Wesco International Inc (WCC) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2006 Wesco International earnings conference call. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards 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 presentation over to your host for today's call, Mr. Dan Brailer, Treasurer and Director of Investor Relations. Please proceed, Sir.

Thank you. Good morning, ladies and gentlemen. Thank you for joining us for Wesco International's conference call to review the first quarter 2006 financial results.

This morning, participating in the earnings conference call are Mr. Roy Haley, Wesco Chairman and Chief Executive Officer; Mr. John Engel, Senior Vice President and Chief Operating Officer; and Mr. Steve Van Oss, Wesco Senior Vice President and Chief Financial and Administrative Officer.

The means to access this conference call via webcast was disclosed in the press release abd 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 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, 2005, including the risk factors described therein as well as other reports filed with the SEC.

The following presentation may also include a discussion of certain non GAAP financial measures. Information required by Regulation G with respect to such non GAAP financial measures can be obtained via Wesco's website at www.Wesco.com.

I would now like to turn the conference call over to Steve Van Oss.

Thanks Dan.

As you have seen by our earnings release we had an outstanding results and another record-setting quarter. We are making great progress on our fundamental programs of driving double-digit organic sales growth and improving our operating margins, working capital productivity, balance sheet strength and financial liquidity. In my prepared remarks I will cover the highlights of the first quarter, as well as provide some insight on our views for the second quarter and the rest of 2006. We will then go to a question-and-answer session.

Our first quarter results again set Company records and includes the second full quarter of activity for the Carlton-Bates and Fastec acquisitions, both of which were completed in the third quarter of 2005. First quarter sales for the two acquired businesses were $107 million.

For the remainder of my comments, I will be concentrating on our consolidated financials which include the acquired Company results. I will also provide selected results of operations which exclude the recent acquisitions.

Consolidated sales increased by 28% over the first quarter of 2005, driven by 17% growth in our base business. Gross margins improved to 20% from 18.7% last year due to improvements on comparable branch sales and higher margins on acquired companies. Operating expenses as a percent of sales at 13.4% declined by 100 basis points from the first quarter of 2005. Operating margins at 6.1% expanded by 220 basis points over last year's first quarter, driven primarily by improvement in comparable branch operations.

In March of 2006, we took a pre-tax charge of $4 million related to a write-down of accounts receivables from a major customer which filed for bankruptcy during the first quarter. This charge was somewhat offset by $2.6 million of insurance recoveries received during the quarter that were related to prior litigation expenses. The first quarter of 2005 included a pre-tax charge of $10 million related to the early retirement of $124 million of high-cost senior subordinated notes.

Consolidated earnings per share were $0.86 versus $0.23 in the first quarter of 2005 and are the best ever reported by the Company. Our focus on productivity improvements in all aspects of our business continues to produce outstanding results. A key measure of our personnel and cost productivity is operating profit pull-through. We defined operating profit pull-through as the ability to convert incremental gross margin dollars to operating profit and net income.

For the previous 10 quarters, we have had pull-through of incremental gross margin dollars to incremental operating income of 62%. Comparable operating profit pull-through for the first quarter of 2006 was 71%. Our lean initiatives continue to favorably impact all aspects of our business and contributed to improved working capital productivity during the quarter. This resulted in strong free cash flow of $30 million, even after funding additional inventory and accounts receivable required to support the 28% sales growth.

Our balance sheet is strong and improving. Our debt leverage ratio for the trailing 12 months was at a record low of 2.9 turns and dropped by .4 turns from the first quarter of 2005 and .6 turns from year-end. We have ample liquidity to fund organic growth as well as accretive acquisitions.

The integration of the systems and operations of both Fastec and Carlton-Bates is progressing well. And we are on track to deliver synergies and operating performance in line with our expectations of 2006 earnings per share accretions of $0.45.

Looking forward from an overall perspective, the economy remains stable with solid activity across our end markets. We are seeing good activity levels in our commercial construction markets and strong activity in our industrial markets for day to day maintenance, repair and operating supply. We continue to believe that an increased level of capital expenditures will be forthcoming about the industrial and commercial markets driven by favorable trends in factory utilization, occupancy rates, and the reconstruction efforts in the Gulf Coast.

In the first quarter we saw what we believe is the beginning of an increased quote in bid activity in many of our end markets. We expect to see commodity and product cost pressures continue at a moderate pace when viewed from a full year perspective. However, commodity pricing primarily in copper was quite volatile in the first quarter. On an overall basis pricing comprised an estimated $60 to $75 million of our sales growth for the quarter.

Categories with the most significant price increases were building wire and cable and general supplies. Product cost increases can have a beneficial impact on our business assuming that other costs are held constant and price increases can be passed along to end market customers on a complete and timely basis. Both of these can be challenging assumptions to manage and are being aggressively addressed throughout the organization. We finished 2005 with a strong backlog of project activity and for 2006, we expect to see the Company continue to outpace the industry in overall sales growth and gain market share.

