Wesco International Inc (WCC) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the WESCO International third-quarter 2005 earnings conference call. My name is Stephen and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Daniel Brailer, Treasurer and Director of Investor Relations. Please proceed, sir.

Thank you, Stephen. Good morning, ladies and gentlemen, and thank you for joining us for WESCO International's conference call to review the third-quarter 2005 financial results. My name is Dan Brailer, and I am the Treasurer and Director of Investor Relations at WESCO International. This morning, participating in the earnings conference call are Mr. Roy Haley, WESCO's Chairman and Chief Executive Officer; Mr. John Engel, Senior Vice President and Chief Operating Officer; and Mr. Steve Van Oss, WESCO's Senior Vice President and Chief Financial and Administrative Officer.

Means to access this conference call via web-cast 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.

This conference call may include forward-looking statements, and therefore our 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 31, 2004, as well as other reports filed with the SEC.

The following presentation may also 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 joining our call. Later on in today's call, you will be hearing from John Engel. John joined WESCO a little more than a year ago, and he has done a great job in helping to raise internal standards and expectations and reinforce performance accountability at all levels in the organization.

Well, we've had a lot going on during the past several months, including an outstanding response by WESCO's Extra Effort employees in providing emergency services for customers and communities affected by two major hurricanes. It has been really inspiring to me to see how our employees have pulled together and distinguished themselves.

As indicated in this morning's news release, WESCO had an outstanding financial and operating result for the quarter. We've once again set new Company records for sales, earnings and productivity. Steve Van Oss will now take you through some of the details.

Thanks, Roy. I'll start the discussion with an overview in order to put the quarter's results into perspective, as well as provide some insight for our fourth quarter. We had a very busy and productive quarter with outstanding financial results, and we continue to set records in our key metrics for financial and operational performance. The management and employees of WESCO completed two acquisitions which have annualized sales of approximately 360 million, closed on 300 million of lower-cost fixed-rate financings, addressed the challenges of two hurricanes, set record productivity levels and resolved a long-standing litigation matter.

Our results for the first three quarters have been excellent, improving off the progress made last year. Good end market activity, combined with our investments in sales productivity and marketing initiatives delivered our highest-ever sales and sales per employee per workday results, with sales increasing by 16% to $1.131 billion.

During the quarter, we took a onetime $9 million pretax or $6.1 million after-tax charge or $0.12 per share to settle a long-standing litigation matter. Adjusting for this onetime charge, we also set Company-best records for operating margin dollars in percent, net income dollars in percent and earnings per share. For discussion purposes, during the remainder of today's session, I will be referring to adjusted results with the only adjustment being the exclusion of the $9 million charge.

Operating profit pull-through, which we define as the ability to convert incremental gross margin dollars to operating profit and net income, is an important metric for the Company and is a key internal measure of our operating efficiency. For the last six quarters, we had pull-through of incremental gross margin dollars to incremental operating profit of 60%. Adjusted operating profit pull-through for the third quarter was strong again at 60%.

Last quarter, we discussed the economic recovery. From our perspective, the economy is stable with solid activity across our end markets. We're seeing good activity levels in our commercial construction markets and continue to believe that an increased level of capital expenditures will be forthcoming in the industrial and commercial markets.

The reconstruction efforts in the Gulf Coast further strengthens our expectation for increased capital and infrastructure expenditures in the near and longer term.

Let's now look at a summary of the third-quarter 2005 results. Growth in sales coupled with our productivity, margin and costs initiatives produced outstanding operating results. Our sales increased $157 million and the Company produced an additional $26 million of gross profit with a pull-through of more than $15 million or 60% incremental operating profit. Net income improved by $12 million or 63%. Earnings per share increased by $0.20 to $0.63, a 47% improvement over last year's earnings of $0.43, and included an increased number of shares in the quarter.

While working capital dollar investment increased to support higher sales level, working capital productivity improved over both the second quarter and year-end and set a new record for the Company. Working capital efficiency contributed to our strong free cash flow of $48 million 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 15% over last year's third quarter and set a new benchmark for our Company, beating previous records which were set in each of the last five quarters. We expect the capacity expansion characteristic of our lean programs to continue and drive increases in our organizational productivity and profitability.

