Wesco International Inc (WCC) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2007 WESCO International earnings conference call. My name is Maria and I will be your audio coordinator for today. (OPERATOR INSTRUCTIONS). At time I will now turn the presentation over to Mr. Daniel Brailer, Vice President, Treasurer, Legal and Investor Relations. Please proceed.

Thank you, Maria. Good morning, ladies and gentlemen. Thank you for joining us for WESCO International's conference call to review the fourth-quarter and full-year 2007 financial results. This morning, participating in the earnings conference call are Mr. Roy Haley, WESCO's Chairman and Chief Executive Officer; Mr. John Engel, Senior Vice President and Chief Operation 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 the 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 maximum number of investor and analyst questions, we would ask that each person be respectful of the time constraints and limit to one question.

This conference call may include forward-looking statements, and therefore, actual results may differ materially from expectations. For additional information on WESCO International, please refer to the Company's annual report on Form 10-K for the fiscal year ended December 31st, 2006, including risk factors described therein as well as other reports filed with the SEC. The following presentation may also include a discussion of certain non-GAAP financial measures. Information required by Regulation G with respect to such non-GAAP financial measures can be obtained via WESCO's website at www.WESCO.com. I would now like to turn the conference call over to Roy Haley.

Good morning and thanks for joining us. In a few moments, Steve will take us through the financial results for the quarter and then John will be commenting on results achieved in some of the major end market customer segments along with a summary of key initiatives that we've got planned for the coming year.

Before that, though, I would like to take this opportunity to acknowledge the good overall performance of our management and staff and the excellent relationships that we have with customers and suppliers. We had our challenges in 2007, and we experienced some shortfalls in achieving our own expectations in several areas. But those shortfalls were largely offset by outstanding performance and new record results in other areas and on balance, we've had excellent results and another quarter and another year of record financial performance.

Looking ahead in 2008, we will have our work cut out for us, but we have good momentum in the key areas involving sales initiatives and operations productivity. I believe that our team is up to the challenge. So now, let me turn it over to Steve Van Oss, Chief Financial Officer and then John Engel, our Chief Operating Officer.

Thanks, Roy. Good morning, everyone. As evidenced on our earnings release, we posted Company best-ever fourth-quarter sales, gross profit, operating profit, net income, and earnings per share results. Consolidated sales were up 8% over last year's fourth quarter. Organic sales were up approximately 3% in the face of challenging end markets. Consolidated earnings per share were $1.34 versus $1.10 in the fourth quarter of 2006, and includes a favorable onetime impact of tax incentives for U.S. export sales, a change in foreign deferred taxes and the timing of realization of Canadian tax benefits. Earnings per share adjusted for these items was approximately $1.22, still, a Company best fourth-quarter result.

Operating margin performance was strong at 6.6%. And, when adjusted for last year's onetime acquisitions-related benefits, represents Company best-ever fourth-quarter performance.

Operating margins in last year's fourth quarter, at 6.8%, were a record for any fourth quarter and include approximately $10.7 million or 80 basis points of onetime acquisition-related benefit. Strong net income drove free cash flow of $50 million, which facilitated the purchase of nearly 1.1 million shares of WESCO's stock for approximately $44 million under our current $400 million share repurchase authorization.

Return on invested capital, which we define as reported all-in net operating profit after-tax in relation to our total unadjusted capital base at 15%, including the 2006 investment in the datacom business and the three acquisitions completed in the last half of 2007, reflect the continued growth in earnings and high asset efficiency.

The integration of our datacom acquisition continues to progress well. And the combining of our businesses has produced very positive results with $170 million of revenue during the fourth quarter. The success of the initiatives and multiple project teams working on operational integration and achievement of current and future years' benefits has produced results that have exceeded our original projection for market synergies and $0.35 to $0.40 of corporate EPS accretion for 2007.

Consolidated gross margins at 20.3% were equal to this year's third quarter and on an adjusted basis, equal to last year's fourth quarter despite a slightly negative sales mix. Consolidated reported operating profit pull-through at 38% was good and moved closer to our targeted level of 50% despite low sales growth. Adjusted pull-through was 70%. This favorable operating profit pull-through was achieved primarily due to operating efficiencies and effective cost controls.

Overall cost-containment actions were effective at reducing our SG&A expense as a percent of sales on core operations to historical best performance for the year and for any previous fourth quarter. Additionally, our effective integration of acquisitions has produced superior operating efficiencies, resulting in low levels of SG&A expense on a consolidated basis as well. We achieved strong fourth-quarter free cash flow of $50 million and record full-year cash flow of approximately $246 million. These strong results helped facilitate the purchase of 7.5 million or 15% of our total shares of our stock over the last 12 months for approximately $443 million while maintaining financial leverage at last quarter's level of 3.1 times.

