John Engel: I missed that. Well, we — when we closed on Rahi, we had been giving updates and you see that’s in our public materials, about what their trailing 12-month sales were. So you saw what it was when we initially announced the deal and you saw what it was when we did our Q3 earnings. So that number is and they came in substantially stronger. We then gave an outlook for the stub period in Q4. It was the result of releasing stub projects and delivering projects that were in backlog. With that said, they grew their backlog. So the momentum vector there is exceptionally strong and we are getting to learn that business. Now we have got a good sense with parts of the Anixter CSS business and that now has been absorbed and integrated and the leader of Rahi’s running WESCO data solution, data center solutions.
So we have taken the Rahi assets and combined them with Anixter’s legacy data center capability and assets globally and the leader of Rahi is running that as part of Bill Geary’s business. But the short answer to your question, Nigel is, it’s the — it was releasing out of backlog booked orders that were there, but the backlog grew. And coming into 2023, we have got a very clear view of what the operating plan commitments are, that that leader who started the business committed to. He’s been over delivering against these expectations, as long as we talked to Rahi, which was many, many, many months. He kept beating and raising, quote-unquote, his performance against his plan. So we locked in his plan. But when I look at the backlog growth and the momentum vector of the business, we are just — we are set up for just an outstanding year.
I think it comes down to, Nigel, fundamentally, the core value proposition of Rahi and combined with the secular growth that’s associated with data centers and how we — where we play in the value chain and the combination with Anixter’s CSS business is exceptional. This is just a terrific acquisition and we are thrilled with the start.
Nigel Coe: No question. That’s — congratulations on the acquisition. Maybe just talk about the kind of the free cash deployment in 2023. So after dividends, both preferred and equity dividends, you are going to have about $550 million of cash flow to deploy. Just wondering how you are seeing that shaking up between debt paydown versus share buybacks versus maybe M&A, maybe just some thoughts on that. And then just on top of that, I think, if you just take your EBITDA plan, you are going to be down to about 2.6 times leverage just on EBITDA growth. So curious how much you want to take down leverage this year.
Dave Schulz: Nigel, thanks for the question. We are going to be balanced with how we deploy the available cash. We are working through with our Board to get the approval for the common stock dividend, so that will be happening here shortly. We also are committed to the $1 billion buyback and we will be focused on leveraging available cash as part of that buyback program. But from our perspective, right now, the primary concern is we want to operate within the middle of our range on leverage. We are getting closer to that, but that does provide us with significant optionality, which will include providing capital back to shareholders, plus we will continue to take a look at M&A activity and see what may make sense for our company. But again, I think, the common stock dividend and the buyback is something that we will be initiating here in 2023.
Nigel Coe: Great. I will leave it that. Thanks.
Operator: The next question comes from David Manthey with Baird. Please go ahead.
David Manthey: Yeah. Thank you. Good morning, everyone.
John Engel: Good morning, Dave.
David Manthey: Good morning. I’d like to circle back on the gross margin. Dave mentioned that you are expecting record gross margins in 2023 and you clearly have a lot of company specific factors that are driving it higher. But what would need to happen to drive 2023 gross margin below what you just reported here in 2022?
Dave Schulz: Yeah. Dave, I think, we would have to see a considerable amount of pressure on our topline and if we see that considerable pressure on the topline, we would see our supplier volume rebates would fall to the lower end of the historical range. And just to put that into perspective, as we outlined, we did get the benefit of higher supplier volume rebates versus the prior year. So that will be a headwind going into the more normalized period in 2023. But if you start to see demand from, call it, a deep recession, then that would mean that our supplier volume rebates would tend to the lower end of the historical range. That would put pressure on gross margin. We have been very clear about our margin improvement program and our focus on passing through costs to our customers.
We have been positive on that throughout the full period of 2022. It will be incredibly important that we are able to sustain that momentum into 2023. We believe that we have provided our sales force with the right tools and techniques in order to do that. But clearly if we saw significant demand destruction, that would put pressure on gross margin.
David Manthey: Okay. Thank you. That’s helpful. And related to that, you are seeing 17% growth in January, you are guiding full year to 6% to 9%. That — it clearly implies some sort of slowdown overall, and notwithstanding the growth driver overlays you have, what is your core assumption for the economy, industrial production when you are thinking about formulating that topline guidance?
Dave Schulz: Yeah. As we mentioned, we think that GDP here in the U.S. is going to be essentially flat. We do think that there are pockets of the end markets that we serve that will still be very positive, including non-res construction, the industrial markets, data center growth. We are still expecting that to be. And so that’s where we are still assuming that we have a volume opportunity as well as the pricing carryover, that’s going to move our sales up in 2023. So we are taking a look at all the same economic data that you are. We are also talking to our customers. That’s informing how we have positioned our outlook for 2023.
David Manthey: Got it. Thank you very much.
Operator: The next question comes from Ken Newman with KeyBanc Capital Markets. Please go ahead.
Ken Newman: Hey. Good morning, guys. Thanks for fitting me in.
John Engel: Yeah. Hello, Ken.
Ken Newman: First question for me. Sorry if I missed this, but obviously, you have increased the synergy target here, but I know when you first introduced Rahi, there were no identifiable synergies yet as the deal was just closing. Given all the opportunities that you have had to look into that business and obviously, the demand is improving, any way you can kind of parse out just what the identifiable synergies are for Rahi specifically?
John Engel: So I will just tell you I think that, the way to think about that business is it’s going to — it’s a major growth engine and it’s got a tremendously positive business momentum vector and the synergies will be cross-sell, but we haven’t put a specific target on that. Again, we did that when we put two equal sized Fortune 500 companies together back and which was actually announced pre pandemic, closed at the beginning of the pandemic. We are not going to break out a separate synergy target, cross-sell synergy target for Rahi, but that’s how to think about it, Ken.
Ken Newman: Okay.
John Engel: The discipline and the process we put in place across, as a result of the combination of Anixter and WESCO is still in place. I have said — made the statement before, it’s turning out to be the single largest, most sustainable value creation lever of putting these two companies together. I think it’s a demonstration of the combined market leadership position, the superior value proposition, the global scale and we have just raised that combined synergy target again and we think we have got tremendous legs to that as we have tremendous legs to our gross margin improvement program, but Rahi now will draft off of that process. So think about it as taking Rahi’s services, products, really services and solutions, because they are much more service-oriented and just literally adding that to our cross-sell program. And so that will be leveraged inside Anixter. Anixter’s prior CSS business, which is Bill Geary’s CSS business, as well as across the SBUs.
Dave Schulz: I will just highlight that right now we are not going to separate out any of the merger integrated — integration related costs for Rahi. It’s not material the way that the Anixter merger was. So what you see on Rahi will be its fully reported results in our adjusted results, we won’t be breaking out any synergies for you as we go forward in 2023.
John Engel: We will call out the topline growth so you will see reported versus organic sales. So you will see that until we lap the acquisition of the 12-month point post close.
