Wesco International Inc (WCC) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2006 WESCO International Inc. earnings conference call. My name is Lisa and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to Mr. Daniel Brailer, Vice President, Treasurer and Director of Investor Relations and Legal Affairs. Please proceed, sir.

Good morning, ladies and gentlemen, and thank you for joining us for WESCO International's conference call to review the third quarter 2006 financial results. 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 Senior Vice President and Chief Financial and Administrative Officer.

Means to access this conference call via webcast was disclosed in the press release and was posted on our corporate website. Replays of this conference call will be archived and available for seven days.

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 31, 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.

As you have seen by our earnings release, we had another quarter of outstanding results. We continue to see success in our fundamental programs of driving double-digit organic sales growth, demonstrated by 10 straight quarters of double-digit internally driven growth.

Organic growth, including some benefits from our pricing disciplines, improvements in our base business, and strong performance from our 2005 acquisitions, combined to set a host of new records, including revenue, operating profit and free cash flow. Additionally, our balance sheet is in great shape with leverage at 1.8 times and $360 million in liquidity.

Consolidated sales increased by 19% over the third quarter of 2005, driven by 11% growth in our base business despite tough comparables to last year's third quarter. Last year's sales benefited from incremental sales related to hurricane activity, and the third quarter this year has one less workday than the third quarter of 2005. Organic growth adjusted for these items is 14%.

Our organization continues to do an excellent job in managing product cost increases and getting these increases through the channel. We estimate approximately 5 to 6 points of the 14 points of organic growth is attributable to these ongoing actions. And given the current cost environment, we expect to see similar levels of sales going forward sequentially.

Gross margins improved to 20.5% from 18.4% last year, due to improvements on comparable branch sales and higher margins from sales by acquired companies. Productivity gains, positive leverage on the increased sales, and a onetime gain on the sale of a property resulted in operating expenses as a percent of sales at 12.6%, declining by 130 basis points from the third quarter of 2005.

In last year's third quarter we recognized $9 million in onetime costs for a litigation settlement. Adjusting for this charge and the onetime property sale gain of $3.3 million in this year's third quarter, operating expenses as a percent of sales improved by 30 basis points.

Operating profit at $100.2 million was outstanding and was up 112% over last year's third quarter. Adjusting for the litigation and property sale, operating profit was still up over 70%.

These solid operating results were driven by continued improvement in productivity and our ability to realize scale economies. Operating margins at 7.5% expanded by 330 basis points over last year's third quarter, driven primarily by improvements in comparable branch operations.

Consolidated earnings per share were $1.13 versus $0.51 in the third quarter of 2005, and are the best ever reported by the Company. Return on invested capital, defined as annualized net operating profit after tax, divided by total debt and equity, at 17.1% is excellent. It reflects good earnings growth and high asset efficiencies. This measure of return fully incorporates the investment in acquisitions made last year.

Our focus on productivity improvements in all aspects of our business continues to produce outstanding results. The key measure of our personnel and cost productivity is operating profit pull through. We define operating profit pull through as the ability to convert incremental gross margin dollars to operating profit and net income.

For the previous 12 quarters we have had pull through of incremental gross margin dollars to incremental operating income of 64%. Comparable operating profit pull through in the third quarter of 2006, after adjusting for the legal expense and property sale, was 75%.

Our lean initiatives are producing favorable results in our business, and contributed to good working capital productivity during the quarter. This resulted in free cash flow for the quarter of $67 million, and record year-to-date free cash flow of $135 million.

Our balance sheet is strong and improving. Our debt leverage ratio for the trailing 12 months was at a record low of 1.8 turns, and dropped by 2.8 turns from the third quarter of 2005 and 1.7 turns from year end. Our all-in borrowing cost at 5.6% are low and have improved over the last two years, despite a rising interest rate environment. 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 above our original expectations of $0.45 of EPS accretion in 2006.

Looking forward from our perspective the overall economy remains stable with solid activity across our end markets. We are seeing good and improving activity levels in our commercial construction markets and continued strong activity in our industrial markets for day-to-day maintenance, repair and operating supplies.

We continue to believe that an increased level of capital expenditures will be forthcoming in both the industrial and commercial markets, driven by factory utilization, occupancy rates, oil and gas and utility industry initiatives. With with roughly 20% of our business focused on the electric utility transmission and distribution end markets, we are well-positioned to capitalize on forecasted increased spending on maintenance, expansion, and automation of the nation's electric power grid.

As we have a relatively small portion of WESCO sales in the residential construction markets, the long-awaited and forecasted decline in the resi market is having little impact on our business.