Our all-in average borrowing costs are low and at under 5%, have improved over the last three years despite a rising interest rate environment during most of that time period.

With liquidity at over $180 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 two companies -- J-Mark and Monti Electric Supply. J-Mark serves the manufacturing housing end market and Monti serves the contractor market in the Gulf Coast region. Both operations are being integrated into our operating model, and we continue to evaluate other opportunities and expect to balance share repurchases and acquisitions in line with free cash flow and leverage targets.

Let's now focus on our fourth-quarter top-line results. Total sales were up over 8% with sales from core operations up almost 3%, in line with our expectations for the quarter. We saw mid single-digit sales growth in both October and November. December sales were down approximately 1% due to the timing of the Christmas and New Year's holidays, which we believe resulted in a loss of one workday or 5% of sales growth in December.

Our backlog increased from last year-end and we are seeing January sales to date growth in line with the momentum experienced in the fourth quarter. Sales to customers in the industrial and commercial construction end markets were up in the low to mid single digit range. We continue to see the negative impact of the residential construction market slowdown on our utility business, which was down in the low single-digit range for the quarter. Our datacom acquisition results were in line with expectations.

Actions to increase the capacity of our sales force continue to gain traction. And an analysis of the economic data reflecting activity in our end markets, coupled with strong execution by our field operations, indicate an environment conducive for sales growth over the next couple of quarters, in line with what we experienced in the fourth quarter. Our construction backlog is up over year end 2006 and ended the year with good momentum. This signals what we believe is sustainable demand for our construction end markets for the next to two to three quarters.

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'm pleased to report that WESCO delivered increased sales momentum in the fourth quarter with 3% core sales growth, marking our strongest quarter of the year. Our increased emphasis and focus on sales and marketing execution and capacity expansion [initiate] over the past several quarters is yielding positive results. We continue to operate at high levels of sales and operational productivity and remain committed to improving our top-line sales performance.

Now moving to commentary on our major end markets. First, starting with construction. Commercial and industrial construction sales had positive momentum growing mid single-digits versus the fourth quarter of 2006. Our backlog is strong entering 2008 and nonresidential construction continues to present project opportunities across our major markets despite the forecast of a decline in construction starts this year.

A significant issue facing both our customers and us going into the year remains the availability of qualified labor and support personnel, a dilemma we are addressing through the combination of WESCO resources, improvements in customer sourcing and material management processes, and feature products that improve safety and enhance labor productivity. We are aggressively executing a broad set of construction growth initiatives targeting the construction end market and are making good progress.

Number one, we are strengthening our relationships with North America's largest engineering procurement construction companies or EPCs, and national contractors by providing a complete solution comprised of multiple product lines, that is, electrical, datacom, industrial and materials and product management services, delivered through WESCO's national accounts service/supply model to customer locations anywhere around the world.

Number two, we are adding personnel and increasing our sales coverage in attractive industry verticals, such as energy, health care, education and government, and unique applications such as data centers, that offer opportunities for sustained growth over the next several years.

Number three, we continue to augment our geographical service capabilities through additional sales resources, new branches, and bolt-on acquisitions such as Monti Electric Supply, whose strong and established presence on the Mississippi Gulf Coast gives us the ability to more fully participate in the rebuilding of the region's residential, commercial, hospitality, and gaming infrastructure.

And finally, number four, we are emphasizing senior executive sales programs to drive additional penetration at both new and existing customers, including local and regional contractors, who are traveling out of their hometowns to work on projects in other markets and who desire consistency of pricing, product, service, and account representation regardless of the location of their next project.

Now moving to industrial, opportunity with multi-site industrial customers remain strong as they continue to outsource portions of their supply chain needs. Sales to customers using our integrated supply services model showed good strength and were up high single digits in the quarter. Sales to our national account customers were up mid single-digits in the quarter, supported by our industry-leading business model, which continues to demonstrate its effectiveness in our high customer renewal rates and in our consistent addition of new Fortune 500 customer wins.

We entered 2007 with a significant number of national account contracts up for renewal and I'm pleased to report that we experienced 100% renewal rate last year. Bid activity levels remain high with the national account opportunity pipeline at an all-time record. Our increased sales and marketing activities in the second half of 2007 are continuing into '08 with a particular emphasis and focus being placed on what we refer to as highly concentrated customer sales [kiaizon] events and joint calls with our supplier business partners. And these are targeting our Fortune 1000 customer base.

Number two, a series of new product launches traveling trade shows and direct-mail campaigns, targeting our customers and driving customer demand.

