Wesco International Inc (WCC) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first-quarter 2007 WESCO International, Incorporated, earnings conference call. My name is Nicole, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to Mr. Daniel Brailer, Vice President, Treasurer. Please proceed.

Thank you, Nicole. Good morning, ladies and gentlemen. Thank you for joining us for WESCO International's conference call to review the first-quarter financial results for the year and -- for the first-quarter 2007. My name is Dan Brailer and I'm Vice President and Treasurer of WESCO International.

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

Means to access this conference call via 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, 2006, including the risk factors described therein, as well as other reports filed with the SEC.

The following presentation may also include 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.

Actually, I am going to start with this, Dan, if that is okay. This is Roy Haley. Before Steve and John provide details on the quarter, let me do a little stage setting.

A lot of things have gone right for WESCO as we begin 2007, but we came in below our plan in a couple of key areas. We achieved record results in sales and earnings, while maintaining our pricing and working capital management disciplines.

Profitable growth is key for our long-term success. I am particularly pleased with our ability to successfully combine core and acquired businesses and to show further gains in Return on Invested Capital, while absorbing all the investment and integration-related expenses into current operations.

During the quarter, we invested in additional staff and in new initiatives. We have laid the foundation for higher levels of performance for the balance of the year. The energy level and enthusiasm inside the organization is high. We are winning new business in tough competitive situations. And we are attracting top-quality individuals to the WESCO team.

On the other hand, we did not achieve our objective for sales growth. A variety of market factors worked against us. Going forward, we're concentrating on service delivery in well-established markets where we have leading positions, and on developmental activities in segments that we believe have both near- and long-term growth potential. John will have more to say about this later. But now let me turn it over to Steve for a discussion of first-quarter performance.

Thank you, Roy. I like to start with a high-level overview of the quarter's results and our conclusions regarding the Company's performance, prior to getting into a more detailed review of the results.

As evidenced in our earnings release, we posted Company best-ever sales results in record first-quarter operating profit, net income, and earnings per share, even with the absorption of a one-time litigation settlement. Total sales grew by 15%. But organic growth at 2%, which was below our expectations for both the quarter and the year, caused our SG&A expense ratio to be higher than anticipated.

Margin pressure from declining commodity prices, which began in the fourth quarter and continued through most of the first quarter, was more than offset by margin expansion in other product categories and, combined with our Communications Supply Corporation acquisition, resulted in an expansion of our gross profit percentage.

Our balance sheet continues to be in solid condition. Good working capital performance during the quarter drove strong cash flow, which facilitated the purchase of more than 3 million shares of WESCO stock for approximately $200 million during the quarter. Since 2004, we have spent over $1 billion on acquisitions and share repurchases and have reduced our financial leverage from 3.7 times to 3.1 times during that period.

While the organic growth in the first quarter did not meet expectations, our takeaway is the Company is in good shape from a competitive standpoint, with industry-leading sales and marketing programs serving customers who operate in resilient end-markets. Our investment in personnel, programs, and facilities are appropriate to perform well in the sales environment we expect for the remainder of 2007. We expect to produce another year of record financial results.

As noted in our press release, the combination of nonrecurring legal expenses of $4.9 million after-tax, or $0.09 a share, and a one-time favorable adjustment of $1.6 million after-tax, or $0.03 per share, in the accounting treatment of our accounts receivable securitization facility had a net negative impact to earnings per share of $0.06 for the quarter. There are no significant legal issues outstanding that we are aware of at this time.

Core sales started with modest growth in January, followed by a decline in February, and ended with 6%-plus growth in March. The March growth was more in line with our expectations for the entire quarter, which was comparing against a record-setting 17% core growth in the first quarter of 2006.

Gross margins improved by 60 basis points, despite an unfavorable mix and lower commodity prices during the quarter. The addition of CSC with its higher gross margins and margin improvement in other noncommodity product categories more than offset the mix and lower copper prices during the quarter.

Reported operating profit of $83 million, a 7% increase over last year's first quarter operating profit of $77 million, was the best-ever first-quarter result for to Company. Adjusting for the one-time items, operating profit was $90 million for 17% above 2006 and expanded by 10 basis points over last year's first quarter.

Consolidated earnings per share was $0.93 versus $0.86 in the first quarter of 2006. As previously covered, the first-quarter 2007 earnings per share were negatively impacted by approximately $0.06 related to the two one-time items.

Return on Invested Capital, including the investment in CSC, at 16% is excellent and reflects good earnings growth and high asset efficiency. We define Return on Invested Capital as net operating profit after-tax, divided by a simple annual average of all-in debt and equity.

Return on Invested Capital has increased 120 basis points or more than 8% from last year's first-quarter level of 14.8%, while we have added in excess of $550 million to invested capital.

The integration of our Communications Supply acquisition continues to progress well, and the combining of our businesses has produced very positive reactions from suppliers and customers. CSC contributed $160 million of revenue during the first quarter, and EBITDA levels were above expectations. As stated last quarter, we expect CSC to add $675 million to $700 million to revenues in 2007 and feel confident that we will meet our original projection of $0.35 to $0.40 of corporate earnings per share accretion.

Our lean initiatives are producing favorable results in our business and contributed to increased working capital productivity during the quarter. These activities were significant, as we achieved record first-quarter free cash flow of $73 million.

Consolidated operating profit pullthrough, adjusted for the one-time items, was 28%. With 2% organic growth, operating profit pullthrough on core operations were negative, as the cost structure in place for the quarter supports a higher growth rate, and margin improvement initiatives were directed at offsetting the impact of declining commodity prices.