Commodity pricing stabilized somewhat in the third quarter and had less of an impact on our results than it did in the second quarter of 2006. Going forward, we expect to see commodity and product cost pressures continue at a moderate pace. And we would expect to maintain or increase sales levels in these commodity product categories.

We finished 2005 with a strong backlog of project activity, which has continued to grow sequentially. For the remainder of 2006 we expect to see the Company continue to gain market share and outpace the industry in overall sales growth.

Let's talk a little bit about acquisition. On October 3, 2006 we announced the signing of an agreement and plan of merger to acquire Communications Supply Corporation. CSC is a leading national distributor of low voltage network infrastructure and industrial wire and cable products, with projected sales of $600 million for 2006. We are in the process of completing required regulatory filings, other closing matters, and are still under confidentiality agreements with the sellers. As such, we are somewhat limited to the amount of information we can divulge at this time.

We are excited about the prospect of combining our businesses and have had very positive reactions from both suppliers and customers. The purchase price of approximately $525 million represents a 9.5 to 9.7 times EBITDA purchase price multiple, based on anticipated pro forma trailing 12 months EBITDA.

By the end of 2007 the purchase price EBITDA multiple is expected to be below 8 times, reflecting anticipated sales, operational and administrative synergies. We expect this acquisition to close in early November and be immediately the accretive and contribute $0.04 of EPS in 2006 and $0.35 to $0.40 of earnings per share in 2007.

At this time we expect to finance the acquisition utilizing our existing credit facilities and other indebtedness to be determined. We expect to be able to provide more information on this acquisition over the next few weeks.

Before looking at the fourth quarter, let's restate our operating philosophy, objectives and expectations. We will continue to work on operational improvement projects to increase sales performance, personnel productivity and operating margins. We believe that our double-digit organic sales growth performance can be extended.

Gross margin dollars should increase at least as fast as sales, with margin improvement initiatives offsetting any mix shifts towards increasing project business.

Operating leverage and productivity initiatives are expected to sustain pull through at 50% or more of incremental gross profit to operating profit on comparable operations. Working capital productivity should be maintained on a day supply basis. And free cash flow over the next several quarters will be directed at debt reduction and/or accretive acquisitions.

Looking at the fourth quarter of this year, historically WESCO's sales seasonality is such that the second and third quarters are the strongest quarters and tend to mirror each other, and that is exactly what we experienced in 2006. The first quarter is generally the weakest, followed by the fourth quarter, which is historically 2.5 to 3% lower sequentially than the third quarter.

Last year's fourth quarter included approximately $50 million of sales of a onetime nature related to hurricane activity in the Gulf Coast region.

Giving our current view of the end markets and continuation of current trends and macroeconomic activity, combined with market share gains, we expect to see this year's fourth quarter sales for our current businesses in line with the sequential historical seasonality pattern.

Operating margins are expected to be in the range of 6.8 to 7.1%. The tax rate for 2006 is expected to be in the 33 to 34% range. And share count for the fourth quarter of 2006 is expected to be 53.5 million, and averaged 52.5 million shares for the full year. The increase in the share count is a result of the higher share price and the convertible debt put in place in September of 2005.

In the first quarter of this year we communicated a new overall three-year target for operating margins in the range of 8%. We are off to a good start and remain committed to deliver on that target.

Again, we had terrific performance for the first three quarters of 2006, and are looking for another record-setting year. Our view for the remainder of 2006 and into 2007 remains positive, and we believe that we are extremely well-positioned to capitalize on increasing nonresidential, commercial, industrial and infrastructure construction projects and the forecasted increased spending on the nation's electrical grid. Despite difficulties in some industries, we also remain bullish on sustained solid performance in industrial markets.

Our 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 up the call for a question and answer session.

(OPERATOR INSTRUCTIONS). Dan Whang, Lehman Brothers.

I just wanted to clarify, I think you did mention it initially that your reported organic growth was 11. But I guess adjusting for a couple of items, the one less sales day, as well as the hurricanes, that it was 14%?

Correct.

How much did each one of those factors contribute?

A 3% delta, and they were roughly one-half each. About one-half, 1.5, 1.6% for the loss of the work -- the sales workday and about a similar amount for the hurricane. It was about $15 million of sales last year.

I think you said that in terms of the pricing impact was it 5 to 6%?

Yes.

Regarding the impact on the bottom line, how much do you think was realized from inventory profits?

