Wesco International Inc (WCC) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2005 earnings conference call for WESCO International. My name is Jean. I'll be your coordinator today. [Operator Instructions] At the end of the conference we'll be taking questions. At this time I will turn the call over to your host Mr. Daniel Brailer Treasurer and Director of Investor Relations. Sir, please proceed.

Thank you, Jean. Good morning, ladies and gentlemen. Thank you for joining us for WESCO International's conference call to review the first quarter 2005 financial results. My name is Dan Brailer, and I am the Treasurer and Director of Investor Relations at WESCO International. This morning Mr. Roy Haley, WESCO's Chairman and Chief Executive Officer, will make some opening comments followed by an overview of the earnings press release issued by Mr. Stephen Van Oss, WESCO's Senior Vice President and Chief Financial and Administrative Officer. Means to access this conference call via webcast was disclosed in the press release and was posted on our corporate website. Replays of this conference call will be archived and available for seven days. Following the commentary we will open the session to your questions for Mr. Haley 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 10-K for the fiscal year ended December 31st, 2004 as well as other reports filed with the SEC. The following presentation may include the 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.

Good morning, and thank you for participating in our call. We really appreciate your interest. Over the past month or so, we've received a number of calls from analysts and from investors inquiring about the Cypress Group, our largest investor, shares by certain executives who had previously been party to lockup agreements and other matters. Behind these questions was an apparent concern that WESCO was expecting a disappointing quarter. Well, very much to the contrary, WESCO has had a truly outstanding quarter and terrific financial results. Organic internally driven sales continue to set new record levels of performance. Productivity and service level improvements are top priorities, and we are systemically improving our overall capability and competitive position.

As you probably know our total market is very large, it's growing and we are doing a much better job at identifying and developing opportunities that lead to increasing sales and market share gain. The bottom line as indicated in our earnings release this morning is that WESCO is performing very well, generating excellent financial results and getting even stronger. Steve Van Oss is now going to present highlights and take you through the first quarter statements and when he is finished we'll respond to any of your questions or comments.

Thank you, Roy. I'd like to shift to a review of our results for the first quarter and how we see the second quarter and the rest of the year shaping up. I'll start the discussion with an overview of a few items in order to put the quarter's results into perspective.

As Roy said, 2004 was a terrific year for WESCO. We delivered record results in virtually all significant financial and operational aspects of our business. We ended the year with good momentum, and the momentum continues. Our results for the first quarter were excellent. Our investment in productivity, sales and marketing initiatives continues to pay off. Sales increased 17% with one less sales per - - day for the quarter.

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. This capacity creation was reflected in our productivity as measured by sales per employee per workday which improved 16% and set a new benchmark for our Company beating our previous record, which was set last quarter. We expect the capacity expansion characteristics of our lean programs to continue and facilitate increases in our organizational productivity and profitability as we grow our top line revenues at a higher rate in the industry while holding cost to a much lower rate of increase.

Our sales productivity combined with margin and cost initiatives delivered our highest ever first quarter operating results and are expected to yield further improvement in 2005 and beyond. For the last several quarters we have discussed the concept of operating profit pull-through. We define operating pull-through 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 full year 2003 and each quarter of 2004 we had pull-through of incremental gross margin dollars to incremental operating profits ranging from 50-70% plus. The trend has continued into this quarter. You may recall that a significant activity in the fourth quarter of 2004 was a 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 in our Company with several positive benefits, including a 60% increase in the publicly traded float of our stock to a total of 29 million shares, the improvement to our balance sheet, additional financial flexibility and upgrades to our credit ratings.

New equity research coverage and the first of several anticipated partial liquidation events for our private equities 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 was utilized to retire $124 million of high cost subordinated debt in March of this year. The subordinated debt retirement resulted in a one-time charge against earning of $0.13 cents 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.

Last quarter we discussed the economic recovery which for our business occurs in three stages. We continue to believe we are in the second phase of a three-phase recovery in WESCO's markets. In the first phase, which began to positively effect 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. Stock sales of standard components and commodity products began strengthening in the fourth quarter of 2003, improved throughout 2004 and continued in double digit growth through the first 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 first quarter of 2005 and for the first time in this recovery grew at a rate higher than what we saw in our stock 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 it relates to gross margin and cost characteristics, we view the three phases as cumulative and additive to improving our operating margins.

Let's now look at a summary of our first quarter 2005 results. Our reported results include the impact of our bond redemption. Again, this redemption resulted in a non-recurring charge of $10 million pre-tax or $0.13 cents per share. When I discuss the results for the quarter and the balance of this report, I will be excluding the impact of this non-recurring charge.

Growth in sales, coupled with margin and cost initiatives, produced outstanding operating results. Our sales increased $143 million, and the Company produced an additional $24 million of gross profit with a pull-through of slightly more than $12 million or 51% to incremental operating profits. Net income improved by 84% at $8 million or 33% of the incremental gross profit was pulled through to the bottom line. Earnings per share increased by $0.13 cents to $0.36 cents, a 57% improvement over last year's earnings of $0.23. Working capital performance improved over year end and cash flow was positive and liquidity was at $178 million. We retired $124 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 let's get into some more specific first quarter results. Sales were $991 million for the first quarter and were up 143 million or 17% from the first quarter of last year and represented a record first quarter and a higher level of sales per workday per employee than any quarter in the Company's history. Sales were up slightly over the fourth quarter of 2004. Historically our first quarter sales are the lowest of the year and almost always below the previous year's fourth quarter.

