Wesco International Inc (WCC) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2006 WESCO International Inc. earnings conference call. My name is Francis 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 call over to Mr. Daniel Brailer, Vice President, Treasurer of Investor Relations and Legal Affairs. Please proceed, sir.

Thank you Francis. Good morning, ladies and gentlemen, and thank you for joining us for WESCO International's conference call to review the fourth quarter and full year financial results for the year ended 2006. 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 Roy Haley.

Good morning. As you've seen in the results that we reported earlier today, we had excellent financial performance for the quarter and an outstanding year. Before Steve takes you through the financial statements though, I wanted to provide some background on the quarter, which for us was very active.

In October, we completed the very successful issuance of $300 million of convertible debt securities under very favorable terms and we then proceeded to finalize the acquisition of Communications Supply Corporation in early November. CSC is the third largest distributor of data communications, security and low-voltage cabling and connectivity products in the U.S. Their target markets, operations, and customer base are an excellent strategic fit for WESCO.

As with our other acquisitions, we've gone to work immediately on a wide range of operational integration activities and initiatives to realize anticipated synergies and incremental value. CSC is a well-run business with an excellent management and sales organization and we expect this acquisition to add approximately $0.35-0.40 to EPS in 2007.

As you probably are aware, our approach to acquisitions has worked extremely well and we are seen in the industry as a good acquirer and a good operator. We have the financial and organizational capacity to actively pursue attractive acquisition candidates and we will continue this strategy. Additionally, we've announced today that we will utilize our financial resources to buy back as much as 12-15% of WESCO's outstanding stock, in effect acquiring the best company we know.

Shifting now to the overall market conditions, there was a well-publicized, but modest, slowdown in economic conditions during the quarter and for us it was particularly noticeable in October, which is typically the strongest month in the quarter. With the exception of weakness in October, the quarter played out generally as we had expected.

Copper price levels have received a lot of attention from investors and analysts during the past year and we'd previously described our approach to managing commodity price fluctuations. There are two ways to think about the price changes and the impact that they have on financial performance. First, in looking at sequential run rates or momentum, which is actually the way we run the business on a day-to-day basis, the decline of approximately 10% to an average price of about $3.20 for the fourth quarter creates something of a drag or a headwind on our sales growth rates and margin improvement for certain copper-based products.

In this environment, we also lack any inflation recovery and pass-through benefit from increasing inventory value. I'm pleased to report though that our approach to managing inventories and customer pricing has worked well. Nevertheless, while we were negatively affected in both sales and margin of copper-based products, our broader based growth and margin initiatives have resulted in no significant weakness in overall combined performance.

That was the first way to look at the copper impact and that is on a sequential basis. The second way would be to look at the changes on a quarter-over-quarter basis and on that basis, prices contributed favorably to overall sales gains, but there are pressures on margin that we have to deal with. Despite the downward pressure that falling copper prices may have had on the topline, we expect that 2007 will be another year for continued above-average sales growth and improving profitability. Our business model and our very strong position in key markets present numerous avenues for growth. The markets we serve are very large and we remain optimistic about favorable conditions in these markets and stability in the overall economy.

With that introduction then, I'd like to turn it over to Steve to tell you more about our record-setting performance.

Thanks, Roy. As you've seen by our earnings release, we had another quarter of strong results, and we finished our third straight year of record performance. Organic growth, improvements in our base business and strong performance from our November 2006 acquisition of Communications Supply Corporation combined to set a host of new records for the year, including revenue, operating profit, free cash flow, and return on invested capital.

Additionally, our balance sheet is in great shape with our year-end leverage at 2.9 times and $360 million in liquidity. Consolidated sales increased by 11% over the fourth quarter of 2005, driven by growth in our core operations and our fourth quarter acquisition of CSC. Our base business grew by 8% after adjusting for $50 million of one-time sales associated with the hurricane activity in last year's fourth quarter.

Without adjusting for these sales, organic growth of 4% was approximately $20 million below what we normally expect on sequential seasonality between the third and fourth quarters. However, sales per workday on a comparable basis in December, normally the weakest sales month in the quarter, turned out to be better than expected.

Gross margins improved to 20.9% from 20.4%. We experienced margin compression in copper-based products due to the retrenchment of copper prices during the quarter, but margin improvement in all other product categories more than offset this decline. Productivity gains and positive leverage on the increased sales resulted in strong operating profit of $93 million, which was up 25% over last year's fourth quarter.

Operating margins expanded by 80 basis points over last year's fourth quarter driven primarily by improvement in comparable branch operations. Consolidated earnings per share were $1.10 versus $0.80 in the fourth quarter of 2005. Fourth quarter earnings per share benefited by approximately $0.04 from an adjustment in our full-year effective tax rate reflecting the positive affect of foreign tax credits.

Return on invested capital, including the investment in our recent acquisition of Communications Supply Corporation, at 15.6% is excellent. It reflects good earnings growth and high asset efficiency and our return on invested capital has increased 24% from last year's fourth quarter.