Three, we're launching a nationally sponsored workplace safety campaign in collaboration with the Electrical Safety Foundation International.

And four, we're launching a new marketing campaign to match best-in-class products and services with our customers' interest in energy savings and sustainability requirements. And this is being supported by our recently introduced, and an electrical industry first, Green Buyer's Guide.

Despite the recent drop in the ISM index in December and the 0.6% fourth-quarter GDP rate, feedback from our customers in the industrial MRO market continues to be generally positive, consistent with their high levels of capacity utilization and the continued growth in industrial production.

Now shifting to utility. Sales to our utility customers experienced a softening in the fourth quarter, declining mid single-digits versus last year. And this has been driven by the impact associated with the continued end market declines in residential construction. Sales to investor-owned utilities were up low-single digits, offset by declines with public power customers and utility contractors. Feedback from customers and suppliers indicate that we have not lost market share for distribution, equipment and supplies, the D of T&D.

Despite the decline in sales and the expectation that demand is expected to remain soft in the first half of '08, the utility market remains very active with bid requests and key alliance proposals for traditional distributor sales as well as new and emerging supply -- integrated supply opportunities.

Implementation of our integrated supply program was one of the largest utilities in the U.S. is progressing well and remains on track. WESCO's integrated supply and national accounts business models have excellent growth potential, [via] application to other investor-owned utility and public power customers who are looking to outsource portions of their supply chain, while demanding consistent service level across their many locations.

We believe this customer trend of outsourcing of noncore functions will continue and when coupled with the underlying need to strengthen the generation, transmission and distribution network, represent 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 capitalize on the forecasted future increases in spending on maintenance, expansion, and automation of the nation's electric power grid infrastructure.

Now shifting to data com. CSC continued to perform consistent with expectations and delivered a solid quarter, capping an excellent first full year as part of the WESCO team. Long-term growth prospects remain attractive, driven by four continuing trends.

First, the growing demand for bandwidth in commercial, government and residential applications, including network infrastructure retrofits and upgrades to support customers as they migrate to higher capacity network architectures, 10Gb Ethernet. Second, new commercial construction with an emphasis on data centers. Third, opportunities for growth within the physical and network security markets. And fourth, the overall trend to convergence; and that is the convergence of voice, data, security and video.

Our new market initiative targeting data center opportunities, which cuts across all industries and commercial enterprises, and it's financial, telecom, medical, education, government, and other data intensive high-tech market segments is yielding positive results with some recent wins.

Overall, our sales and marketing initiatives remain focused on combining our newly acquired data com expertise in network infrastructure, data communications, audiovisual and IP-based physical security products with WESCO's electrical and power capabilities and extensive geographic footprint to provide a comprehensive solution for commercial construction projects.

In summary, we are continuing our investment in sales and marketing and are on track to add over 200 personnel to our sales force over the next 1.5 to two years. These sales and marketing initiatives and resources are focused on increasing our customer penetration in attractive vertical markets as well as in local branch geographies that offer strong incremental growth opportunities. The market is large and fragmented and offers many opportunities for customer value creation. We remain focused on creating and taking advantage of sales opportunities while preparing for and staying ahead of any further economic softening through disciplined execution of our lean initiatives and a relentless focus on improving efficiency and effectiveness and delivering productivity. Lean remains our foundation for operational excellence and now in year five of our continuous improvement journey, we continue to aggressively pursue the countless opportunities to improve and profitably grow our business. Now back to Steve.

Thanks, John. A couple of quick comments on commodity pricing in the sale of our 60% interest in our LADD operation, and then we will look at the first quarter and the full year of 2008.

Commodity prices, primarily copper, were relatively stable during the last two quarters of 2007 and were generally comparable to the last half of 2006. Top-line revenue results are comparable for sales of products in this category both sequentially and quarter over quarter. Margins for this product set were steady sequentially and comparable to last year's fourth quarter.

As previously communicated, on January 1 of this year, we sold a majority interest in our LADD operation to its primary supplier, Deutsch's Industrial Products division. LADD had annual sales of approximately $100 million in 2007. Effective with this year's first quarter, we will no longer report the results in our financial statements as revenue, cost, operating profit, etc. Our 40% interest in the new joint venture will be reported on an equity basis, below the operating profit line. LADD operation is an excellent business and we believe that our partnership with Deutsch will further strengthen the operation.

Let's now turn to 2008. Typically, our seasonality is such that the first quarter has the least sales of the year. The second and third quarters are similar and the strongest and the fourth quarter is down sequentially from the third quarter, but higher than the first quarter. Economic data pertinent to our end markets continues to be mixed. The 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, the consensus view is overall market activity levels will be somewhat slower to what we saw in the fourth quarter of last year, but we believe that our sales and marketing initiatives and our strong market position will enable our company to perform well throughout 2008. For the first quarter, we expect to see sales growth rates quarter over quarter in the low single-digit range, after adjusting for the LADD joint venture accounting, similar to what we saw last quarter.