Our balance sheet is strong and improving. As announced last quarter, we have improved 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 was 3.1 turns and included funding the purchase of more than 3 million shares of our stock for approximately $200 million during the February and March. Our all-in borrowing costs are low and have improved over the last three years, despite a rising interest rate environment during most of that time period.

With liquidity at over $210 million and strong free cash flow, we continue to have ample liquidity to fund organic growth, purchase additional stock, and make accretive acquisitions.

As we have discussed in the past, WESCO's end-markets can be best categorized in four major areas, which are industrial, construction, utility and commercial, institutional and government. 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 the various OEM value-added services, has positioned WESCO well to serve these large markets and to grow at above-market rates on a long-term basis.

From our perspective, the overall economy has transitioned to a level of somewhat slower growth, yet still provides a favorable environment for sustained sales growth across our end-markets. Despite the sluggish sales during the first quarter, we remain confident that our organic will gain positive momentum as 2007 progresses. Our backlog is 6% above last year's first quarter and signals a continued broadbased demand for our products and services.

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.

We continue to believe that an adequate 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.

Although we have a relatively small portion of WESCO's sales in the residential construction market, the decline in residential market is having some impact on our business, particularly in our customers serving the recreational vehicle, modular, and HUD code structured housing markets.

Now, anticipating questions relating to our end-markets and first-quarter sales performance, John Engel, our Chief Operating Officer, will provide additional insight into our end-markets and initiatives we have been undertaking to accelerate our organic growth. John?

Thank you, Steve. I would like to provide some commentary on our major end-markets. I will start by briefly talking about our CSC integration efforts, which have been well underway since the close of the acquisition in the fourth quarter of last year. We have over 20 different sales operations and functional teams actively working sales margin and operating efficiency opportunities.

Over 200 joint sales calls -- which are structured and organized WESCO plus CSC senior level sales calls -- have been conducted, focused on our national account government and commercial construction customers.

We have identified an opportunity pipeline of over $100 million. This is a significant commitment of effort and energy that is laying the groundwork for future sales, and initial results are very encouraging.

First-quarter operating results were strong with double-digit sales growth and double-digit backlog growth for CSC. Long-term growth prospects remain attractive, driven by one, the growing demand for bandwidth in commercial, government, and residential applications. Two, new commercial construction with an emphasis on data centers. Three, significant growth opportunities within the physical and network security markets. Four, the overall trend of convergence; and that is the convergence of voice, data and video. CSC has proven to be an excellent cultural fit within WESCO and includes a talented and committed team that delivers results.

Now shifting to the increased investment we are making in sales and marketing, we have added resources and launched a series of targeted development initiatives focused on oil and gas customers and international EPCs. These EPCs are engineering procurement and construction contractors, such as Fluor and Bechtel. International backlog is at an all-time high, and relationships are being strengthened and built for the long term.

We are also committing additional resources to markets such as healthcare, government, and higher education. These are attractive growth segments where we have significant but underdeveloped market positions.

Finally, we are adding resources to commercial construction for market intelligence and early tracking of capital spending in major construction project activity. This is a subset of a broader lean program which is underway and is focused on construction project lifecycle management.

Now shifting to industrial, industrial manufacturing and capital spending got off to a slow start and were impacted by extended equipment lead times, weather, and availability of skilled and experienced engineering and construction personnel. Supplier production lead times for large critical equipment components impacted quotations and project schedules. And hurricane projects in the first quarter of last year did not repeat in the first quarter of this year.

Sales to customers using our integrated supply services showed good strength and were up 9% in the quarter. Our national accounts model continues to be very effective with customer renewals. Examples include US -- include Cargill, Goodyear, ITW, and Tyson in the first quarter. Also with new wins. New national account wins in the first quarter include U.S. Postal Service, BAE Systems, Terex, and Diageo North America.

National accounts bid activity levels remain high, and industrial construction starts are expected to increase double-digit in the second quarter. Focused customer sales Kaizan events and joint sales calls with key manufacturer and supplier partners continue to expand in number and increase in effectiveness. We are tripling marketing activities in the second quarter, including national sales promotions, new product launches, tradeshows, and national account sales blitzes.

Moving on to construction, commercial construction experienced softness entering 2007. It was a continuation of a trend that began in the fourth quarter last year. Bad weather, particularly in the Northeastern and Northwestern portions of the US and Western Canada affected construction employment and activity levels; while the tight labor market in high-demand regions like the Gulf Coast, Southern California, and the Canadian Oil Sands resulted in project delays and deferrals.

Despite the soft start to the year, the American Institute of Architects Billing Index has been above 50 for four straight months, indicating that project activity should rise in 2007. Bid activity is high and construction backlog is up versus the first quarter of '06 and December year-end levels.

March was strong in comparison to January and February, with an increase in direct ship sales. We are executing multiple sales in lean-related initiatives including new resources targeting the EPC customers we have talked about, and also large multi-location national contractors such as [MCOR, IES, and Kioway] through both new and enhanced supply and service agreements.

Also, CSC's expertise in network infrastructure, data communications, and physical security products is beginning to yield significant cross-selling opportunities with key contractors. This should result in additional billings in the second half of this year.

Manufactured housing end-markets comprised of HUD housing, recreational vehicle, and modular contracted in the first quarter. Reduced production levels and the FEMA sell-off of inventory homes in the Southeast US translated to double-digit declines in these product markets.