I think a good way to look at that is to -- given that we have had a kind of continuous cost environment is to look at that on a sequential basis. And on a sequential basis, the overall impact from the higher level of pricing was probably less in the third quarter than it was in the second quarter. And that the inventory profits component of it was probably also relatively similar to what it was in the second quarter of probably around $0.05 or so.

Actually it is probably a little bit less. I think year-over-year last year -- in the second quarter it was about $0.06, $0.07 so it is probably a little bit less.

Yes, on a quarter over quarter from the inventory standpoint you've got that in there. Again I think the right way to look at it is sequentially. On a sequential basis the inventory profits were relatively similar. And the overall impact, and it was probably a little less as we have been buying into the inventory at this level throughout the last six months or so.

On an ongoing basis, how would you characterize the current commodity cost environment, and what is your expected impact in the fourth quarter from commodity?

Again, on a sequential basis, we expect to see the top line be maintained. We will lose a slight amount on the inventory markup. But I think another way to look at this is not to be so much focused on commodities but to look at what impact this has on a long-term basis. Similar to what happened a couple of years ago when steel and copper first spiked, we saw general price increases resulting from that about a year later. We have worked that through the channel. And for a distribution company that is a very good thing. We would expect to see similar levels proceed forward in that the pricing from the commodity should work its way through the channel and be modest priced increases in the future. And that kind of topline growth is very sustainable.

I will just finish up with one question on the CSC acquisition that you announced. I know it is still preliminary, but could you share a little bit more details in regards to the integration plan and some of the activities that might be involved, just kind of roughly as we move forward?

We feel very confident. We are very excited about this acquisition. They've got a great management team. From an integration perspective, to the extent that we do own the company yet, and we're still officially competitors, there are certain things we can't do. But we're really using a very disciplined approach that we used in the past.

The best example is what we did with Carlton-Bates. We had in the neighborhood of 30 integration teams, ranging from sales, margins, facilities, IT platform, distribution, terms and conditions, suppliers, etc., put in place for that. We have already identified those teams for the Carlton-Bates acquisitions. We've got the functional and operational leaders identified on the West Coast side and on the Communications supply side. We expect to hit the ground running, and actually be running a little bit before we hit the ground when we close this in early November. We are in very good position on that.

Sam Darkatsh, Raymond James.

A couple of questions for you, Steve. First off, if my math holds, receivables grew slower than sales did. Does that indicate that perhaps end of quarter demand slowed a little bit or moderated the growth rate, or was that more of a factor -- or affected by customer mix, or just a focus on collections, or what would that be attributable to?

We had good working capital performance during the quarter. If you look at sales on a per workday basis, September was actually the best sales per workday in the Company's history. It wasn't a slowdown in sales. We did improve our working capital, our receivables days performance by a day or so. I think it was basically performance related.

Second question. In your prepared remarks in talking about the fourth quarter you mentioned, I think, that you're saying an increase in project business. If we take a look at your mix of out-of-stock versus special order and direct ship, has the mix changed much at all towards the special order director ship, or is it just the fact that project business is growing at similar rates to the rest of the business?

Similar rates. There is not been a significant change in mix at this point in time.

When you refer to the increasing project business, what do you mean by that in terms of how it affects things from a financial standpoint?

That is from an activity level. At this point we continue to see activity. It is being reported in the macro environment that the commercial nonresidential construction is firm. And that is an area where we have a pretty good chunk of our business. We just think that as the economy continues to move, we will see some shift to that perhaps going forward, and that should be beneficial to our results.

Last question, if I could and I will let others ask. In terms your -- you originally said that you were expecting earnings similar to the second quarter for your third quarter results. There's going to be a lot of puts and takes obviously as the quarter progresses, but what were the primary variances in the quarter positively and negatively versus your internal expectations as you look back?

What we talked about last quarter is we said the second and third tend to mirror each other, and that we would have to -- and we expected to see that this quarter. And that we would have to actually perform better on an operational basis to have the same results that we had in the second quarter from a variety of reasons.

One of those being we had a positive impact in the second quarter on a bad debt reversal that we took in the first quarter -- a portion of that. We also had additional non-cash compensation related costs for FAS 123 for additional options that were granted. There is $1 million or so of additional costs in the third quarter.

Basically we got good movement, good performance in our SG&A. We did have a onetime benefit on a property sale, but if you strip that out we are still significantly better than the consensus. Basically, we did what we said we were going to do, and just did a little bit better as it related to executing on continued cost containment, continued productivity, with the lean initiatives, and continuous work on pricing. There is lot of -- the good news is it was very balanced quarter. All end markets performing and the Company performing well across a variety of initiatives that continue to be ongoing.