Before we review the detailed results for the quarter, I would like to take a few moments to discuss four topics in a little more detail. First, on the acquisition front, we completed two acquisitions during the quarter. Fastec Industrial Corp., a national distributor of fasteners, cabinet hardware, locking and latching devices, was an asset purchase and was acquired on July 29. Carlton-Bates Company, a regional distributor of electrical and electronic components, was acquired as a stock purchase on September 29. We are well underway with integration initiatives and are reaffirming our previous guidance of earnings accretion of $0.10 and $0.45 per share in 2000 and 2006, respectively.

Second, I would like to comment on WESCO's response to the two hurricanes and its impact on our third-quarter results. The financial impact to our business for the third quarter is not material. Overall sales were up 7 to $10 million over last year's third quarter, but we also incurred extra costs and certain inefficiencies associated with recovery support, cleanup and incremental logistics costs.

WESCO had five branches directly impacted by Katrina and three branches by Rita. Most locations were back in business within days, with one location in metropolitan New Orleans back in business in early October. No significant property damage was incurred. We expect to see increased activity in the region for the next few years in industrial commercial construction and in the utility markets.

Third, during the quarter, we resolved a long-standing litigation matter. Under the terms of the settlement, both parties agreed to release all claims against each other in exchange for cash and other consideration. The settlement plus related litigation expense resulted in a $9 million pretax or $6.1 million after-tax or $0.12 per share charge against the third-quarter 2005 results. There are no further expenses anticipated with this matter.

Finally, I will make a few comments related to our financing activities during the quarter. During the quarter, the Company successfully completed $300 million in new long-term attractive fixed-rate financing, comprised of 150 million of 2 5/8% convertible senior debentures and $150 million of 7.5% senior subordinated debt securities. The proceeds will be used for general corporate purposes, acquisition funding and the upcoming redemption of our remaining $200 million of 9 1/8% senior subordinated debt securities. The redemption date of the debt will be October 29, 2005. By the end of October, we will also have unwound the existing $100 million of fixed to floating rate swaps associate with the bond.

Liquidity, defined as available debt plus invested cash, was strong and totaled $286 million at the end of the quarter. Liquidity after the redemption of the bonds and the unwinding of the swap is projected to be 130 to $140 million, and liquidity at year-end is expect to be in the range of 170 to $180 million.

Third-quarter results -- sales were 1.131 billion and were up 157 million or 16% from the third quarter of last year and represented our highest quarter ever and produced a record level of sales per employee -- per workday per employee for the Company. Sales were up 6.5% over the second quarter of 2005. Typical seasonality would normally result in comparable sales levels in the second and third quarters for WESCO.

Activity levels in the major industrial groups that are heavy users of electrical equipment and MRO products strengthened further during the third quarter, and current sales activity has exceeded the highest levels previously experienced by the Company. Sales gains were achieved with markets outside of the U.S. being up 25%, helped somewhat by the strength of the Canadian dollar.

Sales utility customers remained strong and were up over 18%. Improvements in day-to-day MRO and OEM activity and increased sales activity in small and medium-sized construction products resulted in our sales to customers in these large market segments being up in the aggregate approximately 9%.

The recreational vehicle and modular construction markets showed sales improvements of 7% over last year, which was very strong, being 21% over the prior-year period. On the strength of new programs and improving MRO activity, sales to customers through our national accounts and integrated supply programs were up over 18%.

While the industry does not publish market share data, successes in developing customers for our integrated supply, national account and alliance programs, as well as reporting by other companies and routine feedback from our supplier base, gives us confidence that we're systematically increasing our market share.

On an overall basis, pricing had an estimated $30 million or 3% impact on sales for the quarter. Categories with the most significant price increases were building wire and cable and general supplies.

Our third-quarter gross margins at 18.4% were 10 basis points above the second quarter of this year and compares to 18.7% for the third quarter of 2004. The decline relative to 2004's third quarter has been anticipated, due in part to the favorable impact of commodity price increases experienced in 2004 and to a shift in mix towards our project business.

The magnitude of general price increases experienced across much of our product and supplier base in the first half has diminished somewhat, but we continue to see a significant number of cost increases. While keeping up with supplier price increases has been challenging, we're committed to adjust and implement new pricing throughout our customer base and expect to see margins improve going forward.