Now shifting to utilities, the market performed well, consistent with expectations, and produced double-digit sales growth in the first quarter. We exited the quarter with a strong backlog and expect our performance to continue in the second quarter as we enter the traditional construction season. The market is very active with bid requests and key alliance proposals for traditional distributor sales, as well as new and emerging integrated supplier opportunities, which we have talked about in the past.

This is driven by a growing customer trend of outsourcing of non-core functions and is supported by a shift from manufacturers selling direct to serving customers through distribution.

In the first quarter, WESCO entered into an integrated supply agreement with one of the largest electric power companies in the US, and is well positioned to provide a complete service-oriented value proposition to customers as they invest in capital projects, new power plant construction, and alternative forms of energy such as wind.

The utility industry has excellent long growth potential, driven by the underlying need to strengthen the transmission and distribution network in the US. This will translate into increased spending in the maintenance, expansion, and ultimately the automation of the US electric power grid. We continue to be very bullish on utility.

In summary, we have an extensive set of sales and marketing initiatives underway which gives us confidence in our continued ability to provide value for our customers. This is as we build upon the strong relationships that we have with our supplier business partners. We are well positioned and it's our objective to again demonstrate that we can grow faster than the market for the balance of 2007. Now back to Steve.

Thanks, John. Before looking at the next quarter, I will make a few comments on copper price trends and its impact on our results. Commodity pricing moderated further in the first quarter. On average, copper declined 15% during the first quarter versus the fourth quarter of 2006, putting downward pressure on gross margins for this product category.

We have tightly managed this commodity class and did not take, nor do we anticipate taking, any inventory write-downs. As previously discussed, margin compression in these product categories was offset by our margin initiatives in other product categories.

On a positive note, there has been a significant upward trend in copper prices since mid-March and into April, which if maintained will have a positive impact in the second quarter.

For the second 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. We believe that the growth in the industry for 2007 will be low to mid single digits and that our performance will be 2 to 3 percentage points above the industry.

For the second quarter of 2007, we expect to generate growth in our core business in a range of 6% over 2006. Second-quarter sales from CSC are expected to be between $175 million and $185 million. Total sales for the quarter are expected to be in the range of $1.6 billion.

Gross margins should remain relatively stable during the second quarter. SG&A as a percent of sales should improve by approximately 100 basis points from the first quarter of 2007 rate, excluding the one-time litigation charge. This reflects the positive leverage on higher sales.

Depreciation and amortization is expected to be approximately $10 million for the quarter. Tax rate is expected to be in the range of 32%. Working capital productivity should improve further on a days supply basis. Free cash flow over the next several quarters will be directed at debt reduction and WESCO share repurchases.

Based on share repurchases to date, share count for the second quarter of 2007 is anticipated to be approximately 50 to 51 million shares, and average approximately 51 million shares for the full year.

In early 2006, we communicated a new overall target for operating margins in the range of 8% by the end of 2008. We remain committed to deliver on that target. Our view for the remainder of 2007 remains positive, and we believe that we are well positioned to capitalize on nonresidential, commercial, industrial, and infrastructure construction projects and the forecasted increased spending on the nation's electrical grid.

We're also confident on sustained solid performance in industrial markets. 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. Nicole, could you please open up the lines?

(OPERATOR INSTRUCTIONS) Adam Uhlman with Cleveland Research.

Good morning. I was wondering if you could help me reconcile some of the mixed messages that we have been hearing on nonresidential construction, recently. Because some of your larger suppliers just this week, including Eaton, have presented a fairly bullish outlook and recent demand trends for nonresidential construction. So do you have any visibility into when large construction project activity might accelerate?

Adam, good morning. It's John. You know, our backlog is strong and growing in construction, so we do expect that we will see some pickup in activity as we move through the second quarter. But principally as we move into the second half of the year.

But you know, the first quarter for us had some challenges where project owners and contractors grappled with material prices, wage inflation, shortage of skilled labor, as we have discussed. So that is our perspective on construction. Nonresidential construction.

When you look at our performance in the first quarter, part of that bridge is really the hurricane activity we had last year, and some extended lead times. Really, weather had an impact on us, both in the Northeast, the Northwest, and Western Canada. We came out of the first quarter in Western Canada, for an example, and had an all-time record sales month in March. That bodes well as we start to move into -- move through the year.

Okay, thanks, John. That's helpful. My second question here is for Steve. You made some great strides on the SG&A line over the last several years with lean. Could you talk about your ability to drive further leverage, even if project activity doesn't re-accelerate?

If you look at the results for the quarter on an annual -- the quarter and looking at it last year in our core business. We were able to essentially maintain the same SG&A rate -- once you adjusted for the litigation, the one-time expense in that -- even with a rather sluggish top-line growth. I think that demonstrates that our lean activities continue to drive that through.

If you think about what we have talked about in the past and our pullthrough concepts with a top-line growth. And we have used what we characterized as Simple Simon models, with kind of a 6% to 8% top-line growth. And talking about the challenge of delivering a 50% pullthrough, when you have a cost structure in place with normal inflation on an employee and a merit-base. That would tell you that at 2% or 3 % it would be very difficult to get continued improvement.

But when you look at our results quarter-over-quarter, essentially flat in that area, and I think demonstrates that the SG&A is under control. It is in good shape to support the business we see coming forward for the rest of the year. And the lean initiatives continue to work.