On November 3, 2006, we finalized our acquisition of Communications Supply Corporation. CSC is a leading national distributor of low-voltage communications network infrastructure with sales of over $600 million for 2006. We are well underway with combining our businesses and have had very positive reactions from both suppliers and customers. For the period of November 6th to December 31st, CSC contributed $96 million of revenue to WESCO sales. For 2007, we expect CSC to add $675 to 700 million to revenues and we remain confident in our original projection of $0.35 to $0.40 of corporate earnings per share accretion.

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 define operating profit pull-through as the ability to convert incremental gross margin dollars to operating profit and net income. For the previous 13 quarters, we have had pull-through of incremental gross margin dollars to incremental operating income of 65%. Consolidated operating profit pull-through, even including the results of CSC for the fourth quarter of 2006 was 54%, reflecting good cost controls in our base business and cost synergies achieved related to our two acquisitions made in the third quarter of 2005. On a full-year basis, pull-through was 63%.

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 full year free cash flow of $199 million. Our balance sheet is strong and improving.

As announced, we are improving the transparency of our financials by moving our accounts receivable program to on-book treatment. This resulted in the addition of an equal amount of accounts receivable and debt to our balance sheet. Our debt leverage ratio at year end was 2.9 turns including funding $525 million purchase of Communications Supply Corporation and improved by 0.6 turns in the fourth quarter of 2005. Our all-in average borrowing costs are low and have improved over the last 2 years despite a rising interest rate environment. We continue to have ample liquidity to fund organic growth as well as accretive acquisitions.

Fastec and Carlton-Bates are fully integrated into our base operations and delivered results above our original full-year expectations. Today, we also announced the authorization of a $400 million share repurchase program. We are confident in the power of our business model, in our ability to perform better than the market on an ongoing basis. The opportunities provided by our continuous improvement initiatives, our successful acquisition program in a fragmented industry, and our strong financial position provides us the ability to create additional shareholder value through a stock buyback program.

Given our strong earnings and free cash flow, the company has ample capacity to continue to fund above market organic growth and accretive acquisitions in conjunction with the announced share repurchase program. As we discussed in the past, WESCO's end markets can best be categorized in four major areas which are industrial construction, utility, and commercial, institutional, and government. We also call that CIG.

These markets are extremely large and are primarily served by a very fragmented distribution channel. The continued trend of companies in outsourcing logistical and sourcing functions is beneficial to WESCO. Our approach to outsourcing initiatives including integrated supply along with various OEM value-added services has positioned WESCO to grow at above market rates.

Despite what some have called a temporary soft patch in the fourth quarter economic activity, we believe that yesterday's positive GDP report gives an indication of the underlying strength in the economy. Even though the data seemed to be driven by consumer spending. Despite the small miss in our top line targets during the fourth quarter, our backlog increased 15% over last year end and was seasonally higher than normal. The combination of invoice to sales plus the change in backlog which together represent end-market activity and sale success also signal continuing broad based demand for our products and services.

From our perspective then, the overall economy remains stable with solid activity across our end markets. 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 roughly 18 to 20% of our business focused on the electric utility generation, transmission, and distribution end-markets, we are well positioned to capitalize on the forecasted increase in spending on maintenance, expansion, and automation of the nation's electric power grid. As we have a relatively small portion of WESCO's sales, in the residential construction market, the decline in the residential market is having little impact on our business.

Commodity pricing moderated in the fourth quarter. While copper was up quarter over quarter, we saw a 10% decline in its average price during the fourth quarter versus the third quarter of 2006. We have tightly managed this commodity class and did not take nor do we anticipate taking any inventory write-downs. While we experienced margin compression in these product categories, our overall gross margin for our core operations increased sequentially on both an absolute and mixed-adjusted basis and increased quarter over quarter on a mixed-adjusted basis.

Before looking at next year, 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 growth in the industry will be mid single digits and that our performance will be 2 to 3 percentage points above the industry. We will continue to strive for double digit organic sales growth. 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's supply basis and free cash flow over the next several quarters will be directed at debt reduction.

Let's take a look at the first quarter of 2007. Given the current trends in macroeconomic and end-market activity, we expect the second half of 2007 to be stronger than the first half. Our full-year organic growth expectations are in the 8 to 9% range and excludes the growth that will result from the CSC acquisition.

For the first quarter of 2007, we have some tough year-over-year comparables and expect to generate growth on our core business of approximately 6 to 7% versus 2006. First quarter sales from CSC are expected to be in the range of $155 to $165 million. Total sales for WESCO for the quarter are expected to be in the range of $1.5 billion. SG&A as a percent of sales should increase slightly from last year's first quarter due solely to the impact of our 2006 acquisition. However, operating margins are expected to be approximately 50 points above the first quarter of 2006 reflecting gross margin expansion, primarily due to ongoing margin and efficiency improvement initiative in our core operations and the impact of our 2006 acquisitions.

Depreciation and amortization is expected to be $42 to $44 million for all of 2007. Full year tax rate for 2007 is expected to be in the range of 32%. Share count for the first quarter of 2007 excluding any impact of our share repurchase program is expected to be $54 million and average $55 million for the full year. The increase in share count is a result of the higher share price and a convertible debt issuances put in place in September of 2005 and October of 2006.