SG&A expense as a percent of sales, excluding the litigation matter, was 13.1%, a 100-basis-point improvement over last year's third-quarter expense ratio of 14.1%, reflecting efficiency gains resulting from our lean initiatives and the positive leverage of the increase in sales.

Our management and employees have done an outstanding job in improving the efficiency and effectiveness of our organization. Employment levels for our core operations declined during the quarter. Compared to last September, our sales increased 16%, while our total employee base rose just 1.5%, even with the addition of 133 employees from the Fastec acquisition.

SG&A expense for the quarter at 148 million is up 11 million or 8% over the third quarter of 2004 on a sales increase of 16%, due to the variable nature of certain components of our compensation programs and the adoption in 2003 of FAS 123 on our previously granted stock options. SG&A costs declined 30 basis points as a percent of sales, compared to the second quarter of 2005.

Third-quarter operating income, adjusted for the litigation matter, was a record $56.3 million or 5% of sales, versus 40.9 million or 4.2% of sales last year. Operating income increased 38% over the third quarter of 2004. Interest expense and other costs totaled 10.2 million for the third quarter of 2005, compared to 12.7 million in the third quarter of 2004 and 9.9 million in the second quarter of 2005. As expected, the retirement in early 2005 of a portion of our higher-cost bonds offset increases in interest rates that have occurred over the last year.

In the third quarter, our effective tax rate was 32.5%, reflecting the Company's ability to implement tax planning initiatives. We expect the effective tax rate for 2005 to be approximately 31 to 32%, due to benefits from our foreign tax planning initiatives implemented in the third quarter of 2004 and the positive impact of tax benefits associated with the Carlton-Bates acquisition.

Third-quarter adjusted net income of 31.1 million increased by 12.1 million or 63% over the third quarter of 2004. Adjusted earnings per share for the quarter were $0.63 or an improvement of 47% over last year.

We'll now turn to the balance sheet. For discussions on debt, working capital and cash flow, our accounts receivable securitization program will be described as if it were on book. Free cash flow for the third quarter was strong at $48 million, reflecting outstanding working capital performance and increased net income. Working capital dollars have increased $41 million in the core business from year-end, due to higher levels of sales and resultant accounts receivables and inventories somewhat offset by increased accounts payables.

Total debt, net of cash, increased $228 million from year-end. Leverage on total debt, net of cash, was 4.3 times at the end of the quarter and improved by 0.2 turns from the third quarter of 2004, even after the funding of two acquisitions. Liquidity is good and 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 September 30 were senior sub notes and other of $350 million; finance receivables of $310 million; senior convertible debentures of $150 million; acquisition notes payable of $23 million; real estate financing of $49 million; and cash on hand of $61 million. Capital expenditures from the third quarter were approximately $3.1 million, compared to 1.7 million in 2004.

In summary, we had an excellent quarter, continuing the strong momentum from 2004 and the first half of this year. Higher sales drove additional gross profit dollars and significantly improved SG&A expense rates and resulted in a 38% increase in operating profits and a 63% increase in net income. Leverage and interest coverage ratios are good and liquidity remains strong.

With our lean enterprise initiatives providing additional impetus in all areas of the Company, we're well-positioned to make further earnings gains. Our solid liquidity position and strong balance sheet will allow us to fund future organic growth, as well as capitalize on other improvement opportunities.

Before we go to our outlook for the fourth quarter, John Engel, our Chief Operating Officer, will spend some time discussing our progress on integrating the two acquisitions consummated this quarter.

Thank you, Steve. I will start out by providing an update on Fastec. The acquisition of Fastec Industrial Corp. was successfully closed on July 29, 2005. Fastec is a distributor, importer and manufacturer of industrial fasteners, cabinet hardware and locking and latching products and is a leading supplier of the manufactured housing and recreational vehicle industries.

The acquisition of Fastec strengthens and expands our leadership position in the manufactured housing market and adds a significant sourcing capability in China and Taiwan. This Asian sourcing capability will be leveraged in the near term in our manufactured structures operations and later in support of other market segments served by WESCO.

Our efforts throughout the third quarter have been focused on successfully integrating Fastec into WESCO. Overall, our integration plan is on track. Fastec has a track record of growing sales and profitability, and that performance continued in August and September, with strong double-digit sales growth and expanded operating margins.