What was the -- in the third quarter what was the quantification of the gain on the sale on the property?

It was $3.3 million.

Is that pretax or after-tax?

Pretax.

I might have missed this in your prepared remarks, but did you mention what you expect organic growth to be in the fourth quarter?

We're continuing to work, and I would say on a comparable basis we continue to drive the organization to double-digit organic growth. Do be cognizant of the fact that we had about $50 million of hurricane related sales last year, and so far that is not being repeated. If you adjust for that, we're looking towards double-digit organic growth.

Curt Woodworth, JP Morgan.

If you look at the gross margin performance of the Company this year, it has been very good. I have you off about 212 basis points this quarter. And can you help us dissect the components of that movement? How much of it is related to the acquisition accretion from Fastec and Carlton-Bates? How much is it -- is some of it a gain on the copper issue? And how much is it just on the core business that you're seeing the billing margin improve?

Again, I think on a sequential basis the commodities are very similar, so there is not a big change on that.

Year-on-year?

A sequential, I said. On a year-over-year the biggest driver of that, and it continues to be -- it is a combination but the biggest component of that continues to be improvements we're making on our base business. We have talked about that for a long time, and that is where the real power of our model is.

We had good improvement on the base business, and there was incremental on the gross margin and pull through from the acquisitions as well. The commodities did have an impact. There's probably in the neighborhood of -- if my mental math is right -- probably in the neighborhood of 20 to 30 basis points or so could have been on that. The real driver is fundamental improvements on the core business.

You mentioned in your remarks that you think enhanced productivity is probably going to offset maybe some negative mix impact on the gross margin side as the director ship probably is going to grow quicker. Do you feel like you still have a lot of room to run even in that scenario, or is it kind of a thing where you feel like you are kind of where you want to be on gross margins?

If I said we were where we want to be, my boss would shot me. We continue to believe that we have room to grow. If we look across the industry, we're not the top gross margin producer. We think there's room within the market for us to do that. We've got a tremendous amount of initiatives that are in place, ongoing that will continue to drive that.

We talked in the past about as we see some -- if and when -- we see the mix shift moving towards a more project business, we think that the pricing and margin improvement initiatives that we've got across the vast array of initiatives should offset that mix. We intend to maintain gross margin percentages on the comparable business and be working to improve that over time. Our target, getting to the 8% operating margin, is based on improvements in gross margin and continuing to get positive leverage on our cost base as we grow the top line.

I would think the mix shift -- generally, if I recall correctly, you say the incremental margin on the later cycle project work, and I believe utility supply business is higher than the MRO. So on an EBIT margin basis I would assume you would positive mix benefits going forward.

That is accurate. We drive our businesses on the operating margin level because there is different characteristics of cost and value add across different end markets.

Just last question. On the 14% organic growth on an apples-to-apples basis, can you dissect how did MRO do, what was the T&B market up for you guys this quarter, and also what was the later cycle project work up?

If you look at it, it was pretty blended. To get to the 14% it was banded fairly evenly and there wasn't a significant mix shift to where the project business outstripped the day to day, and there wasn't a big end market shift from utilities or from oil and gas, etc. It was pretty constant with what we have seen on a sequential basis.

Dave Manthey, Robert W. Baird.

First question on the $3.3 million, where is that in the P&L? Is that in other?

That would be in the SG&A. It would not be in other.

It is in the SG&A. Okay. Then just so I'm clear on what you're talking about here in terms of a sequential trend, are you saying that sales in the fourth quarter you expect to be 2.5 to 3% lower in the core business than they were in the third quarter, is that what you're saying?

Yes, if we look at historical seasonality, that is generally what we would see as it relates to the end market behavior with the holidays and the winter starting.

Just so I'm clear on the hurricanes and the commodities, not to keep hitting on this, but in terms of the hurricanes, could you just tell us again what you said was the impact in dollars you saw in the third quarter, and then what you that it was in the fourth quarter? Was it $15 million or $50 million? What were the numbers you said?

You got them. 15 in the third quarter of last year and 50 in the fourth quarter.

Then in terms of the pricing, I believe you said that last quarter you saw $0.06 to $0.07 because of the inventory benefit of copper. And I believe it was $0.05 last quarter due to the year-to-year impact of copper pricing? You also said that this year would be a little bit less. Am I reading that right?