Early last year, we communicated a new overall 3-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 2006 and are looking for another record setting year. Our view for 2007 remains positive and we believe that we are extremely well positioned to capitalize on the increasing nonresidential commercial, industrial, and infrastructure construction projects and the forecasted increased spending on the nation's electrical grid. 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 employees and creating superior shareholder value. At this point, I would like to open up the call for a q-and-a session.

[OPERATOR INSTRUCTIONS] And your first question comes from the line of Curt Woodworth of JP Morgan. Please proceed.

Yes, hi, good morning. Steve can you comment on the operating margin results of this quarter at 6.8%. That was at the low end of your guidance at 6.8 to 7.1, and I was wondering what are the factors that brought you to the low end and also looking into the first quarter, the guidance suggests that margins are going to be roughly flat despite the fact that you are going to have more benefits from the CSC deal which I know is at a higher margin business, and so I was just wondering what some of the puts and takes are on that.

Yeah, Curt, it's Steve. If you look at the shape of the business in the quarter, we did -- and the margin expansion coming in, we had a good quarter result. The issue now is a little bit of margin compression from copper. We were able to offset that, but we weren't able really to expand on that to get to the higher end of the range. That was part of it.

And the other component, we had a little less positive leverage on the infrastructure. Sales came in slightly below our expectations. So those two combined would put us pretty much smack in the middle of the range.

We did a great job in taking our pricing initiatives across to all of the product categories. I think we did a very good job managing a relatively rapid decline in the copper prices, and we were able to expand our gross margins on an adjusted basis.

Okay. And can you comment -- provide a little more granularity on some of the trends you saw in the economy, maybe break out growth rates either in the MRO business, the commercial construction business, and what you are seeing in the utility side of your business?

Yes. Hey, Curt, this is John. Good morning.

Good morning.

In terms of the -- the overall economic indicators are still positive. Let me speak briefly maybe to industrial and construction.

Industrial production remains stable and factory utilization remains above 80%, at the end of December with 81.6%. So we're still consistent with good capital spending. [TMI] is above 50. It dropped below 50 in November but it ended the year at 51.4.

Industrial unemployment is 3.8%, the lowest level since 2000. Industrial workers are working an average of 42.9 hours, above a 10-year average of 42; a new cycle high. So the takeaway overall is the factories are humming, the factories are full.

In terms of our industrial end markets and our performance, national accounts and integrated supply remain strong. We've got good performance and strength in oil and gas, metal, mining, general manufacturing, healthcare and government.

The soft spots are what we've seen throughout all of '06, and these segments are down year-over-year, and it's food processing, and it's automotive -- transportation, principally automotive. So they are the offsets. In addition, the challenging comps to Q4 '05 due to the hurricane.

So all in all, when you look at the overall economy, we think it got -- again, driven by a factory performance and utilization, are full. We've got good performance across our national accounts and integrated supply businesses. And we expect the industrial markets to be stable through the first market with modest capital spending and sustained manufacturing activity.

I will tell you that in the industrial market, we are seeing -- some manufacturers have lead times that are extending a bit, and that is because factories are full. So -- but that's a challenge we are working through.

In the construction market too, from a non-residential perspective, it has good indicators. On the resi side, we don't have much exposure there, but on the non-resi side, if you look at the overall market, the American Institute of Architects Billing Index is at the highest point in 11 years. Vacancy rates are down in the mid-12% range, which is good.

Many of the markets across the U.S. in fact have -- over 10 markets have vacancy rates below 10%, which is good for -- support speculative construction activity. Dodge and Reed data suggest a 7% to 9% growth for non-resi in '07. And we've had good performance.

We did see a bit -- and your question on what we're seeing -- we did see a bit contractors hedging their yearend purchases based on prices of copper, aluminum, and steel. And I've mentioned the lead time issue on behalf of some manufacturers kind of pacing things a bit. But overall, for construction, bid activity is high, contractors are optimistic. We've got some good feedback from a lot of the major contractors. And we've got a very strong and growing backlog, and our backlog is up double-digit percent versus the end of '05, which bodes very well for entering '07.

So that's some insight in the industrial construction market.

And how big is the backlog right now?

Backlog finished the year about 15% above where we were last year, and it's at a record level. So you can look at --

What's [multiple speakers].

-- over the quarter, looking at our sales activity, combining that with the backlog would suggest that end markets are -- the activity level is still pretty good and that we should be able to see a good business going forward. And as John mentioned, across a vast array of end markets, it still continues to point to a pretty solid 2007.

Great, and one final question if I may. On the copper headwind this quarter on the margin, copper being down 10% sequentially, can you quantify what the headwind was that you were able to offset?

And I guess looking into the first quarter of 2007, copper is down roughly 15% sequentially. Is it fair to say that the headwind would be about similar, just to get a sense for what it is you're having to offset through productivity and other issues?

Yeah, we talked about this throughout all 2006, how we'd try to manage this with a very small amount of inventory in the system. We were able to, in a rising environment, to mark up our inventory quickly, get our sales force out there to sell at market levels. We garnered some inventory profits with that.

And we did see margin compression in the fourth quarter on that, from a -- both a sequential and a quarter-over-quarter basis, and we were able to offset that. Had copper stayed the same, we would have seen a little bit better performance in the operating margins and in the gross margins. As you can see by our results, we expanded our gross margins even with that piece of the headwind.

