our outlook. Growth momentum in data center continues to be exceptionally strong, and we received the market returned to growth in both broadband and our EES business unit. Full year free cash flow was one of $1 billion, a record level for the company. In 2024, we repurchased $425 million of common shares and reduced net debt by $431 million. In 2025, we expect to deliver above market growth and improved profitability.
With that, operator, we'll now open the call to questions.

Question and Answer Session

Operator

(Operator Instructions)
Sam Darkatsh, Raymond James.

Sam Darkatsh

Good morning, John. Good morning, Dave. How are you?
Two quick questions, if I could. Help us with what gives you confidence with respect to your visibility into the second half recovery, with the utility vertical. I know that the first quarter is the seasonal low point, but you also took your primary KPI, as I recall, was mostly fill rates as opposed to perhaps forecasting demand level. So, what gives you confidence that the second half? Is there a right time to assume a snapback in that business?

John Engel

A good question, Sam. First, we do have a couple of new customer wins that start to ramp up here in the first quarter build through the second quarter and are reaching the electronic run rate of sales in the second half. So irrespective of the market, those wins occurred in the second half of '24. So, we enter the year they're both very meaningful so we're very much encouraged by that.
Secondly, Jim Cameron and his team have had deep discussions with all our utility customers. And I think that given the secular growth trends we're seeing, the change in the administration in the U.S. and the fact that we think they've been customers, on behalf of with us have been working down their inventory levels where we've built the customer by customer. It's our team here that as we get through the first quarter, through the second quarter, moving into second -- latter part of the second quarter into the second half that materially that utilities will turn back the purchasing engine backlog.
I think, overall, our view of this overwhelmingly strong secular growth trends through the entire utility power chain remain intact. As I've mentioned quite a few times, all these other secular growth trends we're talking about require one thing: power. So, we're going to have a kind of an overall increase in the power demand curve as far as we can say and that's going to pull on capacity. It's got a mandate in utilities, in dash that increasing our capacity from generation through transmission substations. And then, obviously, through the distribution portion of the power chain.

Sam Darkatsh

Thanks.
To my second question, Dave, you mentioned that you expect gross margins to be up slightly for the year. I'm guessing, especially because it's an easy comparison in the first quarter, that you're anticipating gross margins to be up all year long, is that a fair representation?

Dave Schulz

Yes, it's a fair representation. I would point you to -- we did have a peak in the third quarter. Again, a lot of that will be predicated on what is the mix of the business and the impact on gross margin. As we think about the full year, one of the benefits we are expecting on gross margin is the higher supplier volume rebates are supplier volume rebates in 2024 was that one of the lowest historical levels that we've had so we do expect that to increase, particularly, as we looked at growth at the higher end of our range. At the midpoint, we would still expect SDR benefits against gross margin in 2025.

Sam Darkatsh

Thank you.

Operator

Tommy Moll, Stephens.

Tommy Moll

Good morning, and thank you for taking my questions.
John, thanks so much for the gross margin inside at the segment level, maybe next quarter, we'll get to a business unit as well. But for the moment, could you just give us some of the back story here on what was the decision making process on going ahead and providing that disclosure and what you want to make sure we take away?

Dave Schulz

Yes. Hey, Tommy. It's Dave Schulz.
So there is a new requirement from the SEC that companies filing after December 15, 2024, are required to provide the key segment expenses. And when you take a look at the composition and the profit structure of our business, one of the key drivers of our profitability is obviously gross margin. So, we are just closing that, you'll see that in our 10-K that will be released here, probably the end of the week, early next week. You'll see three years of detail within the segment footnote, disclosing the gross profit and then the adjusted SG&A as well. And so, we do intend to continue to disclose the gross margin at the SKU level. From our perspective, it is complying with the SEC regulation.