Remember, the lean processes that we put in place addressed virtually every aspect of our business from generation of sales, from working on our margin initiatives, to controlling costs on SG&A. Internally, as well as trying to address the external cost factors that are related to fuel prices, transportation, and the like. So we're very confident on our lean programs and believe that we have quite a bit of room to grow on that.

Thanks, Steve.

Deane Dray with Goldman Sachs.

Thank you. Good morning. Steve, I would like first some comment on pricing. On a 2% organic growth in the quarter, what was the contribution from pricing?

We think pricing was probably around that range, Deane. I would like to make one comment that we have really not talked a whole lot about. If we look at that 2% organic growth, when we have talked about it in the past we have had a price factor; we have had a foreign exchange factor; and then we had what we considered to be a unit volume growth.

Foreign exchange for the quarter was essentially no change. The Canadian dollar was essentially where it was in the first quarter of last year, so that wasn't there. We thought for the year, we would see a price increase in the range of about 2%; and that feels about right still for 2007.

If we look back into the first quarter of 2006, we have still a fair amount of hurricane-related activity. North of $20 million. So if you kind of adjust it for that on an apples-to-apples basis, our organic growth was more in the 4% range. So we think we had some growth in there; about half of it was in price.

Okay. Then, on the commodities side, we have seen yet another spike in copper. If we understand how your P&L works with a precipitous rise in copper, would that set you up potentially for some second-quarter inventory gains? Or is it too early to tell?

It's a little bit too early to tell. But if -- the price level that is out there right now and what we feel is going to be out there, that would put us in a position for some slight inventory gains in the second quarter. Had virtually no impact in the first quarter. We saw a deceleration in the fourth quarter on copper prices; and continued to decelerate in January and February; and turned around about mid-March; and has behaved fairly nicely.

Our conversations with suppliers to date would indicate that they feel that the current price levels will probably stick. If that in fact happens, we will be and are on top of that already in trying to have the new level out in the field. So we would see a positive impact on that in the second quarter.

I will just add, again we are hopeful as we enter the construction season, where prices typically increase, that we would be able to support pushing those prices through to customers.

Good, it sounds like you managed to well when copper prices came off. So we will just watch it now with regard to any potential inventory gains.

Next question is on SG&A. If I understand it correctly, John, in your prepared remarks, when you talked about the work on the SG&A ratios; but it also sounded like you are doing some additional spending in the second quarter, in your comment on tripling market activities. Is there a dollar amount associated with that? Or is that just an allocation of resources?

That is an allocation of resources. You know, the message I wanted to deliver is we have got a number of, a series of terrific development opportunities, some of which have been under development for some time. We have got targeted initiatives focused on that.

We have done some selective hiring of some terrific talent that has joined our team in the last several months, and as part of an effort to really focus on key growth verticals, and coming with a complete WESCO value proposition and solution for customers in those verticals. Attractive verticals that are growing.

With respect to marketing, we have been investing in marketing over the last four to five years and have built a strong marketing capability. As we enter the second quarter, we are ramping up activities, and we expect to get some good return out of that. So it is really activity level and focus, Deane, and shifting of resources relative to marketing.

Got it. Then last question, and maybe this is for Steve. Just help us bridge the pullthrough, because this was the lowest we have seen in a couple of years. If we look at versus a year ago, could you size for us what the factors were? How much is just pure organic growth falloff? How much is anything on the expense side that got away from you? But help us understand what that shortfall was.

What the contribution from CSC might have been there, too. So ex-CSC, what might that have looked like?

You know, the pullthrough on a consolidated basis, adjusted, was about just south of 30%. On the core business, with the growth at 2% we actually had negative pullthrough. The comment I would make on that is really related to less-than-expected sales growth during the quarter.

We think that our cost structure is in good shape. There were no surprises on the cost side during the first quarter. We would expect to see pullthrough moving right back up during the second quarter with what we see in front of us from the top-line basis.

So there is nothing out there, Deane, from the expense side that gives us cause for concern at this point in time. We saw a little bit of softness in January and February. March came in on the core basis right as we anticipated it to come in, and the whole quarter.

So at this point in time, I would tell you the issue was a top line; and we don't feel concerned at this point. If the top line does not materialize throughout the year, we will take appropriate actions on the cost side. But we don't see that, we don't feel that at this point in time. We have been making the investments that we believe are appropriate on a long-term basis to drive above-market sales and get the pullthrough that we have had for the last three years.

Can you comment on daily sales in April? Any early looks?

The early look, we had a little bit of a -- I call it a mismatch, when the Easter holiday was last year versus this year. So for the first half of the month there were some tough comps on that. But we have seen it improving over the last week. So right now, we feel pretty good about the quarter.

Great, thank you.

Dan Whang with Lehman Brothers.

Yes, good morning. First question was regarding the monthly trends that you talked about in the first quarter, how January started slow, and then February slowed down. Could you talk about some of the end-markets' trends that might have given that? How much of that was weather? Any details on what made the pace pick back up?

Yes, I would say that if you step back and think about the first quarter this year, we absolutely had a different winter than we did a year ago. If you think about the profile of the quarter, it particularly impacted us in February.

So weather was an impact across the quarter. A major impact in February. And the winter season in general was a tougher, more challenging season. It impacted multiple portions of the US, as I said before, Northeast and Northwest and actually the Upper Midwest, as well as Western Canada. So that is the weather impact.

With respect to the project activity, Steve mentioned that that was upward to $20 million of nonrepeating business that occurred in the first quarter of last year that did not repeat this year. They're with customers that we have got great relationships with; the backlogs are healthy with those customers; we see that picking up as we move into the second quarter.