Copper right now is in the $2.60 range; it's still above where it was in the first quarter of this year. As I believe Roy mentioned in the opening comments, we really run our business on a day-to-day going forward basis, and so we're paying more attention to the sequential aspects of it.

Our inventories of copper-based products are at a record low. Inside the company I would say we've done what we said we were going to do. We managed our exposure by keeping our inventories under control, and when the prices were rising we tried to get our sales force attuned to a higher cost level to sell from.

In a lower environment we are pushing to get the best margins we can on that. And we've offset that with our ongoing margin initiatives. We would expect that trend to continue in 2007, that is, incremental improvements across all product categories that would be -- if we were seeing an environment of copper continuing to stay at this level or slow down, we believe we should be able to offset that.

We do not take any write-downs in our inventory, we don't have any issues with that, and don't foresee any in the near future.

Curt, as we step back and look at the quarter -- the fourth quarter was just another quarter in a long series of quarters where we are getting very good traction on our comprehensive set of margin initiatives. We've talked about that in the past.

We have, again, just a very strong, comprehensive, very disciplined set of margin improvement initiatives. And we are very encouraged by the margin performance we've gotten across all the other categories other than the copper-sensitive categories. And that's really what helped provide the overall strong results of margin expansion.

And Curt, as the months play out and the copper pricings come down, what we all have is a natural lowering of our cost base in that inventory. So that will settle down as we go forward and we would expect to see the margins on that come back to normalized levels. So we -- the first part of the year, we saw an [all-in] margin levels on those products a little higher than normal. The fourth quarter was lower than normal.

These things tend to set out. We deal with these type of commodity increases all the time.

Right. Okay, thank you.

Your next question comes from the line of Deane Dray with Goldman Sachs. Please proceed.

Thank you. Good morning. I'd like to get a little more color regarding the expected timing and size of the buybacks, and just want to put it within the context of your priorities on debt paydown and then also with respect to your comfort-level leverage. You said you finished it at 2.9, you could go as high as 3.5. But what are the expectations regarding timing and size of this buyback program?

Deane, as far as our leverage here, we're kind of right in the middle of where our sweet spot is on that. And seeing the quarter-after-quarter performance that we -- the Company has, from an earnings perspective and a cash flow generation, been able to take the leverage down quite quickly.

We believe at this point that the stock is fairly significantly undervalued. You look at where we are trading on a trailing or a forward PE ratio. We believe we are trading at a fairly significant discount to our peer groups and we view this as a good return to the investors to bring back the shares into the Company as appropriate.

We've got plenty of capacity on our debt lines to both bring in the stock under the size of this program, it's a $400-million authorization. And we will look at where the stock is and we will move quicker when it is lower, but on an ongoing basis, we would expect to, during this year, be fulfilling that program. We don't expect that this will take any actions away from us as far as opportunities in the acquisition pipeline. We are -- it has been still very active as far as the number of attractive properties coming on the market, and we've got good capacity from a leverage standpoint to do both a buy-back and if significant acquisition come on, we would add new debt lines on that and still maintain a very attractive leverage ratio.

So just to be clear, you -- if I heard you correctly, that you would take on additional debt to fund buy-back program?

No, we don't need to take on additional debt to fund this buy-back program. To be clear, if we were doing well into the buy-back program, we had an attractive acquisition of say the size of CSC, we would put on new debt lines to handle that.

To clarify that point though, Deane, you asked about additional debt. What I think Steve's comment reflects is that our lines of credit, our capacity with existing facilities and the like is certainly ample to meet our objectives over time. So we don't want that -- want there to be a confusion that we have $400 million of idle cash sitting around, but we will utilize our available capacity and will do it in a smart fashion.

And just very specifically, sometimes managements will set for a buy-back program a goal of -- at a minimum to absorb the share creep, in this case from the convert. Is that a goal that you would set?

The buy-back program is well in excess of the -- any share creep by the two convertible debentures.

Okay. And --

And let me -- let me amplify just one point to just follow up on this a little bit because you ask about the range of leverage. A well-run distribution company, particularly one like ours that has a very low appetite for capital expenditures has a risk profile that is conducive to good management of leverage, our good management of a debt structure similar to what we have had over a long period of time. And so this is not something that even gets close to getting out of the bounds of very high levels of comfort with where we are.

So when you ask about the range and where we are, the fascinating thing for us in terms of how strong the business has been is our ability to generate significant amounts of cash flow. When you think about the significant acquisitions that we've made in the last roughly 15 months or so, and we are today at levels reported at year-end of 2.9 times, we've brought our leverage down, we've added a lot to the -- to the operation.

So, I think just again to point out that the risk profile and characteristics for a company like WESCO are low in that regard.

Great. And if I could just shift over to CSC and get little more specific update regarding the integration status and if you could address what the initial revenue and cost synergy, what the assumptions were and how is the integration tracking against both of those at this time.

Yes Deane, this is John. Well, we are basically at the two months' point and I -- as we've done with prior acquisitions and integrations, we have a tremendously detailed 100-day integration plan and we are taking a similar approach with CSC as we've done with Carlton-Bates and Fastec over the last 15 months.