What I look -- the inventory process is generally accurate. It is not something we can get 100% precise, because it is marking the inventory -- it is selling the higher cost inventory and looking at how quickly you can get those prices pushed through the channel. I think the right way to look at it is sequentially as well. We are seeing commodity prices more stable. And going forward we expect to see the top line equal or moving -- depending on our sales success in selling more products -- growing sequentially from a price standpoint.

Did you also say that the top line growth in the third quarter was aided by 5 to 6% due to commodities?

Yes. That is really relating that to the 14%. If we take a look at the first three quarters of this year and adjust for workdays and some of the pricing impact and the hurricane, we have seen a very steady and similar level. Second and third quarter would have been virtually identical, and they were both just a little better than the first quarter.

Got it. Okay. Then just two more quick ones here. In terms of industry growth rate, what would you consider the overall industry growth rate today? I don't know if you can just aggregate between units and pricing as you look out in the world.

Let me try to answer that one for you. It is tough for us to get industry growth data. We look at a variety of economic data. We look at industry data. For the construction industry, for example, there are two or three sources, the Dodge, First Source, Reed and [Mean] all give indications of what the market value put in place as well as contracts are.

And including inflationary costs, the estimates for nonresidential construction are in the high single digit category. We also look at what competitors, and in particular we try to monitor what manufacturers are reporting, different manufactures in different market segments. And by and large, they are in the mid single digit range in terms of what their would be. A number of them actually report what they believe the market to be growing at it, and that is clearly in the mid single digit range, including inflationary impacts.

It is hard to get specific data because the industry is so large and so fragmented. The best we can tell is that the industry, as we kind of participate in it, is in the mid to upper single digit range on an overall basis, including the effects of commodity pricing.

Rob Damron, 21st Century Research.

I wanted to ask a few more questions on the Communications Supply acquisition. Could you give us a little bit more color on the margin structure of that business? And also the balance sheet financials, do they -- how do they do in terms of inventory turns and accounts receivable turnover?

I can't give you a lot of details on that from basically what I said earlier and where we're at in the stage of the acquisition. But I would tell you in general terms it is an extremely well-run organization, from sales through working capital management. If you look at the data communications businesses of the two other national players, Graybar and Anixter, their ratios would compare favorably to those.

Then just one other question. I don't believe you mentioned national accounts or integrated supply. Can you talk about a little bit about the growth rates of those two segments?

They are not really segments, those are just end markets that we take a look at on that. They were performing -- national accounts very strong. And integrated supply is performing well based off of some very tough comparables from the previous year.

Adam Uhlman, Cleveland Research.

It is Mark Koznarek, standing in for Adam. It looks like most of the things have been covered, but just a couple of things. One is your SG&A was down a little bit in the third quarter versus the second. Is that solely the impact of that gain on sale or are there some other dynamics at work there?

The gain had certainly a positive impact on that. When you strip everything out and adjust what we still had, the type of improvement we would expect to see with our lean initiatives, so we had a modest improvement again SG&A as a percent of sales.

Okay.

More specifically, Steve's comments were that if you make adjustments for the third quarter of 2005 and for this property sale, the SG&A improved by 30 basis points, which is in line with what our longer-term expectations are for continuing to drive operational economy.

When we talk about the fourth quarter and you describe that normal seasonal pattern of sales down 2.5 to 3 percentage points, that sounds like it would presume that you are not going to experience a sequential price increase that is in the fourth quarter versus the third, as that would offset some of that seasonal decline. Is that an accurate assessment of the situation?

We feel that given the current environment with pricing and cost pressures, that it is going to be pretty similar to what we have seen in the last quarter or two. That would basically mean the seasonality will have its normal impact is what our thinking is at this point in time.

In other words, you don't expect a material amount of seasonal price changes in the fourth quarter versus the third?

It doesn't look like that right now. No.

In the year ago, when we had some hurricane benefits, did those have a different margin associated with them, those increments of sales, or would they pretty much at the quarter average margin?

It would have been normal margin activity. We didn't -- we maintain the same pricing disciplines and didn't -- and were good corporate citizens. In that it came with a rapid and contained period of time, we would have gotten a little more leverage on our SG&A cost structure, but not a lot.

So basically the same. Right?

Yes. That is how we would look at it.

Finally, can you comment at all on the backlog that you've got right now, whether you could do it specifically or just directionally with regard to the project activity that seems to be unfolding? How much visibility do you really have currently versus one or two quarters ago?

We're not a -- we have the same visibility. We've not a backlog driven business per se. But our backlogs ended up 2005 at a record level. We have continued to build backlog throughout 2006. From a seasonality standpoint, it continues to improve at a period of time it would normally flatten out. It provides directional indications that things should be solid in that area. But we're not a backlog driven business like a manufacturing company would be.