We will continue to work on operational improvement projects, to increase both gross margin and personnel productivity. Improvements in gross margin across all operations are expected to offset anticipated mixed shifts towards project business. We expect to continue to pull through at least 50% of incremental gross profit to operating profit on comparable operations. Working capital productivity should be maintained on a day's supply basis and free cash flow over the next several quarters will be directed at debt reduction.

And more specifically for the second quarter of 2006, given the continuation of positive trends and macroeconomic and end market activity combined with market share gains, we expect to continue to generate growth on our core business of approximately 10% over the second quarter of 2005. Sales from companies acquired in 2005 are expected to be in the range of $105 to $110 million.

Total sales for the second quarter expected to be up 1 to 2% sequentially, given the strong first quarter growth which included increased activity related to the hurricane reconstruction efforts and a very mild winter.

Operating margins should be consistent with the first quarter of 2006 and improve over the second quarter of 2005, reflecting both improvements in gross margin and positive leverage on our operating cost structure and our lean initiative.

The tax rate for 2006 is expected to be in the 32 to 33% range. Share count for the second quarter of 2006 is expected to be 52.5 million and average 53 million for the full year. The increase in share counts is the result of the higher share price in the convertible debt put in place in September of 2005.

On a final note I want to share with you our current profitability commitment. In 2004, we launched initiatives directed towards achieving 50 to 70 basis points of incremental improvement annually in our operating margins, with an overall goal to increase operating margins from 4% to 6% by year-end 2007. Successful for implementation of many of our improvement initiatives augmented by the two acquisitions consummated in the third quarter of 2005 have resulted in attaining the 6% operating margin target for the last two quarters. Consistent with our operating model and continuous improvement culture, we intend to maintain our objectives of achieving annual increases in operating margins in the range of 50 to 70 basis points. And we have established a new overall three-year target for operating margins in the range of 8%. This would be a 330 basis point improvement over our 2005 results of 4.7%.

Again, we had a terrific start for 2006 and are looking for another record-setting year. Momentum is strong and we look forward to another year of delivering excellent service to our customers, improving our operations, providing a rewarding and growth environment for our employees, and creating superior shareholder value.

At this point I will open the call up for a question-and-answer session. Colby.

(OPERATOR INSTRUCTIONS).

Lionel Jolivot with Barclay Capital.

Good morning. First, could you just quantify the sales of the additional sales that came from the reconstruction in the (indiscernible) ? How much did it impact your sales and your profitability in the quarter?

It wasn't nearly as much as we saw in the fourth quarter. It was in the range of just a little bit under 1% of sales for the quarter.

And then when we look at your [supply] it seems like you are doing extremely well in all of your market. It seems like it's only getting stronger. I just wanted to have your opinion on where you think we are in the cycle at this point. Is it [still actually] rating and how many years do you think we still have ahead of us before reaching the peak?

I would say that's a tough question and I wish I had the crystal wall that would give me some precision in that. We look at our business, we look at some macro trends and construction project activity and other levels. We tend to believe we are kind of in the midpoint of the cycle of recovery which generally for us starts with our day-to-day MRO business and our stock sales. We saw that improving from the downturn that ended in late 2003. And it's been quite strong for us through today.

We are seeing a pickup in the project activity, both commercial construction and industrial. On the industrial side this is a first, at least, from a quote bid activity level. The first what we believe we saw in the first quarter was the first meaningful impact of that picking up, really since the last four or five years. We think we are kind of in the middle of the recovery and it appears like it wants to run for quite some time.

Okay. And last thing, Home Depot acquired Hughes Supply during the quarter. Have you seen any change in your market? Are you seeing any impact from the viewpoint of your market at this point?

This is John Engel. We really not seeing any change yet and you know we don't expect that we will see major dramatic changes in the competitive landscape in the short term. It's a large very fragmented market. And we don't expect to see any sweeping changes in the short term.

Thank you very much.

Curt Woodworth with J.P. Morgan.

Good morning. Congratulations on a great quarter. Questions on the 2Q margin guidance. If I look back the past couple of years, and '05, sequentially, you are up 70 basis points and EBIT margin; in '04, you are up 150 basis points. I'm just wondering what the thinking is behind flat margins, in an environment where the project business seems to be accelerating which has high incrementals and your sales is going to be higher?

Well if you look at it, it's really in line with the first quarter, which was exceptionally strong. One of the first few times that we've had a start in the first quarter that would be actually in excess of sales in the fourth quarter. And traditionally we had seen in the neighborhood of 3 to 5% sequential growth second quarter over the first quarter. If we were to see that type of growth we would expect to see some additional expansion on the operating margin due to leverage.