The integration efforts are well underway. We've chartered over 30 different integration teams focused on joint sales opportunities, other margin improvements, and operating efficiencies.

On the sales side, the sales opportunity side, we have a significant opportunity to go after and capture national accounts growth. CSC is a very well-run business, but they didn't have a national footprint. And we spoke about the power of this combination as part of doing the acquisition, but coming -- becoming part of the WESCO family, we now have access to our national account base and our strong and broad geographic footprint. It is a terrific fit. They were number three in datacom and now with that combination with the WESCO capability, we have a viable national datacom solution.

In addition for construction project activity, non-resi or commercial construction projects, you can think of that as being -- now we can go in with a very strong one-two punch, full broadline electrical solutions, switchgear lighting, bulbs, all of that and MRO to follow, plus now datacom. So I'll leave you with a -- really the priorities on the sales synergy side are focused on really leveraging the national account opportunities and construction projects and going at that -- those projects in tandem as a team.

We've already executed a number of joint sales call opportunities. We've already -- the lead generation machine is humming and we are very encouraged. Overall, our sales and cost synergies and we've been pretty clear about this in terms of the accretion commitment for 2007, we are in the $0.35 to $0.40 range and we see that being on track.

Finally I'd say CSC is turning out to be an excellent cultural fit. We've already talked about the rationale of the deal and the strategic fit, I think, several times before, but it's turned out to be an excellent cultural fit, very strong committed team, well-run company, strong branch operations. And if you look at how they run, it just -- it fits very well with how we operate. And I'll leave you with this. The more we see, the more we get to know them, the more we go together, the much -- the more we like what we see. And we're just -- we're really thrilled with the start that we've got in our first effectively 60 days.

How many branches have been cut over to the WESCO IT system?

None, zero. And I think we -- I mean, we'll go through -- that is one of the integration teams as it was for the other acquisition we did, Carlton-Bates, et cetera. So -- and we'll go after that very thoughtfully. They've got a good IT platform and system and capability. It is clear that we are going to need to get them on to our platform and that team is working through the transition in a detailed -- our top priority though fundamentally is this -- the rationale of this deal is really one plus one equals three in terms of customer value proposition and top line growth. And so we are going to do everything we can to support that and we will be very thoughtful and measured in how we manage the IT platform transition because the last thing I want to do is even have a one-day ripple in terms of how we service customers and support them.

So with that said, that team is grinding through. We've not -- we've not fully locked a detailed schedule, but that -- we'll have that locked as we go through the next month or two in terms of [inaudible] plans are.

Deane, it is our normal practice to take certain financial and administrative control activities right away and our standard has been we don't attempt to change out the operational aspects of the computer systems until we make sure that we have a very good understanding of the business. So that typically is a --anywhere from 10 to 24 months kind of a timeframe. We are trying to accelerate that timeframe, but the basic logic is get control of financial and operational and human resource related activities and procedures and systems and on the, what we think of, as our bread and butter business systems. We take our time on that to make sure we have a full appreciation for any special ramifications.

Great. Thank you.

The next question is from the line of Adam Uhlman from Cleveland Research. Please proceed.

Hi. Good morning.

Good morning.

Just a clarification Steve. What was the benefit to revenue growth from pricing this quarter?

I would tell you in a dollar amount, it was the least of the year and it was probably in the $45 to $50 million. If we look at kind of a total year impact on the company, we think it was around 4.5 to 5% for the total year and we look at an adjust for the hurricane impact and foreign exchange and price. We think we came in pretty much in that 4% range of growth, if you look at the pricing impact and the hurricane, if you take the price out, add hurricane back in. So it was slightly less than what we saw in the three quarters, but not a dramatic -- first three quarters, but not a dramatic difference.

Okay. And then what are you hearing from your suppliers in terms of price increases for 2007 and what have you baked into your revenue growth forecast [or] organic target of 8 to 9% sales growth. How much of that would you expect to be from price realization?

We've got and our expectations -- it is a little bit more difficult in our companies. We sell extremely large number of different products and so it's a little more difficult to get that across thousands of suppliers, but we think we are going to see a couple of points of price in there. We think this is a very real and good for a distribution company.

A lot of the increase in commodity prices last year, it takes times to work that through the channel. We saw -- an analogy to that would have been back in 2004 after maybe half a decade or so of not much price power in the channel. You had that first spiking of steel with the tariff situation followed with copper and those commodities we were able to see and then to realize price increases pretty much right away. It took couple -- three quarters for the suppliers to get price into the channel and to work those commodity price increases through the channel. We expect we will see the same thing in 2007 and those -- that type of price gains, we would look at to be permanent and good for us. We would expect to maintain our margins and have more margin dollars to work with based on that. So, couple of points.

And leave you with this, yeah, there is a time lag between what you see happening in the commodity prices and how it ripples through the chain, but fundamentally we faced a continuous pressure/opportunity every day of suppliers trying to push price increases to us and through us to customers, and we have talked about that at length in the past.