Do you actually have visibility into '07 with current backlog?

Some of it will run that way. It depends on the size of the project and whether we're on the front end or the power side of a project, or whether we would be more on the back end of the power distribution and lighting and gear and that type of products. We have some visibility on that, but again, a lot of the business comes in and comes out the same quarter. But we have been adding to the backlog and have a nice level of sales in the project business today.

It is ahead of year-end levels?

Yes.

Deane Dray, Goldman Sachs.

I have a question. Steve, in your prepared remarks when you talked about directing free cash flow towards more accretive acquisitions. Let's talk about the digestion process for CSC and what the pipeline looks like. And then specifically address -- you made an interest comment in the Denver analyst meeting, that it is basically a target rich environment, so you are able to be pretty choosy as to what kinds of acquisition candidates and actually select them as to how you would perceive the integration and how smoothly that would be.

Could you address the pipeline, address the quality of the acquisition candidates and what the timing might be in light of your digestion of CSC?

Sure. First, this clarification or comment was we continue to direct free cash flow at debt and/or accretive acquisitions. First and foremost, we're going to complete the process of finalizing the acquisition of Communications Supply. As I talked about earlier, we've got a good start of knowing what we want to do, and how we're going to do it, and who is going to do it on that integration process. Having said that, that will take a fair amount of organizational effort to get that done.

The CSC team management team is very strong, and they will be taking a very active role in all of that. So that we feel pretty confident that what we have seen with this company that we will actually deliver on.

The pipeline continues to be quite active. It tends to be in companies that would be smaller than the CSC range. That is a fairly large acquisition. As we have done in the past, we will look at four or five different elements that has to be in place, a good well-run management, a market that is growing at or better than the end markets that we're playing in today. We would want it to be accretive out of the box for the most part. We want the business to be performing well. We don't go after and look at turnarounds.

There's nothing in the pipeline right now of a significant nature that is imminent. We continue to look at those opportunities, particularly given that our balance sheet is in very good shape and our cash generation is very strong. Our fundamental bias though is to continue to improve on our core business, and to invest in the activities that will allow us to drive our base business to grow faster than the industry, and to continue to get incremental profits out of it. That leverage on that base business provides the bulk of our earnings power, and the acquisitions are a nice add-on to that.

When you talk about potential valuations in the pipeline, are you still able to get the same sort of accretion that we have seen in Carlton-Bates, and now we see in CSC? Is pricing still in your favor?

Pricing is a difficult topic to hit on because people tend to look at that and look at the trailing 12 months multiple that was paid. And while that is an important starting point, the real thing that we look at are what are we going to be able to do with this business as part of WESCO? What kind of leverage can we get through our distribution network? What kind of cross-selling opportunities can we get utilizing our national accounts platform that is set in place as far as having a lot of customer, a lot of business in various end markets in there?

What kind of corporate structure they have from an administrative and an IT platform, and how quickly can we absorb that, and what kind of synergies that we get in it. We really focus, like we did with Carlton-Bates, like we did with Fastec, like we're doing with Communications Supply more on where we are going to be 12 to 18 months down the road on that.

Each acquisition has different dynamics. The smaller, what I call more bolt-on types, tend to have less synergies, but tend to be a couple of turns maybe of a purchase price multiple lower on the outset. It is a competitive environment out there. I think the prices are being paid are fair -- a bit on high end of fair on the larger opportunities.

Good. Yes, it was recognized that when you talk about free cash flow the first priority is debt pay down. Could you remind us of your goals and comfort zone within leverage of what we might think about at year-end and what we might think about post CSC?

Our target range is in that 2 to 3.5 times. It is a fairly broad range. Right now we're at below the low end of our range. We're very comfortable at the high end of our range if we needed to be. We have operated as a leveraged company in the past. We have go a lot of disciplines in place. We think that is what has helped with our cost structure. Year-end, after CSC we expect to be in the middle of our range.

Steven Fisher, UBS.

I wonder if you could just comment on what CSC does to your commodity exposure?

They have a fair amount of business, as you may expect, in the cabling area and the connectivity. It would be -- their business would probably be similar to WESCO's mix on commodities. We don't see anything there that gives us any concern.

Similar amount of copper, in other words?

I don't want to get fixated on copper, because if you look at it the piece of metal as a component of a total price, when you have labor, distribution, the resins around it and the connectors and all that, while it is important it is not overwhelming. But it is a similar business (inaudible). That is a business that WESCO is in today. We have a meaningful amount of data communications business today. I don't see it having any type of a big impact, being different than what we already deal with.