But our view at this point in time is continued great success on our initiatives. We expect to continue to drive double-digit from the core growth. We had, we think, a very strong first quarter. The winter was pretty mild and we think we got some help there. If the end markets continue the way they are, we could see some expansion on that. We had outstanding results. Record operating margin production for the first quarter. We set that as our floor going forward and we feel pretty good about where we are.

Great. And on the gross margin being up 130 basis points, year on year -- that's obviously a phenomenal performance especially in the light of the fact that the project business seems to be accelerating, which is (indiscernible). Are you getting higher gross margins on the direct business than you thought? Or is really lean just more than offsetting some of that margin pressure you would see from the project business picking up?

I think we're getting some but I think fundamentally -- this is John again. Fundamentally, I think what we are seeing is the effects of lean. And it's broad-based. I mean, the good news is we've got broad-based and balanced contributions in terms of both sales growth and margin expansion across primary segments.

Last question on the SG&A as a percent of sales, at a little over 13% this quarter. You know, a big improvement year on year. Do you think that is a sustainable level for the Company? Do you feel like there's further room for improvement? You know you talked about the pressure curve. You still see that widening?

The pressure curve is pretty wide right now. We continue to believe that we will see and make improvements in that. As you know, we have a very balanced approach and target on the expansion of our operating margins. A blend of gross margin improvements across all aspects of the business as well as continuing to leverage the size of the Company through the lean initiatives. So we would expect to see, given in market strength, about where they are and after gaining market share continue to see some improvement in the SG&A.

Thank you very much.

David Manthey with Robert W. Baird.

Good morning. In the comments this time, I think it was Roy that was quoted as saying he's seen good momentum in end markets and they appear favorable through 2006. Going back to the last, the end of '05, I think the comment was more that most economists or the outlook was for moderating growth into the second half of '06.

I'm wondering if there is an intentional change in tone there? Obviously you are seeing strength in your end markets right now; but is there a reason you are coming off of that original commentary?

You know we are a quarter further into the year and we had a nice start. Our backlog continues to grow and the activity levels appear to be pretty good at this point in time from our vantage point. We think the end markets for the next couple of quarters are going to be pretty strong.

The economic data would continue to suggest that we are going to see some softening relative to current levels. You see that in the residential market. You see it in consumer durables. So there's still a level of activity that most economists see as some weakening of the economy in the second half. Our comments are really reflected on the markets that we serve and what appear to be the trends and the subset of the overall market.

At this stage, it looks like to us that we are going to continue to see good strength for the balance of the year. Some of that, again, is the long-awaited uptick and capital spending and commitments not only in the budgetary levels of capital spending, but in the actual constructions put in place. That's still ahead of us. So from our standpoint, specific markets, it looks favorable for the balance of the year.

Now obviously that could change but that is our take at the present.

Sounds good. Then the second group of questions has to do with commodities. As you look at rising copper prices here and you go to market, do you tend to put through price increases in discrete pieces meaning to put through a 3% price increase across the board on certain manufacturers' products? Or is it more ad hoc where you're pricing daily and it might fluctuate more frequently than sort of an across the board national price increase?

We have pretty sophisticated pricing algorithm. It would be -- to the latter part of your comment we would be attacking that on a customer by customer basis. We would do similar to what we did in '04 when we saw the rapid run-up in that, we take our existing inventory and we will bring that to market levels to ensure that the organization is getting price increases passed through on a timely basis.

There's a tremendous amount of effort in the organization that goes behind that. We've done it before and we've been in the process of doing that throughout the first three or four months of this year.

Same thing on freight or delivery surcharges. Things like that?

That tends to be a little more difficult but we do work those initiatives as well, where we find ourselves using common carriers or UPS not where you'll see fuel surcharges on the bill. Those tend to be somewhat easier to pass through to the extent that we use our own Company trucks. It's not as visible to the user. Those tend to be a little bit more difficult to pass through, but it is an area that we've got a lot of focus on and continue to work and push it through. It is a challenge but we think we are adequately addressing it.

And we have a specific lean in this center focus on transportation as well, and it looks at working our efficiency and working at optimizing our fleet and usage of our fleet. So we work both sides of that equation.

And then the final question again on commodities. For example if you get an additional $1.00 of GP related to an increase in copper and I realize you would be raising prices, your cost of goods sold would go up but let's assume you end up with a GP $1.00 extra versus what you would have had copper not moved in your favor. The pull-through margin on that particular $1.00 has to be particularly high Internet? I mean I'm sure there's some variable compensation component there, but in broad strokes is it safe to assume that the pull-through margin on $1.00 increase in copper is a lot higher than it would be for an incremental sale or something?