Okay, sticking with that discussion a little bit, earlier in the year, you were talking about this rapid rise in commodity cost, pressuring new construction starts because of the uncertainty with the cost environment. Now, that commodity costs have come down, is it fair to assume that some of these project delays have been reevaluated, maybe they're beginning to be started and is that what you're seeing so far here in January to -- what's your guidance for the first quarter in terms of organic sales growth? Does that imply that you're starting to see nonresidential construction projects move forward that had been delayed?

Yeah, again two comments which I made earlier and I'll emphasize again. In terms of nonresidential commercial construction, we see very high bid activity, our backlog is up and when you think about that, that is also tempered with the fact that our suppliers' factories are very full and that creates an allocation challenge and opportunity, so when you really look at the whole supply chain, we are managing through that, we've got customer commitments. We've got great sets of preferred supplier relationships. We are encouraged by the bid activity we see. We are encouraged by the backlog we have Adam, as we enter the year and now it's a matter of executing those projects as a program management exercise, really, executing those projects in tandem with our suppliers to fill out the need.

Okay, thanks John.

Your next question is from the line of David Manthey with Robert W. Baird. Please proceed.

Hi, good morning. Could you -- not to overemphasize this copper thing but in terms of the up to $200 million in positive impact from pricing in '06, Steve, I think you said this quarter was 45 to 50 and it was lowest of the year. How much of that was related to copper?

Probably the bulk of it, probably in the 70% range, 70-75% range. Steel would be another category but [inaudible] the copper would be -- for us would be the bulk of that 70%.

Okay. And then in terms of CSC in the current quarter just for ease of modeling, could you tell us what the revenues and margins looked like this quarter?

Revenues were just [under] $100 million -- well, we only had it for a partial quarter --

Right.

-- so, they were seeing high single digit growth on their comparables and their -- they fall in line pretty much with our corporate average with gross margins being a little higher than our average but their cost structure being higher as well, but they fall right, kind of right in the center [part] of our business, and we see good opportunities to help them, John mentioned to help them and help WESCO on the national accounts on ability to cross sell opportunities, and we believe that we will have a nice impact with them as we get the companies together with our lean program. They don't have a current lean program in place and that's something that we will see traction on in the latter part of the year.

Okay, I think going into the quarter, you'd mentioned something like $0.04 of accretion is what you expected. I am wondering is that what you experienced and then second part of it, is that based on borrowing rate of 2%?

We came in a little bit better than the $0.04 in the borrowing rate and we gave -- our given forecast was a consolidated rate which anticipated funding half to a little bit more than half with the convert that we did and the other half in our own model that -- and had those comments was under our existing accounts receivable securitization and asset-based revolver lines. So an all-in rate in the kind of 4-4.5% range and that's what we've baked into our model. We executed it extremely well on the convert. It came in at 1.75%, was a little better than we thought we would get on that but not materially different. We did upsize it a little bit, so our model had kind of a 50/50 mix and it ended up being 55/45, so but that came in operationally slightly above where we thought they would. Their momentum was very good.

Okay, and then my last question relates to your end-markets and the tone of business that you talked about through the quarter, I understand was an overall view. Could you break it down and talk about your industrial end markets which I believe is still 40% or something versus the infrastructure markets that seemingly have better trends and a better tailwind from the economy.

Yes, let me. Let me kind of recap that again. Again, in terms of the industrial end-market -- the economic indicators are positive. The factories are full, capacity utilization is at a high rate, and so -- that's the fundamental driver, our national accounts and integrated supply businesses performed well and that's across the entire broad based industrial market.

When you get underneath of that, look at the various verticals underneath. We managed that with a dozen plus key end-market verticals. We talked about that in the past. We saw strength in oil and gas, metals, mining, general manufacturing, as I mentioned earlier. The weakness we saw was contained to food processing and to automotive and that was really across the good part of '06 but particularly in the fourth quarter and both those segments were down year-over-year, and with respect to food processing, those companies went on inventory reduction. There were doing just a bare minimum MRO spend to keep the processes running. I think higher energy cost also had a factor, so that's the fourth quarter story in addition to the challenging comp to the Q4 '05 that impacted those companies and businesses that were in the greater Gulf Coast region. So that's industrial, and then I think we've spoken about construction, and kind of the dynamics there.

Right, so in terms of that industrial -- what I am trying to understand is how you're able to circumvent the trends that we're seeing among most of the other industrial distributors that we talked to that are seeing a deceleration. We've had ISM below 50 in two of the last three months now, and it seems like the general prevailing wisdom is that the industrial economy is softening to some extent. Whether it's an economic factor or just an inventory adjustment or what it is and I am trying to understand how you -- it sounds like you're seeing none of that other than a couple of these areas.

With the industrial -- in the industrial market, there has been some slowdown and deceleration -- there clearly has. I think now what you have to do is put that in context with what is our capability, what is WESCO's capability and how have we been performing.

So, when you step back and think about our broad geographic footprint, our leading national accounts position, and our leading integrated supply position, the way it is materially working is, we are literally in those factories every day and trying to sell additional products and services. So, obviously, we are a big driver as overall industrial activity. But I think we have clearly shown that we have been consistently through adding value increasing our products and our services to those customers, we've been taking share and the market is huge and highly fragmented, and so we've talked about that. It really represents to us virtually unlimited growth opportunities. When you think of how broad-based the end industrial market is, all the various verticals, our national accounts position, our integrated supply position, there's literally countless opportunities that can add value for customers.