Activity levels in the majority of the major industrial groups that are heavy users of electrical equipment and MRO products strengthened further during the first quarter and current activity levels for WESCO are just slightly below the historical high levels of 2000 and 2001. Market share gains resulted in our utility operations being up approximately 26%. International operations were up over 23%, helped somewhat by the strength of the Canadian dollar. Improving market conditions and increased sales effectiveness in the recreational vehicle and modular construction markets of our manufactured housing operations resulted in sales in this market being up almost 17% over last year.

Improvements in day-to-day MRO and OEM activity and increased sales activity in the small and medium-sized construction projects resulted in our sales to customers in these large market segments being up in the aggregate approximately 8%. On the strength of new programs and improving MRO activity, sales of customers through our national accounts and integrated supply programs were up over 20%. While the industry does not publish discreet market share data, [successes] in our integrated supply, national accounts and alliance programs as well as reporting by other companies and routine feedback by 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 $17 million or 2% impact on sales. Categories with the most significant price increases were building, wiring and cable and metallic and non-metallic conduits.

First quarter gross margins at 18.7% were flat to the fourth quarter of 2004 in comparison to 19% for the first quarter of 2004. Building margins improved over the fourth quarter of 2004 despite a mix shift as we successfully pushed supplier pricing increases through the channel. A return of more historical general price increases across much of our product and supplier base has been challenging., but we are committed to adjust and implement new pricing throughout our customer base and expect to see margins continue to improve going forward.

G&A as a percent of sales improved to 14.4%, a 90 basis point improvement over last year's first quarter expense ratio of 15.3%, reflecting efficiency gains resulting from our lean initiatives and positive leverage of increase in sales. Our management and employees have done an outstanding job in improving the efficiency and effectiveness of our organizations. Our sales increased 17% while our total employee base rose approximately 2% compared to last March. Continued cost control focus and successes in our lean initiatives resulted in productivity improvements over the year end with further progress made in April. This is a meaningful departure from the past when sales increases and personnel additions were closely correlated.

Since the first quarter of 2001 when we first began to feel the impact of the 2001 to 2003 economic declines, productivity as measured by sales per employee per work day has increased 23%. Again our SG&A expense rate for the quarter declined by 90 basis points as a result of productivity improvements and the favorable impact of sales leverage across our cost base. SG&A expense for the quarter at $143 million is up $13 million over the first quarter of 2004 on a sales increase of 17%. Due to the variable nature of certain components of our compensation programs, total payroll expense was up approximately $11 million over last year's first 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 $1.3 million for stock option expense associated with the early adoption in 2003 of FAS123 on our previously granted stock options. All other SG&A expenses were up only slightly due to double increase in sales. First quarter operating income was $38.6 million or 3.9% of sales versus 26.3 million or 3.1% of sales last year.

Operating income increased 47% over the first quarter of 2004. Interest expense and other costs totaled $11.2 million for the first quarter of 2005 compared to $11.1 million in the first quarter of 2004 and 12.6 million in the fourth quarter of 2004. For the most part, decreases in average debt offset increases in interest rates over the last year.

During the quarter, we recognized a $10 million non-recurring charge for loss on debt extinguishing related to the retirement of the $124 million of high cost debt utilizing proceeds from our December 2004 equity offerings. Excluding the charge for debt extinguishment, income before taxes increased 80% to 27.3 million for the first quarter of 2005 compared to 15.2 million in last year's first quarter and 26.3 million in the first quarter of 2004. For the first quarter our effective tax rate was 34.7% compared to 36.1% for the first quarter of 2004 . Our tax rate for all of 2004 was also 34.7%. We expect effective tax rate for 2005 to be approximately 34 to 35% as we benefit from our foreign tax planning initiatives implemented in the third quarter of 2004.

First quarter net income of 17.9 million increased by $8.1 million or 84% over the first quarter of 2004 due primarily to the operating margin improvements driven by a reduction in the SG&A rate. Reported earnings were $0.23 cents excluding the non-recurring charge for the retirement debt. Earnings per share was $0.36 cents an improvement of 57% over last year.

We'll turn to the balance sheet now. For discussions on debt, working capital and cash flow, our accounts receivable securitization program will be described as if it were on book. Total debt net of cash decreased $12 million from year end 2004. Free cash flow for the first quarter was $9 million. Working capital dollars increased slightly from year end due to higher levels of sales and results in accounts receivables. Inventory dollars declined slightly. Leverage on total debt net of cash was 3.2 times at the end of the quarter improved by 2.2 turns in the first quarter of 2004. Liquidity, defined as readily available borrowing capacity, and invested cash was 178 million and compares to 200 million in the first quarter of 2004.

