Wesco International Inc (WCC) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you very much for your patience and welcome to the third-quarter 2007 WESCO International, Incorporated, earnings conference call. My name is Bill, and I will be your conference coordinator for today. At this time, all of our participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of today's presentation. (OPERATOR INSTRUCTIONS) As a reminder, today's conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today's presentation, Mr. Daniel Brailer, Vice President, Treasurer, and Legal and Investor Relations. Please proceed, sir.

Thank you, Bill. Good morning, ladies and gentlemen. Thank you for joining us for WESCO International's conference call to review the third-quarter financial results for the year ended for 2007. 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 Operations Officer; 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. In order to keep the conference call to one hour in length and to accommodate the number of investors and analysts with questions, we would ask that each caller be limited to one question. If time permits, we would welcome follow-on questions.

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 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.

Actually, Dan, this is Steve; I'm going to start off today. Thanks a lot and good morning, everyone. As evidenced in our earnings release, we posted Company best-ever sales, gross profit, operating profit, net income, and earnings per share results. Consolidated sales were up 15% over last year's third quarter. Organic sales were up 1.5% in the face of challenging end markets.

Consolidated earnings per share were $1.50 versus $1.13 in the third quarter of 2006 and include the favorable impact of the recognition of prior year's state net operating tax losses and foreign exchange gains. Earnings per share adjusted for these items was approximately $1.29.

Our operating margins are at our best-ever performance if you adjust for the favorable impact of commodity pricing in 2006. The third quarter of 2007, our operating margins were 7.1%. Operating margins in last year's third quarter were a record 7.5%, including an estimated 50 basis points of favorable commodity pricing impact.

The record net income, coupled with strong working capital performance during the quarter, drove free cash flow of $75 million, which facilitated the purchase of nearly 1.2 million shares of WESCO stock for approximately $65 million during the quarter. Since 2004, we have spent nearly $1.3 billion on acquisitions and share repurchases, while also reducing our financial leverage.

Return on invested capital, which we define as reported net operating profit after-tax in relation to our total capital base with no items excluded, at 15-plus-% including the recent investment in Communications Supply Corporation reflects good earnings growth and high asset efficiency.

The integration of our CSC acquisition continues to progress well. The combining of our businesses has produced very positive reactions from suppliers and customers. CSC contributed $181 million of revenue during the third quarter. We are confident that the many initiatives and multiple project teams working on operational integration and achievement of current and future years' benefits will produce results that will meet or exceed our original projection of $0.35 to $0.40 of corporate EPS accretion for 2007.

Consolidated gross margins at 20.3% were close to last year's third quarter, despite a slightly negative sales mix and the absence of approximately 50 basis points of commodity-based inventory revaluation profits.

Consolidated operating profit pull-through at 24%, while good, was below our targeted level due to the low sales leverage on core operations. Overall, cost containment actions were effective at reducing our SG&A expense as a percent of sales on core operations to historical best performance. Additionally, our effective integration of acquisitions has produced superior operating efficiencies, resulting in record levels of SG&A performance on a consolidated basis as well.

We achieved record free cash flow of $75 million in the third quarter. Year-to-date free cash flow was approximately $196 million. These strong results helped facilitate the purchase year-to-date of 6.4 million shares of our stock for approximately $400 million, while reducing financial leverage from the second quarter of this year.

Our all-in average 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 $185 million and strong free cash flow projected, we continue to have ample capacity to fund organic growth, purchase additional stock, and make accretive acquisitions while maintaining targeted levels of leverage.

Last quarter we acquired a small automation controls distributor. Integration plans are progressing smoothly. We are evaluating other opportunities, and we expect to be in a position to complete one or more transactions during the next several quarters.

Let's now focus on our third-quarter top-line results. WESCO's direct exposure to residential construction is in the range of 6% of our total volume, consisting of sales to residential contractors and our recreational vehicle and prefabricated housing customers.

Additionally, our utility industry work related to local area distribution networks turned out to be more vulnerable to downturns in residential activity than previously recognized. Even though our utility business sales were up in the quarter, distribution system component sales were below historical trends. Related inventory stocking adjustments by utility customers that surprised us in June continued in the third quarter.

These events, all driven by the weakness in the residential market, resulted in lower sales of approximately $50 million or 3% of our third-quarter revenue. Offsetting these declines (inaudible) mid single digit growth in other parts of our utility business and in our industrial and commercial construction and OEM direct material end markets, with the overall results being 1.5% sales growth for the quarter. Our CSC acquisition results were in line with expectations.

Actions to increase the capacity of our sales force are gaining traction. An analysis of the macroeconomic data reflecting activity in our end markets, coupled with strong execution by our field operations, indicate an environment conducive for modest sales growth over the next couple of quarters. Our backlog is up over year-end 2006 and also signals what we believe to be sustainable demand for our products and services.

At this time, John Engel, our Chief Operating Officer, will provide additional commentary on our end markets and initiatives we are undertaking to strengthen our organic growth. John?

