Wesco International Inc (WCC) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the WESCO International Fourth Quarter 2004 Conference Call.

I would now like to turn the presentation over to Mr. Dan Brailer -- Treasurer and Director of Investor Relations. Please proceed, sir.

Thank you, Steve. Good morning, ladies and gentlemen. Thank you for joining us for WESCO International’s conference call to review the fourth quarter and full-year 2004 financial results. My name is Dan Brailer, and I am the treasurer and director of investor relations at WESCO, International.

This morning, Mr. Stephen Van Oss, WESCO’s SVP and CAO and CEO will provide an overview of the earning’s press release issued this morning. Means to access this conference call was disclosed in the press release and was posted on our corporate website. Replays of this conference call will be archived and available for 7 days. Following the commentary, we will open the session to your questions for Mr. Roy Haley, WESCO’s Chairman and CEO and Mr. Van Oss.

This conference call may include forward-looking statements, and therefore actual results may differ materially from expectations. For additional information on WESCO International, please refer to the Company’s Annual Report on Form 10K for the fiscal year ended December 31st 2003, as well as other reports filed with the SEC. The following presentation may also include a discussion of certain non-GAAP financial measures. Information required by Regulation G -- with respect to such non-GAAP financial measures -- can be obtained via WESCO’s website at www.WESCO.com.

I would now like to turn the conference call over to Mr. Roy Haley for a few introductory remarks.

Thank you and good morning. We welcome you to our call. Steve normally kicks these meetings off. But because the results and the news were so good, I thought I’d try to upstage you a little bit and change the batting order, to make a few introductory comments about our overall performance.

Many of you know that at WESCO, we have very good information systems. And we’re constantly finding ways to benchmark ourselves and identify the potential for top performance. Through this process, we realize that WESCO has a lot of room for improvement. Having said that, the year 2004 will go down in the record books as our best-ever overall performance, to date.

Consider these statistics. At 13.9 percent, WESCO had its highest annual sale growth in more than 15 years -- maybe even longer. Including years when we made multiple acquisitions. On that point, 100 percent of 2004 sales growth was organically generated. We achieved the highest-ever gross margin dollars generated, and our highest annual gross margin percentage. We had the highest level of full-year incremental gross margin pull-through percentage, which Steve will discuss in more detail later.

Virtually all earnings measures -- both in dollars and percentages -- including operating profit, income before taxes and net income -- reached highest-ever performance levels. And our capital structure -- the quality of our working capital -- and our working capital management programs -- are in better shape than at any period in more than 15 years.

Looking back, the year 2004 turned out to be much, much better than we had anticipated just 12 months ago. Of course, there are a lot of reasons. The economy was stronger, and that certainly helped. But we had new or strengthened customer relationships and marketing programs that had been developed over the last couple of years, and they really began to deliver the expected sales volume. Additionally, our supplier programs and support have improved dramatically. And our lean initiatives -- only a year and a half since adoption and initial pilots and rollout, have begun to establish meaningful, critical mass.

But most importantly, our employees met and exceeded the standards reflected in our moot, “The extra-effort people.” They met the operating and competitive challenges of a tough marketplace, and significantly improved our service and technical support performance in serving our customers. They responded in the way we had hoped and the way we had expected, to the challenges of the most wide-ranging and most exhaustive of business process analysis and auditing associated with the Sarbanes-Oxley compliance program. They did this and much more, while being highly productive and efficient, and also setting the highest-ever records for sales-per-employee, gross margin-per-employee, and contribution margin-per-employee. We really do have a great organization. It’s a learning organization, and an organization that expects to be even better in 2005.

Now with that little sermon behind us, let me turn it over to Steve Van Oss, our SVP and CFO and CAO.

Thank you, Roy. Good morning. I’d like to start the discussion with an overview of a few items, in order to put the quarter and the full-year results into perspective.

As Roy said, 2004 was a terrific year for WESCO. Our investment in productivity, sales and marketing initiatives over the last several years resulted in record results for the Company in virtually all significant financial and operational aspects of our business.