As we move through the fourth quarter, we expect to see benefits from FEMA and hurricane-related purchases of manufactured housing for emergency shelters -- positively impact both our manufactured structures operations and Fastec.

Looking ahead to next year, we expect to see continued sales growth and margin improvement as our Asian sourcing efforts kick in. These benefits will result from shifting to an Asian supply base for selected existing manufactured structures products, as well as utilizing these new supplier relationships to support new product introductions. Over 100 product opportunities have been identified to date and are being evaluated.

Now, moving onto Carlton-Bates. The acquisition of Carlton-Bates was also successfully completed in the third quarter, closing on September 29, 2005. Carlton-Bates is a premier regional distributor of electrical and electronic components with a special emphasis on automation and electromechanical applications and the OEM, or original equipment manufacturer, market.

Carlton-Bates strengthens WESCO's OEM business, adding new product categories, new supplier relationships, kitting and light assembly services, and access to new end markets. Our efforts since the closing and throughout the fourth quarter focused on successfully integrating Carlton-Bates and WESCO. Over 30 separate integration teams have been launched and are developing and implementing plans to deliver sales and margin growth and productivity improvement through capturing key operational and functional synergies.

Specifically, these cross-functional teams are targeting opportunities in the sales, operations and administrative functions. These opportunities include, number one, leveraging the expanded portfolio and increasing account penetration with our existing customers by selling the additional products and services into the WESCO national accounts base, the Carlton-Bates OEM customers and other key markets and geographies. And number two, capturing synergies in key operational and functional areas such as transportation, distribution and information systems.

Overall, our integration efforts are off to a terrific start through excellent teamwork and disciplined execution of a comprehensive plan that will result in sales growth, margin expansion and productivity improvement. As we learn more about Carlton-Bates, we see more opportunities for the combined companies to better penetrate our markets and deliver superior results.

In summary, these two acquisitions help improve our overall ability to serve customers, expand our supply base and strengthen our position in multiple market segments, while providing exciting opportunities for all our employees.

I will now hand it off to Steve, who will provide an outlook for the fourth quarter.

Thanks, John. Given the number of moving parts in the third quarter and given the fourth quarter will represent the first full quarter impacted by both acquisitions, the Company will provide additional information that may be useful in your modeling and analyses.

For the fourth quarter of 2005, acquisition sales for the quarter are projected to be in the range of 90 to $95 million. Sales in our core businesses are expected to be slightly below this quarter due to two factors. Historic seasonality in our served end markets generally results in sales levels of 3 to 5% below the third quarter. Additionally, our business and sales activity is driven by actual workdays in a given month or quarter. The fourth quarter of 2005 contains one less workday than this quarter and the fourth quarter of 2004.

Given a continuation of positive macroeconomic trends and end market activity similar to what was experienced last quarter, along with market share gains, we expect to be able to generate growth on our core business of approximately 10% over the fourth quarter of 2004 on a per-workday basis. This equals roughly 8 to 9% over the fourth quarter of 2004 on an absolute basis.

Based on current momentum, continuing operational improvement projects and generally higher margins generated by the acquisitions, gross margins are expected to improve over last quarter. We expect to continue to pull through 50% or more of incremental gross profit to operating profit. We will incur a onetime pretax charge associated with the retirement in October of $200 million of senior subordinated debt and our swaps of $3.9 million or $0.05 per share. Interest costs for the quarter excluding this charge are projected to be in the range of $13 to 13.5 million.

Working capital productivity is anticipated to be maintained on a day 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 be 50 million shares.

Again, we had a strong quarter. We have good momentum entering into the fourth quarter of 2005. 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. We are excited about the addition of Fastec and Carlton-Bates to WESCO, and we look forward to growing these businesses and increasing our sales penetration in the combined served markets.

At this point, I will open up the lines for questions.

(Operator Instructions). Deane Dray, Goldman Sachs.

I'm not sure who wants to handle this first question, but it's regarding Carlton-Bates. Can you give us a sense of what your assumptions are on the integration and what the synergy assumptions are, both cost and revenue synergies?