Thanks, Steve. Good morning, everyone. I am pleased to report that our third-quarter results include new record levels for sales per workday and sales per employee performance. We have returned to peak levels of sales and operational productivity.

Despite these records, we know that we can improve our top-line sales performance. Here are some of the details about the third quarter.

Sales to industrial customers were up mid single digits, consistent with our first-half results and in line with the overall industrial end market. Sales to the construction and utility customers showed improved momentum in the quarter versus our second-quarter results.

Moving to specific commentary on major end markets, starting with utility. With roughly 18% our business focus on the electrical 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. Expenditure levels for distribution equipment and supplies were generally consistent with last quarter, resulting in low single digit utility sales growth, a slight improvement over second-quarter results.

Top-line momentum was driven by increased sales associated with transmission-related projects, consistent IOU spending levels, and continued impact from the soft housing market. Overall, the market remains active with bit request and key alliance proposals for traditional distributor sales, as well as new and emerging integrated supplier opportunities.

Implementation of our integrated supply program at one of the largest utilities in the US is progressing well. WESCO's integrated supply business model has excellent growth potential via application to other investor-owned utility customers.

The customer trend of outsourcing of non-core functions continues and, when coupled with the underlying need to strengthen the transmission and distribution network, represents strong growth drivers for the utility market over the mid to long term. We are confident that our share in this market is steady, and we remain very well positioned to capture the growth associated with our customers' increasing capital project, daily MRO, and supply chain management needs.

Now moving to construction. Commercial construction sales had positive momentum, growing sequentially versus the second quarter, but were essentially flat versus the third quarter of last year. End-market activity levels are generally healthy as we close out 2007 and enter 2008. Bid activity levels remain high, and our construction backlog is up versus the second quarter of this year and year end -- and the end of last year.

Our contractor customers and major suppliers are generally optimistic about 2008. Architectural and engineering employment is up 3% over the last year, a positive sign that the pipeline of new projects will remain full. Potential spillover effects of the credit crunch in the residential construction downturn into retail development has not yet had a significant impact to date.

Contractors are facing some challenges in recruiting experience and talented personnel, particularly for work in energy-related industries. This is expected to continue.

We are aggressively executing a broad set of growth initiatives targeting the construction market. Number one, we are successfully adopting our national accounts service model to the construction industry and developing more strategic relationships with North America's largest EPCs and national contractors.

Number two, we continue to target high-growth industry verticals such as energy, healthcare, government, hospitality, and gaming. These are all industries where WESCO has established customer relationships and a reputation for customer service.

Number three, we are actively targeting a broad range of opportunities, both domestic and international, and marketing the full complement of WESCO products and services, including CSC.

Number four, we have opened several new branches to directly support active construction markets, including LaGrange, Georgia, site of the new Kia manufacturing plant, and Grand Junction, Colorado, a center of activity for oil extraction from shale.

Finally, number five, as we discussed last quarter we are actively and aggressively recruiting top talent to our recently-announced sales force expansion initiative, and have placed experience sales managers with strong construction backgrounds in two major regions in the US.

Now moving to industrial. Opportunities with multisite industrial customers remain strong as they continue to outsource portions of their supply chain needs. Sales to customers using our integrated supply services showed good strength in the quarter and were up high single digits.

National account sales were up mid single digits in the quarter, supported by our business model which continues to be effective with customer renewals. Examples include Shell, OxyChem, and ConAgra in the quarter and new wins. Examples include Bosch and the state of New York. These activity levels remain high, with the national account opportunity pipeline at an all-time record.

Focused customer sales Kaizen events and joint calls with key manufacturer partners continue to expand in number and increase in effectiveness. Our increased marketing activities in the second and third quarter, including national sales promotions, new product launches, trade shows, national account sales blitzes, are continuing in the fourth quarter.

The overall industrial MRO market indicators continue to be positive as measured by the ISM Index, a high level of capacity utilization, and stable industrial production.

Shifting now to CSC, CSC continues to perform consistent with expectations and delivered a very strong quarter, with double-digit sales growth and double-digit backlog growth versus last year. Long-term growth prospects remain attractive, driven by the growing demand for bandwidth in commercial government and residential applications; new commercial construction with an emphasis on data centers; growth opportunities within the physical and network security markets; and the overall trend to convergence, the convergence of voice, data, and video.

Our new vertical market initiative targeting data centers is yielding good results with some recent new wins. Data center opportunities cut across all industries and commercial enterprises, with strong growth in financial, telecom, medical, education, government, and other data-intensive high-tech markets.

CSC's expertise in network infrastructure, data communications, audiovisual, and physical security products, combined with WESCO's electrical and power capabilities, provides a comprehensive solution for these commercial construction projects.

Finally, as discussed last quarter, we are continuing our investment in sales and marketing. These sales resources are focused on increasing customer penetration and growth in priority growth verticals, as well as in local branch markets that offer strong incremental growth opportunities. We are on track to add approximately 200 personnel to our sales force over the next 18 to 24 months, and we are continuing to invest in new branch operations in select, attractive growth geographies. Now back to Steve.