But that was a significant and challenging, I would say, comparable that really spread across the quarter. You know, it wasn't -- you know, front end of the quarter, say January and February.

As we said, March did pick up. March picked up in activity level, both in terms of bid activity level, in terms of backlog growth and out the door sales. So that was encouraging as we exited the quarter.

Okay. Just moving on to some of those issues that you talked about that is being worked out in the marketplace. The material price issues I guess between the contractors and the owners, and some of the equipment lead-time issues. Could you delve a little bit more into the details? What type of equipments are involved?

And these type of labor issues, do you think that could be worked out over the next couple months. Or has it been worked out already?

You know, I think, I would say the equipment lead-time issue is a well-understood and publicized issue. It is across -- it is not isolated to a single narrow product category or a single manufacturer. So we have seen that across a number of categories with our supplier business partners. I think that will sort its way through.

The other thing is, I think our manufacturing customers did have an inventory buildup late in 2006, which is had some bleed-off as we started to go through the quarter. That bleed-off probably will extend into the latter part of the second quarter. So you know, that is our perspective, kind of coupled with the other drivers we talked about.

Okay. Finally, you were quite active in that whole share repurchase program, so you're about halfway through that. What could we expect? I guess the plan to continue with that, and any possibility of acquisitions at some point, second half of the year?

Dan, we are pretty active buyers of the stock during the quarter. We look out on a long-term basis and the value proposition and how we see our business [feathering] out. We think that it was during the first quarter and continues to be -- one of the best acquisitions we can make is WESCO stock.

We will continue on that premise in the near term. We have got plenty of liquidity. Our cash flow is very strong. We would look to still be an active participant in that.

Having said that, we have [still got] a pretty active acquisition pipeline. There is several what I call small bolt-ons in the electrical area, and there's a couple of other nicer-sized ones that we're in the very early stages on. We will balance and blend up the share repurchase with the acquisition activity as appropriate.

We have got -- our leverage is still in great shape. We have got a lot of capacity on our existing lines. If need be, we will look to the outside markets, debt markets most likely, to do a combination of the share repurchase and acquisitions, if appropriate. But the current availability and our forecasted cash flow at this point would allow us to fully execute the share repurchase program during 2007. We will just watch where the valuation of the stock is at.

Sounds good. Thank you very much.

Curt Woodworth from JPMorgan.

Good morning. You know, in the last quarter, you commented again that you thought the back half of the year would be strong. You know you got off to a little slower start. I am just wondering if you could comment on, do you still think that 8% to 9% organic growth is possible for the year? It seems like that would be pretty aggressive, because you're talking definitely over double-digit growth in the back half. So if you could just kind of update your thoughts around that; and then I have a follow-up.

Our outlook for the total year is in the 6% to 8% range. I think that we released that in the press release this morning for the total year. So that's -- the 8% to 9% thing sounds a little bit on the high-end from what we may have said before. I thought we were talking in the 7% to 8% range.

But we basically feel pretty good about the rest of the year. Similar to how we felt before, just adjusting for our first-quarter results.

Okay. In terms of the acquisition pipeline, you know you are looking at a couple larger transactions early in the stage. Can you give us a sense for what end-markets that you're targeting?

Also if you could provide some color on the utility market. There is not a lot of transparency that we have on that market. How fragmented is it? Is that an area where you could look to get bigger?

On the acquisition side, Curt, it is too preliminary at this point in time. We typically don't talk much about those until we are well on into the process. So I am going to take a bye on that one at this point in time.

There are a couple of smaller ones that are what I call more bolt-on electrical that help improve our position in a couple specific geographies and improves our product penetration.

On the utility side, I will turn it over to John to make a few comments.

You know, Curt, we feel very good about our business model in utility, our national footprint, and our value proposition. It is strong. There are some macro trends occurring in that industry, which we have talked about before. We see those continuing. If anything, we see more evidence, not less, as we move through the first quarter. That speaks to the comments about where we are bullish.

You know, just to give a few factoids to kind of cement this, again the transmission and distribution assets in the US are old. There's reports it will be $100 billion plus investment over the next decade. When you look at the opportunities we have on that side of the business, there is no geographic concentration. It tends to be uniform across the US, and we are well positioned to take advantage of that.

We are also well positioned to take advantage of growth in alternative forms of energy. You know, WESCO participates in many pieces of a wind farm project -- underground distribution, overhead, as well as the substation work.

Our backlog is increasing. We see good activity. The shift on the part of investor-owned utilities to look at getting better return on their invested capital, to look at outsourcing what is non-core and causing that supply chain shift plays very well into our strengths. We see more and more activity around that.

The large win that we had in the first quarter speaks to our ability to provide that value proposition and gives us confidence as we move to the latter part of the year in utility. So I would say all signs, all indications are very consistent with the macro trends that we have talked about for some time.

Curt, one dynamic that is different for the utility industry than most of the rest of our business, though, is that there is still a fairly high percentage of product that moves direct from manufacturers to, particularly, the investor-owned utilities. Big procurement items.

That is shifting slowly over time. That is a favorable trend. But therein lies perhaps even some of the difference that someone earlier inquired about, as far as how certain manufacturers have different dynamics in different market areas. But we see that transitioning slowly over time. It started a number of years ago with deregulation in the industry.

It is a favorable trend for us, overall. But there is still a lot of activity that goes direct from the manufacturer to the utilities.

Great, thank you.

David Manthey from Robert W. Baird.