Sure, Dean. This is Steve Van Oss. Carlton-Bates, as we've talked about a little bit before, from an operational standpoint, we see a significant number of synergies and some common customers, as well as the ability to take our products into the OEM marketplace and you take some of our national accounts customers into their business. So we see a fair amount of topline synergies in that.

When we look at the number of locations that they have, it's some 30-odd branches, we have a fair amount of overlap and some opportunity for some facility savings. The big areas that we see in the area of synergies really relate to the administrative functions at Carlton-Bates, being a very large privately held company with a full complement of headquarters functions, and there's areas for improvement there that have been identified and are being worked on, as well as converting onto one information technology platform.

Having said all that, we feel very good about the previous guidance we have given as far as earnings accretion for the Carlton-Bates and WESCO combination.

So Steve, just when you talk about the accretion assumptions that you've included, the $0.37 to $0.40, is that inclusive of these costs of revenue synergies, or is there upside to those?

What we're talking about at this point in time includes all those synergies. As John mentioned, the more we get into our integration plans, the more positive we are about it. But at this point, those would be our best estimates at this time.

Good. And could you just give us a sense of where the margins are in Carlton-Bates relative to WESCO?

When we look at -- and this would be for both Carlton-Bates and Fastec -- when we look at the operating margins that they have, they are roughly almost twice what the core business of WESCO would be from an operating margins standpoint.

And are there best practices you'll learn from them?

Couple of things we are looking at. The strength that we've seen at Carlton-Bates is a very good, premier organization, strong customer relationships, disciplined pricing areas, and so we look to try to do best practices across Carlton-Bates, as well as the rest of WESCO.

WESCO has 350 branches prior to this and it's given us an opportunity to do internal benchmarking in that area as well. On the other side is the lean initiatives inside of WESCO are very strong. We look to take those and put that across Carlton-Bates as well.

This is John. With our 30 integration teams, what we're seeing is -- and they're focused on sales, the front end of the business operations and the administrative functions. Their approach really is to take a look at the best practices that exist inside both companies and to take those and extend them across. So we're very encouraged by the initial results of the integration team efforts.

Great. And if I could just ask a question on the margin improvement that you showed on the core business this quarter is very impressive. Could you size for us the components of the margin improvement -- let's say how much might have been price and what piece of it is productivity and what specifically is changing that you would show that sort of margin improvement on the productivity side?

Are you talking about the operating margin?

Yes.

The primary driver of that would have been the leverage we've gotten and the productivity we continue to get on the employee base and the activity levels. As I've mentioned, on our core business, our headcount was actually slightly down when we look at it on a quarter-over-quarter and then from a sequential basis. So we're really getting continued good results from our lean initiatives.

We've done a -- I think the organization has done an outstanding job in keeping up with and trying to get ahead of what has been a tremendous amount of general price increases throughout our supply base, and we felt -- I think we've done a good job and have in fact pushed those prices through, and we're looking for future opportunities going forward to actually get some expansion on the core.

Dan Whang, Lehman Brothers.

My first question was regarding your current backlog. Could you talk about the trends there -- what sort of increase you saw sequentially or year over year?

Yes. Similar to what we're seeing in terms of topline sales, double-digit growth, we're seeing very nice increase in our backlog. It's balanced, it's broad-based and it's in the double-digit range. So we're -- I would characterize it by saying our sales momentum and maintaining the double-digit sales performance, we're seeing that being fueled by the growth in the backlog as well in support of those double-digit sales.

Right. And in terms of the particular mix of the backlog, is there a noticeable trend -- sort of a bias towards these larger projects, and were you able to book any incremental large projects coming off some of the hurricane activity?

I would tell you that the mix of the third quarter was similar to the second quarter. It's balanced. It's pretty broad-based. We're not really seeing the contribution yet from very large projects being booked. So as we move through the fourth quarter, we've got good momentum, and as those kick in as we anticipate next year, we would expect that that would continue to fuel the backlog and then consequently sales.

And you made a comment regarding the hurricanes activity. Basically, what we would tell you and what we're seeing is that that region for the most part is in the assessment phase of determining what's going to be done and when and how. So we won't -- it will be developing over the next quarter or two before we see the real impact on that.

