Good morning, and welcome to the Wesco Fourth Quarter and Full Year 2020 Earnings Conference Call. All participants will be in a listen only mode. Please note that this event is being recorded. I would now like to turn the conference over to Leslie Hunzicker. Please go ahead.
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 are subject to inherent uncertainties. Actual results may differ materially. Please see our webcast slides as well as the company's SEC filings for additional risk factors and disclosures.
Any forward looking information relayed on this call speaks only as of this date, and the company undertakes no obligation to update the information to reflect changed circumstances. Today, we'll use certain non GAAP financial measures. Required information about these non GAAP measures is available on our webcast slides and in our press release, both of which are posted on our website at wesco.com. On this call this morning, we have John Engel, our CEO and Dave Schultz, Wesco's Chief Financial Officer. Now I'll turn the call over to John.
Well, thank you, Leslie, and a warm welcome to Wesco. It's great to have you on the team. Thank you. Good morning, everyone, and I hope that all of you have been staying safe and healthy. I'll start out with a summary of 2020 and some of our most notable accomplishments.
Dave will take you through at that point an update on our rapid progress that we're making on integrating Anixter and I'll take you through our Q4 and full year results and then give you an overview of our outlook for 20 21. After that, I'll offer a quick recap before we open the line for questions. So starting out, 2020 was an extraordinary year for WESCO. We completed the transformational acquisition of Anixter, doubling our size of the company and changing our trajectory for years to come. We're off to an excellent start and are more bullish than ever on delivering against our substantial value creation potential.
In addition, I'm inspired by and would like to thank all of our associates for their dedication, commitment, resilience and extraordinary effort in serving customers during the global pandemic. As most of you know, we announced our agreement to acquire Anixter International last January and we were very pleased to close the transaction a little more than 5 months later. The 1st 6 months of the integration have gone exceptionally well. Our synergy capture has exceeded our expectations, both in terms of size of the opportunities as well as the rapid pace of our execution. You'll recall last quarter, we increased our 3 year post merger cost synergy target from $200,000,000 to $250,000,000 In addition, the highly complementary nature of Westco and Anaster and our substantially larger scale has enabled us to build a cross sell pipeline that's starting to show up in our top line results and this is very encouraging.
At the same time that we are working towards closing the transaction and beginning integration, we are managing through an incredibly challenging macro environment driven by the COVID-nineteen global pandemic. In response to this, we took quick and decisive actions that are really on 3 priorities. And we've talked about this in the past. 1st, protecting our employees. 2nd, ensuring that our customer experience service and support was seamless and exceptional and number 3, taking the necessary actions to reduce our cost and efficiently manage our operations.
The diversity of our end markets, our differentiated service offerings, our global footprint and the attractive secular trends we support help temper the effects of COVID-nineteen on our business last year. On the right hand side of this page, you can see the attractive secular growth trends that are driving demand for electrical, communications, security and utility solutions, all of which will continue to drive demand in the years ahead. All three of our strategic business units have the scale and capabilities to deliver growth associated with the increasing use of automation, machine to machine connections, the electrification of our infrastructure and the demand for faster bandwidth and data center capacity. Emerging growth trends such as the relocation of supply chains back to North America and increased remote connectivity also drive additional growth opportunities. In combining WESCO and Anixter, we have created the industry leader in electrical, communications and utility distribution and supply chain services.
Just as these secular trends are poised to drive strong growth in all the markets we serve. Now moving to Page 5. During our Q2 earnings call in August, we highlighted our priorities for the second half of twenty twenty. They were to take share, deliver synergies and focus our free cash flow generation on debt reduction. In the Q4, we saw improving sales momentum coming out of the COVID-nineteen trough and are successfully utilizing our increased scale and capabilities to take share.
Sales were up 4% sequentially in Q4 on a workday adjusted basis, when typically our sales declined sequentially in the Q4. We closed the year with a record year end backlog, which sets us up well to continue building on this positive momentum in 2021. Even more importantly, January sales reflected a return to year over year sales growth with sales up low single digits on a comfortable workday basis. We've made great progress across the board on our synergy capture efforts. Our team is laser focused on driving synergies.
As we have combined into 1 organization, we've made great progress in reorganizing recognizing the savings from duplicative corporate overhead and functional integration. Adjusted gross margin was up versus the pro form a prior year for the 2nd consecutive quarter. Our management team is now in place and we've been able to streamline roles across functions for greater efficiency. We are on track to meet the higher synergy targets that we announced last quarter and have very high confidence in delivering upside to these targets. Free cash flow was another major highlight for us in 2020.
We generated $586,000,000 of free cash flow last year, close to the $600,000,000 target that we set for 3 years out and more than 2 50 percent of our adjusted net income. This enabled us to reduce net debt by almost $400,000,000 and leverage by 0.4x in just the 1st 6 months since the Anixter closed. And last month, we completed a debt refinancing of our 2021 notes that reduces our interest expense by $20,000,000 per year, which will further enhance cash flow and support achieving our 2023 reduction and debt repayment target. Overall, we are very pleased with the results we're delivering on all fronts. We're entering 2021 from a position of strength with an unwavering commitment to our strategies and growth plan and an extraordinary team of associates and outside partners.