Good morning. Thanks a lot. Just to check some numbers here. I might have missed it. Roy, in your monologue you mentioned organic average daily sales January, February. I got March at 6%-plus. But could you fill in the gaps for me, there?

Yes, that was John's comment earlier, having to do with how the quarter developed. I don't have that in my notes, but it is basically the -- Steve, do you have that?

Yes, basically January, David, was up, but not up as much. In a couple of point range. Kind of what the quarter average, where we saw a fall-off in February and then March came in very strong. I say very strong; but where we expected to be in that 6% range. (multiple speakers)

Okay, you mentioned that April started out a little weaker based on this Easter year-to-year factor. But as a whole or as you look at it, however you want to look at it, the second quarter, is that then as strong as you saw in March? Or is it is not so?

It's a little early to tell, but based on what we have seen in discussions with the field and the project activity that is out there, we would expect to see the second quarter more in line with the March run rate.

Okay. Then for the full year, Steve, I think you said for the second quarter 50 to 51 million shares. Did you say 51 million for the full year?

That is what -- if we stop where we are at right now and don't do any further share repurchases, that is the estimate of where we are going to be. Now that the -- it is a tough number to pin down. We would anticipate doing more share repurchases. That would take the number down. Things that would take the number up would be any stock option exercises and movement in the share price upward.

Okay, perfect. Okay. Then in terms of the breakdown of your business, what percentage of your business today is to industrial end-markets?

Industrial business is roughly 40% of our business.

Okay.

It depends on how you classify utility. In the overall statistics that the government keeps, utility operations are oftentimes included as a subset of industrial. But we break that out separately.

Right. I am not sure if you mentioned this, but what was the year-to-year growth rate among those types of customers in that industrial segment?

We talked about the utility being in the double-digit range.

Industrial it's low single digits.

Okay. Okay. Then, a similar question, what we have been talking about here in the Q&A session. When you look at the back half of the year, in order to get to 6% to 8%, if you come out of the gate here relatively slowly, you do need to get toward the upper end of sort of 8, 9, 10, at least percent growth rates in the third and fourth quarters, depending on how the second quarter shapes up.

But if that is the case and as you look at it, are you anticipating a recovery in industrial end-markets as well as construction and utility?

Not a significant change in that. If you look at the shape of our year, we had organic growth of around 17% in the first quarter of last year. It kind of mollified a little bit throughout the year. So we are looking at more on a sequential basis, David. So we're not looking for a big change in the end-markets for that forecast.

Okay. Then the final question. Steve, you had mentioned a couple of times in terms of your cost structure being about where you wanted it; and the sales being the issue. Should we then assume that the level of SG&A you have out there right now, in terms of the dollar amount, not percentage, but in dollars is roughly where you plan to be? Then hopefully, the growth comes in, in that mid single digit range?

The base part of our cost structure won't change dramatically. As we move through the year with the sales and the margin initiatives, you will see the incentive piece of that or the sales commissions, those things, automatically move with the gross margins. So as that increases, you will see that portion of the SG&A increase. But the rest of the basis should not change significantly.

Great, all right. Thank you.

Sam Darkatsh from Raymond James.

Good morning, folks. A couple questions for you. Most of my questions were answered. But with respect to pricing, Steve, what are you expecting in terms of price inflation that goes into your 6% organic sales growth in the second quarter?

We are looking out what we talked about last quarter and are still seeing from the supply-side, generally would be 2% for the entire year. So that is what we have got worked into the --.

So 2% for the second quarter as well? Then I'm confused, then. So based on the recent move in copper, is that to say that if you were able to have this level be sustained and go back to the customer base and pass it through, would that be incremental to your expectations? Or is that currently reflected in the expectations? I'm confused because of the dramatic moves in copper. What is inherent in your forecast?

Right, Sam, when we talked about this in February, we were looking at the copper prices to average the year in the 3 range. We were kind of in the high 2s. That was kind of the level we thought we would see.

It actually dropped a little bit below that; but now it has come back a little bit above. So it is only 10% to 12% or so of our business. So I don't want to overreact to it. If it continues at this level, this level is slightly higher than what we anticipated; so it would have some modest impact.

Okay. So on the existing forecast is what you're referring to?

Right.

I got you. Second question, on the 8% EBIT margin goal for next year, you were saying that the pullthrough this quarter was lower-than-expected, because of the lower-than-expected sales. What organic sales growth, [core] growth rate would you need in both '07 and '08 to be able to hit that 8% EBIT margin? You're saying 6% to 8% or so in '07. Would a similar rate be needed in '08 to hit that 8%?

That 6% range, yes.

Okay. The next question I would have, I'm going to try and phrase this properly, but I'm sure it is going to come out politically incorrect. In the first week of February or so, when you gave guidance for the quarter in terms of the organic growth expectation, were you seeing something that you hadn't yet seen in January that you were anticipating? Or why if January was off or was up but only slightly, and February was soft, why the expectations in the quarter of 6% to 7% comps? Was there a project or two that didn't flow through? Or what was the reasoning behind that and what didn't develop?

I don't know that is all politically incorrect (multiple speakers). When we talked about it, that was the first of February; we were just closing down January; we didn't have the book completely closed on it. It was slightly below where we were. But it was off of a very, very, very strong January of 2006. Really February kind of slid towards the middle end part of February. And that was a real surprise for the quarter.

Was there something in particular? Or was it pretty much broadbased of a downturn? Because it doesn't seem as though -- again when an earlier questioner asked that at least Eaton in particular was mentioning any kind of weakness whatsoever that they were seeing.