EPS at $1.47 for the year improved 125 percent over 2003. Our top line grew 14 percent -- all on organic growth. And our local and national sales and marketing programs capitalized on improvements in our served markets, and in expanding our market share. Our productivity, as measured by sales-per-employee, improved 15 percent, and set a new benchmark for our Company, which has historically been a highly productive organization and one of the lowest cost operators in the industry.

Our margin initiatives have produced record results for the year and are expected to yield further results in 2005 and beyond. Our lean initiatives continue across major functions in our business, and are creating capacity for future growth in both facility and personnel-related areas, such as sales, marketing and administrative functions.

The capacity of expansion impacts of our lean initiatives should continue to facility increases in our organizational productivity and profitability as we grow our top line revenues at a higher rate than the industry, while holding costs to a much lower rate of increase.

Last quarter we discussed the concept of operating profit pull-through, which we defined as the ability to convert incremental gross margin dollars to operating profit and net income. This is an important metric for the Company, and is the key internal measure of our operating efficiency.

For the full year 2003, and each quarter of 2004, we had pull-through of incremental gross margin dollars to incremental operating profit ranging from 50 to 73 percent. With this level of incremental pull-through, net income for 2004 more than doubled.

One of the more significant activities in the fourth quarter of 2004 was the very successful $290 million equity offering completed by the Company in December. The offering was comprised of 4 million primary shares issued by the Company, and 7 million secondary shares sold by existing shareholders -- primarily from our private equity investors. This transaction had a big impact on our Company, with several positive benefits, including a 60 percent increase in the publicly-traded float of our stock, to a total of 29 million shares, improvements to our balance sheet, additional financial flexibility and upgrades to our credit ratings. We got new equity research coverage and provided a partial liquidation event for our private equity investors.

The $100 million of proceeds received by the Company from the issuance of the primary shares, combined with $24 million of proceeds from our existing low-cost loan facilities will be utilized to retire $124 million of high-cost subordinated debt in March of this year. This subordinated debt retirement, which again is anticipated in March, will result in a one-time charge against earnings of $0.13 per share in the first quarter and full-year of 2005. The impact of the reduced interest expense makes the issuance of the $4 million shares slightly accretive on a go-forward basis, after the one-time charge.

I’d now like to turn to a discussion of the economic recovery, which for our business occurs in 3 stages. We believe we are entering the second phase of a 3-phase recovery in WESCO’s markets. In the first phase, which began to positively affect us in the fourth quarter of 2003, we saw an accelerating pickup in our day-to-day MRO activity and what is often called fill-in business.

Top sales of standard components and commodity products began strengthening in the fourth quarter of 2003, improved throughout the year, and were up 17 percent in the fourth quarter of this year.

Our mid-cycle business or second phase, is reflected in our small- and medium-sized project business, which began to show signs of strength in the second quarter of 2004, and continued to gain momentum through the fourth quarter. This increase was aided somewhat by material price increases in copper and steel products, which are prevalent in our project business.

Our late-cycle business or third phase, is reflected in large, complex, longer-lead time projects, and has yet to emerge in a meaningful way.

While each phase of the cycle produces different dynamics as they relate to both gross margin and operating costs characteristics, we view the 3 phases as cumulative and additive to improving our operating margins.

Let’s now look at a summary of the fourth quarter 2004 results. Growth in sales, coupled with margin and cost initiatives, proved outstanding operating results. Our sales increased $138 million, and the Company produced an additional $25 million of gross profit, with a pull-through of $15 million or 59 percent to incremental operating profit.

Net income improved by 82 percent, as $8 million or 31 percent of the incremental gross profit was pulled through to the bottom line. EPS increased by $0.17 to $0.38 a share -- an 81 percent improvement over last year’s earnings of $0.21. Working capital performance improved by 1 day from last year’s fourth quarter. Cash flow was positive, and liquidity increased to $286 million.

We retired $10 million of high-cost senior subordinated debt during the quarter, and our leverage and interest-coverage ratios improved significantly, and are at the best levels since our recapitalization in 1998.