Coupled with our strong execution and accelerating progress on the integration, we have very high confidence in our ability to deliver sustainable long term value creation. 2021 will be another positive and important stepping stone in our transformational journey. With that, I'll turn the call over to Dave, who will take you through our financial results. Dave?
Thank you, John. Before getting into the results for the Q4, I'd like to address where we are with cost synergies from the integration with Anixter. When we announced the merger with Anixter back in January of 2020, we anticipated a mid-twenty 20 close and provided investors with our view on synergies for the 1st 3 years post close. On Slide 7, you'll see that we've converted our synergy timeline to align with our fiscal year end. The chart on the left side of the slide shows the cumulative realized cost synergies that we expect to generate by fiscal year.
Realized synergies are those that are reflected in our income statement. In the 1st 6 months post close, we have realized $39,000,000 of cost synergies, $15,000,000 in Q3 $24,000,000 in Q4. In 2021, we expect to realize an additional $90,000,000 of synergies, bringing our total to $130,000,000 by the end of the year. Consistent with the expectation we provided on our last earnings call, we still anticipate realizing $100,000,000 of cost synergies in the 1st 12 months of the merger through June of 2021 with the cumulative cost synergies of $130,000,000 by December. In addition to the cumulative cost synergies, we have shown the cumulative one time operating expenses to achieve the synergies below the bar chart.
As you can see, we have spent $37,000,000 in time operating costs in the 1st 6 months and expect to spend an incremental $78,000,000 on one time operating expenses to generate the incremental $90,000,000 of synergies in 2021. By June of 2023, we expect to generate $250,000,000 of realized cost synergies on a trailing 12 month basis. In total, this $250,000,000 target is comprised of initiatives that are approximately 20% related to cost of goods sold and approximately 80% related to reducing operating expenses. This is consistent with the sources of synergies we previously discussed and we expect the synergies related to corporate overhead, G and A and field operations will drive the SG and A synergies with the majority of the supply chain synergies impacting cost of goods sold. Turning to Slide 8.
In Q4, we delivered another quarter of strong free cash flow that represented more than 160% of net income. For the full year, free cash flow was $586,000,000 or more than 2 50 percent of adjusted net income. This level of free cash flow generation highlights WESCO's ability to generate strong cash flow throughout the economic cycle and especially during down cycles like the one related to COVID-nineteen. This resilient model coupled with our execution on the integration with Anixter gives us very high confidence that we will successfully reduce leverage below 3.5x adjusted EBITDA over the next 2.5 years consistent with our commitment when we announced the merger. Our capital allocation priority remains unchanged.
We will allocate capital to support the integration, invest in our business and rapidly delever the balance sheet. We made substantial progress on this goal in 2020 as we reduced net debt by $389,000,000 and leverage by 0.4x trailing 12 months adjusted EBITDA since closing the Anastor acquisition in June. Net debt was reduced by $109,000,000 in the 4th quarter following our 1st semiannual payment of $103,000,000 of interest on our new 2025 2028 notes. Liquidity, which is comprised of invested cash and borrowing availability on our bank credit facilities, is exceptionally strong and totaled $1,100,000,000 at the end of the 4th quarter. In early January, we increased the size of 2 bank credit facilities by a combined 2 $5,000,000 We utilized this higher capacity and existing availability to retire our $500,000,000 2021 notes.
Turning to Page 9, this summary table compares our 4th quarter adjusted income statement results to the pro form a for the prior year period and our adjusted results in the Q3. Because Anixter and WESCO had different fiscal reporting periods, there was an extra week of Anixter sales in the Q4 of 2019, making comparisons to that period less meaningful. For that reason, most of my comments today will be on the sequential comparison against the 3rd quarter. On a reported basis, sales were flat versus the 3rd quarter. It is important to note that the 4th quarter had 3 fewer workdays compared to the 3rd quarter.
When adjusting the results to a comparable workday basis, sales were up more than 4%. The momentum has continued into January with Workday adjusted sales up low single digits versus the prior year. Adjusted gross margin, which excludes the effect of merger related fair value adjustments to inventory and an out of period adjustment related to inventory absorption accounting was 19.6% in line with the prior quarter and up 10 basis points versus the prior year. We are seeing continued traction from our margin improvement initiatives, including early results from deploying Anixter's proven gross margin improvement programs across the combined business. Note that the out of period adjustment relates to the cumulative effect of the adjustment to inventory since WESCO was spun out of Westinghouse.
In no period was the adjustment material to our reported results. Adjusted income from operations was $172,000,000 in the quarter after adjusting to remove the effect of merger related costs of $40,000,000 merger related fair value adjustments on inventory of $16,000,000 and the out of period adjustment of $23,000,000 related to inventory absorption accounting. Adjusted income from operations was $28,000,000 than the Q3, which primarily reflects an increase in SG and A related to the discontinuance of temporary cost reduction measures we had taken in response to COVID-nineteen. As we had highlighted in our Q3 earnings call and reiterated in the 8 ks that we filed on December 15, we reinstated the full salaries of legacy Wesco employees, instituted 2020 merit adjustments and resumed the retirement savings plan employer matching contributions effective October 1, 2020. These measures, along with certain other actions had generated more than $50,000,000 of savings during the 2nd 3rd quarters of 2020 relative to WESCO's Q1 SG and A run rate before the merger.