Thanks, John. Before looking at the fourth quarter, I wanted to comment on copper price trends and its impact on our results. Average copper commodity prices were stable during the third quarter of 2007 and were down slightly from the third quarter of last year. Top-line revenue results are comparable for sales of products in this category, both sequentially and quarter-over-quarter.

Gross margins for this product set were steady sequentially but below last year's third quarter. Prices last year ramped up sharply during the first three quarters, resulting in the sale of lower-priced inventory into a rising price environment, yielding higher margins in 2006.

Looking forward to the fourth quarter of this year, the economic data pertinent to our end markets continues to be mildly positive. Current weakness in the credit markets and softness in residential construction markets have the potential to weaken future end-market activity levels.

At this time, our view is activity levels will be similar to what we saw in the third quarter of this year, adjusted for normal fourth-quarter seasonality. Typically, our seasonality is such that the first quarter has the least sales; the second and third quarters are similar and the strongest; and the fourth quarter is down sequentially 3% to 4% from the third quarter.

Gross margin percentage should be maintained, and SG&A as a percent of sales should be in line with the SG&A rate in the fourth quarter of last year, reflecting the lower sequential sales. The tax rate is anticipated to be around 32%.

Our working capital productivity should be maintained on a days supply basis. Free cash flow over the next several quarters will be directed at debt reduction and WESCO share purchases. Based on share repurchases to date, share count for the fourth quarter of 2007 is anticipated to be approximately 47 million shares and average 49 million shares for the full year.

Our view for the remainder of 2007 is steady. We believe that we will see improvement in our sales to non-residential commercial, industrial, and infrastructure construction projects and that we are well positioned to participate in the forecast increased spending on the nation's electrical grid.

At this point, Bill, would you open the call up for a question-and-answer session?

(OPERATOR INSTRUCTIONS) Deane Dray of Goldman Sachs.

Thank you. Good morning. Steve, question on SG&A; and maybe John is going to jump in here too on the answer. But is down sequentially, which shows that you have made good progress in cost containment. But I'm also tried to reconcile that, because you have been talking about adding sales and adding marketing effort. So there obviously was progress on both sides.

If you could just walk us through, where was the cost containment? What kind of headcount actually got added in sales? And any measures of productivity would be helpful.

Deane, there's a couple of things that are reflected in our third-quarter results. First and foremost, I think the organization did an excellent job on a broad basis of cost containment actions.

Our net headcount on a sequential basis for the quarter was down slightly. That included adding people into the sales -- both the sales management, sales, and sales support areas -- in line with our target over the next 18 months or so to get to that 200 net addition. Our goal would be on a long-term basis to continue to get efficiencies out of our lean activities to fund that sales growth.

So we made progress in adding salespeople, and we kept our headcount flat, slightly down. That was very important in our cost containment in that area as well as others.

Additionally, the foreign exchange translation gain that was more of a onetime item, favorable, also helped take the SG&A rate down a little bit.

You're still comfortable with that 8% operating margin goal?

That is our target. I think you saw from these results from this quarter that even in a slower growth environment we are able to make some progress in that regard. We would anticipate a little bit stronger economy than we are seeing today to get to that. But we have not backed off on that goal at this point in time.

Then just to clarify. For the fourth quarter, organic revenue growth target range might be what?

I'm sorry, Deane, what was that?

What would you set for expectations regarding organic revenue growth for the fourth quarter? I know you have given us the seasonality, and that was very helpful to say typically 3% or 4% down from third quarter. But as a comparison for the fourth quarter, what is your best estimate here?

Basically we are seeing a similar environment that we have had now and we expect to be in that range. I am going to have to cut you off from your one question at this point.

Terrific, thank you.

Adam Uhlman of Cleveland Research.

I guess, somewhat of a bigger picture question here, Steve. You were mentioning that you are evaluating some acquisitions expected to close in the next couple of quarters. We have seen in the industry here a pickup in acquisition activity, specifically CED and Sonepar.

I guess, one, how do some of these larger acquisitions that might be unfolding here in the near term -- does that change your acquisition priority list at all?

Then, two, would you be considering acquiring a foreign distributor?

Okay. First, the activities out there is broad-based and not a lot different than what we saw in the past, from our perspective. So we continue to see nice opportunities for what we have called in the past bolt-on acquisitions. Territories and suppliers and end markets that we are comfortable with, that we can bring in, integrate to our operations, and have an accretive acquisition.

The activity that is going on today, we don't see that dramatically changing our strategy per se. I think it is an indication that this is a good industry to be in and that consolidation will continue. We view that as positive for WESCO. Generally, more consolidation, the more stability, with larger players with longer-term goals of profitability; we view that as positive.

We have said many times as far as WESCO's acquisition strategy that we are primarily focused in North America. There is a tremendously large market there in the electrical, and in the OEM direct materials, and in MRO space with geographies that we are comfortable with and a supply base that we deal with today. We don't see any reason to be looking at significantly change-of-scale acquisitions on the foreign basis.