Now for some more specific fourth quarter results. Sales were $988 million for the fourth quarter, and were up $138 million or 16.2 percent from the fourth quarter of last year. Sales were up $13.4 million over the third quarter of 2004, and were approximately 20 percent over the 2003 full-year average.

Activity levels in the majority of the major industrial groups that are heavy users of electrical equipment and MRO products strengthened further during the fourth quarter, although not yet at the historical high levels of 2000 and 2001. Improving market conditions and increased sales effectiveness in the recreational vehicle and modular construction markets of our manufactured housing operation resulted in sales to this market being up almost 20 percent over last year.

Improvements in day-to-day MRO and OEM activity, and increased sales activity in small- and medium-sized construction projects resulted in our sales to these customers in these large market segments being up, in the aggregate, almost 16 percent.

International operations were up over 15 percent -- helped somewhat by the strength of the Canadian dollar. Our utility operations were also up over 15 percent. From the strength of new programs and improving MOR activity, sales to customers through our national accounts and integrated supply programs were both up over 20 percent -- continuing the positive trend from last quarter and last year.

While the industry does not publish discrete market share data, successes in our integrated supply, national account and alliance programs, as well as routine feedback from our supplier base gives us confidence that we are growing market share by a meaningful amount.

On an overall basis, pricing had an estimated favorable $23 million -- or 2.3 percent -- impact on sales. Categories with the most-significant price increases were copper, metallic and non-metallic conduit.

Fourth quarter gross margins at 18.7 percent were flat to the third quarter of 2004, and compare to 18.8 percent for the fourth quarter of 2003. Building margins declined during the quarter, as we worked to push supplier price increases through the channel.

We returned to more-historical general price increases across much of our product and supplier bases. That’s created a timing challenge, and we are working to adjust and implement new pricing throughout and customer base, and expect to see margins improving, going forward. On a full-year basis, gross margins are up 40 basis points over 2003, and consistent with our overall expectations for the year.

SG&A expenses as a percent of sales improved to 14.3 percent -- an 80 basis point improvement over last year’s fourth quarter expense ratio, of 15.1 percent -- reflecting efficiency gains resulting from our lean initiatives, and the positive leverage of the increase in sales.

Our management employees have done an outstanding job of improving the efficiency and effectiveness of our organization. Sales increased 16 percent, while our total employee base rose less than 2 percent compared to last December. This is a meaningful departure from the past, when sales increases and personnel additions were more closely correlated. Since the first quarter of 2001 when we first began to feel the impact of the 2001 to 2003 economic decline, productivity as measured by sales-per-employee, has increased by 17 percent.

Again, our SG&A expense rate for the quarter declined by 80 basis points, as a result of the productivity improvements, and the favorable impact of the sales leverage across our cost base. SG&A expense for the quarter, at $142 million, is up $13 million over the fourth quarter of 2003, on a sales increase of 16 percent.

Due to the variable nature of certain components of our compensation programs, total payroll expense was up approximately $14 million over last year’s fourth quarter -- primarily due to increased performance incentive accruals, and higher commissions. Also contributing to the increase were higher healthcare benefit costs and additional costs of over $1 million for stock option expense associated with the adoption of FAS 123 on our previously-granted stock options.

Additionally, we incurred approximately $0.5 million of one-time expenses associated with the sale of secondary shares included in the December 2004 equity offering. All other SG&A expenses were down over $1 million from last year’s fourth quarter, despite the 16 percent sales increase -- further demonstrating the positive impact from our lean initiatives and the emphasis we give to operational excellence.

Fourth quarter operating income was $39.4 million or 4 percent of sales versus 24.7 million or 2.9 percent of sales last year. Operating income increased 60 percent over the fourth quarter of 2003.

Interest expense and other costs totaled $13.1 million for the fourth quarter of 2004, compared to $11.3 million in the fourth quarter of 2003 and $12.7 million in the third quarter of 2004. The increase in interest expense over last year resulted from an increase in average working capital and related debt levels, higher interest rates and $500,000 of costs associated with retiring a portion of our subordinate debt during the quarter.

Income before taxes doubled to $26.3 million for the fourth quarter of 2004, compared to $13.4 million in last year’s fourth quarter.