It should be higher because you are moving the same amount of weight. But you are right on target.

You can extend that argument, Dave, for almost any product out of stock simply adding one more line item to any customer's order. Generally would have the same impact because we already have the investment. We already have the goods. We are already going to be making a delivery to the location. We are already going to be producing an invoice. So any incremental volume on an existing order is also one of those areas that we continue to work on for the very same purposes that you get considerable pull-through or profitability on those kinds of incremental sales.

Thank you very much.

[Adam Ulman] with Midwest Research.

Good morning. Great quarter. Last quarter you mentioned that you'd started to get some traction with a China sourcing initiative with the Fastec operations for the core business. I was wondering if you could give us an update on the progress that you are seeing there and maybe run down any kind of longer-term opportunities that you might be seeing with that?

Yes, well, we feel good about the progress we've made in 2006 with our Asian sourcing initiatives. We've received two different product categories now, as a result of our Asian sourcing efforts in the States. We've been evaluating several series of SKUs for each of these different product categories when customer deliveries are in essence beginning now and slated to occur, start over the balance of this month.

So this is the plan and schedule that we had laid out. Evaluation first, assessment, and then beginning to sample some products and begin some transition. The effect is going to be very small initially. We want to basically cut our teeth and make sure that we've got this thing working right. We are focusing in some very specific areas. As I said, the delivery will start here and gain growth and will build momentum as we move through the year.

We are encouraged by initial results in terms of the quality of the products. Initial customer reaction from the samples has been positive.

So how much of your current SKU offering do you think that this could address over the next several years?

We have not, again, looked at it and laid it out across Wesco. We are looking at one specific end market as the initial entry point that is highly competitive and that is where we are targeting initially. Even with that, we are picking off a few SKUs in a couple of different product categories and beginning there.

I think it's our plan and approach similar to our approach with lean where we will learn as we go. We will get this started. We will learn from it and as a result of that, we will be able to increase our goals and our ambitions as we move forward. So we've not laid out a very specific target in terms of overall percentage across our SKU base.

You need to also keep in the back of your mind that a significant portion of what we sell today from our current supply base is already being sourced from Asian sources. So all of our key suppliers have manufactured operations over there today.

Then, Roy I was wondering if you could update us on the appetite for acquisition at Wesco and the current pipeline that you see out there, kind of multiples paid. So what is happening in regards to that?

First of all, let me just mention that acquisitions have been a part of our past. They will be a part of our future. But we have been attempting to make sure that we always reinforce the fact that our strategy is really driven on incremental improvement on our base business and the incremental rate gains that we can get off of our base business. That puts us in position to be very effective at making incremental add-on acquisitions. And we are going to continue to be opportunistic in looking for situations that expand our product or service offering or capability, and solidify the base of business we have perhaps in different industry segments where we are generally already strong.

So it's just as a general framework acquisitions are something that we are actively researching. We do have continuous steel flow. We are evaluating -- have evaluated opportunities. There's nothing at this stage that we are prepared to report on or to suggest that we are in -- at a stage where we can start developing expectations that the deal is likely.

There's just a lot of situations that need to be evaluated once you are on that path. As far as the expectations go, I would say that generally expectations are higher today. That is, expectations from sellers are higher today and that makes it a challenge in terms of how we look at acquisitions. We have a very deliberate methodology that we follow. We have very stringent return expectations and guidelines. We have a demanding requirement for performance, looking from the time of completing a deal to one year later we have some pretty demanding expectations with respect to synergies.

So in the current environment with seller expectations being hyped, it just takes longer for any deal to come to a close.

And then just one last thing in regards to the 10% organic sales growth guidance for the second quarter. Is that consistent with what you are seeing here so far in the month of April? Have you seen somewhat of a pull back after the warm weather that we had in the first quarter or you know? And then, also, you stated that your backlog is still really strong. Do you ballpark a percentage for us?

From our standpoint, our organization is focused on growing at a rate that is faster than the industry and what we set the minimum target for the organization to strive for is double-digit growth. We've got lots of initiatives and activities underway. We are seeing continuous opportunities that present themselves.

So we are comfortable with continuing to target that kind of growth expectation as far as the quarter is concerned. That really for us is more a long-term objective not just an objective for the quarter.

So is there any commentary on trends so far into the second quarter here? (MULTIPLE SPEAKERS)

Don't really try to draw any conclusions on data from just a couple of weeks. You know, the business that we do is in some respects because of our size, it is pretty steady but we do get involved in project opportunities that can have ups and downs on a short-term basis. So we are not really in a position to draw any conclusions based on April data.

Thanks a lot.

Rob Damron with 21st Century Research.

Good morning. First of all, Steve, just can you clarify the write-down of receivables and then the offset in gain in insurance? Where did those two items hit the income statement?