The Company is in a strong position to fund further organic growth as well as acquisitions. The components of net debt including the accounts receivable securitization program at the end of the quarter were - - finance receivables at $299 million, senior subnotes and others at $200 million, acquisition notes payable at [$50] million, real estate financing at $49 million and cash of $19 million. Capital expenditures for the first quarter of 2005 were approximately $2.7 million the same as the comparable carried in 2004.

In summary, we had an excellent quarter continuing with strong momentum for 2004. Higher sales drove additional gross profit dollars and significantly improved SG&A expense rates resulted in a 40% increase in operating profits and 84% increase in net income before the cost of bond redemption. Leverage and interest coverage ratios improved to our best levels since our recapitalization in 1998, and liquidity remains strong. With our lean enterprise initiatives providing additional emphasis in all areas of the Company, we are well positioned to make further earnings gains and together with our improved balance sheet fund future organic growth as well as capitalize on other improvement opportunities.

Going to the outlook now. The Company will not be providing specific point estimate guidance for sales and earnings; however, we will reiterate the fundamental tenants 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 to 2 full points above GDP (ph) growth rates. WESCO should grow at a rate of at least 1 to 2 points above the industry growth rate based on our extensive local sales and marketing programs coupled with our unique positions and current market penetration in our national accounts and integrated supply programs. With current economic projections calling for a 3 to 4% increase in the GDP for 2005, we expect to see industry growth in the 5 to 6% range.

Normally we would expect to grow around 2 points above the industry, given the leverage of our national programs overlaying our local sales and marketing initiatives. Based on our strong first quarter results and current momentum, our growth should be in the 8 to 10% range for the year notwithstanding the excellent sales growth achieved in 2004 and the increasingly 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% over the next 36 months. We intend to produce annual growth of net income of 20 to 25% on an ongoing basis. Recognize that any given quarter may exceed or fall short of these metrics given discreet events in the economy or company dynamics. Regardless we expect our management to drive initiatives to deliver superior results on an ongoing basis. Capital spending is projected to be in the 13 to $15 million.

As for the second quarter of 2005, given a continuation of positive macro economic trends and endmarket activity similar to what was experienced last quarter along with market share gains, we expect again to be able to generate growth of 10-12% over the second quarter of 2004 which grew 13.5% over the second quarter of 2003. Historic seasonality in our [served in] markets generally results in 3 to 5% sequential increase over our first quarter sales results. Based on current momentum and continuing operational improvement projects, gross margins are expected to improve over last quarter.

Working capital productivity is anticipated to be maintained on a data supply basis and free cash flow over the next several quarters will be directed at debt reduction. Share count used for calculating earnings per share is estimated to be 49.5 million reflecting the December equity offering and the current stock price. Again we had a strong quarter. We have good momentum entering into the second quarter of 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 will now open the call for a question-and-answer session.

[Operator Instructions] And your first question of the day comes from David Manthey of Robert W. Baird.

Yes, guys. Good morning. Just wondering if you would talk about March specifically. Seems many of the other companies in industrial America and other industries are talking about a soft patch in March that seems to have unwound in April. I'm just wondering what your experience was. Did you see any unusual softness in March, and was there an impact from Good Friday being in March this year versus April a year ago?

Hi, Dave. As we look, reviewing the quarter we saw sales per workday improving throughout the entire quarter and did not see the so called soft patch, and we're continuing to have good momentum into April.

Okay, that's good to hear. In terms of the gross margin, as we move through '05 and assuming that we move from sort of phase two in the beginning parts of phase three. I would assume the larger projects would pick up, the drop shipped sales would increase. In that environment what is the impact you expect on GP? In general is it - - in terms of basis points is it 50, 100, what would you expect for a normal progression?

A lot of that depends on the nature of the mix as you talk about, moving toward the direct shift, which would tend to have some pressure on the gross margin line; focus more on the operating margin we would anticipate we continue to get improvements in the operating margin line. We are continuing to look at and focus across all of the organizations, whether it's project business or stock business or what we call special order business to get improvements across each one of those lines.

We had a tough challenge in the last couple of quarters with the general price increases coming through. We've got those pushed through the channel. We've not made much improvement over previous quarters as we'd like to make, but we have been able to get the cost increases through and our intent would be able to continue to improve the margins going forward giving a - - kind of a trend of the direct shipment business we're seeing now, proceed at the same rate we're at today. We expect to see gross margins stay where they're at or get a little bit better.

The big impact will be continued leverage on our operating expenses. You’ll see continued improvement there assuming that we have growth in larger project business. We would expect to see that spread between whatever the gross margin development is actually increase because of the efficiency of handling that kind of business.

Right, okay, and a final question on these phases and the cycle and so forth. Roy, maybe you can address past cycles. I’m mainly interested in the corollary between the current cycle and the one we saw in the mid-1990s. It looks very similar; a lot of metrics. I'm just trying to get your read on - - how long do these things last typically for you, these phases and is there some visibility, does the phase three given the nature of it, does it last at least 12, 24 months or something?

That's a good question, Dave. There's not really a bright line of demarcation between these various phases. There’s an ebb and flow as different industries, our industry subsegments, themselves, sort of progress and have an ebb and flow to them. For example we saw some reasonably good results last year in the automotive industry and that is sort of flattened out and weakened with some of the problems in that industry, but we see pickups in other areas that offset that. In both cases we see that as, sort of, an element of the early stages depending on the industry cycle.