For the fourth quarter, our effective tax rate was 35 percent, compared to 29.5 percent for the fourth quarter of 2003 -- which benefited from favorable foreign tax credit carryforwards and IRS audit adjustments. Our tax rate in the third quarter of 2004 was 32.5 percent, reflecting the year-to-date impact of favorable tax initiatives. We expect the effective tax rate for 2005 to be approximately 34 to 35 percent, as we benefit from our foreign tax planning initiatives implemented in the third quarter of 2004.

Fourth quarter net income of $17.1 million increased by $7.6 million or 81 percent over the fourth quarter of 2003, due primarily to the operating margin improvements, driven by a reduction in the SG&A rate. EPS for the quarter was $0.38, and compares to $0.21 for the fourth quarter of 2003, and $0.43 for the third quarter of 2004.

For discussions on debt, working capital and cash flow, our accounts receivables securitization program will be described as if it were on book. Total book debt, net of cash decreased $29 million from last year’s fourth quarter. The proceeds from our December equity offering, coupled with cash-generation from increased earnings and working capital days’ performance was used to fund acquisition earn-out payments, working capital associated with the increased sales, accretive equity transactions, and reduced debt.

Free cash flow for the fourth quarter was $18 million and $29 million for the full year. Working capital days improved 1 day over the fourth quarter of 2003, and leverage on total debt net of cash was 3.5 times at year-end, and improved by 2.2 turns from the fourth quarter of 2003 and by 1 full turn over last quarter.

The components of net debt, including the accounts receivables securitization program at December 31st were -- senior sub notes and others of $318 million. Finance receivables at $208 million. Real estate financing at $49 million, an acquisition note payable of $50 million, and cash of $35 million.

Liquidity, defined as readily-available borrowing capacity and invested cash, was $286 million, and compares to $184 million in the third quarter of 2004 and $197 million at year-end 2003. CapEx for the third quarter of 2004 were approximately $5.2 million versus $2.8 million for the comparable period in 2003.

In summary, we had an excellent quarter and a terrific year. For 2004, higher sales coupled with continuing improvements in gross profit margins and significantly improved SG&A expense rates, resulted in a 74 percent increase in operating profits and a more-than-doubling of net income.

Further progress was made in working capital initiatives, and leverage in interest-coverage ratios improved to our best level since our recapitalization in 1998, and liquidity remained strong.

With our leading enterprise initiatives providing additional emphasis in all areas of the Company, we are well-positioned to make further earnings gains and improve our balance sheet in an improving economic environment. I stated in the opening comments that our Company achieved record results in virtually all significant, financial and operational aspects of our business. The results which we have established this year and this quarter provide the benchmark foundation for future improvement.

Moving to an outlook for 2005. The Company will not be providing specific point-estimate guidance for sales and earnings. However, we will reiterate the fundamental tenets of direction and commitment objectives we provide to our management leadership team in driving our business over the next few years.

Our industry has historically grown at the rate of 1-2 full points above GDP growth rate. WESCO should grow at a rate of at least 1-2 points above the industry growth rate, based on our extensive local sales and marketing programs, coupled with our unique position and current market penetration in our national accounts and integrated supply programs.

With the current economic projections calling for a 3-4 percent increase in GDP for 2005, we expect to see industry growth in the 5-6 percent range. And our growth should be in the 8 percent range, notwithstanding the excellent sales growth achieved in 2004 and the difficult year-over-year comparisons we will face in the second half of this year.

Our lean initiatives, affecting all aspects of our business, are expected to drive operating margins to 6 percent over the next 36 months. We intend to drive growth and net income in excess of 20 to 25 percent on an ongoing basis.

We recognize that any given quarter may exceed or fall short of these metrics, given the Street events and the economy or Company dynamics. Regardless, we expect our management to drive initiatives to deliver superior results on an ongoing basis. Our capital spending is projected to be in the $13-15 million range.