I don't think it was broadbased. I think we probably got a little -- certainly below our expectations on some of the residential spillover impact that hit the recreational vehicle, modular housing market was more than we would have anticipated.

Got you. Thank you very much.

Steven Fisher with UBS.

Good morning. You guys have talked a lot about backlog and trends. Can you just remind us how you define backlog? Is it signed contracts or what is the definition there?

Yes, the backlog is firm quarters on the books. For our business, it is considered -- think of that as kind of project activity.

That would include construction utilities, just any types of projects?

It includes construction as well as large industrial projects.

It would generally be project nature.

If we got a large blanket purchase order on stock business throughout the year, we would not throw that into our backlog. It is primarily project-related business.

Okay. Was there anything that was actually -- any projects that got canceled in the backlog? Or is it just that your backlog -- the projects that are in there are experiencing some delays?

No. Let me put a fine point on it again. I guess I didn't mention whether any got canceled or not. No major projects got canceled. The backlog grew in the quarter versus first quarter last year; it grew sequentially off the end of last year. What we are seeing again is kind of extending out, extended lead times, it is shifting out the execution of projects. Bid activity is very high, which is driving the backlog increase, as well as the extension of lead times.

Okay, now when you say the bid activity, is that the actual pace of bookings going into the backlog?

Pace of bookings going into the backlog. So when bid activity broadly defined is measured in the quotes that we're submitting, the proposals we are submitting; and then ultimately that becomes a front-end feeder when you get the order. When you book the order, it gets entered into backlog.

Okay. Can you just comment on what the pace of your actual bookings was? Is that double-digit?

I don't have a good number. It is up. The activity is up, and up, and up. I will tell you again, that is also very qualitative in terms of just you see the level of activity; you feel the level of activity across many different aspects of the business. You see the intensity as you walk through the various operations. You know, we are definitely feeling the that activity (multiple speakers).

The bid activity, Steve, is one that we watch. But it's hard to quantify that. The actual booking activity, the orders that got finalized and put into our backlog was up 6%.

Okay, great. Thank you very much.

Rob Damron with 21st Century.

Good morning. Just one question from me. If we look at your $0.35 to $0.40 accretion goal for CSC, were we near that run rate this quarter? If not, what else needs to occur in terms of integration to get to that level?

We are in good shape on the CSC. It is running on track, slightly ahead of schedule. We were slightly above that rate in the first quarter to achieve that. So we are highly confident of achieving that.

The integration activities are progressing well. We're doing them methodically. We're not trying to rush anything. This will continue over a long period of time.

Are there some incremental opportunities in the next couple quarters to take that up higher? Or is that just over time we will see that increase?

It will be over time. There is not going to be a step function change in that, Rob.

Okay, that's helpful. Thank you.

Sarah Thompson with Lehman Brothers.

Good morning; this is [Dorey Koenig] for Sarah Thompson. Just a couple of real quick questions. Looking at your working capital as a percentage of sales, it looks like over the past several quarters it has increased. I am assuming that that is as a result of the CSC acquisition. I was hoping that you can comment a little about whether that is the result of structural? I mean structurally in CSC, or is that more of an opportunity for --?

I am not sure exactly what you're looking at, but there's a couple of things that changed if you're looking quarter-over-quarter. We did have the accounts receivable securitization facility revert to on-book treatment. So you would have seen a jump in that. Then in the fourth quarter versus the third quarter last year, an absolute increase due to the acquisition of CSC.

But the working capital requirements there are very similar to the rest of our business. It is in good shape. We saw improvement in our working capital performance from a days supply standpoint in the first quarter of 2007 versus where we exited the year.

We believe if you look at the three components, you've got inventory, receivables, and payables. We think that we have some further opportunity in inventory. We are about where we want to be on receivables, between keeping a tight rain on credit while also facilitating sales. So we are pretty comfortable there. On the accounts payable front, we continue to try to be very aggressive, given our low cost of capital and taking available cash discounts.

So we are pretty pleased with where we sit overall. See some additional opportunity in the -- not huge, but additional incremental opportunity in inventory improvement.

Okay, that's very helpful. My next question is the one-time litigation cost that you guys discussed in the press release. Can you quantify that?

We did. On an after-tax basis it was $4.9 million; on a pre-tax basis, just north of $7 million. That's up in the SG&A line. That is where you will see it.

In the SG&A? Great. Then my last question is the $1.6 million for the AR. Is that also in the SG&A line?

That would be an interest expense.

Okay, so that is embedded in interest?

That is a reduction of interest expense. It is about $2.5 million, a little less than that. So when you look at the interest expense line, it is lower than what we will see on a go-forward basis.

Got you. Great, thank you very much.

William Knobler with Atlanta/Sosnoff.

Thanks. Looking at CSC, you indicated 675, $700 million this year possibly in sales. How would that compare with what they did last year? I am just trying to get organic.

They had actually made a couple of acquisitions last year, so it would not be totally comparable. But this would be in kind of the high single digit range of growth, if you did an apples-to-apples comparison. That is what our expectations are.

Okay. Since you were fairly aggressive on your buyback in the first quarter, 3 million shares, and you mentioned you are still looking at acquisitions, would you be willing or do you think you have opportunities to do something a comparable size to a CSC before you integrate everything fully?

We don't think that from a capital standpoint in the Company there is nothing that would preclude us doing that. From an activity level, we are well into the integration activities. The timing of a larger deal would take days, weeks, months, type of a project. We would be -- we have the capacity to do that, if the opportunity affords itself.