Maybe to answer your question a different way, the last cycle lasted as you know some eight years or so. It did kind of progress as you point out with some similarities to what we're seeing today. Over the last few days I've been checking on some of the operations that we have that typically do a lot of the industrial facilities and larger project business. It simply confirms the fact that the expectations for growth in larger projects is in fact quite solid. The engineering and construction firms are quite busy, but we won't see the purchasing activity on many of these projects until some time in 2006 .

So there's a lot of work that's going on, there's a lot of preparation for this, and it is still ahead of us. The reason I've been looking at this is simply because questions or possible concerns about what the facilities, construction and commercial markets might look like on a going forward basis. Early reports from this quarter indicated some weakness, but our view is, is that we will see continued strengthening in 2005, 2006 and even into 2007 based on the work done by large engineering and construction firms.

Great, all right. Thanks very much.

We'll take your next question from Rob from 21st Century Equity Research.

Good morning, guys. I wanted to ask you again about your lean initiatives. Clearly you've done an excellent job over the last couple of years reducing your operating expenses as a percentage of sales, and I believe part of that is due to operating leverage inherent in the business model, but clearly the lean initiatives are helping as well. Maybe you can update us on where you are in that process, where else you might see some low hanging fruit in terms of continuing to reduce expenses in the organization and being able to achieve ultimately that two full percentage point improvement and operating income.

Hey, Rob. I want to find out that market you shop at about that low hanging fruit. [Laughter] Everybody talks about it. I don't know that I've seen any of it. Actually our lean program is doing quite well. We continue to expand our staffing and support in those functions. We continue to have some good successes.

In truth the real benefits come from highly disciplined continuous focus on the kinds of activities we started just two years ago. We still aren't finished with the first wave of programs and initiatives that gave us a solid boost over the last 12 months to 18 months. Part of working in lean is simply the discipline of staying with these initiatives and grinding out the kinds of productivity improvements and the, in effect, capacity improvements to be able to handle the kind of sales leverage that you talk about. If we didn't have that capacity there wouldn't be that type of leverage.

We experienced over a number of years some frustration with the challenge of realizing the so-called economies of scale. That's really what lean is demonstrating to us. That there truly are economies of scale, but you've got to attack it with some very specific programs.

I believe last quarter you mentioned one of the areas you were focusing on was transportation and warehousing. Any additional feedback there?

I'll give you just a couple of quick points. You mentioned transportation. That is extraordinarily important right now. There's a tendency for people to focus on product cost inflation, but delivery cost is our second-largest cost after payroll. Delivery and transportation is exceedingly important to our organization. With the fuel price increases, the productivity and efficiency of our delivery and transportation is extremely important.

We've got some excellent programs. We're in the midst of getting that pushed out to the organization. We got started in the - - around mid-year last year. But we're still very much in the early stages of pushing that through. The second major initiative, and I'd have to say this one is probably the most significant for us is the work that we're doing to try to decomplex the complex pricing structures and strategies as well as the disciplines associated with pricing flexibility for local market competitive bidding while at the same time providing structure and direction that will lead to the kinds of improvements in margins that we are targeting. So, that's a big effort. We're making excellent progress on it and have a lot of people engaged in that particular activity as well. But we are always developing new programs and new initiatives in this area.

One that I am very optimistic about, we started it when we began to work on the 404 component Sarbanes Oxley; we called it the zero defect initiative. It was really intended as kind of an audit process to augment what we were doing and make sure that we were effective and efficient in that kind of a process. What it's turned out to be is something much bigger than that and I think we'll have much more impact on the organization long run because it's basically the focal point that we are using for retooling all of our administrative and support procedures, and it's attacking the opportunities at the source as opposed to trying to deal with them at the audit stage, we're trying to get all the way back to the very way in which work gets done in the first place. This is going to yield again big productivity gains and increased capacity to absorb additional work throughout the organization. It's also become the focal point for our information systems upgrades and enhancements which is also a big activity in the Company.

And lastly I'll say that I crowned myself Chief Lean Officer for the sales initiatives, because we are making very interesting progress on on applying leans to the selling activities number terms of enhancing our success rate, doing better targeting, being - - in effect pacing our work much more effectively throughout the organization. So we've got lots of different activities that are going on, all of them individually make a difference and collectively, they're very powerful.

Excellent. Thank you and good luck.

And we'll take a question from John Keeley of Keeley Asset Management.

Good morning. Could you comment on the 17% gain? I know that you have a laundry list of things you supply to various people all the way from light bulbs, electrical to paper office supplies, things of that nature. Is there anything that gained and caused your mix to be under some pressure? Also could you update us on the shelf offering?

Okay, first of all, John, congratulations on the nice publicity you got recently.

Thank you.

Secondly with regard to your question about our product offering, we do have a very wide range of products; broadly speaking, the heart of the product offering are many different categories of electrical equipment and supplies used every day in construction or industrial or commercial maintenance activity. Additionally, there is a broad range of what is often called industrial tools and industrial supplies and these involve a wide range of products from cutting tools to safety products and the like. So it is a very broad range. We monitor them all. They go in different cycles that - - again depending on the way in which industries move. Right now, for example, we're preparing for and promoting products that are geared around safety. The reason for that is May is national safety month and we try to encourage our customers to pay additional attention to these types of products because it's timed with the year and a variety of other promotional kinds of activities.