In total, adjusted income from operations was $13,000,000 lower than prior year pro form a on sales that were $223,000,000 lower, representing a decremental margin of approximately 6%. Adjusted EBITDA, which excludes the effect of the adjustments I just mentioned, as well as stock based compensation and other net adjustments was $216,000,000 or 5.2 percent of sales, lower than the 3rd quarter due to the higher SG and A I just discussed and approximately in line with the prior year. Adjusted diluted EPS for the quarter was $1.22 A full reconciliation of adjusted EPS is included in our press release. Before getting to the SBU results, I'd like to remind you of our new three segment structure on Slide 10, which we introduced in the Q3. 1st, Electrical and Electronic Systems or EES, which is approximately 40% of our company's total business 2nd, Communications and Security Solutions or CSS, which is roughly 1 third of the company's revenue and then 3rd, Utility and Broadband Solutions or UBS, which represents represents the remaining 27% of the overall sales across the enterprise.
As we have said previously, one of the most meaningful and positive discoveries post close is how complementary the WESCO and Anixter portfolios are. The pie charts on this page depict the legacy WESCO and legacy Anixter composition for each of the 3 businesses. It is this very highly complementary suite of products and solutions that enables us to offer even more end to end solutions for our customers and supports the cross sell programs John mentioned. Additionally, we found that customer overlap between the legacy companies was more favorable than expected. Turning to Slide 11, reported sales in our EES segment were up 1% versus the 3rd quarter on a reported basis and up 6% on a comparable workday basis.
This growth reflects improving construction demand in North America in the second half of the year as well as the first sales from our cross sell initiatives and our ability to offer a complete electrical package to our customers. We have continued to see some project delays, primarily driven by COVID-nineteen, but still no cancellations. EES backlog was a 4th quarter record, consistent with the trend we have observed since last March as some projects are delayed and we continue to be awarded new projects. We also continue to see increasing momentum in our industrial and OEM business. In the 4th quarter, MRO and project activity levels improved in all of the verticals we serve.
Adjusted EBITDA of $94,000,000 represented 5.6 percent of sales, about $14,000,000 lower than the 3rd quarter. The decrease primarily reflects higher SG and A due to the reinstatement of the temporary COVID-nineteen cost reductions discussed earlier. Turning to Slide 12. Our CSS segment closed out a strong year in part driven by increased focus on bandwidth needs stemming from COVID-nineteen as well as our global scale, which offers greater value to our customers. On a reported basis, sales were 1% lower than the prior quarter, but were up 3% on a comparable workday basis.
We are taking share in all geographic regions and especially in areas outside the United States. As with EES, we saw continued positive momentum throughout the quarter. Specifically, we experienced growth in our network infrastructure markets that was driven by increasing global accounts and continued strong demand in data centers, in building wireless and professional audiovisual applications. Sequentially, security sales were up low single digits on a comparable workday basis, driven by expanding demand for secure network and IP security applications. CSS is uniquely well positioned to benefit from several of the secular growth trends that we have highlighted as the pace of technological innovation, demand for data and reliance on security are all driving an accelerated pace of both new installations and upgrades to existing systems.
Profitability was strong. Adjusted EBITDA was $112,000,000 or 8.2 percent of sales. This was 50 basis points higher than the prior year, but down sequentially from the Q3, primarily reflecting the reinstatement of temporary cost reductions. Turning to Slide 13, sales in our UBS segment were down slightly versus the 3rd quarter on a reported basis, but up 4% on a comparable workday basis. Strong utility demand continued this quarter as our utility customers continue to invest in grid hardening and modernization projects as well as LED lighting and automation projects.
The broadband business was also resilient to COVID-nineteen driven by 5 gs deployments, last mile fiber installations and increasing broadband projects. The global demand for data and high speed connectivity has never been greater due to the step changing requirements driven by remote work and school environments. Adjusted EBITDA of $79,000,000 was in line with the prior year and up 10 basis points as a percentage of sales. Adjusted EBITDA margin was down sequentially on slightly lower sales and the restoration of COVID related cost actions. Turning to Slide 14, I'll walk you through our outlook for 2021.
On a pro form a basis, sales were $16,000,000,000 in 2020. In 2021, we estimate market growth of roughly 3% to percent. We recognize that COVID and the timing of broad scale vaccinations may create volatility and influence the overall demand pattern of our business. We are encouraged by the economic indicators and expect the demand environment to continue to improve as we progress through 2021. On top of that, we expect that the combination of the continued outperformance in our cross sell programs will grow sales 1% to 2% above the market.
Lastly, keep in mind that 2021 has 1 fewer workday than 2020 and we will have the impact of the U. S. Branch sale completed in Q3 of 2020 as well as the expected completion of the Canadian divestitures in the Q1. Aggregate sales relating to divested businesses are approximately $125,000,000 The impact of these will be a headwind of approximately 1%. So in total, we expect sales to grow 3% to 6%.