They are both [DNS G&A] expense rate. If you look at it, it is kind of the size of the strength of the quarter almost offsetting just slightly negative impact on the quarter.

The organic growth was very strong again this quarter. Could you just give us a little bit more color on by segment, national accounts, integrated supply, international and elsewhere? If you could break it down that way that would be helpful.

(indiscernible) talk to the end market. We saw pretty similar last quarter, we saw very balanced results across all the end markets (inaudible) build transportation was down a little bit in comparison but pretty good mix between our project business and our stock business. We are both rounding around, (indiscernible) 17% growth. We had a little bit of foreign exchange coming in from Canada. Just a little less than 1% and it was just consistent, solid end market activity.

Across the segments. Industrial, construction, public utilities segment and if you look at it by you know market segments (indiscernible). Across the various segments.

Thank you.

Sam Darkatsh. Raymond James.

Most of my questions have been asked and answered. Did I get your answer correctly in that you said there's a mix of direct ship versus out of stock didn't really change meaningfully the quarter?

We had a little slight change more project business though it'd be, it was a a slightly more challenging mix but is not material.

So the -- and I apologize if you mentioned this earlier and I missed it. The increase in gross margin, if the direct ship was up a little bit that would have hurt gross margins a shade. So the increase in gross margin would have been either a product mix or commodity-based, I'm guessing. I'm guessing the vast majority of that is commodity-based. Is thjat the way to look at that? Commodity inflation-based?

No; not really. The commodity piece, the challenge there is when you have the change in the commodity price is to maintain the margin%. Will get better dollars but the challenge at least initially is to maintain the margins. The gross margin improvements have really been kind of the hallmark of what our continuous improvement in lean and our culture and the Company which is making daily incremental improvements across a broad base of products and end markets. And the big driver of that was improvements in our core business and the acquisitions that we consummated last year both carry somewhat higher gross margins. They also carry somewhat higher SG&A expense as a percent of sales. So it's similar to the comment on end market.

It's pretty broad-based and across the board. It wasn't really a mix shift and it wasn't really driven by commodities although every one of those items had some impact on it. It's managing thousands and thousands and thousands of events across the base of our business.

So from a sequential basis, if copper prices are flattish and you cycle them through your inventory turns, you wouldn't expect gross margins to be negatively impacted dramatically on a sequential basis?

No. On a sequential basis it should not be to the extent we had a bit of a run up in the first quarter; we were able to maintain the product margins. We should see a slight boost on the inventory component (indiscernible) the inventory up to current market levels and flow that through during the quarter.

Generally the timing is such that you can't get your price increases in the minute they come. So you tend to lose just a shade on that. To the extent (technical difficulty) pretty much offset so a long answer to a short question is, it should be pretty constant.

And receivables didn't rise as much as sales even if you offset the write-down? Is there something to that? How should we look at that?

Yes. We had a slight improvement in our productivity and working capital days both over the first quarter of 2005 and a day or two over our year-end numbers. And it was pretty balanced between AR and inventory. So again like a lot of other areas, the lean initiatives continue to be effective. The absolute dollars rose somewhat with the sales. We picked up a day or two on our productivity or increased the turns a little bit.

That contributed to what I thought was just outstanding results of generating $30 million of positive free cash flow with a significant growth quarter-over-quarter and a sequential growth in our sales. So organization is doing a real good job.

So the receivables not rising as much as sales does not indicate necessarily a slowdown at the end of the quarter? I wouldn't think so.

No.

And I guess rephrasing one of the earlier questions, I'm guessing that what you've seen already in April likely exceeds the 10% organic growth estimate or guidance that you are providing for the quarter?

I would kind of echo Roy's comments on that. It's really hard to draw a line on a couple weeks worth of data. But we've seen some consistent results.

Sam, let me just comment for a moment about your question about the commodity prices. I want to make sure that we don't draw a conclusion that there is a wind fall when costs of products go up. It is an enormous amount of work to get cost increases passed through. And there's no assurance at all that they will be.

Customers are simply not inclined to accept price increases. They are driven to lower product costs regardless of what is happening in commodity markets or elsewhere. So don't -- I wouldn't advise anyone whether it's in our business or any other business to make an assumption that you can passed price increases through.

This is an extraordinarily difficult task in today's environment. Everyone is focused on cost reduction at some level in their organization.

With demand where it is, I'm guessing it would be -- it's not as dramatically hard as it was perhaps or would have been a few years ago. Is that a correct assumption?

I do think that's a good assumption. We are working hard at it. We are making good progress and we got systems in place to get us sort of advance notice, signaling and the like. But every one of those -- we have to take that directly to most of our customers and get an approval to be able to implement an increase of that sort. So there's actually a fair amount of work, physical work involved in getting a price increase through to even one customer - much less thousands of customers.