Tommy Moll

Thank you.
And Dave, a follow-up on your comments regarding redeeming the preferred. It's really a two-part question. As you laid out your EPS guidance range for the year, how many quarters are you assuming we'll have that roughly $14 million headwind there? And then as you redeem these in the June timeframe, the expectation you'll be able to fully redeem with cash on hand or there would potentially need to be impartial debt financing just given timing of cash flows? Thanks.

Dave Schulz

Yes, Tommy, we fully intend to redeem the preferred. That means that we'll pay the two quarters worth of the dividend on that preferred stock. We will evaluate how we fund that redemption, whether it's with a combination of cash on hand borrowing against existing facilities or depending on the market, whether we would go out and issue an additional note. One thing to keep in mind, as we provided you with those key modeling assumptions for 2025, we have assumed a range on interest expense, which based on the current rate environment, now it's almost agnostic whether we use our existing facilities or we finance that with a new note.

Tommy Moll

Thank you. I'll turn it back.

Operator

David Manthey, Baird.

David Manthey

Yes, thank you and good morning.
Dave, just a question on SG&A, you've mentioned the reset of the incentive comp, but you also, I believe, have a 3% annual merit increase. And remind me, does that hit April first?
And then in light of those two items, could you provide any color on how SG&A stepped through 4Q to 1Q, and then from the first quarter and into the second quarter progressively?

Dave Schulz

Certainly. The -- you're right that we've assumed a 20 to 30 basis point headwind on the incentives and that our typical merit increases effective on April 1. So, as we think about the sequential impact to SG&A moving from Q4 of '24 to Q1, we would've expect an uptick. And that uptick in the sequential increase is primarily going to be driven by that incentive compensation. But we then moved from Q1 to Q2, there will be the step-up related to a low-single digit increase in our people costs.

David Manthey

Okay.
And then second, if we adjust for the WIS divestiture, I believe UBS segment EBITDA was one of the lowest rates that we've seen in many quarters, has there been any structural change in UBS profitability as we go forward or with growth as we accelerate into 2025, do you expect to return to more of that sort of 11% plus EBITDA margins we saw in '23 and early '24?

Dave Schulz

Yes. Let me provide a little bit of background on the integrated supply divestiture. So you know, we have spoken about that had a lower gross margin. And when we strip out the impact of integrated supply on gross margin, there was some favorability to the total company, but that was primarily offset by an increase in SG&A due to lack of the operating leverage.
So overall, the integrated supply, the best figure at the company level was a slight favorable on an adjusted EBITDA margin, low-single digit, but basis points so really, no meaningful impact. Within utility and broadband solutions, yes, there was a benefit from was coming out from a gross margin perspective. The business actually performed extremely well and managed gross margin effectively well in 2024. The margin pressure was really coming from SG&A on the lower steps. So, this is a very efficiently run business.
But as those sales continued to decline, how you can see from the slide that we just didn't get the operating leverage on from the business within UBS, I wouldn't say that that's less from integrated supply coming out more from (technical difficulty) being down throughout 2024.

David Manthey

Save time going forward, though with a return to growth. I think Dave you call it a question around operating leverage going forward.

Dave Schulz

Yes, absolutely so that this business runs very efficiently. So as we see there are return to growth on the top line, we would fully anticipate that we will get the margin benefit on adjusted EBITDA.

David Manthey

Great. Thank you and good luck.

Dave Schulz

Thanks, Dave.

Operator

Deane Dray, RBC Capital Markets.