Fine. Then on CSC, again, what would you say the runway is CSC relative to Carlton-Bates in terms of any room for improvement you may have from lean programs and anything you're going to do? I would think that given that CSC was owned by private equity for the last couple of years, I would think they may have done some pretty good cost-cutting. And it sounds like from what you say it is a pretty well run business already.

Carlton-Bates was also owned by a private equity firm as well. The opportunities relate to several areas. When we look at the synergies, it is not all about cost-cutting. There certainly are some opportunities at the headquarters levels, but there's also big opportunities in expense categories.

To give you an example, freight contracts. We have a nice benefit at Carlton-Bates putting them on our national programs for freight carriers. We see similar opportunities at Communications Supply.

We see good opportunities with their management team and their strong sales force on some cross-selling opportunities. That is the same as what we would have seen in Fastec and Carlton-Bates as well. It is not a cost-cutting exercise. We're investing in this business and expect to see some rapid growth in the top line. And it is already a profitable business. There will be some opportunities on the headquarters function areas.

Lastly, Roy, you had mentioned last quarter about a potential for some oil patch projects to come through post hurricane season. We seem to have passed season pretty safely, but now oil prices are down and we're hearing that the projects there might not be going through. What are you hearing in that area? It sounds like you are pretty positive on nonresidential construction, so where are the areas that may be offsetting that?

With respect to your first question, the oil patch, these are long-term investments that are made in natural resources. So they're not the sort of thing that are started and executed instantaneously. They take, in some cases, decades to develop all the way through.

We're very well-positioned in terms of the initial project construction, along with outfitting and ongoing maintenance related activities. We have a very solid position in the oil and gas energy market, just generally speaking. And we believe that that is going to be positive for us quite some time to come. Even at $57 or $58 a barrel, you are well above any cost levels that even such things as the oil sands are deemed to be highly economic at those kinds of prices, which is why you see such a high level of activity in western Canada.

The oil patch energy, generally energy -- generally including the international aspect of energy development, I think we're in very good shape in that market. Mining in various kinds of metals is also strong with expansion. Generally the expansion is in international markets, but upgrading and enhancement to the domestic properties continues. And there have been some announcements of new major properties in the mining and metals industry in the U.S. as well.

The infrastructure -- governmental infrastructure, we believe is going to continue to do quite well. A couple of areas that we're sensitive to in is difficulties that some of the major auto firms are having and the implications that that will have. However, they still have got to produce cars, and we're very well established in the MRO arena. The project related business is not something that we expect to see opportunities in that market segment, but certainly ongoing with maintenance and operating supplies, we expect that to continue to be good.

Is a mix in terms of different areas, but by and large, we are, as I have said before, maybe I am a contrarian, but the domestic manufacturing business and industry is very large. We essentially provide outsourcing services to industrial firms. A lot of people when they talk about outsourcing are thinking about Asian outsourcing. But a lot of work of various types is outsourced right here, and we're clearly a beneficiary in those kinds of initiatives. We think that is going to continue, and so we're bullish on the industrial market.

Brent Rakers, Morgan Keegan.

A couple of housekeeping questions to start off. Steve, I don't believe you've given the revenue contribution in the quarter from Carlton-Bates and Fastec. And then also if you could remind us what Fastec would have contributed in last third quarter?

Actually I think it was in the press release. About $103 million or so for those two businesses in the third quarter. Roughly what we saw the first couple of quarters. Fastec came on board in August. A relatively small company, 60 million in sales or so when we bought it -- $4 or $5 million each month of August and September. But the numbers you talked about were apples-to-apples numbers in the call.

Any additional comment then on, if I recall correctly I think you were running 107, 108 a quarter in those acquired entities -- in each of the quarters in the first half, and it looks like it is coming in. Is that cycle related or is anything else going on here?

Some of that is Fastec's little seasonality. They tend to have a stronger first half than second half. They do have a piece of their business -- has a little bit of residential exposure, so they have been a little challenged there. So it is not -- in the scheme of things it is not even a rounding error.

Maybe you can give us an update. You talk in terms of tracking ahead of the $0.45 or so of accretion this year. How far along are we in terms of incremental -- in capturing all the SG&A savings that you want to accomplish from the transaction?

We're never done totally, but we are in good shape. The Carlton-Bates has been put onto our information technology platform. It occurred throughout the third quarter. We think there will be -- as we get that finalized and get them completely up to speed, we think there will be some incremental opportunities there. But we have been successful in achieving what we thought we would. Actually, as I said a little bit better. There will be some more small incremental gains in that area.