We expect differences in foreign exchange rates to be neutral to slightly favorable for the full year. On the right hand side of the page, we have provided a bridge for our 2020 pro form a adjusted EBITDA margin of 5.3% to our outlook for adjusted EBITDA margin of 5.4 percent to 5.7 percent. We expect to benefit from improving mix, market outperformance and operating leverage, which we will expect to collectively drive about 50 basis points to 80 basis points of margin expansion. In addition, as you saw on the prior page, we expect to generate an incremental $90,000,000 of realized cost synergies in 2021, which will contribute approximately 55 basis points of additional EBITDA margin. Partially offsetting these two margin drivers will be the restoration of the employee compensation benefit costs discussed previously and the restoration of a full accrual compensation, the aggregate amount of which is approximately 90 basis points.
Continuing down the income statement, we expect our effective tax rate to be approximately 23% and adjusted diluted EPS in the range of $5.50 to $6 We assume a diluted share count of approximately 51,500,000 shares. We expect to spend between $100,000,000 to $120,000,000 on capital expenditures in 2021, much of which will be invested in the early stages of aligning our systems and investing in digital tools. We expect to continue generating substantial free cash flow, which we're forecasting to be at least 100% of adjusted net income. As we look at the drivers of the Q1 of 2021, we expect to benefit from $28,000,000 of realized cost synergies in the quarter. Please keep in mind that the Q1 has 2 fewer workdays in the Q1 of 2020 as shown in the table.
With that, I'll return the call back to John for his summary.
Thanks, Dave. We covered a lot of material this morning. Before opening your call to questions, I'd like to walk you through a quick summary. Again, 2020 was a transformational year for WESCO and highlighted many of the company's strengths. 1st, we respond with quick and decisive actions, as I mentioned earlier in response to the global COVID-nineteen pandemic and delivered excellent performance through the downturn.
Number 2, our integration with Anix is off to an excellent start and it is accelerating. We made substantial progress on the integration in just the 1st 6 months and we were very pleased to be able to increase our synergy targets. Our new leadership team is the strongest management team in our history and is driving our high performance culture. We have launched our cross sell programs in all three of our business units and are already seeing positive results. And 3, and most importantly, the business is uniquely and well positioned to capitalize on the highlighted secular growth trends that will drive demand for our full spectrum of end to end solutions for years to come.
2020 marked a watershed year and the beginning of a new era for WESCO. As the industry leader, we are now larger and more diversified with differentiated scale and capabilities in what remains a highly fragmented industry. We're exceptionally well positioned and intend to lead not only a digital transformation of our business, but also of our industry. So with that, I'd like to open the call for questions.
We will now begin the question and answer session. The first question comes from Sam Darkatsh with Raymond James. Please go ahead.
Good morning, John. Good morning, Dave. How are you? Good morning, Sam. Two questions, if I might.
The first, you're calling out, I guess, if my math holds about $150,000,000 of resumed costs in fiscal 2021 from COVID restoration incentive comp benefits and so on. We knew about the $50,000,000 in specific to COVID, the $100,000,000 of incentive comp and benefits, at least to me was a surprise in its scale. To the extent that it doesn't look like you're going to be levering the $500,000,000 to $1,000,000,000 in incremental sales on an organic basis. First off, I think my math holds, but why not lever that type of incremental sales, especially knowing that price and price cost and presumably billing margins are going to be favorable for you this year?
Yes, Sam, good morning. Thank you for the question. We were very clear that we had $50,000,000 on the legacy WESCO business that was COVID related actions that we took in 2020. Obviously, that's being restored as we enter the 2021. We also mentioned on several of our earnings calls that our results were well below our expectations coming into 2020.
And as such, we have not paid out or accrued for full incentive compensation and sales commissions here in 2020. You see that in our results. So similar to what we've done in previous years, our intent is to include 100% target payouts, not only on the incentive compensation, but also our sales commissions. We also do have a couple of other volume related increases to and A, including some higher benefits costs that we've included in that outlook of a 90 basis points drag for 2021.
Okay. My second question, if I might, pardon me, you had $24,000,000 in synergies that you realized in the Q4 and it looks like you're guiding to $28,000,000 in the Q1. I would have thought that the synergy recognition would have been a step function higher meaningful step function higher in the Q1 over the Q4 because of the timing of vendor supply agreements and then rolling over and therefore your benefits to purchasing. Is there an offset to that or what am I missing in terms of thinking about sequential synergies Q1 over Q4?
Yes, Sam. A lot of the benefit that we're expecting to see in the Q1 particularly will really be more on the SG and A side. You are correct that we are continuing to focus on some of our supplier agreements and getting the alignment between the 2 legacy programs. Obviously, we've included some of that in our expectations for the adjusted EBITDA margin. But right now, at this point, we don't expect there to be considerable cost of goods synergies, at least in the front half of the year for 2021.
And Sam, let me just make a comment because I think both your two questions get at this, which is I want to be very clear that we have high confidence on our upside. And the upside is sales, sales growth, cost synergies, margin expansion and free cash flow generation. Our confidence is the highest it's ever been. As we've gone through the 1st 6 months plus post close, our confidence has increased quite frankly. But we did not and appropriately we believe did not build that into our 2021 guide.
Very helpful. Thank you, gentlemen.
The next question comes from Deane Dray with RBC Capital Markets. Please go ahead.
Thank you. Good morning, everyone.
Good morning, Deane. Good morning.