With regard to the shelf registration that you asked about, as I think most all of our major investors know, our largest investor, our shareholder, is a private equity firm - - the Cypress Group. They've been a long-term holder. They've held their position now almost seven years and we, over the years, have informed other investors and shareholders that their intent was to exit their investment over time in a series of market transactions, the first of which was last December. They have now prepared for a series of transactions, but there's no indication of timing.

It's simply a matter of being prepared to be in a position to, either through a block transaction or other forms as they may choose. We are not privy to the timing or their portfolio strategies, that's their business. We are not aware of anything, but I would tell you that their interests are at least as great in terms of shareholder value as any other shareholder we have simply because of their position and their long-term position in the Company.

Thank you.

And, we'll take our next question from Steven Fisher, UBS. Please go ahead.

Good morning. You said that the industrial MRO business is strong, but direct ships seem to have the bigger impact on gross margins in the quarter. Is the industrial business, is that actually decelerating?

No, Steve. It's still responding very well. If you look at virtually all of our end market activity for the quarter were up quarter-over-quarter basis, the only one that showed kind of a flat or soft area would be the transportation group which Roy mentioned earlier, so we saw our MRO activity up in the double digit range for the quarter. We [comping] against a high tougher comparison than our project business was. We did see the project business as a percent grow a bit faster than the [stock] business during the quarter, but as you recall starting at the end of 2003 and then accelerating through all of 2004 our stock business was ramping up and was up as much as over 20% during 2004.

So there's a little bit tougher comparison on the stock business. But, we are seeing some meaningful improvement in our project business. It did have some impact on the gross margin and due to the mix, but our ability to push-through the price increases and continue to work on our lean margin initiatives helped offset that.

The industry association that we are most closely aligned with tends to look at the market for our types of goods and services in four big buckets. One industrial, two, construction, three, utility and, four, a broad grouping that is characterized as commercial, institutional, and governmental. In every one of those large categories, except for commercial, institutional, and governmental, WESCO sales for the quarter were in double digit growth ranges compared to first quarter last year, and the commercial, institutional, and governmental, although it was single digit it was still quite strong compared to long-term historical trends.

Additionally we are really focused on developing improved marketing and sales programs for that market segment going forward. Overall we had a very solid quarter across multiple industries, product types and product categories.

And so with capacity utilization inching up, you still see the outlook for that side of the business as positive?

Not only just looking at capacity utilization, but also just the amount of work done by architects, engineers and large construction firms in anticipation of additional work.

Okay, with copper prices rising again recently , how confident are you, I know you said it's a challenge, but how confident you could give benefits in terms of pricing versus just kind of keeping pace?

Let me take a first cut at that and Steve will add on to it. We do a very good job of adjusting to copper pricing and certain other commodities, because the market readily recognizes the underlying commodity nature of those products. Going up or down, there's reasonably quick adjustment in those categories. The places where we've had a little bit of difficulty is in sort of the second tier or the second order as higher commodity prices make their way through to individual piece parts and component part that go into a wider range of products and trying to keep our eye on all of those changes and get many of those through even though they may individually seem small; collectively they are large. What you're specifically referring to, I believe, in copper wire or steel conduit; those are changes we can make pretty readily.

I would add to that , last year we had, call it very rapid and continuous write up on those materials, both copper and steel and it had very positive impacts on our results last year. We've got the process and the systems and the discipline and the organization to be in front of those and to make sure we get those through.

This year if you look at this quarter versus last quarter, if you put it on an apples and apples basis and said we would have had the first - - same type of run-up in commodity prices in the first quarter of '05, we believe our gross margin mix component would have been favorable as far as our gross margin percent. We probably would have picked up 20 or 30 basis points. The fact we were slightly down from last year and flat with fourth quarter, I think, shows that the Company's been able to push those through. We've got the systems in place, we have the process; the organization knows how to do it and, I think, we'll be continuing to stay on top of those.

Okay. Lastly on a net basis, you paid down about $28 million in debt for the quarter. What are your current thoughts on debt reduction for the year and, kind of, balance that with other acquisition thoughts?

At this point in time our free cash flow continues to be directed at that reduction. We're looking at the total year of free cash flow in the neighborhood of $70 million and we would anticipate that being towards debt reduction. Having said that, historically WESCO had been an inquisitive company. We bought 25 companies in a period of 6 years, from the 90s into early 2000; we are looking at acquisitions again. With a very disciplined approach. There are several properties we are in discussions with, but we always have some deal flow going. So, I guess my - - I would try to manage to stay tuned. We view our capital structure as being in very good shape at this point in time. We have kind of a rough guideline being between four times and two times levered. As I mentioned earlier, we're in the low threes right now.