Having said that, if something was attractive that made sense, primarily or particularly in the oil and gas services area where we are strong, we could be looking at it. But that is not a focus for WESCO today and has not been in the past.

Okay, got it. Thanks, I will leave it at one.

(OPERATOR INSTRUCTIONS) Matt Duncan with Stephens Inc.

Good morning, guys. My question really is with regard to your cash flow and your balance sheet. First of all, what was total debt?

Then after that, looking at your free cash flow, it was very strong free cash flow performance. Thinking about your new $400 million buyback, would your plan be to predominantly use your free cash flow for that? Or do you expect that you might use some debt for that as well?

First of all, easy question. Debt is about $1.3 billion. Our leverage dropped by 1/10 of a turn during the quarter sequentially. Free cash flow was good and we would project going forward it to be at that level or better in the next quarter or so.

Given the current credit markets, our view towards share repurchase and acquisitions is going to be utilizing our free cash flow and being cognizant of the leverage in the Company today. So we will be looking to maintain leverage levels approximately where they are at right now.

Depending on the opportunity, we would use free cash flow; and we still have a significant amount of capacity on our debt lines to either do share repurchases or acquisitions. So it is a bit opportunistic in that regard.

Okay. Then one little housekeeping item, the impact of pricing, and I will get back in the queue. Thanks, guys.

Not significant for the quarter. We had a little bit of FX coming from Canada, but maybe a half a point on the top line. But other than that, pricing was relatively stable. We are continuing to work hard to get all price increases through the channel. I think our gross margin shows that we have been pretty successful in getting that done.

Robert McCarthy of Banc of America Securities.

Good morning, guys, and congratulation on what seems to be at least a relief for the quarter. In terms of the pricing question, just drilling down on that again, would you say that volumes were essentially flat in the quarter? That you got about 1 point of price? Or how would you characterize that 1% that you did get?

We got 1.5% on the organic; 15% overall with the acquisition. But we think it was about a half a point of price and a half a point of growth.

Half a point of growth overall? Okay.

Half a point of price and 1 point of growth.

1 point of growth? Okay. Fair enough. Then on CSC, any update in terms of the underlying profitability there? What kind of margin, what kind of margin mix you are seeing? And just any kind of outlook for kind of anything kind of telecom-related in terms of spending and demand trends.

Yes, in terms of CSC's operating margins before they acquired them were very good relative to their competitive peers. They have maintained/improved margins as part of WESCO. We are getting good traction across our integration activities.

In terms of the outlook, CSC performed well in the quarter. They are exceeding expectations as I mentioned. Double-digit sales growth, double-digit backlog growth, and across really all their end-market verticals we are seeing good growth.

Driven by data centers, driven by fiber-to-the-premise applications, and a number of other core drivers. Fundamentally, the demand for bandwidth is the underlying growth driver, and our outlook is positive.

Okay, and just one more question, and I understand we will have to move on from there. Just in terms of nonresidential construction, definitely a lot of more cautious commentary coming out of the wide swathe of industrial companies reporting. Particularly looking to 2008 and particularly looking at some of the outlooks from Dodge and elsewhere, from what you are seeing, obviously it looks like you haven't seen any kind of deterioration.

But does this give you pause? What are kind of your underlying assumptions near-term for commercial construction activity?

Here is our view. The nonresidential construction market overall is generally healthy. That is despite the latest Dodge report. But even if you look at the latest Dodge report, it shows kind of a deceleration of growth from 6% to 8% this year as the forecast for when the year ends up to a kind of 2% to 3% level next year.

But the market is large. It has many different assets and facets to it. We have got a whole number of initiatives targeting that growth. Overall, we remain optimistic concerning '08, based upon the following factors.

We have a strong backlog, and our prospects for future bookings associated with commercial and industrial construction projects is positive. We have delivered improved construction momentum in the quarter. So, I mean, relative to ourself, our position in the market, the initiatives that we launched, we feel good about the fourth quarter and moving into 2008.

I will leave it there. Congratulations.

Curt Woodworth of JPMorgan.

Good morning. You know, you commented that both in the construction and utility market you saw improved momentum in the quarter. So can I take from that that essentially sales growth kind of ticked up every month during the quarter? Or can you quantify that at all for me?

Yes, in general, we saw increasing momentum through the quarter, as we moved through the quarter.

Okay. So I guess my question is, then, in terms of your guidance and how you think about visibility, you know, it seems like that would be the most difficult end market to forecast. Right? That is the most lumpy relative to kind of the industrial MRO.

So you know, your sales this quarter were slightly below the 2% to 4% target. If that market was kind of better probably, or maybe you expected it to accelerate, where was the variance in your thinking? Was it really on the residential side, the 6% to 8% that was off $50 million?

A couple of comments, Curt. First, I would tell you that we -- typical if you want to talk about seasonality within a quirk, you generally see momentum improving throughout the quarter. So September we did see momentum improve throughout the quarter. It was not significantly out of line with what we would typically expect to see. So I wouldn't say there was a big change in what we had forecasted.