So it's a factor that we have to deal with. It's one that we are geared up for. We are making good progress on it but it's not something that we take lightly at all, or assume will be a favorable as we look forward planning our activities.

So I guess, Steve, the way to ask the question then, is on the 60 to 75 million of incremental sales as a result of the commodity inflation, your overall contribution margin for the quarter was about 14%, which is incremental EBIT over incremental sales and so then, we should infer then, that of that $60 to $75 million in revenues, that the conservation margin on those revenues was similar to that 14% or so you got Companywide?

That would be -- it's somewhat of a science or art versus a science but that's probably a good assumption.

Deane Dray with Goldman Sachs.

Good morning. First question wanted to clarifym make sure I heard correctly on the timing of your reset goal on the operating margins. You are going from 6% to 8%. Is that by the end of 2007?

(MULTIPLE SPEAKERS) three-year target. We expect to be getting at that target at the end of '08 moving into a full year basis of '09.

But you are extending the starting point today to be this recent run rate of 6%?

Yes. We are looking at getting the 50 to 70% basis points of improvement annual; but that will be starting today.

But the 6% had been an '07 goal? (MULTIPLE SPEAKERS) Correct.

Good. Then in terms of, Roy, I think you mentioned a couple of times the expectations on increasing overall market share. Came you give us a sense of where Wesco is today? And what sort of incremental margin share improvements you might expect and what timeframe?

We don't have good market intelligence data in our industry to be able to have a precise estimate of market share. The way sort of what we are looking at is the same kind of information you would likely be looking at and that is to look at what is happening. These are with other distributors that operate in similar markets or to look at manufacturers to see what their volumes are; and to the extent that we are growing at a faster rate. We draw the assumption or the conclusion that we are gaining share.

Now share is one of those numbers that can be defined in many different ways. You can define share in terms of the total aggregate market of all types or you can try to draw it down narrowly to specific types of competitors or sizes of competitors. But what we are really looking at generally speaking is our growth rate, relative to other growth rates to give us sort of a clear indication of progress.

Just as you do, we look at a number of peers and the like. But for our largest type of commodity product, the electrical industry - we don't have good public data that gives us a broad picture. So we have to rely on industry figure exchange confidential figure exchange programs to get a rating on how we are doing relative to the industry generally. And we continue to perform favorably.

We expect that we will be performing favorable, relative to industry for the balance of the year, given the number of initiatives that we've got going.

Great. Then just to switch gears over to the large projects. You mentioned that you are seeing some increased activity. Could you be a little bit more explicit if you could? Is this -- you are referring to quote activity and at what point might you see these larger projects getting released? And what might have been the holdup? We have heard things from project redesigns, raw material costs, creating some rebudgeting and so forth. But give us an update there, please?

Who wants to take that one? John? You want to take it?

Again we have seen the quote activity start to increase and we've seen our backlogs increase and so overall large project activity, particularly if you look at non-residential commercial construction. We are seeing the overall forecast for that market improving, as we move through the balance of the year and we are seeing -- we are seeing projects start to kick in.

You know, it hasn't really increased dramatically yet at this point but we are seeing some encouraging signs as again as I said represented by our quote activity and our backlog levels.

To your question about timeline, large project quote activity that we might be engaged in today, the likelihood is we wouldn't see results of that in terms of actual sales transactions for something like between four and 12, maybe even as much as 18 months. So a large project can stand a number of months but one starting today the likelihood of seeing activity in less than four to six months would be somewhat unusual.

It would be a fast track kind of activity or initiative.

On the other hand, where there are large maintenance projects or initiatives, and someone asked earlier about Gulf Coast-oriented initiatives, these tend to be on kind of an emergency basis. And so to the extent that some of those come out there is a oftentimes a little bit faster timeline to see results.

Last question is on the utility market overall. And we can flip the calendar and no longer be talking about ice storms but now on brownouts and power outages you are hearing about in Texas. Could you give us an update on the utility spend for your customers? Where that might have changed in terms of adding more inventory for preparations for wind damage and lightning strikes and that sort of seasonal (indiscernible)?

At this stage we don't see any meaningful change. I think the more interesting part of your question though was the longer term expectations with regard to such things as brownouts. That's really an issue of making sure that there is adequate transmission and infrastructure available. So from that standpoint I think we are just going to see this be another indication or call to action for investments and fundamental utility grid infrastructure.

There are a lot of data points on that from a lot of different places but these are projects that take a good long time to get regulatory approval and then get started. But over the next several years, maybe as much as five to 10 years, we believe there will be significant expansion and investment in the basic utility of the structure and we are very well positioned to participate in that.

Thank you.

Dan Whang with Lehman Brothers.