As for the first quarter of 2005, given a continuation of positive macroeconomic trends and end-market activity similar to what was experienced last quarter, and market share gains, our expectations for top line growth for the first quarter are in the realm of 10 percent over the first quarter of 2004, which grew 7.2 percent over the first quarter of 2003.

Historic seasonality in our [Surgan] markets generally result in a 4 to 6 percent sequential decline from our fourth quarter sales results. Based on current momentum and continued operational improvement projects, gross margins are expected to improve over last quarter, and be at or above the rate achieved in the fourth quarter of 2004.

EPS for the quarter and the year will be reduced by the $0.13 per share one-time charge against earnings relating to the retirement of the $124 million of subordinated debt, in conjunction with the recent equity offering. As indicated previously, the debt reduction and lower interest expense results in a slightly accretive going-forward EPS.

Working capital productivity is anticipated to be maintained on a days’ supply basis, and free cash flow over the next several quarters will continue to be directed at debt reduction. Share count used for calculating EPS is estimated to be 49.5 million shares -- reflecting the December equity offering and the current stock price.

Again, we had a strong quarter and a terrific year. We have good momentum entering into 2005, and we will continue to focus on programs and initiatives designed to deliver organic growth in excess of market growth, and to improve operating margins and strengthen the Company on an ongoing basis.

I’d now like to open up the call for a question-and-answer session.

[Rob Bannering], 21st Century Research.

Just a quick question on the business model, and how it may change over the next year or so as commercial construction activity begins to pick up. If you could give us a little bit of color on how the gross margin in that segment is different from the day-to-day activity and how the operating margin might play out. And then also the working capital commitment to that business, relative to the day-to-day business.

Okay, Rob. I’ll try to break down your question into a few answers. As it relates to the dynamics in our gross margin and operating margin -- I like to tie those two together -- generally the project business would be such that has a gross margin that would be less than what the Company delivers on an overall basis.

Appendant to that, that type of generally carries a much lower cost structure than we would see in our stock or our MRO activity that’s been driving a lot of results in 2004. Consequently, what we would expect to see on an operating margin basis is that that type of business would deliver the same type of net operating margins that we see on an overall basis. So we would look at that to be additive to our business. And from a cost standpoint, generally runs less. So it would basically give us very strong operating profit pull-through.

As it relates to working capital, the working capital associated with this business tends to be a little less than our stock business, and that we’re able to more closely align the purchase of the material offset by our payables with our suppliers.

That helps. Maybe Roy could give us some updates on the lean initiatives. I believe the most-recent area of focus for the Company was in transportation and logistics. Could you give us a little bit of color on how that’s coming? And also, just with some of the other lean initiatives that the Company’s pursuing?

Rob, we’ve got about a dozen or 15 well-defined programs that are in various stages of implementation. One way to think about these programs is -- frankly --that they never end. We are today in follow-on stages with some of the activities that we originally launched mid-year 2003, when we started this program and activity. We will continue to be refreshing and extending our capability.

Sometimes that aspect of what we do is not all that well understood, because there is a sense that there is a definite start and a definite end to a project or an area that we work in. But the Company that sort of exemplifies lean is Toyota. They’ve been working on it more than 50 years and still are finding lots and lots of opportunities. We will be in that same mode for a long time to come.

With regard specifically to transportation, we are continuing to roll that program out. I had a review just yesterday on a couple of particular branches that are most recent in the process. We are, in fact, identifying and taking action on a variety of cost aspects and service-performance capabilities with that particular program.

Delivery expense is our second-largest specifically identifiable expense after all forms of payroll, so it gets a lot of attention. But it’s also an area that has a lot of competitive aspects in terms of trying to match up service and cost of service in many, many local markets. So it’s a big area. It’s sort of a challenging area for us to tackle, but we’re making good progress in that regard.

So a lot’s going on. And as I mentioned in my opening comments, we are reaching a level of critical mass, where we have now a dozen people that are working in the organization as what we call “lean application specialists.” The demand for these folks in our organization is phenomenal. They do a terrific job, and they’re engaged in just a very, very wide range of activities. We continue to be able to identify and hire people with the kind of background that we’re looking for, but we’re very optimistic that we will continue to see very substantial improvements.