We would have like to have seen a little bit more activity in areas. I would tell you that the residential impact, we have spent a lot more time analyzing our business and understanding where the impacts are in there. It probably continues to be a bit more than what we had originally anticipated a year or so ago. But I wouldn't say there is anything significantly different about the quarter.

Looking forward, it is really about the execution on the West Coast side, with all the programs that John talked about is where we expect to see improvement, not from the end markets themselves.

I mean, Curt, if you step back and think of the quarter, industrial performed consistent with our expectations and consistent with the second quarter. Construction utility was up a little bit, improved momentum versus the second quarter.

Remember, our overall organic growth rate in the second quarter was essentially flat; and we are at a point and a half here. So when you look at that, where did we see the delta? The delta was some incremental improvement in momentum Q3 versus Q2 in construction and utility.

Okay, so as expected then?

Right.

Okay. Then, just quickly on the utility side, what is your sense on the inventory situation there? It seems like you have been destocking for two quarters now. Do you feel like we are close to the end, or --?

This is John again. You know, are we close to the end? Who knows? I mean your forecast ability, anyone's forecast ability, it is kind of murky. But I will tell you that the third quarter looked similar to the second quarter.

We did see a little uptick in momentum. That uptick came with investor-owned utilities. But it is not a meaningful difference Q3 versus Q2. That is the results we saw as we moved through the quarter.

As we move into the fourth quarter next year, it is going to be a function of what investor-owned utilities choose to do in terms of their stocking levels.

Great, thanks for the color.

Dan Whang of Lehman Brothers.

Yes, good morning. First question was regarding your backlog for the projects. I think you mentioned that that was up sequentially over second quarter as well as year-end last year. I was just trying to understand for the projects that are in backlog, the financing that is tied with that. Is it safe to assume that for those projects -- I know you usually put them in -- if there is a high expectation that they will come through. But is it safe to say that the financing for those projects is secure?

Dan, when we look at our backlog, we actually have several categories that we try to track. Backlog that we define in meetings like this is -- these are hard orders; they are in the house; they are for delivery with a very definitive timeline associated with them. They are not questionable at all with regard to financing or any other matters.

So when we talk about backlog, that is what we are referring to. These are firm, in the house, kind of order activity that has a schedule ahead of it.

What you are referring to is actually the promise of business to come, some of which is in final negotiation stage and some of it is still yet to be bid in a precise manner. So these projects can have a very long lifecycle associated with them, particularly a large-scale power generation or refinery kinds of project activity.

We are in the hunt in all of those. We have outstanding customer relationships with the owners of those projects as well as with the major construction firms. So we expect to be participating at some level in some very substantial projects that are visible on the horizon.

Now, those have the potential of having some financing contingencies associated with them. In our view, it is not a matter of if; it is really more a matter of when. So the timing could stretch out a little bit perhaps, in the event that there are financing issues.

We don't see those today. We have a major customer that has billions of dollars in their capital spending plan over the next five years, the next three years of which are already funded. So we see some of this as clearly going to happen. There might be some modest schedule slippages. But because of what we can, in effect, see and touch and people we talk to, we are very confident in the next couple of years with respect to large-scale construction initiatives.

Dan, to date we have not seen any step-function change or an issue with the credit concerns moving up into the types of products that we deal with, if that was your question. We have not seen that in any meaningful amount.

Right, right. Okay. Just to kind of add to that, just a clarification. I mean I know, Roy, you have been involved in the WESCO organization from the very beginning. I mean, well, from its split-off from Westinghouse, and I think you have got a great perspective on this whole industry. I mean, how does this, the current cycle and where we are, how does that feel?

I mean, you obviously went through some challenging times in the start of the decade. But I think the buildup coming out of the slowdown in this particular cycle was somewhat modest. I mean, how much sort of life and kind of energy do we have in this cycle?

The sample answer for me is that I have never been more bullish about our business. Part of it is the -- even though the orders are not in hand, I am talking personally with companies in multiple industries about the activities that they have got going on.

Also, we have had a long run in the North American industrial market. Capacity utilization being where it is at high levels, industrial output is at high levels. There is going to be continued expansion, upgrading, retrofitting, and enhancement of our existing industrial base; and that is ahead of us.

The NERC Report, the national energy reliability report, just came out this week highlighting the capacity challenges for the entire electrical generation and delivery mechanisms. There are some big investments that will have to be made. They will be made, and I just feel very good about where we are positioned in that regard.

That's great. Thank you very much.

Sam Darkatsh of Raymond James.

Good morning. One of these days, it could be worse, knowing my last name.

Just go with Sam. How is that?

There you go. I'll be a one-name person. First, a little housekeeping question, then my real question. Steve, what was the SG&A benefit from the FX gain? I'm coming up with somewhere between 4 and $5 million. Is that about right, pre-tax?

Yes, $4.5 million is a good number.

Okay. Then my question; and I am not sure who wants to address this. But my guess is that you guys feel that you are at least maintaining market share, if not gaining share against your distributor peers. Many of us obviously have seen an increasing disconnect between what your large vendors are saying the electrical end markets are growing at, and then what is actually occurring or happening through the distribution channel.