Deane Dray

Thank you. Good morning, everyone.
14 day takeaway put a spotlight on the good start to January.
Just take us through the composition of the business, stock and flow, what kind of mix direct ship, any kind of pricing difference versus what you saw in the fourth quarter?
Just some color there would be really helpful.
Yes.
Yes, we're really pleased again with some of the calendar turned of how January ended up.
I will mention that actually started a bit soft.
So it was interesting.
I don't know if this has come out.
Many other companies that have high the earnings calls, but the softness that we saw kind of have to speed January, right, second project or December, that is what was solved by kind of January, started off a bit soft for a week or so, a little longer than a week then kick into gear ourselves.
Really nice to see that momentum as we exit January at a far five plus percent growth rate.
That's ex M&A.
So it's a good sense that there's some headwinds in January to because of FX has stepped us as picked up substantially the start of Q1 of 2025 versus where there's certain Q4 of 2024.
So that just I think that help calibrate the 5% of it in terms of overall mix stayed, it's really an extension of what we saw in the fourth quarter.
So no material mix changes January thus far, I will say that the bookings were very strong.
So book-to-bill was above one data strongly above one bottle and margins were up for a very stable so far.
Yes, very good start.
We feel good about it.
That's great color.
And then just a follow up, but maybe we can visit tariffs.
What the risks are.
You guys have a playbook?
I know you've been through this for.
So just what talk about prioritization and then anything around the metals?
I know this is all laid for a long.
You're just going to have the key for spreadsheet open as long as these changes happened on the fly.
But just if you could share with us your current thinking.
But we we do have a playbook.
It's a well developed playbook.
We've been through this before.
I think I'd take it back to the first Trump administration.
Look at what we look at the tariffs that were put in place looked at bill, we took all the appropriate action will be able to launch our margins very well through that process.
I'll just remind everyone that we have very, very low, I'll call first derivative direct exposure of because our private label business is a very small percent of our overall business.
So where we see the effect on the supply side of our of our business is on the is it with our supplier partners that does the exposure we as we work with them through and together with them to push that the pricing drove net net for distribution of look, we don't want to have to put the price increases through to our customers, but we absolutely will and we'll do that.
I will protect our margins.
We have a strong history of doing that.
So the way to really think about tariffs as to the extent it drives an inflationary effect on the supply side of our distribution business model, we take that we work it through to our customers, continue to sell our value, add capabilities and what that pricing through.
So this all this will just speak to an environment where inflation stays Fidelity higher than maybe some expected.
And that is our outlook as we move through 2025.
That's great color. Thank you.

Operator

Christopher Glynn, Oppenheimer.

Christopher Glynn

Thanks.
Good morning.
So I was curious about comparing the public power SIO use at utility.
John, I think the slides culled out public is kind of weak.
We saw in Q4, Chris, both public power and investor-owned utilities yield those those two respective set of end user customers and the agility were down mid single digits.
So we actually saw similar headwinds with both with both our as we if we could take a look on a full year basis, um, you know, I would say that probably a little stronger with industrial and utilities versus public power in general, but it looked guy.
So I wouldn't really call out any major differences.
The utility effects that we saw really market driven, yes, driven by customers, but it's kind of a market driven sedative effects.
Okay.
And then ENI, the declines there were a little steeper with that kind of a noisy quarter free ENI with some of the particular kind of a December affects more acute in that business may be at the kind of an air pocket?
Or do you think the market up and down a bit more?
Well, look, I think your characterization is accurate, little a little bit of softness in the second half of December.
There.
Look, overall, CSS, really terrific momentum as we build across the year, exit the year with very strong data set, a lot of very strong EBIT improvement and return to growth and security.
It happened in the year.
one thing I will call out, I don't want to get to know because we are pulling all data center sales related to data centers, and we're reporting that as data center sales that include security again or bundling other CSS products and an income Louis core enterprise network infrastructure, what classically would be called that.
So, you know, I think when you look at security like for like just as a category, we had mid single-digit growth in Q4.
It was a return to growth.
So very good.
I'll call it broad-based momentum across CSS.
I would not call out ENI as being kind of a real weak spot.
Again, if you look at some the categories of products that weren't and classically and ENI before we broke out data centers, yes, it would it would have looked of much stronger in the quarter.
Hope that helps gross because I think you have all been weak for us and requests to us.
Yes, we appreciate that.
Thanks.

Operator

Stephen Volkmann, Jefferies.