We do expect that we'll start to see some of the effect, as I mentioned, due to the FEMA purchases and other related purchases in the fourth quarter entering into the first quarter. We'll see that in particular in our manufactured structures business and Fastec, and then also in our other businesses that serve the Gulf Coast region.

Right. And you mentioned that perhaps going into next year that you would anticipate some of these larger projects coming into the backlog. Are you seeing anything in terms of leading indicators that would suggest that to happen?

Not yet.

Great. And the second question, regarding the pickup in higher energy prices, and could you talk about the impact that you're seeing on freight as well as fuel charges, and how you are able to -- how much of that you are able to offset and what your outlook is?

Yes. The fuel costs, obviously, have spiked up. We're seeing fuel surcharges from the carriers on that and we've got a number of initiatives in the Company being driven by our lean teams, as well as the operation of pushing those price increases on transportation through to our customers. So it's a pretty -- it's a challenge, just like general price increases that we see across our product base, but the Company's making good progress on that.

Okay, and also, you had commented that in the next few quarters going forward that you would likely direct free cash towards debt payments. So in terms of how that relates to acquisitions and your view on that, obviously you made -- closed on Fastec and Carlton-Bates this year. What sort of an acquisition pace can we expect going forward? I mean, roughly is it -- obviously it depends on the opportunities, but could we expect one a year? Or any clarification on that would be great.

Dan, I guess I would give you our strategy is on acquisitions and our bias -- go back a little bit, even in the 2001 through 2003, 2004 time period, when things were -- economy was much more challenging. We continued to look at what I'd call a deal flow and keep our toe in the markets, so to speak, and looking at the acquisitions. And we did complete a couple this last quarter.

Our capacity is such that we could entertain, if it was the right thing to do -- but we do not plan on, we do not drive, we don't have a set number of acquisitions that we need to do or want to do. Our focus changed a couple of years ago and continues to be primarily focused on continuing to develop, support, sustain and increase the organic growth capabilities of the corporation, which we're seeing very strong for the last six or seven quarters. That continues to be our bias.

We will look at companies like a Fastec, like a Carlton-Bates, as appropriate when they come on the market or we see the ability to jump in and grow a particular segment. But we do not have a plan at this point in time that says we're going to do one a year or two a year or one every two years. And at this point, our focus, again, is on organic growth and in integrating the two acquisitions that we just did.

To reinforce that again, our fundamental priority is improving the base, and we see many, many opportunities to continue to improve the base. And we will be opportunistic with acquisitions. But quite frankly, we feel very good about the organic growth characteristics of the current business and all the opportunities. And as we continue to mature our lean initiatives across the Company, both WESCO and the new acquisitions, we're going to continue to see that show up in sales growth and margin improvement and productivity.

Lionel Jolivot, Goldman Sachs.

I probably just missed this number, but what was the contribution of working capital to the $48 million of free cash flow this quarter?

The working capital on an absolute dollars actually increased slightly. The drivers of the cash flow were net income and non-cash charges on some other accruals, for the most part. It was really driven by good, strong operating income. But the fact that our working capital productivity increased allowed to have good, strong cash flow in light of a 16% sales growth.

Okay. And then I think in the past, you've given a guidance of roughly $70 million of free cash flow for '05. Where do you stand today on the full-year guidance in terms of free cash flow and working capital?

Well, we had talked last time of around 70 million for the year, which was all biased towards the second half of the year, as we were essentially flat through the first two quarters. On a year-to-date basis right now, we are at $55 million. Giving anticipated seasonality, we would expect to surpass the $70 million that we talked about earlier.

Okay. And then looking at the different markets, I was just trying to see if you were seeing any differences in growth. Do you still see any particular weakness in your markets at this point, or is it just broad-based recovery?

Again, what we see is just good, broad-based recovery and strength across the various segments. Steve mentioned in his comments the strong growth in utility and our integrated supply businesses, and also our national accounts being strong double digits. So we feel good about, again, the end markets that we serve. We do serve a diverse set of end markets.

One market that is feeling some contraction is automotive. And we obviously are focused on providing value to customers in the automotive market as they sort through that. But overall, if you look at the performance, it's just, again, very broad-based across the various operating groups inside WESCO.

Rob Damron, 21st Century Research.