I was curious as to what you guys thought the two or three major drivers of that disconnect might be. And whether or not that dissipates over time, or increases over time; or if it is a new dynamic, or if it happens to be where we are in the cycle, where the larger-project businesses, perhaps the vendors go direct to the customers and circumvent distribution; or if it is an international versus US thing. Or just if you could give us some color as to why that disconnect may be happening and what the future direction of that delta might be.

Sam, this is John. We feel that we are absolutely holding market share if not increasing market share. We feel terrific about all of the activities we are driving.

When you analyze our performance versus any particular manufacturer, you really need to take into account to a couple factors. One is, what is their international mix versus US and Canada as compared to ours? Also, what is their overall mix relative to what is sold direct to their customers versus through the channel or distribution or supply chain partner like us? You got to find a way to get some sense and make some adjustments on that.

Some of the large commercial and industrial construction project owners, or their EPCs and general contractors, purchase large equipment like distribution equipment or other products directly from manufacturers. It is not a new phenomenon. It is how the industry has worked. This points really to a potential source of disparity in terms of overall reported numbers.

I would say fundamentally, we feel good about our value in the whole supply chain. We are seeing a clear trend of outsourcing across all our various customer segments, which I think will bode well for us over the mid to long term in terms of increased opportunities. We think we are very well positioned to compete effectively against a direct sales model.

A good example of that, and it is in utility, is our major integrated supply program with a large -- one of the largest utilities in the US. If you look at that, it is kind of a whole series of products and services, that were purchased direct, we now have an influence in. We talked about that in the past.

So we see ourselves taking an increasingly value-added supply chain management role. Again, we're confident that we're holding our share position, if not increasing it. But we will face some of this increase in certain product categories, with direct sale. Using utility as an example, transmission line conductor -- that is the wire -- is oftentimes purchased direct.

So to the extent that you have major transmission projects, we will be involved in some aspects of those projects, but the percentage of our involvement relative to the total will likely be somewhat smaller. It will still be relative to our distribution industry peers good; but relative to the total spend or the total amount manufactured, the total amount reported by manufacturers, certainly there could be some disparities.

We try to monitor this, obviously, from a distributor standpoint. We try to have some influence with manufacturers who declare that all of their channel sales go through distribution. Where we find that that is not the case, it concerns us.

But overall, I think you are hitting on an important point. It has to do something with the end-market mix of activity, mega-projects, and some shifts in terms of the kinds of primarily construction-related activity.

There is no evidence whatsoever of this kind of phenomenon, though, in the MRO area, in part because there you are looking at very fast turnaround of product delivery. And generally the service component, which is where we excel, is so much more valuable to the end customer.

So there are some dynamics, but I think overall, we're monitoring them. We're sensitive to them. We think we are doing well right now, in terms of holding our own or improving our relative performance. You see that with -- if you look specifically at some of our more direct market-related peers.

Thank you very much, and keep the momentum up. It is good to see.

David Manthey of Robert W. Baird.

Thank you. Just two quickly. One is, could you tell us what percent the backlog is up from the year-end of 2006?

It is up over '06 --.

2% to 3%.

2% to 3%? Okay. Then, could you give us -- I know you have talked about this qualitatively, but just so we are clear, could you give us numbers? Or maybe if it's going to be qualitative, a little more specific on the three segments.

Could you talk about organic growth in industrial construction and utility, whether that is a number or saying it is up low single digits, down low single digits, sort of thing?

Well, let me kind of -- again, I think if you look at the industrial is the mid single digits, and we have got good balanced growth inside industrial, integrated supply and national accounts and a good kind of balanced growth across end markets and our customers.

Then, construction and utility are very -- both improved momentum in the third quarter versus the second and low single digit growth.

Then manufactured structures, which we didn't talk about, is still down significantly. We are seeing those markets had collapsed. They are not coming back, and they are still down significant double digits.

Okay. What -- you said 6% was related to housing. If that is 6% down that much, and the rest of the business is sort of up low single digits, that is how you get to the 1.5%?

No, there's really a couple of things in there. The 6% relates to what we consider more the direct residential, and that is the residential contractors and what John was talking about with the prefabricated housing markets.

There is also a component inside the utility business and the grid that is directed towards new development. When you roll all that up, as far as what we think the exposure is, it is a bit more than 6%.

But you look at the big pieces, you are kind of 5%, 6% kind of flattish, and then maybe down in that other area.

Okay, great. Thank you.

Steven Fisher of UBS.

Good morning. The major engineering and construction and companies have had massive growth in their backlogs over the last couple years. Are these the projects that are already in your backlog? Or are the E&Ps are still shopping that backlog around, such that you might still see a wave of bookings there?

It's a good question. Those mega projects and the backlogs are very large, depending on which EPC you are looking at. This is -- that is a long-cycle business, there are many years to those projects. We don't load that into our backlog until we will get a small piece, or a piece of the electrical bulk spend, or whatever particular project. (inaudible) a project we have, which is much, let's say, downstream from when they book that in their backlog.