Hey, I'd like to
pick off where Sam left off there. In terms of this, the rollback of the temporary costs, it looks like it hit the electrical segment disproportionately. It just in terms of like the margin hit. And I know you've given the for 2021, you size it at 90 basis points. What was it for Electrical, maybe for the 3 segments in the Q4?
Because it just feels like it there wasn't a feathering back of these costs, but it was more just a full reversion there. So just take us through the size and maybe that will help us calibrate the impact.
Yes, certainly. So going back to what we talked about in the Q3 on our COVID related cost actions. Again, this was really on just the legacy WESCO business and obviously we've done quite a bit of work to begin the integration. But as we highlighted that COVID related cost reduction of $50,000,000 as part of our Q1 earnings call, As you see that we had $28,000,000 of benefit from that program in the 3rd quarter that basically came back in the 4th quarter as we restored those activities. If you take a look at the composition of our strategic business units, there are more sales from the legacy WESCO business within the EES SBU.
And therefore, they took a higher portion of that recovery of COVID related actions within the Q4 relative to the other 2 SBUs. So that's really what's driving that margin degradation in EES relative to the sequential numbers from Q3.
That is actually very helpful. We're just looking the context of having higher WESCO legacy sales in the Electrical segment. That's a good input there. And then
And Dean on that, again it was temporary salary reductions which then the benefits came with that 401 match. It was in a very as you know and as we've articulated very aggressive set of actions. And so that mix effect is what you're seeing as Dave highlighted.
So that color is helpful. And then second question on Page 7, the whole cost synergies, the timeline. Just as a reminder, these are net synergies. And are you seeing any sort of lost sales and branch consolidations, sales force reductions? Are any of the revenues walking out the door?
So I'll answer the second part and Dave may want to tag on the bounce. The very encouraging answer to this is we have not gained. We feel very good about our momentum in the marketplace. And we're not seeing first of all, we have structurally addressed the combination of 2 companies with structural cost takeout, and we highlighted that we had over 650 full time equivalents that have left the business. So we've been working that.
We've not seen unplanned or unwanted attrition, point 1. Point 2, we are not seeing any share leakage. So very encouraged by our results thus far.
That's helpful. Thank you.
And, Steve, let me address your question on Slide 7 of our deck. What we're showing here are essentially the gross cost synergies that we expect to achieve, which would be a structural takeout versus our 2019 pro form a. And we're showing you separately the cost to achieve, which would be one time in nature.
Got it. Thank you.
The next question comes from David Manthey with Baird. Please go ahead.
Thank you. Good morning, everyone. Good morning, Dave. First question, you don't mention price in the sales outlook, but with copper and other industrial commodities being up as much as they are, how are you thinking about price increases in 2021? And related to that, when you talk about the 50 to 80 basis points of EBITDA improvement for mix, share and leverage, how much of that is mix alone?
Are you assuming gross margin is higher
in 2021? So Dave, for our outlook, we have not specifically called out the inflationary benefit that we would expect to see as commodity prices increase. It's always extremely difficult for us to project what that would look like for the full year. So clearly, we have seen what's going on within the current market. We know it's volatile.
And our expectation is that as we see those cost increases, we will continue to pass them through to our customers. But inherently, we have not built that into our outlook for 2021.
And Dave, I will comment on gross margin. We're not guiding gross margins, but I'll give you some indication of how we're thinking about it because clearly we're now seeing, I would say, for Q1 of this year, if you look at supplier price increases that we are aware of, been informed of and we also have obviously have knowledge of what we suppliers are intending on doing to some degree before everything's fully rolled through. We work with them in conjunction. The number and overall average increase average increases of those price increases has increased. So clearly above a year ago, we're seeing that momentum build.
Net net that will be a good thing and it will be a positive support for our margin expansion. We absolutely intend and are very focused on getting core gross margin expansion this year. We're just not guiding to that level as you know. And what we've done and we've talked about in the last two quarterly earnings calls, Anixter did I think an outstanding job with their multi year margin improvement program. We've taken that program and there were some other refinements they wanted to make.
So we incorporated those improvements and that is being deployed enterprise wide. So the refined version for Anixter has been deployed enterprise being deployed and then across WESCO and we do fully intend and expect to see core gross margin expansion. I mean Anixter has delivered 2.5 plus years of gross margin expansion looking back every quarter, which is absolutely terrific in the environment that we collectively faced. That environment, right, is going to get a bit better here with inflation increasing. And then finally, we've got unmatched supply chain capabilities.
I just think if you look at the 2 together and this is more of the strategic benefit. I was addressing earlier more of the kind of the initiatives and tactical benefit. But strategically, we doubled the size of the company and we've got unmatched supply chain capabilities. And we are in the process now of going through our category review. So we're going category by category by category and looking at the complete supplier lineups.
And it's a part of that process underneath the guys of the integration management office fully dedicated staff driving execution is to drive business to our preferred supplier partners. And that inherently will result in a larger more strategic relationship with them. Net net together we'll be able to provide even better value and I think that will be margin accretive as well. Does that help?
It does. Thank you very much, John.
The next question comes from Christopher Glynn with Oppenheimer. Please go ahead.