I wanted to ask a question about the sourcing overseas. I know Fastec has a nice capability there. What has WESCO's capability been in the past, and what additional product categories do you see ultimately moving overseas and then ultimately generating hopefully better margins?

Okay. Our focus initially is the manufactured structures markets and industries, principally modular and the RV industries. That's where Fastec plays. The major percent of their sales are focused in those industries. It's very nice synergy with our manufactured structures operation.

So we're going to walk before we run. We're going to focus on those industries first. We have a team in Asia as we speak. It's a joint Fastec-WESCO team. They're over in Asia making a tour through China and Taiwan. We've identified over 100 suppliers that we're going to get exposure to, and Fastec has some 20-odd years' experience in both China and Taiwan.

So we feel good about the opportunities, leveraging off the relationships that Fastec has built and the capabilities that exists that they've been leveraging for the last 20 years. The market synergy we're going to take advantage of. And specifically the strategy is to use the Asian suppliers to enable new products into the manufactured structures markets and also to look at current products that could potentially be shipped to Asia, where it makes sense and where we can improve competitiveness and value.

So that's the initial strategy. I think your question also spoke to what do we do beyond that. I think in the near term, again, our focus will be the structures operation. And as we work at that, we'll obviously learn and see more opportunities and then figure out where additional opportunities can be captured across WESCO.

And just one other additional question. The operating profit pull-through has been quite dramatic over the last many quarters. And you mentioned that it would be above 50% again in Q4. That's the goal. How much additional capacity does the Company have in order to continue this pull-through going into next fiscal year and beyond?

Well, Rob, our target has been 50% for several years. We've been at that rate not just for the last -- well, really, we've been that since all of 2003, all of 2004 and now the first three quarters into '05. Certainly a piece and a portion of that has been driven by our lean initiatives. And as you know, we've only been about two, two and a half years into that. This is a process that will be continuous inside the corporation. So we expect to be able to continue to do that.

And another big advantage that WESCO has in being able to maintain this level is for the most part, our footprint is firmly established. We have all the locations where we need to be at, and we believe we have good capacity in those for an indefinite period of time. And we don't see any large areas of expenditures that would put a drag on our ability to be able to maintain this type of pull-through.

Our information technology systems are sound. They are in place. We don't spend a lot of money on that, just a normal amount of CapEx year in and year out. So we think that we've got good opportunities there. And then the other component that would drive that would be the margin initiatives that we have, which are directed at improving our gross margin percentage. And as we get that up there, that too will help significantly maintain this 50% target.

Every one of our operating groups have a very firm target of where to be on pull-through. We are in the middle of our planning process. It's being reemphasized with that, and we feel very confident that we should be able to continue to do that.

Again, the real driver is lean, and in some ways, we've seen some terrific results and we've accomplished a lot and we've got a very good momentum. But in other ways, we think we've just begun. And you know, we look at it as we're early in this lean journey, being in the third year, and I think lean is the big driver to the pull-through.

Steven Fisher, UBS.

It seems like a lot of your margin improvement, as you say, is headcount reduction driving productivity. Can you just talk about what areas of the business and what types of functions you are actually taking headcount out of?

Steve, it's -- as Jon talked about our customer and our backlog growth being broad-based, it's the exact same scenario for lean. Lean initiatives we've talked through and go through whether we are in the warehouse, we're in our sales front end of our business. We're doing it across the administrative functions. And so it's pretty much broad-based. It's not -- the headcount is not focused on any one particular group or function. It's pretty much broad-based across the Company.

So when you talk about having more runway and being in the still-early stages of lean, would we expect that it would continue to drive more headcount reduction?

I wouldn't say a reduction per se. What I would say is continued capacity. If you look at this over a 12-month period or so, our headcount is up just ever so slightly on 16, 17% growth. So the productivity issue we're really driving at is kind of a sales per employee per workday which drives this, and we believe that we can continue to grow above where we are today.

You may recall on past conferences, Roy Haley has talked about a much more aggressive target in his mind. And we've seen this and we can benchmark within our own internal facilities that we have clusters of branches -- large clusters of branches that are a step function or two above other areas. And so we do internal benchmarking on that as well. So we're continuing to work at it. We continue to think there's capacity generation that could be had with the lean initiatives.