So we have said before we are encouraged by the fact that some of the large EPCs have double-digit backlog in the billions. It is a long-cycle industry, and that bleeds through our backlog when we get to the latter phases and the electrical bulk spend and some of the other MRO supplies and construction supplies flow through our business. So does that answer your question?

Steve, we would see that in front of us, still. A lot of their big spend would be released to us later.

Okay, no, that's helpful. Then could you just clarify? I think you just answered Dave Manthey that the backlog was up 2% to 3% over year-end '06. I think last quarter I thought you said it was 6%; and it sounded like it was up sequentially. So I wonder if you could just -- maybe I missed something.

There is a certain amount of seasonality into just our aggregate backlog that has lots of other types of project activity compared to what you are referring to as major large-scale projects. So that has to do to some extent with budget cycles and with weather and the like.

So we would typically see a strong building cycle earlier in the year, and some sort of flattish-ness in terms of the backlog as the year progresses, after -- in the second half. Again, it is generally because of weather and budget cycles that organizations go through.

Steve, we did say that last quarter. The disconnect there would be -- is that John is talking about sequentially is on a pure construction backlog; and some of that backlog that is down, that took it from the second to third quarter, relates to utility.

Okay, great. Then just a very quick one. You talked about a refinery project that was pushed out from earlier in the year that was expected to start in Q4. Has that project started yet?

We have not seen material sales yet. That is still in front of us.

But we have got some great -- the news is very positive.

(multiple speakers) It is happening, it is just -- and we haven't seen a material impact yet. So we feel good about that, because that is to come.

Great. Thanks a lot. Nice quarter.

William Knobler of Atalanta Sosnoff.

Thanks very much. Congratulations on reducing your costs and having a very good quarter. Just a question. When I read the release, it isn't clear to me if the last 1.2 million shares were purchased under the $400 million program. Really, the question has to do -- have you bought stock on the new $400 million authorization?

The 1.2 million that was purchased during the quarter was under the first $400 million authorization. We have yet to purchase under the new authorization.

Okay. As a follow-up, can you -- it sounds like your goals roughly, with free cash flow of perhaps $75 million a quarter, would be -- depending on acquisition opportunities -- to use that cash flow more or less for the new program. That type of rate, would that be accurate?

The balance between really three factors, Bill. The acquisition program, maintaining leverage, at targeted levels, and the share repurchases. (inaudible) it depends on where the share price is as well.

Thanks very much.

John Baliotti of FTN Midwest Securities.

Actually, my question was answered. Thank you.

Rob Damron of 21st Century EQUITY.

Good morning. Just one quick question. You mentioned that you plan to add about 200 salespeople over the next year or so. I was wondering if you could give us a little color on how you plan to allocate those salespeople by vertical market segments.

I'm not going to give you the specific breakdown, but we have got it lined up by vertical market. In addition, we have got targets we are going after in some select, local geographic markets where we think we have got some significant growth opportunities to capture.

By the way, when we put a new branch in place, obviously, there will be salespeople wrapped around that. I mentioned two branches that we opened this quarter, one in LaGrange, Georgia, and one in Grand Junction, Colorado. So we wrap salespeople around that as well, targeting the growth opportunities.

Okay, thank you.

Bernard Horn of Polaris Capital.

Just one follow-up on just a recent question on the 1.2 million buyback. I assume that was just for the second -- well, it was just for the third quarter. But did you complete the February '07 buyback? I thought that you did.

Yes, we did.

Okay. The other question is really just more of a kind of a strategic competitive question to follow up on what you were talking about earlier. I'm just curious if there are any competitive responses that you have seen in the marketplace in reaction to your success.

Related to that, whether there are any foreign exchange issues that are somehow affecting your business due to the obvious decline in the value of the dollar. So are you either positively or negatively affected by that in terms of your sourcing? And/or are your competitors positively or negatively affected by that?

Then lastly, whether the customer base that you have is yet to see any effects of that.

With regard to your question about foreign exchange, I will take part of it and Steve will chime in on part of it. We expect to see particularly large-scale industrial projects continue to move. Our positioning on those projects will be good; and part of that is driven by favorable exchange rates for the dollar.

A lot of equipment, particularly involved in chemical or metals processing plants and the like, use North American standards; and that means North American manufacturers. So that will be a positive over time assuming the dollar is stable.

A couple of (inaudible) some I think, nuances in there. From an exposure standpoint, we did have some positive impact this quarter. But we really structure our organization to mitigate those on an overall basis and going forward.

For the most part, our big exposure is in Canada. It's a big operation for us, and we generally buy our goods in Canada and sell those in Canada. We had some intercompany payables and receivables that have been settled up to mitigate going forward any significant impact.

As far as our customers and where does that position us and our suppliers, for the most part everyone that sells the equipment, our products in the distribution channel, is sourcing from similar OEMs. They all have operations in low-cost countries and are going to be generally facing the same type of directional changes, whether the dollar strengthens or weakens.