Thanks. Good morning, John, Dick. Good morning. Good morning. So you guided EBITDA adjusted EBITDA margins for the segments, for the D and A in order to kind of bridge to the adjusted earnings on the P and L.
Is the 4Q represent a good annualized run rate for the segments in total? What are you expecting for D and A?
It's a good proxy for what we're expecting for D and A in 2021. I mean with the Q4, you can see how our D and A came down slightly versus Q3. That's a good starting point as you're thinking about 2021.
Okay. And back to Slide 7 there, the cumulative one time OpEx, we can tell the incremental amount. I believe that gets adjusted out within the merger cost buckets each quarter. I just want to verify that?
That is correct.
Okay. And then in terms of the restoration of costs, that 150,000,000 dollars per Sam's accurate map there. How much of that run rate would you say was realized restored in the Q4, maybe on a percentage basis?
Yes. The only thing that really hit us in the Q4, Chris, was that restoration of the COVID actions. And so we relative to Q3, we restored little over $28,000,000 of COVID related cost actions here in the 4th quarter. The balance is really what we're expecting in terms of primarily target payouts and the impact of inflation on some of our benefits programs for 2021 that have not impacted 2020 in our numbers.
Okay. Thank you.
The next question comes from Nigel Coe with Wolfe Research. Please go ahead.
Thanks. Good morning.
Good morning, Nigel.
Good morning. I hope all is well. Just wanted to just dig a little bit deeper into Slide 14. Now in your adjusted EBITDA margin targets, that excludes stoppage comp, stoppage comp hits EPS. So I just wanted to size that.
I think it's $35,000,000 in 2020. Just wondering what that is. And then interest costs below the line, what should we start in for that?
Certainly. So the stock based compensation, you should assume approximately $35,000,000 for a 2021 impact. And again, as you mentioned, we do exclude that when we talk about our adjusted EBITDA, but that impact is included in the adjusted EPS numbers.
And then interest?
For interest expense, you're probably looking at somewhere in the range of $67,000,000 to $70,000,000 per quarter in 2021. That's taking into account what you saw here in Q4, but then we also do have the benefit of the 2021 notes being called. And we'll also be obviously managing our facilities down aggressively.
Okay. So $67,000,000 to $71,000,000 per quarter. So my broader question is that when I put all these inputs into my model, I'm pretty sure I'm getting into your EPS guidance range. So I'm wondering if there's some considers a more hedge baked into that range over and above all the inputs you've given us. Thanks very much.
Yes. Again, we've given you a fairly clear view of our expectations throughout the income statement. We've also provided you with our view of what you should expect in terms of the free cash flow generation. Again, we know that there's some volatility in the end markets. We're laser focused on not only meeting the expectations we've set on delivering the synergies, but exceeding them.
And so I'll let you draw your own conclusion in terms of how we put together the guide. I mean, obviously, you've done the math. Again, we believe that we are just starting to see the true benefit of the strategic combination of WESCO and Anixter coming together in 2021 in terms of top line and our ability to drive cost synergies.
And Nigel, as I mentioned earlier, again, we very high confidence we have substantial upside completely down the P and L and with cash generation. Again, look at our cash generation in 2020. Look at it, a little under $600,000,000 which is just a 3 year target that we have set. And again, we did not build into the guide and we think appropriately so. I mean, let's keep in mind that we there is a lot of positive indicators around overall market recovery.
We feel very good about our trajectory because we think we're accelerating and doing better than market. But we're not fully recovered yet. And there's still many customers have not returned to work. And so that's what also informs what we think is an appropriate guide.
Great. Thanks guys. Appreciate that.
The next question comes from Tommy Moll with Stephens. Please go ahead.
Good morning and thanks for taking my questions.
Good morning. Good morning.
I wanted to start on your outlook for revenue this year. If I'm interpreting correctly, I think we're looking at up 3% to 6% year on year across all three segments. But could you give us any insight, maybe a rank ordering of segments, which might skew toward the higher end of that range or the lower or relatedly any kind of specific end market color you could give would be helpful? Thanks.
Sure. The 3 businesses, I'll start with the one that is the most global. It's the 2nd largest at CSS Communications and Security Solutions. So when you take a look at our materials, Tommy, and you look at the secular growth trends we called out, almost all of those directly impact that business. It's the most global business.
It's been enjoying a multi year run of very strong growth. That's the legacy Anixter NSS business and the legacy WESCO Datacom business. But mix wise, it's substantially driven by the legacy Anixter NSS business. And so the secular growth trends really weigh in heavily there. Of the 3 businesses, that's the one that has in terms of end markets and performance against the end markets the highest growth opportunity.
So you put that at the higher end of the range on a relative basis. UBS is next, Utility and Broadband Systems. Utility market very stable. We've got a tremendous franchise business. We're pulling together the legacy what used to be HD Supply that Angster bought and the legacy WESCO Utility business, it's really strong broad service oriented business.
We feel very good about utility. There is pent up demand for investment. We talked about this at length in prior calls. That's we clearly see that in the future. And broadband is also part of that business unit that faces an exceptional set of growth opportunities driven by the 5 gs build out.