Good morning. My first question was regarding the long-term margin goal of 8% and I was wondering if you could provide more detail as to the gross margin and SG&A performance in getting to that 8%?

This is Steve. Be very similar to what our goal, what we established in '04 to go 4 to 6% and it's a blended balance between initiatives that would improve. And this assumes a kind of a GDP that we are in today. 8% to 10% topline growth on the core business without acquisitions. And looking at incremental expansion of gross margin and SG&A leverage in similar amounts. So 50 to 70 basis points in total for the operating margin.

That could move around in any particular year given where we are at in the cycle but we would expect over a period of time to get and to drive changes in our organization to get improvements in both the gross margin and the SG&A. So a balanced approach to that.

Right. So it's just continuing to head onto different initiatives. I mean nothing special in addition to what you have going on right now?

We have a lot of special and specific initiatives but there's not a new direction that we are coming into, we are counting on, a series of doubles or troubles or home runs. It's just continued execution and the continuous improvement (technical difficulties) culture inside the Company.

And I think we've said before that we are still in the early innings of our lean implementation. So it's just to reinforce Steve's comment. We are looking at a balanced approach. We've got a breadth of lean initiatives focused on improving sales. Sales productivity, margin, overall cost productivity, and we believe we've still got a lot of runway in front of us.

In terms of your current capacity utilization of DCs and your infrastructure, where are you now in terms also supporting the growth that you anticipate going forward?

We continue to believe we've got capacity in our existing distribution centers and branch network. The lean initiatives are critical in a couple of areas. On our warehouse initiatives, when we do a lean event, we generally see a 20 to 40% improvement in our flow-through capacity of goods.

But more importantly it's with our people. We continue to see expansion on that. We are just in the initial rollout phase of some nice improvements in our information technology area, and some programs that affects the order cycle and we are very encouraged by the preliminary results where that continues to create capacity with our people. So we don't view growth being capacity-constrained by facilities or people. Nor do we see a significant investment that we would have to make in facilities to continue to grow the business.

What was the headcount growth during the quarter?

If you look at it, quarter-over-quarter on our core, it was essentially flat. I think we added three people in our core business, first quarter of '06 versus the first quarter of '05 and that's on top of the 17% core business growth. So we've been doing this for three years.

We still believe we have the ability to continue to be very productive and we will drive sales growth at a rate higher than headcount growth.

Finally on Carlton-Bates, could you just provide an update? What's left to be done there in terms of the whole integration process there?

You know, we've had a very rigorous process as we've talked about before in terms of the integration planning and execution. Some 30 odd integration teams that have been executing the integration test. We are very encouraged by the results. Carlton-Bates has delivered very strongly against the commitments in terms of sales growth and margin expansion.

But we are not done with the integration efforts. You know we've got lean implementation that's beginning inside the Carlton-Bates operations. We've begun to do some consolidations. There's a DC inside Carlton-Bates that we are folding into one of our -- folding into another DC for example. We've still got a lot on the plate that we will run out really through the balance of this year, in terms of running through the major integration tests for the Carlton-Bates acquisitions and integration.

It's what we said last quarter, Dan. That we would expect from a synergy standpoint beyond the added sales and margin to see the cost synergies we would expect to see primarily in the second half of the year versus the first half. Although as John mentioned, we are making great progress across a wide variety of fronts on that.

The system conversion will be a key element of achieving some of the cost reductions in the second half and that is pretty much on schedule and slated to begin at the end of this quarter.

Okay. Thank you.

Jeff Feinberg with JFL Asset Management.

Thank you. Most of my questions have been answered. Great job, guys. The one question I had just wasn't clear to me. The commentary you had about the quote activity increasing and the backlog activity increasing. Was that any specific segment of your business or was that just the overall trends in the maintenance projects and nonresidential construction?

Again we are seeing that across the segments. Overall. Overall - both in the industrial market segment and the construction market segment.

Okay. So obviously I know you guys like to be conservative from your past but there's no reason to think that the business is not going to be able to sustain the great trajectory you've been on?

Thank you.

Terrific. Thanks very much.

Thank you for your confidence.

Brent Rakers with Morgan, Keegan.

Good morning. Just I guess a wrap-up question maybe on the Carlton-Bates. If you could give us some scale? I know you said most of the synergies and cost savings are second half but if you could maybe compare and contrast what you are able to capture in the fourth quarter maybe sequentially to what you were able to capture in the first quarter?

I think how I would couch that is we gave guidance initially of both FasTec and Carlton-Bates when we initially did them kind of a $0.40 to $0.45 range when we first did it. And we firmed that up last quarter saying we felt comfortable with $0.45. Our performance in the first quarter has us right on track delivering those type of results, maybe slightly better.

Did you give a number as to what you realized in terms of additive impact in the first quarter?