Dave, let me just take one other stab at that. One -- you might say, well, where did you under-perform, or what are some areas for further improvement or -- that we are working on.

And in the industrial arena, we didn't do as well as I would have wanted us to. I think we did well, but not as well. And that's the OEM market. The bread and butter that we've had over the years that has a driven a lot of our growth and our access to customers has been in the industrial expansion, which has a sort of a construction/renovation productivity upgrade character to it.

And in the MRO activity, that has remained very positive. Our data would suggest that we didn't do as well, and in fact, performed below our average. And I'm looking at the annual data here, not the quarterly data. Where we didn't do as well was in the OEM market. And that's huge, it's a big opportunity for us to take some, I think, some -- several opportunities we have for utilizing and finding ways to make sure that our sales propositions with the integrated Carlton-Bates organization and WESCO is put to the test on making sure that we build in that market as well.

While we are on the subject, the other area that I think again is a huge opportunity for us, and we've got a number of major initiatives going on, is in what we group collectively as commercial institutional and governmental markets. This is going to be a great opportunity to have -- for WESCO and CSC to join together on some major opportunities and initiatives.

Between the two organizations, we've got terrific relationships, but we haven't been maximizing our opportunities. And in that particular group of market segments, institutional, we under-performed relative to our total growth rate.

Maybe we took our eye off the ball with everything else that was going on. We have the capacity, the capability, the know-how to do very well in that market and we've got lots going on to make sure we don't fall behind there.

Thank you.

Your next question is from the line of Sam Darkatsh with Raymond James. Please proceed.

Good morning, Roy, John, Steve. How are you?

Good morning.

Hey, Sam.

A couple of just housekeeping questions. The new debt issuance fees in Q4, were there any incurred, Steve?

As far as new debt?

Yes, with the -- what was it, a couple of million dollars maybe of fees incurred that would have been rolled into the P&L?

Not much. I mean, we did do the convertible but there were some fees that got expensed. The bulk of those would have gotten put into the capitalized and then be amortized over the anticipated life of that.

Okay. Second question, going back to one of your earlier responses, Steve, to the question regarding share repurchase. If I understand your response correctly, all else equal and roughly at current levels, you anticipate repurchasing the entirety of the $400 million throughout calendar '07, is that how to read your comments?

Yes.

Okay.

Let me just, again, amplify on that a little bit. We're going to be, as you would expect, opportunistic in doing this, but that would be our expectation. So if -- depending on how things turn out it may go faster, it may go slower.

Okay, next question. The gross margin expansion, if you were to back out the impact of the CSC mix -- I was pleased to see it continuing to move in a positive direction. I guess what I'm looking at -- I'm always -- try to be cognizant of the mix between your out-of-stock, your out-of-inventory sales with respect to your direct ship or special order.

And the fact that your gross margins rose year-on-year, would that suggest perhaps that that mix really hasn't changed much? That's -- so we're really no closer to the end of the cycle than we were perhaps a quarter or two ago, is that how to read that?

I don't know if I'd read it exactly like that. We did see some mix shift going on, particularly in the fourth quarter we -- pretty much as we've been talking about, we saw the project business and the mix of our total business being higher.

And we did -- we were able to get a gross margin expansion. I think the more important piece is the operating margin expansion that we got, Sam. And that is a combination of a lot of factors that's getting incrementally better pricing across the product categories dealing with the copper and other commodity situations, as well as getting leverage on our cost base.

So if you kind of adjust for -- looking at the fourth quarter or even looking at the total year, and you try to normalize from a mix basis, we got improvement in the core business as well for the full year and for the quarter. And if you take the mix out of it, the core gross margin would be slightly off from the run rate.

And how much of a jump did the project business mix represent in the quarter, or what's been the recent trend there?

We moved -- I don't have it right in front of me, but we moved probably three or four points more towards project business.

In your experience generally at what point is the tail-end of the economic cycle, when that mix hits, at what point and how far away from that point are we?

I don't -- that's a crystal-ball question. I can't give you a great answer on it. I would tell you that, as John has mentioned a couple of times here, the activity levels and the industrials still are high. And that generally tends to be in our stock area.

We had some extremely tough comparables in the fourth quarter when you look at our stock businesses, as it related to a lot of activity in our utility business. All that business came right out of stock. We had a lot of activity in the housing, recreational vehicle component that hit the Gulf areas.

And so there's -- some of that was a tough comp. Our industrial base and our MRO business is broad and we think it's still going to be quite robust.

The end market activity in the commercial and construction and the forecast coming out of Reed and Dodge suggest a pretty robust 2007 so we feel that there is several years in the cycle. I don't know that we'd be good enough to call an inflection point. We certainly don't feel at this point in time that we are at the end of the cycle.

Last question -- I may be asking a prior question in a different manner, and I apologize if I am. But the $20-million-or-thereabouts sales shortfall from your original plan, if I heard your prepared remarks correctly, I just want to see if I could get at the derivation of that $20 million as best you can tell.

Is that from -- you know, just simply October being a funky month or copper coming in lower than what you had expected or your OEM performance a little soft? What -- the variance versus plan, what was the primary genesis of that?