And so feel very, very good about that. I'd put that one kind of mid to higher end of the range in a comparative sense for in terms of where that ranks growth wise both market and performance. And then comes EDF. It's our largest business And that's predominantly the legacy WESCO Electrical Business plus annexure's wire and cable business just to remind everyone, we're now positioned to sell the complete electrical package. So that's the breakout move for us.
That's the strategic power of that combination. From an end market perspective, it is a global business, okay? But end market, it's really big industrial exposure, big construction exposure. So the industrial exposure we're seeing as we're all I know many of you've seen it, but we're clearly hearing it from our customers improving demand, positive momentum vector in terms of industrial spending. There's some there's turnaround projects that have been delayed.
There's other spend levels that we're getting good indications should increase as we move through 2021 and the economy recovers. For construction, we're predominantly non resi, very little direct residential construction exposure. I mean the good news there is that residential ended 2020 that is on a very strong note that portends well for non resi. But non resi this year I would say will be a mixed bag. There'll be some verticals that are going to grow and could have some nice very
nice
growth healthcare, education, infrastructure. There's some other verticals that are going to remain pressured and that's oil and gas. So net net that hopefully gives you a sense. We've got 3 businesses that we all expect all 3 to grow. The largest kind of grower is probably at the high end would be CSS, UBS right behind it and then EES, the Electrical and Electronic Solutions.
I will say this about construction though. Despite kind of a mixed bag outlook on the non resi market in 2021, I think most folks have that. For us in particular and consider this a special cause driver, we ended last year with an all time year end record backlog and that speaks to our project business. And we haven't seen any material cancellations. It's just been some spotty delays here or there.
So it sets up very well for us, I think, in 2021. In our bid activity levels for projects, both non resi and industrial and even into the commercial, institutional and governmental market those customers. Our project activity levels are quoting activity levels let me say very, very robust to start the year. Our opportunity pipeline is also at a record level.
That's all very helpful and very much appreciated. I'll shift to one follow-up question here to drill down a bit more on the Q1. So we don't have official guidance in terms of the outlook here, but I would ask for any kind of color you could give us on margin expectations. It sounds like there's some crosscurrents with some incremental synergy capture and then with the offset of some of the incremental costs. And I think specifically you called out of the we broke up the $150,000,000 for the full year into $50,000,000 COVID related that's already hit in Q4, but $100,000,000 on an annualized that has yet to hit.
And so presumably some of that will offset in Q1. So anything you could frame for us there in terms of the incremental possibilities or maybe even just a margin bridge Q1 year on year or maybe Q1 sequential? Anything to just calibrate our expectations would be helpful. Thanks.
Yes, Tom, it's Dave Schulz. I appreciate the question. The one thing that I would call out is if you look historically at the WESCO business, the Q1 is primarily our lowest adjusted EBITDA margin quarter of the year. Also in Q1 of 2020, we did not have the COVID related cost actions. So that will create a little bit of a different comparison versus Q3 and Q4 going forward.
And Q2. And Q2. Literally
Q2. Thank you. I'll turn it back.
The next question comes from Steve Barger with KeyBanc Capital Markets. Please go ahead.
Hey, good morning guys.
Good morning.
John, you said this is the strongest management team in WESCO's history and you also said you have high confidence and upside to sales margin and free cash flow, but you decided not to build that into the 2021 guide. I just want to make sure I understand the message. If your confidence is that high, why not push the organization to accomplish that via stated goals?
Yes. Internally, we've got targets that well above our external targets. I've already said that, right? We've been very clear. Let's think back on how the last story that we struck the DOL2 and got Anixter Board approval.
They approved the WESCO bid for Anixter. It was only a few months later well before close that we put out 3 year targets on cost synergies, on margin expansion, EPS growth as well as free cash flow generation. We closed the acquisition on June 22. We report our 2nd quarter results that includes a 9 day stub period. We're well into the integration because we had started aggressively integrating plan integration planning pre close and then we shut out the gate with integration.
We had a flawless we use this term flawless day 1 close. Look at our Q3 results very, very strong, right, versus what expectations were. We beat our own expectations. Remember we're driving the higher targets internally. And what we did was we were realizing the capture to on track with higher target levels.
1 quarter, 1st full quarter under our belt, we raise our guide around the synergies and we raised them substantially. We went from $68,000,000 in year 1 to 100,000,000 dollars We went from $200,000,000 in year 3 to $250,000,000 Substantial raise, right? Here we go through Q4. We absolutely delivered what we said. If you look at Q4 actually came in a bit stronger than what we signaled.
We didn't have a guide out there, but everything we signaled was even stronger than we thought. We never thought we'd have backlog build that strongly. We had sales came in stronger, margins were solid. We have a record backlog and we had exceptional free cash flow. We got close to $600,000,000 of free cash flow, a little under in our 1st full year.
It didn't even include 4 quarters of Anixter yet, right? It included 2 quarters of Anixter. So that gives us the confidence as we're coming into 2021. What we don't control is the macro. So it's a long winded lineup to say what is out there that is out of our control.
We don't control the macro. So there's still enough uncertainty around that. We reinstated a guide. We put a guide out there and we think this is an appropriate guide, okay? But we and we continue to drive the internal targets that are above our external commitments with margin and that's what gives me the core the fundamental confidence.