If we continue the year as we see it in cash generation the way we are looking at it right now, we'd be below three at the end of the year, gets us into the lower level when we look at returns for our equity owners, we certainly believe that a good source - - a good depository for free cash flow would be with accretive acquisitions in keeping that leverage component in that three range, so it is something we are working on. We don't have anything that we are ready to announce at this point in time. We've been inquisitive in the past and we see that as a practice we will continue in the future and look at that as a very good add to the EPS earnings growth that we started generating organically. We think we can supplement that with low risk, very solid acquisition opportunities.

Thank you.

And, we'll take your next question from Dan Wang of Lehman Brothers.

Yes, good morning. First question is regarding your remark about the small-medium projects picking up at a faster rate than the MRO. From that standpoint, can you talk about - - describe what the mix was between the stock versus direct and special orders?

In general, Dan, if you look at our business in total, our direct business represents 40 to 45% of our overall business. With stock in S.O. have pretty much the same characteristics, so I would lump those together ; it's generally in the 55 - - 50, 55% range. And the gross [inaudible] hasn't changed dramatically, but a change of one point or two can have a pretty significant impact if we're not at the same time working on improving all elements of our pricing and margins in each one of the categories, so that the shift wasn't dramatic, but it was growing at a faster rate and moved at about a point, point and a half or so during the quarter so the direct shipment component of our business picked up 1 to 2 points.

Just judging from the past cycle and peak, how much further shift could we see? Like, even a 5% once you completely you shift over or shift to a greater extent to the [inaudible] project.

I don't know that I would use historic, Dan. It would change a lot of emphasis in our business with our integrated supply business growing rapidly, very good penetration with our national accounts, which has a larger stock component, on - - we're growing that base of day-to-day MRO activity. I won't quite call it annuity but more a repeatable business is growing as well. I wouldn't expect to see that dramatic of a shift. We do have lot of good activities going on in the project area. Roy mentioned in general that area with the engineering consulting firms and what they're working on; what they've got on the drawing board as growing. Our intent would be to continue to grow our base business, of stock business rapidly as well.

And also, I noticed, you had very strong terms national accounts, integrated supply. Did you add any new accounts in those programs during the quarter?

A combination of some new accounts in our national account programs and continued roll out in our integrated supply of large programs, base program was one in 2004.

Last question was regarding the joint direct marketing program. I think you were working on or still working on with some of your key suppliers where you are based on past purchase trends, you're targeting particular customers with new products that your manufacturers are providing. Could you provide an update on progress on that?

Dan, we have a variety of pretty exciting marketing programs that are driven in part by our really top quality information systems and our ability to analyze historical data for exactly the purpose that you are referring to. For example if we know that certain components of certain kinds of manufacturers are used in control cabinets, then we can find all of the customers that bought control cabinets, then we can work back to say what components did they buy or identify opportunities where those customers should be buyers of those types of components, and that's the kind of thing we're doing across all of our major preferred suppliers. Indicative of this is that in late 2003, we were working with just four manufacturers, I believe, on such programs. We just did a first quarter review that also projected to mid-year.

We will have 60 programs. That's not necessarily 60 suppliers, but 60 different initiatives working with suppliers on that type of targeted marketing happening in the first half of this year, so we've had a dramatic increase in the type of activity with the number of suppliers that we are working with. And this is creating lots of opportunities that we otherwise may have obtained but we're really working hard to put these kinds of activities in front of customers. A good example of that is we are working with a range of suppliers in this safety initiative that I referred to earlier. We published a new safety catalog; it's hitting the streets right now. It's got a variety of manufacturers in it. It's supplemented by joint sales calls with those manufacturers including seminar types of programs. We've done really a terrific job of integrating various forms of marketing to condition the potential customers, existing and potential customers, to be more inclined to respond favorably to sales activities.

Right. Actually I had one last one, maybe for Steve. You talk about CapEx spend, [inaudible] 13, 15 million, how much of that do you think is going to be allocated for I.T.? And how does that compare to year-over-year?

The first question on the I.T. components, probably be a 60-70% will be in I.T. and it's in line with what we spent in the past. As far as comparison to last year's it's up 1 million or $2 million. On an ongoing basis 13 to $15 million is pretty much what the business appetite is so pretty much down the middle.

Thank you very much.

We'll take a question from Brent Rakers with Morgan Keegan.

Yes, good morning. First question, and I hate to beat this dead horse a little bit too much. On the gross margin issue, just to clarify, was there no positive negative impact in the quarter on the percentage margin for either price - - product price increases or product cost increases, you think it's pretty much neutral in the quarter?

We believe that would be neural, because we've done a good job of getting the cost increases passed through. It was essentially as contrasting to the first quarter of last year where we had a pretty significant positive impact on inventory profits with the markup in the commodities, and essentially none this quarter, just pushing through just general price increases so that would have been pretty neutral for us.

And then again on the price increase side going into the second quarter, is there likely to be due to timing of the some of the price increases, some sequential pick up in pricing Q1 to Q2?

Well we see a - -- there's a seasonality in our business that we would typically see. A stronger second quarter; 3 to 5% if you go look over the last five or six year. The second quarter is generally stronger than the first quarter. As price increases continue to be pushed through the channel you'll see a little bit of impact on that to the extent that they were put in any of the previous 2 to 3 quarters you're going to see some minor improvement on that. What we saw if you look at where we can get a better handle on the - - with price increase which would be more on the commodity side with product such as a building wire and cable or conduit, both metallic and PVC, we though for the first quarter of this year we had about 2% of our sales, $17 million that would have been related to the price component of that. We expect to see those types of numbers going forward.