Given, I guess I thought there was maybe more of a lag effect to some of the wire, the copper wire rated products in terms of pricing. Are you actually alluding to the fact that possibly there was a decrease in pricing sequentially on the products overall?

No, my comment was as far as the profitability would have had a little less impact because of the inventory side. Because we have been buying -- the commodity price had been relatively stable and we have been buying into that for the last six months, so it is pretty much reflected into the inventory.

Do you have a sense for how much pricing contributed sequentially to the revenue line?

Yes, we said we think around 5, 6%. Sequentially, it would have been very similar. I'm sorry. The 5 to 6 was quarter over quarter. Sequentially we don't really see any difference.

Then last question, given what you're saying about inventory profits, that looks like the gross margin percentage expanded 35 or so basis points from Q2 to Q3, ex-ing out the inventory effect in each period. Can you maybe elaborate as to what is going on their, just on a one quarter to one quarter basis?

You've got it accurate. The impact on the inventory was similar for both quarters, and so we saw a real improvement in that. That is what we are all about and taking a variety of initiatives across all of the end markets that we serve, both from a pricing, purchasing, and a SG&A and efficiency standpoint, and continuing to drive better operating margins.

We would anticipate -- our goal, as we set these things, is a balanced growth of expanding our gross margin, dollars and percent, as well as getting some leverage on our cost structure. It is really part of just our basic day-to-day operations. I can't point -- there's not a specific single program or a specific single event that would have driven that, but as you can imagine we had served over 100,000 customers, and sell hundreds of thousands of different products, and so it is basic block and tackling, being driven and led by our lean initiatives on a continuous basis.

Then last question to wrap up for me. As you go into the fourth quarter, the way we look at it from a go forward basis is essentially pull out that approximately $0.05 from gross margin and start working from there. But maybe even starting from those higher level that you hit in the third quarter?

From a gross margin -- yes, that is how we would look at it. Adjust for the inventory and then move forward.

There should not be any inventory profit contribution in Q4?

Know, we don't see that at this point, assuming that there's not a dramatic shift in commodity pricing, yes.

Curt Woodworth, JP Morgan.

If you look at your business over the last 11 to 12 months your organic growth has been averaging about 15%, which from everybody we look at is definitely best in class. And the earnings have gone from $0.65 in '03 to probably $4 this year. My question is basically, what is the internal view of the company that once growth rates probably do start to moderate, and stay a mid single digit organic growth type environment, what do you believe is the sustainable earnings growth power of the company?

We have talked for a couple of years now, and putting together what we called a simple Simon model. But with our operating profit pull through target of 50%, what we have looked at this industry over the past 20 years has averaged a 5 to 6% growth rate, higher than GDP, given the fact the nature of the electrical products.

We believe we have demonstrated, and we believe we will continue to demonstrate our organizations ability to grow a couple of points faster than the market. If you wanted to pick a 7, 8, 9% so use 8% as a topline growth, we believe with nominal improvements in our gross margin and continuing to get some leverage on our cost structure that we would be able to grow our earnings 20 plus% in that type of environment. We feel confident with that, and we think that that would certainly be best in class performance.

Given the time, I think it is probably appropriate to wrap up. Lisa, if there's one more question that is being held in queue, let's go ahead and take that, and then we will wrap up.

No, sir, there are no questions at this time. I would now like to (multiple speakers).

Let me just maybe reiterate a couple of points. Given the variety of activities you can hopefully understand we have been very busy, and WESCO team has executed very well on numerous planned initiatives.

Record results were again established in virtually all areas. I am particularly pleased with the after-tax return on capital, including the major acquisition investments made to our long-term success. Our historical core business has been right at the heart of these improvements and has achieved significant gains in operational and financial performance. We expect that as the work is done to build momentum in these activities in this part of the business will continue.

We have made some great progress on successfully merging two acquisitions that were completed last year. We've got some great people in those companies. They're doing some terrific work. And there are great shared opportunities across the business. They have been great additions to WESCO.

Lastly, we've got another major acquisition pending. None of these things happen easily. They take a lot of work to get to this point. And we are very enthusiastic about the future with CSC being added to the WESCO team. The expanded product and service capabilities that will result from the combined WESCO and CSC team will be good for the customer base on a combined basis. We continue to be very pleased with the progress that we're making and the success that we have been having.

We thank you for participating in the call today. I hope you have a good day and a good week. Lisa, that will complete the call.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.