Stephen Volkmann

Thank you, guys.
Dave, I wanted to dig into something you said I think earlier when you're talking about data centers and large customer projects, which maybe comment a little bit lower margin and provide a little bit of a headwind, but maybe over time, there's more service.
So I'm curious, as we continue to see data Harris grow much faster than the rest of the business, is that still kind of a margin headwind as we go forward?
Or do you get that service from him more quickly and it kind of normalizes it normalizes.
And so just to provide a little bit more color on this one, particularly in the fourth quarter, we saw a lot more of the early phases of these data center builds, and those were direct ships for many of those larger customers.
So just like the balance of our business, whenever we have a direct shipment and never touches our warehouse, we don't service it basically goes directly from the manufacturer to the job site so that the gross margins on that always tend to be low.
And that's one of the things that impacted our CSS margins in Q4.
But as we began working with the customer to operate that facility, there is that opportunity for more products and services to be sold through to that customer, which will come at the higher margin, particularly if we can attach it to the services portfolio that we've continued to expand, including with the acquisitions that we completed in 2024.
So it is a margin story that we would expect to normalize.
That's been our experience with other large customers in the past.
Got it. Okay, thanks.
And then just switching over to free cash flow.
I guess I'm might have expected a little bit more of this year, just in the sense that we spend a couple of years well below the 100%, it seems like we have some some ground to work to get back to sort of that 5-year average.
So maybe the way to think about that is working capital to sales ratio is still quite a bit higher than pre-COVID.
Does that does that get meaningfully lower from here?
How do we see think about that?
We would expect it to get meaningfully lower in 20 JPY25.
And we highlighted that we do and some big ones of them.
We do expect continued growth in 2025, consistent with what we provided to you.
So yes, if you take a look at just the midpoint of that from where we started with net working capital at the end of 2024, we've highlighted that we would anticipate that our networking capital, we grow half the rate of sales.
So just looking at the midpoint of our outlook yield, but a sign that 1% increase in net working capital that will drive further efficiency overall on net working capital.
Also, please keep in mind that from an overall inventory requirement, John mentioned, we've got some new accounts and utility, so that will require us to fill inventory requirements earlier than we begin to see the sales.
So there will be some lumpiness in our net working capital, particularly in the first quarter as we begin building out for some of those new customers.
But overall, we would expect continued efficiency to net working capital through the end of 2025.
Okay. Thank you.

Operator

Ken Newman, KeyBanc Capital Markets.

Ken Newman

Hey, Mike volatile.
Maybe first, I just wanted to get a quick clarification, Dave, from an earlier question for the earnings guidance that you outlined on slide 15 or 14 that does include a full year of the preferred dividend or is that not the case?
That is not the case.
So it assumes that we have half year of the dividend payout.
So rough round $14 million quarter, we'll pay that for the first two quarters of 2025.
That is included in our outlook.
Got it. Okay.
And then for my follow up here, I just wanted to run back in the 1Q organic growth guide.
And then just trying to square that against the 5% you saw in January, given that it doesn't look like the comp, I think, step down sequentially in February and March, I think January, is that a normalization from a snapback from that slower in the back half of December, slower first half of January?
Or help us kind of understand the the assumptions underlying that first quarter guide?
Yes, certainly some of the 5% that we talked about for the month of January, preliminary sales growth, it is against an easier comp.
It does not include the impact for the M&A impact in the month of January.
As you think about how January shaped up relative to the fourth quarter?
The composition of our businesses was about the same.
We continue to see strong growth from CSS.
Yes, we're still seeing some challenges with been UBS.
We expect those challenges UBS to recover in the second half of the year.
But in terms of where we're seeing the full quarter, as John mentioned, we've got a couple of new contracts within the utility space.
We've got a backlog that is still at a near a record high level.
So from that perspective, yes, the comps get tougher in February, worry in March, but excluding the M&A impact, the low to mid-single digit outlook is appropriate.
Very good for the color.