From our -- I think on a positive standpoint for WESCO is our big industrial footprint. Where the dollar is at today has made exports much more competitive, and we are seeing our customers being busier than they have been in the past. We think that we have very good exposure from that regard.

With regard to your question about competitive changes, one of the things that I am quite pleased with is the success that we have had with quite a number of major customer renewals, with respect to agreements positioning us as their preferred supplier.

It seems like for some reason this year we have had a lot more of those sort of renewals coming due, and we have been quite successful. So from a competitive standpoint I think we are doing really quite well.

Our concerns on the competitive front are really more from the fact that a good number of both contractors and distributors who have served the housing market -- and they don't simply go away; they try to find something, someplace where they can compete.

That means there is perhaps more competition on local business on a day-to-day basis. So much of our business, some 80%, we think of generally as being local market, having heavy local market influence. So from that standpoint, it is just something we have to be continuously aware of.

It is a very competitive environment. It is a very efficient market. Three bids and a buy years ago turned into 10 bids and a buy. So there's a lot of bid and quote activity that is continuously going on. That is where I think some competitive risks exist.

That is why we put so much emphasis on the quality and reliability of our internal operations, because we have to be effective in competing in every one of those markets. If we fall down, we run the risk of losing some major business because of a local plant issue.

Well, we have got time for one more question. So why don't we take one more, Bill, and then we will wrap up?

Brent Rakers of Morgan Keegan.

Good morning. Just wanted to see if you guys would spend a little bit of time talking about SG&A. You do a real good job, I think, when the 10-Q comes out of breaking out some of the payroll growth numbers on a core and acquired basis, and then the other cost items as well. I was just hoping you can give us a flavor what those look like in the quarter.

Brent, it's Steve. I would just reiterate, I think we did a real nice job of controlling costs. We did get some help on the foreign exchange. But you push that aside, and you look at what our biggest challenge is, which is our payroll and payroll-related costs, and we did a nice job of keeping those controlled during the quarter.

Even with the impact of the FAS 123, the nonstock -- noncash stock compensation, just for an example, on a year-to-date basis that is up almost $3 million. We have been able to absorb those into our core operations, continue to get the productivity, and keep our costs pretty well under control.

Beyond those areas, I would say everything else was pretty much in line. We have done a lot of work on transportation, which is another big piece of our SG&A cost. With what has happened in fuel prices, both transportation in and out, we have done a nice job of keeping those costs under control as well.

So it is a lot of hard work and it's a lot of individual actions, but the nice part about that, it is pretty targeted. For the most part, it is people and the expenses that go along with those people, and we have done a good job of keeping that well under control.

Steve, just related to that, you took a big year-over-year reduction in the second quarter in incentive compensation costs. Could you give us a flavor of what that was down year-over-year in Q3?

It was down slightly. It is a little bit of what we call -- in our core operations. In aggregate the costs would have been flat kind of on a total companywide basis. But there's a lot of things that are in our cost structure that (inaudible) activity levels. Salesmen's commissions are, and pay for performance incentive culture, the plans at the branch operations and administrative operations all get moved along in that regard. But it is down somewhat, but the biggest impact really is control of the absolute number of people.

Okay, great. Thank you, Steve.

Okay, I think that is it for questions and answers.

I just -- there was one offhand comment made early in the questions that referred to something like, gosh, it is a really for the quarter, or something along those lines. I thought it might be worthwhile just to make an observation or two along those lines.

There has been expressed among investors concern about how WESCO can perform in a flattish market environment or in a downturn. Our point of view has been that WESCO is a dramatically different company today than it was five years ago, 10 years ago, or 15 years ago.

We have benefited enormously from our attention to lean process improvement; and you might say, simply said, that is attention to detail. It is all in the details, and we have got everyone in the organization focused on managing operations much more tightly than ever before. So the dynamics in our Company are really quite different.

The performance measures, the systems that we track, the signals and triggers for taking action, our ability to manage our margins effectively, and as Steve points out, the fundamental cost control issues that are generally linked in large measure to getting the right balance of our personnel resources to the business that we are doing, and to have high levels of individual productivity -- we have got lots of measures around that.

So, I think part of the relief, if you will, and part of the success of the quarter has been on these kinds of operational disciplines. We mentioned early in the year we got a little ahead of ourselves with staffing for our future growth. We have made certain adjustments. We have grown into that level. We are making other adjustments as we go forward.

So today, I think we are quite pleased with where we are. We see a lot of business ahead of us. Frankly, we are disappointed that we haven't performed even better, given the fact that the markets -- while not as much of a boom as in 2005 and 2006, they are clearly okay. And we just feel like we should be doing better. So we have got lots of activity to try to drive that kind of performance, and performance that we expect and we know you expect as well.

So, we are working hard at it, intend to keep working hard at it. But I think you can take some confidence in the fact that our business model is very strong, and it is quite resilient. So thanks a lot. We appreciate your participation and we look forward to seeing you soon. Have a good day.

Thank you very much, sir. Thank you, ladies and gentlemen, for your participation in today's conference call. This include your presentation for today. You may now disconnect. Have a good day.