Okay. Great. Any sort, you alluded to it but I don't think you specifically quantified the foreign exchange - - dollar foreign exchange benefit year-over-year?

Not as much this quarter as we've seen in previous quarters and that generally comes from our Canadian operations. I don't have a specific number for you, but in the past that's generally been a point to a point and a half of the sales, it's sort of been a little bit less than that this quarter.

And any new outlook at all on adding sales people, any kind of employment numbers shift over the last say 3 to 6 months?

I'll let Roy address some of the sales. I'll tell you we look at where we were year end to where we are now and continuing to April as we continue to drive these lean initiatives, we've not seen any increase employment despite the increase in sales. As you saw in the first quarter, our productivity hit record levels, and that was on top of a record we set in the fourth quarter and that's really what we expect to do out of these lean initiatives is to create capacity both in our physical facilities as well as in our personnel capacity. That relates a lot to the sales initiative as well. We would tend to look to free up administrative capacity; redirect that toward sales capacity. And where the situations warrant, we certainly will add head count for sales. We have a very rigorous and disciplined process where we look at every one of our locations and try to drive them towards certain productivity and profitability improvements. We look at payroll productivity as it relates to how much profit the organizations bring in, and that's kind of gating factor. And then we also look at where we have opportunities; we'll make the investments in those areas where we see the growth. And we’ll pull them out of the areas we don't see the opportunity for the business.

And one last question, you said the utility market was up 26% in the quarter, I was wondering if there's any sort of large project or something maybe driving that number up and if you could also comment on construction versus maintenance and maybe even transmission versus distribution part of the business.

Our utility business has been a very good segment, has nice growth characteristics over the last 4 or 5 years. We were very successful last year on a couple of renewals as well as winning major portions of business with a couple of our alliance utilities that significantly increased the volume with them. Those would tend to be day-to-day type of business, not construction type progress on that. Big piece of that was second half wins that we did in the utility group last year on a couple of major alliance accounts.

Additionally we have seen a pick up in transmission project activity. We have one significant transmission line in the process of being built; it's still in the early stages. It will go on for the balance of the year. We expect that that will lead to additional transmission projects. We see evidence of consideration of those kinds of projects in the news, and we do our best to try to stay on top of those opportunities.

Great. Thanks a lot.

And we have one last question from Curt Woodworth of J.P. Morgan. Please go ahead.

Good morning. Question on your organic sales growth, you talk about the industry growing two points above GDP and you're trying to grow one to two point above that; to me it seems you're taking pretty significant market share, just given the kind of 15% organic growth X price. Can you quantify that at all in terms of how much share you're taking, in terms of this total $80 billion market which you're 4 to 5% of, how much market share do you think you can take, what are the limitations there, maybe talk about management goals around that issue.

We would love to be able to track this a lot better and to track, as far as nuances of different product categories and market share. What we try to do - - is we try to follow information from the National Electrical Manufacturers Association, NEMA, because for the manufacturers they do have a bigger exchange program amongst themselves that helps them monitor that type of market data, and we try to use that as an indication even though we would be a smaller component than that because they look at the total market with all of the outlets to the end users and we would just be one of those outlets. So that's one source we use.

Another source we would use are the results being posted by some of the major manufacturers of electrical and industrial goods, and because again they cover a large part of the market. Just sort of on the initial tracking we see a few of those manufacturers if you can x out acquisition activity into the mid-teens range. But you also see quite a number of them in the low single digits to mid-single digits, ranging anywhere from essentially flat to 7 or 8% so we are at least of the opinion that we are clearly doing better than the market overall, doing better than what our expected couple of as many as 3 or 4 points above what the market growth is so we are doing quite well in that regard right now. We are working hard to try to make sure that we keep looking at penetration opportunities with existing customers as well as some good targeting in specific subsegments or niches where for whatever reasons in the past we've not been as effective.

An example of that would be in the past we found it difficult to find the right strategy for really being effective at consistently growing our business in the residential construction market. Our culture, our bias, manufacturers we work with tended to be geared toward larger construction, commercial and industrial activity. But during the past year we've done really quite well at building a much stronger base and even though we're fairly reasonable size in the residential market because of the number of locations we have, we are growing in that segment faster than ever before, again because of the focus we've applied to it and the effectiveness of that, those kinds of marketing programs.

The 1 to 2% we really laid down - - 2% what laid down as a continuous long-term year after year type of number that we want to be at least at that level performing much better than that, and as we talked about the second quarter. We see that type of stronger than that strength continuing.

Yes, just the growth numbers to me just appear very impressive. It's hard to base it off some of these formulaic assumptions, but with our guys looking at 4% [GDP growth] that kind of would equate to your goal of growing close to two, maybe an 8% range. The fact that you came in at 15 is just, seems to be pretty indicative of the fact that you're taking share. It's hard to adequately define the market and get a gauge for what the market is doing. That's helpful.