That helps. Thank you. Again, great quarter.

Dan Whang, Lehman Brothers.

The first question on the pricing dynamic that you talked about. The supplier price increases, and how that’s going to flow through. Can you provide a little bit more detail on the timing of that? And class magnitude?

Dan, the phenomena that we face, being a service organization and a wholesaler, is that we have literally thousands and thousands of manufacturers whose products we represent, market, sell and support. These companies are continuously adjusting their pricing. There’s no given schedule. There’s no established frequency. In some cases, price increase come through on a very regular sort of continuous basis, where we have commodity type products like copper, for example. Because it’s constantly tracking movement in the market, and we’re constantly getting adjustments.

Others may periodically raise pricing. So with that complexity, it’s literally reacting every day to unexpected, unannounced price increases that many of these manufacturers believe should be implemented instantaneously.

On the flip side, we have hundreds of thousands of customers, and they buy many different products from us. Because the products are coming from these different manufacturers, we have many different price adjustments that we have to make in each of the customer relationships that we have.

So it is a very, in some ways, complex and continuous process that we have to go through. And we are constantly doing that. We’ve made a variety of adjustments and improvements in our internal processes to try to get ahead of the curve with pre-announcements. We also try to negotiate with suppliers, with what you might think of as a training period or grace period -- where we get some advance notification so we can start the process going.

So there’s a lot going on, in this regard. But just so you understand, it’s a fairly complex, ongoing, every day kind of activity. The challenge that we have is really one of timing and making sure that we can not only respond and react to the information and the systems processes that we have to go through, but we actually get face-to-face with customers and get those new prices incorporated into the marketplace. So there is a bit of a timing challenge of sort of staying up with the number of price changes that are occurring.

This is a little different from the phenomena that we faced over the last 5-8 years, where we were seeing a lot fewer price increases. In fact, it was very difficult to get a price increase through. So we’ve got a situation where we’re sort of barraged with transactions that have to get worked through our system.

We’re making good progress. We had good progress all year long. The organization has responded very well, and we’re getting effective at getting these changes pushed through. But we are a little bit behind the curve, and frankly, we’ll probably stay a little bit behind the curve. But we stay as close to it as we can to be as current as we can, getting this worked through our customers’ information systems, as well.

I hope that answers your question.

That did, definitely. My second question was regarding the order trends. Can you talk about how that tracked through the other three months of the quarter? How did December end? Unless you…

Dan, it’s Steve. Two comments. One is back on the price increase, to thoroughly put it into perspective. What we saw in the third quarter was some additional pressure to what Roy talked about, in that we saw more general across-the-board price increases than the industry had done for several years. So we had some time to get that through. We’re making very good progress on that, so we’re confident that we will continue the trend that we’ve done over the last couple of years of getting our margins up. So I just wanted to make sure that that was clear.

On the order progress, what we would typically see on a seasonality basis is our fourth quarter on a sequential basis to our third quarter would generally come down somewhat. We actually saw the quarter hold up very well, and December business being quite strong against the normal seasonality trends. So we saw a trend in our end-markets of business continuing to be solid, and maintaining order levels that are near the levels we saw in the third quarter.

Finally, I think in the release you made some comments about the fundamentals being favorable or looking favorable for larger-sized projects to materialize in 2005. I just wanted to understand perhaps if maybe you’ve seen some indications around that. If you can share that with us, it’d be great.

Dan, you will recall maybe for the last 5 or 6 discussions of this type, we have sort of talked about what our expected volumes would be in what we think of as larger construction-related activity. It sort of played out generally in line with what we had expected. What that is, is that we would begin to see momentum build in the second half of 2004. And that we would see that continue through 2005 and into 2006.

So we see or we would expect that we would have favorable trends -- sort of systematically -- through commercial and industrial and even governmental-related construction-supported activity. So from our standpoint, that’s a significant positive. We believe that we are still in the early stages -- the middle stage of the overall recovery. And we are anticipating that we will see that kind of improvement in the construction markets.