Operator

Patrick Baumann, J.P. Morgan.

Patrick Baumann

Hi, good morning, Tom.
During the call here this morning.
I had a question first, maybe on the sale of cadence through the year, it looks to me like the first quarter you're guiding down about 1% on a workday adjusted basis versus the fourth quarter.
And historically, I my math says it's typically down 4% to 5% kind of work day adjusted basis sequentially.
So what this means, I think you need below seasonal trends for the rest of the year to get to the midpoint of your guide?
Or are there any large projects maybe for data center construction that are coming off from the first half of the second half that would cause this or any other color you could provide on why that would bear?
Certainly the, um, so we provided you our expectations for Q1.
What are the key drivers to the phasing of the quarters throughout the year?
Is the timing of the recovery on utility.
We've talked about that being more in the second half so that that will influence the growth rates that we would expect to see in the first half of the year with an expansion in the second half of next year.
So in terms of how the outlook layout, we would expect that to come from our reported sales perspective will be light in Q1 as we've already provided to you that information.
And then we would begin to see an improvement through the Qs two through four primary driven by continued benefit from that data center growth.
The ES. business for the full year being on a reported basis, flat to up low single digit and that back half recovery on utility.
Okay. Right.
And on the on the US construction market for 25, can you talk about that flat outlook that you have maybe by vertical mentioned solar as a headwind in the fourth quarter?
Any other color you can offer in terms of vertical end markets and then also in a segment, I guess that's also related to construction that's flat.
Maybe just flesh out kind of the construction outlook across the different segments.
I guess, yes, we're still seeing and have an expectation for considerable growth in the data center space.
Of that will impact our ES. business as well across some of the other verticals within nonres construction were not expecting there to be any significant growth opportunities in the office space.
There are some pickups in nonresidential construction related to manufacturing and then also within the healthcare space.
So those are the verticals that right now we're targeting.
And again, most of our business in that and that construction space will be on the nonres side.
And that's where our exposure is were also comping.
We've primarily finished the comparisons that have been negative on solar.
So we won't see that downdraft on solar in our construction business.
As it relates to E. and I. again, that business is influenced by both new construction plus renovation jobs.
Some of it is office related, some of its manufacturing related.
So that's what's also informing our outlook for enterprise network infrastructure.
Those same impacts to our ES. construction business will be impacting our E&I business cabinet.
Wal-mart.
Just really quick one housekeeping on the on the P a center that you guys did you book a $30 million in the quarter, which for one month of ownership seem like a big number.
What's like the right run rate of sales for this business?
Tom, and why would the fourth quarter have been so high in terms of sales contribution from that business?
Here on the Ascent acquisition that was completed in December of one of the things that we had already talked about publicly was that we acquired the business had run rate sales of about 115 million per year, but it was growing at about a 30% rate.
We did have a very strong December within our CSS business contributing.
I would assume contributing to that growth rate?
We've not provided any other specifics.
We do anticipate that that business will continue to grow, consistent with what we've heard of think about it and growing double digits with the capability that we are providing within the data center space.
Okay, thanks a lot.
Better luck.

Operator

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

John Engel

Thank you, all, again for your support is much, much appreciated. We've addressed all the questions that they got teed up during the call. I know we have a lot of calls lined up through this afternoon and tomorrow and I think some after the weekend as well, so I'll bring the call to a close. In terms of future events, we look forward to speaking with many of you over the over the next two months as well.
At the rate we'll be attending the Raymond James Institutional Investor Conference on March 4, we'll be attending the J.P. Morgan Industrial Conference on March 12, and we'll be also attending Distribute Tech Conference on March 25. So with that, I'll ask about and we will announce our first quarter earnings on Thursday, May 5.
So with that, I'll bring the call to a close and thank you and have a good day.

Operator

The conference has now concluded. Thank you for attending today's presentation.