No, we don't. And I really don't like to do that for a variety of reasons. First and foremost, part of our integration plan means a blending of the operation. So we will -- as John mentioned we will be folding in some operations at the D.C. level, at the branch level depending on the facility size and determine the lease and the strength in the market. We may blend a Wesco operation into a Carlton-Bates branch and vice versas. We will quickly be coming to the point after the system conversions when these are done that we really don't have the ability to report on it separately. And we treat it as our core business. We've done a lot of acquisitions. We've brought in over 100 branches into our network; and I think the power of our business is that we don't treat them separately to become part of our day to day business and they are able to take advantage of the strength that we bring to the -- as John mentioned we've already got our lean teams beginning into the Carlton-Bates organization.

And we just do that quick assimilation in part of our business going forward. It becomes core in a hurry.

And then we obviously had a big uplift or at least a meaningful uplift, I think, in the manufactured housing business in the fourth quarter. I was wondering if you could maybe provide some scale as to how much of that may have went away, going into the first quarter after the one-time Katrina boost there?

You know we have had similarly strong performances, I would say in the first quarter, in that end market segment. Again driven by FEMA driven demand. But that is rounding off now and it is going to become more of a challenge as we move through the year. We will have some tougher comps as we move through the balance of the year.

With that said, that's a very strong business that -- and we have a very strong position in that market segment; and with the addition of Fastec and the Asian sourcing, we think we are very well positioned to continue to provide strong growth in that segment.

And then, I know you talked a good bit about the utilities sector but I was hoping you could give maybe more clarity on kind of the maintenance kind of business, relative to the new construction and maybe the mindsets of some of the utility customers as we kind of go into the summer's one-year anniversary of the Energy Bill?

Our business has driven, there's a lot that -- what you characterize as maintenance. But there's also a lot that is new development. We primarily play in the transmission and the distribution side of that. On the power generation we would play that more in line with our national account focus of treating that power producing plant as an opportunity to sell MRO supplies; and so we are generally in the transmission and distribution side of that.

The expansion on that would be residential construction as new developments are going out and new commercial buildings. You have got to put the infrastructure in place. We are extremely well positioned for that component as well as upgrades into the system. The transmit, the T&D side looks to be an area where investments are going to be forthcoming. We are very well positioned there. That's where we grew up in and it's been pretty -- We are not seeing over similar to our other markets. We are not seeing an overweighting in any one particular area.

We're seeing good activity across that. I would not say that we've seeing something dramatically change because of the anniversary of the Energy Bill. But as Roy mentioned earlier over the next five to 10 years we believe this is going to be a very strong market and Wesco's got a leading position in that market and we think we will do quite well in it.

Just one last question and I know this is probably harping an extended amount on this period. But last quarter, I think you guys talked about maybe 15 to 20 basis points of this inventory profit, if you will, and from the rhetoric that I'm getting it almost seems on a percentage basis maybe there was a slight negative impact, again, just on a percentage basis in the first quarter. Is that a correct assumption?

It's a tough one to do because you've got to look at customers that you served quarter to quarter and the product commodities. Our feeling is that there's some offsetting forces in here. As Roy mentioned it's a very demanding task to be able to get price increases pushed through the channel. We think we do a pretty good job of that but it takes some time. Offsetting that in a rising price environment, you tend to get some inventory markups or inventory profits that can help offset the time delay of pushing the price increase up. I think it was relatively neutral. It's a bit of an art, not a science.

Thanks a lot.

[Connor McLaughlin] with JLF Asset Management.

If there are no further questions, I will go into a little wrapup. Do we have any others waiting in the queue for questions?

There's one question in queue.

Take it and that will be the last one.

Curt Woodworth. J.P. Morgan.

Just a quick follow-up. When you look at the margin change this quarter, how much of that was from the acquisitions that I think, roughly, had doubled the EBIT margins that the base business had?

Again, we are losing some of the ability as we merge these operations in there but we had - just from sheer size - we had significant improvement in our core business as well. So the acquisitions definitely had an impact maybe a little bit more than half of the impact. I don't have a precise number for you on that.

Thanks.

First of all, let me once again thank all of you for your continued interest in Wesco. As you can tell, our organization is providing and producing excellent results, along with some good progress on a variety of improvement initiatives. And one of the exciting things about being in our business today is that, each day, we see further opportunities or generate additional ideas that suggest that we can do even better in the future.

Market conditions are generally favorable and we know that there are areas where we should be able to make further marketing inroads and where we should be able to make further operational improvements. Our personnel are committed to a long-term strategy and goal of operational excellence; and we intend to continue to do what we call grinding out incremental gains on a quarterly and on an annual basis, as we strive to systematically raise the standards in all areas of the operation.

Thanks again and have a good and profitable day.

Thank you for your participation in today's conference. This concludes this presentation.