Others who track the construction markets or break it into 2 or 3 big categories -- one of which is residential -- and the expectation is that will be… Growth in that area will moderate -- be flat in some -- even say slightly down. That market itself does not effect us nearly as much as the commercial and industrial market, which is expected to grow nicely in 2005. That has been and continues to be our expectation.

Dan Leben, Robert W. Baird.

A couple quick questions. You talked about the smaller- and medium-sized projects picking up and a portion of that was of metal-based price increases. Could you try to kind of quantify how much of that was price increases versus just a general pickup in the market, that you’d expect to trend over the next couple of years?

We certainly did some price in that, Dan. As I tried to [sum] it up for the quarter for our total businesses, it’s in the neighborhood of the $20-23 million range. Or a couple of points on our 16 percent [quoted] piece.

On the project area, it probably would’ve been a number maybe in the 4 percent range, or so. In aggregate, 4 to 4.5 percent on that business. So we did see real growth in what our what I call the early-mid cycle project business, to small- and medium-sized business. It was up almost double-digits toward the end of the year. So we would have seen some real improvements in activity as it relates to unit sales, as well.

So is this the segment that we should expect to see the real kind of strong growth in 2005 in this segment, with the larger projects looking to pick up in 2005, but really be supportive in 2006 and beyond, given the long lead times and the fact that the market just hasn’t quite picked up yet?

Well, we basically would expect to see our day-to-day activity continue to be strong. What would rive the project activity is going to be a continuation of good base levels of business that will then start to drive on the industrials. The capital spending for capacity expansion. So we would anticipate as that begins to materialize -- as Roy said, toward the end of this year -- and hopefully continue into 2006 -- that the day-to-day activity would continue to be strong, as well. But from a delta standpoint, we would expect to see a little bit more pull-through and push from our project activity toward the end of this year and moving into 2006.

Then from the variable compensation standpoint, you mentioned that there was a pretty significant chunk of increase in variable compensation that came in this year. Just trying to get a sense of how the benchmarks have changed, going into 2005. And how variable compensation will be determined. And if this is an area that we should expect to see kind of an expense down-take in, given the pretty high bar you guys have set this year.

I think if you look at it as a rate-of-sale, that’s a very accurate comment. As a percent, we would not expect to see it rise. We’d actually expect to see it come down, somewhat. Our compensation programs are highly biased toward performance. Our performance for 2004 was very strong, and it improved throughout the year. So we saw the variable compensation -- the need to fund that -- increase throughout the year.

But when we look at 2005, we have the phenomena somewhat of what I call the resetting to zero -- and each of our performance objectives for all of our operating management and executive management gets ratcheted up a little bit. So the returns required to make similar level of incentive compensation -- the bar will be raised for 2005. So that combination with an increase in the top line growth, we would expect to see the expenses be at or below, on a rate-of-sale basis, than what we experienced in 2004.

Great, guys. Congratulations again on a great quarter.

Thank you.

There are no further questions, sir.

Let me just then wrap up a little bit. There are perhaps a couple of things that maybe would be worth commenting about. Just to make sure we’re all in line with this.

As you know, we did have an equity offering. It was a very successful equity offering. We do anticipate that we will be redeeming or calling bonds. And that is a process that we’ve already started. It should be complete by the end of March. As Steve pointed out, there is a charge that we expect to take, which you, I’m sure, understand the dynamics of. It’ll show up in the first quarter. But we expect to see very strong performance, as well, on a comparable basis.

The results, as we go into 2005, as Steve points out -- we sort of recalibrate our expectations and standards. This time a year ago, we certainly didn’t expect the level of activity and the kind of performance that we ultimately achieved. But we had a lot of things that we had underway, and made terrific progress. So as we enter 2005, frankly, we’re considerably more optimistic than we were in 2004.

We really do expect to do well. We should exceed the level of sales achieved back several years ago, which were our highest levels ever. That should be exceeded in 2005. We believe the sales growth rate will also be very good against just about all prior standards, with the probably exception of the fantastic year that we had this year.

So looking ahead, there are a lot of positives in the organization. We look forward to talking with you again in the not-too-distant future, and thanks again for listening in today.