I can't point to one single item and say here is the $20-million variance. Certainly copper had an impact on that; it dropped a bit further than I think people were anticipating. It definitely had some compression on our margins, which we did a nice job of negating.

Some of it was with the comps obviously, what I talked to you about before, with the significant amount of activity that we saw last year. But as far as where we thought we would be off that $20 million. And a little bit of that was in the -- in our stock business area; copper was certainly a component of that.

And we did see what I would say probably some budgetary constraints hit in a couple of areas, notably in our utility business, given the fact that transformers had a pretty significant price increase throughout the year. We got feedback from several utilities that we have big relationships with that they were simply out of their budgeted dollars. For spending in that and that it would resume in the first quarter.

And that's pretty much played out in what we saw so far in January. We've seen a nice pickup in the utility sector, pretty much as forecasted back in December by some of the utilities we've been talking to. So I think that was a little bit with the impact of commodity prices, probably not in anybody's budgets to the extent they occurred in 2006. We found some of our customers running out of budget money.

Thank you very much [inaudible].

Okay, let me take a couple of quick housekeeping items. I just had a note slipped to me that some may not be able to hear us. We will all get a little closer to the speaker phone and secondly is that right now, it's 12:00 o'clock. I think under the circumstances, maybe we'll only take another couple of questions and we will try to be a lot more crisp with our responses. We apologize for running long.

And your next question is from the line of Steven Fisher with UBS. Please proceed.

Good morning and thanks for taking the question. Just a clarification, what was the pull-through on gross margin ex-acquisitions? You mentioned it was 54%, I guess, reported.

It was -- we had a 13 quarter run rate over -- in the mid-60 range and if we back out the CSC acquisition we were above that, so we have -- our core operations had continued strong operating profit pull-through. The acquisition brought it down somewhat, but we were above our 13 quarter average a little bit.

Okay. So the quarter was above the 54%?

The quarter was above the 63% we've averaged over the last couple of years.

Okay, and then just on copper again, what do you expect for year-over-year pricing impact, I'd say, the second and third quarter of 2007, when copper will be showing about a 25% year-over-year decline, if it holds at the $2.60 level where we are today. Are you -- you are looking for a couple of percentage points year-over-year for 2007 overall, but what do you think it will be in the mid part of the year?

The mid part of the year with -- from a comparison standpoint is the highest what it was. Copper averaged about $3.35 to $0.40 in the second quarter and about $3.55 in the third down to total year average, it was just over $3, its $2.60 now. We saw the impact of compression in the fourth quarter. Our inventories are in great shape in that. Our -- it is 10 to 15% of our total business and we -- our -- Steve, what we would do is anticipate offsetting that in other areas. Whereas, the numbers we've given on the 8 to 9% and 6% or so in the first quarter would assume copper levels roughly where they are at today.

Okay, and then just lastly, how accretive were Fastec and Carlton-Bates relative to that $0.45 original guidance?

They came in higher than that.

The problem in trying to answer that question quantitatively is that a lot the synergies that we look at end up being the costs that are taken on in the core. So we almost have to look at questions like that within several months as a -- how are we doing in the aggregate on specific kinds of issues? So as we transfer some people or consolidate some functions or activities, merge some operations, it's really hard to pinpoint exactly something like EPS to a specific operating unit.

Is it more revenue synergies or cost synergies or just a mix?

It's a mix, Steve, in there. What Roy said is right on it. I'll tell you, at this point, both Fastec and Carlton-Bates are completely integrated. We, at this point in time, have lost the ability to specifically say what their individual contribution on an apples-to-apples basis are, but from what we expected out of the operations in the sales side and the purchasing side, from the individual programs, were on the high end of what our expectation were.

Okay, thank you.

And your next question comes from the line of Rob Damron of 21st Century Research. Please proceed.

Good morning. Just a quick question on the balance sheet. I wanted to find out from you what the investments in working capital might be needed into 2007? Should we expect any increase or decrease in DSOs or inventory turns?

We'd expect to see our working capital performance maintain the good performance that we've had and the dollars would -- would pretty much go pro rata with the sales increase. So in the past we've given some numbers that were roughly per dollar of the top line sales growth, you are looking $0.10 to $0.11 of working capital investment. Now, we don't anticipate seeing a significant change up or down in either receivable days, inventory days, supply on hand, or accounts payable days. We believe we are in good shape in all those categories.

Are there any balance sheet synergies by -- with the acquisition of Communication Supply in terms of consolidating some inventory?

Not significantly as they are a north -- they are a U.S. based data communications company. We have a very small data communications business in the U.S. and a decent size in Canada. So there is not immediate opportunities for that, but it will be if hopefully, as we work with them in our lean initiatives, just what we've done with our other branch based operations, something we will continue to work at.

Okay, thank you.

Do you wish to take the next question?

I think that -- Roy, maybe, at this point we could probably wrap it --

Okay, if there are no other questions, we thank you for being with us today. We are very pleased with the results, particularly if you look at the entire year and the momentum that we have developed. We have got lots going on and we are enthusiastic about 2007. We appreciate you being on the call today and look forward to talking with you soon. Have a good day.

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