And another way we look at it -- I think we've used this term before -- the power of the distribution. And so we really look at lean and apply it across all the aspects of the business. We feel good about in the aggregate the progress we've made. But when we take a look at virtually any key operating metric across our branch structure and across our function, what we see is a very wide distribution or wide variation from let's call it the minimum performance to the maximum performance.

And so applying this lean approach is all focused on let's tighten up that distribution, focused on the left-hand tail (ph) and shift the mean up and the to the right. And again, this is all down in year three of the lean journey. We see more opportunities today, I think, than we've seen at any point in time.

So you are showing some good progress in your margin improvement initiatives. I think year to date, you're at about 4.5%, up from 4% last year. As you say, next quarter, you'll have Carlton-Bates and Fastec, which I think you said were about double the operating margin level. So with that in mind, does your 6% margin target in 2007 -- does that go higher as well, or had you anticipated some acquisition growth in that original target?

Steve, we remain committed to the target we put together with that. We would anticipate some benefits out of the acquisition. But you might want to give us a quarter or two to get these things integrated and get a little bit of ground under our feet with them. But directionally, we would be to continue to improve those targets.

And then just lastly, I think you said the -- you gave some detail on some of the different segments and their growth. I think you said the small to mid-sized projects were up 9%. Did you say what the actual stock business was up year over year?

We didn't really talk about the exact -- the project. But the stock business continues to be up in double digits.

David Manthey, Robert W. Baird.

Steve, first question in terms of the tax rate for the fourth quarter, I think you're 32% year to date. Is that what we should expect for the fourth?

It will be slightly lower than that in the fourth quarter, but not dramatically. But it should be slightly lower than what we saw in the third quarter.

Okay. And then could you give a percentage or could you give us an idea of magnitude of the auto industry relative to the overall business? And then the final question is related to this -- one of your competitors had an announcement earlier this week or late last week regarding the integrated supply business, saying that it's been harder to close deals and to get people involved. And I'm just wondering if you've seen any change in your close rates on the integrated supply business or any relevance in that release to what you're doing? Thanks.

The first question was on the automotive industry, and it rounds up to maybe 2% of our business. So it's not a material impact on that, although as John said, we've got a lot of value to add there and we work it very hard.

Our integrated supply business is performing very well. We're continuing to roll out new programs. I'd tell you the close rates on integrated supply is always a challenge in that these are very large, very intensive relationships. Any break in the pattern of the customer and how they buy -- so it's a significant move forward that's not easy to move back to or back away from if you don't like it. But we're very, very bullish on our integrated supply business, and the growth rates over the last two years have been very strong, and that's what we would expect to see going forward as well.

Okay. On the 2%, is that -- are you speaking specifically about the big auto manufacturers? Does that also include your best guess for component companies and other things that would be related?

That includes the Tier 2 and Tier 3 suppliers that would supply to the automotive companies.

(Operator Instructions). Barry Hanes (ph), Sage Asset Management.

This is actually Fritz Von Carp for Barry. You mentioned that the utility market was up 18%. I was wondering if you'd just give some more color on that. For example, is it do you think a hurricane effect or is it more broad throughout the country? What segments of the market are showing the strength -- is it an energy bill follow-on or something else? Just whatever you know about that. I appreciate the color. Thank you.

There was some impact from the hurricane. It wasn't material. We've seen good growth in our utility-based customer base and our penetration over the last two years. We didn't see anything dramatically different this quarter.

Segments of the market? High-voltage, low-voltage, medium-voltage transmission versus distribution?

We don't really break our numbers down that way. We are primarily in the transmission and distribution business.

And in general, do you do high-voltage and low-voltage and medium-voltage or just low and medium, or how do I think about that?

We would do across the board.

(Operator Instructions).

Okay, if there are no further questions, I'd like to just once again thank you for participating. These are some exciting times in our organization. As indicated, our management and personnel throughout the Company are highly energized. They are very enthusiastic. We've got lots of things going on. And the thing that causes us to be so enthusiastic is, as John said, we see more opportunities in our base business and we see the great opportunities with combining the base with the recent acquisitions. So it's an exciting time and we're looking forward to finishing the year strong. Thanks again for your interest and we'll talk with you soon. Bye.

Ladies and gentlemen, this concludes the conference. You may now disconnect. Have a good day.