There was an earlier question, Kurt, about whether we were getting national account gains or how that business was evolving. We've been very successful year after year of adding significant new blue chip companies to our customer base and we continue to be successful at doing that, so we know for sure that we are gaining share because somebody else was serving those customers in the past. We're serving them today and we're being selected on a regular basis. We know we are gaining share. The thing that you were asking and, I think others have asked, is can you quantify that in terms of share points and unfortunately just because the data sources aren't readily available, we can't do that. If you look at the growth rate, we clearly are outperforming.

Great. And one last question just on the billing margin. Steve mentioned that some of the inventory profits with regard to price escalation throughout '04, there were some spread benefits there, can you talk about have you quantified what that benefit was to your billing margin last year?

We looked at last year that would have been probably in the 30 to 40 basis point range.

And then, copper has gone back up. It seems like steel prices are going down. Does there come a point in time when that spread is neutralized? This quarter you said it was a neutral impact year on year so you’re kind of maintaining that benefit, if you will. Ultimately is there a timing issue with regard to the fact that your inventory costs kind of cycle back up to a more normalized rate relative to the price? Does that ever reverse out is kind of my question if that makes sense.

[Inaudible - talking over] The benefit we saw last year was not repeated in the spread on a gross margin this quarter. Take the 19 points of gross profits last quarter, first quarter of '04 compared to the 18.7. If you just adjust for the positive impact of our organization being able to effectively, quickly react to increases in prices we would have been this quarter would have been 19, 19.1 as well.

And we take our inventory; we get our inventory up to the new cost level rapidly in a growing environment, so and that gets normalized - - maybe 90-120 days would be the longest we would typically see before the general price increase would be fully reflected in our inventory. We work on an average cost basis in our inventory except for when we see specific and rapid increases and we'll take those particular products and bring them up to current replacement value immediately. Generally speaking what I would say is for our industry and specifically for WESCO, a modest general price environment of price increases is good for distribution company because we're able to get the prices through, takes a lot of work but we put a lot of effort and systems into that and by doing that we get more dollars to maintain or increase percentage and we get more dollars that we can deliver to earnings per share.

That's very helpful. Lastly on acquisitions. Can you give us a sense for the key implications for that in terms of what the areas where you find attractive in terms of maybe some of the things you're looking at. Is it more increasing the product offering, is it growing in certain geographic areas, are there sort of niche specialty distribution segments that you're looking at, that would be helpful. Thanks.

The sarcastic answer to that would be yes. All those things. Let me give you some general parameters. What we look at - - first of all, WESCO is in a good position today. We have a big infrastructure. A big foot print. We're built out geographically very well as compared to most of our competitors, and certainly, we locally limited single location and regional distributors, so as we grow and continue to grow, we do not need to put a lot of infrastructure costs in and that's one of the areas that allow us to continue this superior pull through characteristics that the Company's selling over the last couple of years. So, when we look at acquisitions in general terms, we want to be in market that's got similar or better growth characteristics than the electrical distribution market which has good growth characteristics and would continue to have that. We want to look at businesses that would be at or better than our operating margins so we can leverage that into our base portion of the business, and we typically would look at electrical branch base distribution companies as fill-ins or I call bolt-ons which would be a low risk accretive type of an acquisition. Given our strength in our national accounts and particularly with our integrated supply business which sells a very broad array of MRO products, it also opens up today for us a very solid strategy for going into distribution companies in what I call adjacent categories so look at other distributors like a power transmission device type of distributors.

We've also had good success and a lot of emphasis in a program we call CRS which is directed to our OEM business for providing direct materials instead of just MRO. So, we would also be able to look at companies that distribute products that really focus on the OEM industry, so we've got a tremendous amount of opportunity out of there and we have a very disciplined program. We made a lot of acquisitions. We know how to analyze them; we think we know how to negotiate them properly and pay a fair amount and more importantly then integrate them into our operations such that the sales, marketing and logistics front end is maximized and then we take away the burden of all the back office functions and finance [inaudible] We look at it as a good accretive addition to what programs we already have going on.

And there are no questions at this time. I'll turn the call over to presenters for closing remarks.

Thank you, Jean. Just in closing, I'd like to say that over the last couple of years, we've seen a lot of benefits in our basic strategy of sticking to our knitting and staying focused on working to develop additional business with existing customers and customers similar to those we already have. We recognize that there's tremendous power in the large base of business that we already have and that small or relatively small incremental gains across that very large base can be very powerful to the overall dynamics of our business. Accordingly we've spent a lot of time and energy on sales productivity, sales management and marketing kinds of activities, and as we've been doing that, it's opened our eyes to even more opportunities for expansion and other industry subsegments or niches where we may already have a nice position in one branch or in a region or multiple branches across the Company, but it hasn't been pulled together into a highly organized overall campaign.

So with that we are seeing even more opportunities today than we would have in the past despite the fact we are growing the way we are. We are very bullish as far as the near term outlook goes, and we look forward to having another good report for you at the end of the second quarter. Thanks again for tuning in today , and we look forward to seeing you some time soon. Have a good day.

Ladies and gentlemen, thank you for joining us on the call.