Also, you mentioned the first quarter last year was a very tough bogey. I think you said 17% organic. Could you refresh my memory? What were the last three quarters of '06?

It was like 17%, 14%, 11%; and then adjusted for the hurricane impact, about 8%.

Right. So your current forecast for internal growth in the second quarter is 6%?

In that range, yes.

So as a previous questioner said or asked, you would hope that that would build in the second half?

Correct. Not dramatically, but we would expect to see some build on that. If you do the math, it has to.

Right, right. Okay, thanks very much.

Nicole, this is Dan. We have time -- just being respectful to everyone's time, we will take two quick questions.

Brent Rakers with Morgan Keegan.

Good morning. I will try to be as quick as possible. Just wanted you to maybe comment a little. You talked a lot about the backlog-oriented business. I am guessing that the backlog helps provide some of the visibility for some of the revenue numbers you're talking about.

I was hoping you could maybe also address what you're seeing in the stock business. Because I would assume that is heavy on the manufacturing end-markets; and I guess what you're seeing there as you get into kind of increasingly tougher comps the next couple quarters on that part of the business.

Let me make a comment about -- let me just say kind of overall MRO activity levels -- generally healthy. As I mentioned, kind of a good litmus test or barometer for that is our integrated supply business. You can think about that being as near -- that is effectively 100% MRO. Our integrated supply businesses were up 9% in the quarter.

In terms of MRO activity levels across the end-market verticals that we serve with our national accounts, there were some impacts. We still saw the automotive and food segments being down. That is a continuation of the trend that existed and we really dealt with throughout 2006.

There were some strikes too that impacted us. Goodyear had a strike, Northrop Grumman had a strike in the quarter. That impacted some MRO activity levels.

But what we are focused on is really kind of -- with respect to industrial and MRO levels and that stock kind of business, it is focused on the national account and integrated supply renewals, and those new wins. We feel very good about the progress we made in the first quarter. Had a very strong pipeline. Laser-beam focused on the renewals; we are executing well.

And we have got an excellent pipeline of new customer opportunities that we're attempting to close. As well as grow with current customers. The way you do that is by expanding with the current customers that we have, by adding additional products and services and capabilities.

We had a terrific session with over 20 national account customers in the first quarter, where we brought them in and did a customer focused application and training event focused on lighting upgrade opportunities. So there is an example of the kind of activities we are driving, where that is kind of incremental business that would get served out of stock, depending on the size of the project.

Thanks, John. One other quick one if I might. This is the first time that I can remember you guys talking about adding salespeople in a long time. I think you had about 1,300 or so at year-end. Can you give me perspective as to how many sale -- I mean, were these outside, inside? And maybe some numbers on how many you added in the quarter.

We haven't really broken out the specific walk on that. But I will say that as we went through last year, we expanded and continue to expand our lean initiatives. We expand them in areas like I mention. Lean construction, right? Where we're doing so pretty interesting and novel things focused on the entire construction project lifecycle.

But we have gone off and been able to -- and what we have found has been able to attract some very strong talent to WESCO given the performance and the impact we're having with customers and the relationship with suppliers. So we have added some strong talent focused on business development, marketing, and targeted sales initiatives.

That was consistent with the plan we put in place for 2007. So we executed that, and that was consistent with that plan. Now, it is a requirement for us to get the return on that investment. That is where our effort is focused as we drive through the second quarter.

Thanks, John.

[Corey Johnson] with Kingsford Capital.

Thanks for taking my question. You have answered a bunch about CSC. I wonder about CSC and how that affects the relationship you have with other suppliers. Obviously, there are some suppliers you are going to be buying less from now that you have CSC. Has that affected your ability to get better price from the suppliers that you're dealing with, because they know that you can go elsewhere and will go elsewhere, including through acquisition?

I will tell you -- I will make a couple comments. First, we pride ourselves in WESCO of having outstanding relationships with our suppliers. We like to call them business partners. I think CSC had the same.

We have -- since the acquisition, the integration effort, we actually have had an integration team focused on those supplier relationships. We have been meeting with them. I'm very encouraged by the ability to do more business together. I see that really as net positive.

As we take our lean initiatives -- and under our lean initiatives for sales that we talked about before, one of the initiatives is joint sales calls, where we work with our supplier partners, and we go call on customers, and focus on their needs and applications. We have launched that process with CSC.

Some of the suppliers are overlapped. It really bolstered our relationship and strengthened it, and allow us to go to customers now with a broader product offering. So, I see this as really being a tremendous positive. I think the CSC team shares that view; we do; our suppliers have given us that feedback. That is something that we are going to leverage as we go through the year as part of the integration effort.

But there are surely some suppliers you will be buying less from because you have CSC now, yes?

Not necessarily.

Not really. When you look at -- keep in mind the rationale for the deal. You know, you look at the supply base we had for Datacom in the US. It was a business that was not very large and kind of spread across all our branch network, and CSC brought us that critical mass and scale and relationship. So again, I see this as a net positive and net gain.

For the most part we were buying directly from the OEMs. That is how CSC buys. So it is just a larger combined spend with, for the most part, either the same group of suppliers.

That's helpful. Thank you very much.

Okay, well, we have run a little bit long. We thank you for your time and attention and interest. As we indicated, there are a lot of good things that happened during the quarter on an overall basis.

We have made investments to support our expectations for improved sales activity for the balance of the year. We are working hard on, again, demonstrating our ability to grow at levels faster than the market. Thanks again and have a good day.

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