So the key takeaway from that being that if the macro comes in the way you may expect internally, then you would expect to significantly outperform the guidance that you've put out today to start the year. Is that fair?
I mean, you're trying to get me to guide the guide. I'm just going to tell you that which I'm not going to do because we just put a guide out there. So but I think I will tell you that we're again we're driving internal targets well above our external commitments. I said well above the organizations lined up for that. We're super excited about this transformation combination.
Feel great about it and it's our intent to deliver upside. With that said, we think we set the appropriate guide given all the is on macro conditions and whatever company info
is out there. But and we'll is on macro conditions and whatever company info is out there, but and we'll never get it right exactly of course, but this time there was obviously a sizable disconnect between expectations and how WESCO is looking at earnings power. Any thoughts on how we can improve the messaging so we don't have this kind of one day volatility going forward?
Look, you asked me directly, if we were we didn't have a guide out there in 2020 like most companies. We didn't guide Q4. But we're very clear on the temporary cost actions coming back in. And so I think that alone plus we were also very clear about all the other aggressive actions we were taking on the cost structure. And so I just I think that my message is that versus what we expected and what we said, we absolutely exceeded our expectations in Q4.
We didn't have a guide for 2021. We didn't have any signaling whatsoever. And I think just that kind of SG and A, if it wasn't set right for Q4, in the absence of a guide, it gets extrapolated into 2021. I understand that. I think this is important to we are working aggressively to be as transparent as possible.
We've got multi year targets out there around the transformation and we're going to continue to be report our progress against that very clearly. We think we're improving that. We're improving in that regard. Give us that feedback. We'd love to hear it.
If you've got some other suggestions on how we could even be more clear about how we're performing against expectations, we'd love to get those inputs. We've got Leslie on board, leading IR for us now. She's an outstanding addition and look forward to just continuing to improve in that area. We're all focused on continuous improvement. Lean is part of our culture, as you all know.
Thanks for the time.
The next question comes from Chris Dankert with Longbow Research. Please go ahead.
Hey, good morning guys. Thanks for taking my question.
I guess coming at this a
bit of another way, thinking about the first quarter SG and A, I mean looking at that step up from the 4th quarter, I mean if we were to kind of baseline the Q1 SG and A in the $630,000,000 range, is that in the right ballpark? Just trying to size how that $100,000,000 rolls on and obviously it's got to be first half weighted, correct?
Yes, Chris. I mean, if you the way to think about it is the we called out very specifically the $50,000,000 that's primarily a Q2 and Q3 comparable. But obviously, we were not given the results of the company and after we integrated with Anixter, One of the other issues is that we do have this issue about the restoration of bonuses, sales commissions and the like, including some benefits and other inflation, that is going to be consistent throughout 2021. And so I think as you're thinking about how to frame that within the quarter, again, I think that you're going to see outside of that $50,000,000 in Q2 and Q3 relatively consistently spread across the quarters.
Okay. Well, and I guess
that $100,000,000 beyond the COVID related $50,000,000 I mean, is that actually a make whole for incentive comp last year? Am I understanding that correctly?
That is correct. And so when you take a look at we did not meet our Board approved plan. And because of that, we did not accrue nor are we planning to pay out at target compensation levels for 2020. Now that's been rolled into our numbers. We did speak to that in some of our earnings calls.
And again, this is consistent with what we've done historically, particularly coming through the industrial recession where we're not hitting our targets, we're not paying the incentive compensation, our sales force is not getting their bonus payments consistent with previous years. We built that all in back at target 100 percent payout for 2021.
Okay. Okay. Thank you for the clarification. And I guess on a more optimistic note, in the slides you guys highlighted reshoring as a positive driver. Is there anything tangible to offer on that dynamic?
I mean, are we seeing actual projects coming through at this point? And then thanks for the color there.
Yes. I will say this that we're having a lot of discussions obviously it's virtual. A lot of discussions with customers. They're evaluating their operations. They're evaluating their supply chains in particular.
And I've spoken about this at length really over the last couple of years, but this has been a real catalyst, this global pandemic. They're looking to obviously streamline, get efficiency, get supply chain cost out of the supply chain, let's say. But they're also looking at inherently supply chain risk. And that's what's driving them to look at reassuring. I don't want to call out any specific examples per se.
We are having those discussions with customers. They're sharing their plans and views with us. There's been a few examples, but again I'd have to get specific, which I can't do on this call. But do I think that there's a potential for a broader trend there and kind of something that could be a meaningful driver of incremental growth opportunities in North America? I do.
I do. That meant I do. I think if one thing the global pandemic did, it put a spotlight actually a microscope on the global extended supply chains and the fragility that was inherent in some of those. I'm talking the whole supply chain. And so just thinking about supply chain risk and integrity, it's a big driver.
And if those supply chains can be shortened and which really is the impetus behind potentially reassuring, it changes the risk profile of the supply chain.
Understood. Thanks for the time, guys.
This concludes our question and answer session. I would now like to turn the conference back over to John Engel for any closing remarks.
Well, thank you all for your time today and your support. We have numerous follow-up calls that have already been scheduled. Dave and now Leslie and Will are available for your follow-up discussions. Have a good day and please stay safe and healthy. Thank you.
The conference is now concluded. Thank you for attending today's presentation. You may now