LADD's sales were approximately $27 million in the first quarter of 2007. Therefore, we expect to see sales in the range of 1.47 to $1.48 billion for the first quarter.

Gross margin percentage to be maintained sequentially and operating margin should be in line with last year's first quarter. Depreciation and amortization should be in the range of 7.5 to $8 million. Our tax planning activities have been very effective. But at the present time we anticipate that the 2008 tax rate will be around 34%.

Working capital productivity should improve several days and free cash flow over the next several quarters will be directed at debt reduction and WESCO's share purchases.

Based on share repurchases to date, share count for the first quarter of 2008 is anticipated to be approximately 44.5 million shares.

Our view for 2008 calls for more aggressive actions on the sales front and will require us to continue to capitalize on sales opportunities to meet our growth objectives. We are confident in our ability to execute in a tougher environment and expect to grow our core business in the low to mid single-digit range for the year, even given a more difficult environment in 2007.

We believe that we will see success in our sales into nonresidential, commercial, industrial, and infrastructure construction projects and that we're well positioned to participate in the forecasted increased spending on the nation's electrical grid.

At this point, Maria will open up the call for a question-and-answer session. Maria?

(OPERATOR INSTRUCTIONS). Matt Duncan, Stephens.

Congrats on nice progress in the quarter. My questions really are two things. First, on SG&A, you guys have done a very nice job on that line. I'm curious if you had any more foreign exchange benefits this quarter as you have the last few quarters. And then if you could talk a little bit about kind of what portion of that line is really discretionary and how you are kind of managing those costs.

And then my last question then is on the acquisition landscape. With kind of an uncertain economic outlook, are you seeing the willingness of your targets to sell kind of maybe go up and multiples come down? Thanks.

Okay. This is Steve. On the SG&A front, there was nothing unusual in the fourth quarter. There was no FX gain in there. We've been managing the intercompany debt between Canada and the U.S. at a low level to take that out of the equation. So that was not in there.

We had very good cost controls, tight controls in there. We expect that general level to be maintained going forward.

I would comment though so on the fourth quarter's SG&A, in that we are a and have a pay-for-performance culture in the organization. We have a very significant amount of compensation that's tied to both relative and absolute performance. Absolute related to previous year and relative to the budgets that we've put together.

In 2007, we had pretty aggressive budgets. As Roy mentioned, we had a great year, but it did not live up totally to our expectations. So when we look at incentive compensations, they will be somewhat down from where it was last year. So you've seen some effect into the fourth quarter.

Rolling forward to the first quarter, as a percent of sales, our SG&A generally has a pretty significant jump for two reasons. One, the first quarter is generally the smallest in terms of absolute sales of the quarter. And two, in that the bulk of our costs, and this will address one of your other questions on discretionary, relates to payroll and benefits we see that cost go up in the first quarter due primarily to higher payroll taxes related to people that got over the limits in the previous year. It restarts in the first quarter.

And then, on compensation -- incentive compensation -- we would have aggressive plans again, but coming out of the quarter, we expect to be on top of those plans, so you could see a little bit heavier accrual on our compensation.

So there's nothing unique about the fourth quarter. I think the organization did an excellent job in controlling the costs and we've demonstrated that throughout the year.

On the acquisition front, there is generally a kind of a lead lag in people's mind on valuation. I will tell you that it's coming down somewhat at this point in time but probably not yet quite fully in line with the economic activity.

Okay. I appreciate it. Thanks, guys.

Deane Dray, Goldman Sachs.

Steve, I would like to hear you expand on your point looking ahead in 2008 regarding commercial construction. Just more color regarding the backlog and the expectations. The market seems to be pricing in a fall off in commercial construction in the back end of the year, and how do you think you are positioned for that, vis-a-vis your P&L goals for '08?

Deane, this is John. Good morning. I think I caught all that question. The last part of it was breaking up a bit. So let me try to address it and if I miss anything, just holler back, please.

First of all, despite the forecast of a 2% decline in construction starts as we move through '08, and that's what the forecast looks like, we actually saw solid performance in the fourth quarter. Our construction performance and sales to our construction customers built momentum across the fourth quarter. So we exited the year feeling good as we enter 2008. Our construction backlog was up. It was up over prior year. It was up over the prior quarter sequentially. So we really enter the year feeling good about construction and the prospect of future bookings associated with commercial and industrial projects.

I think we are seeing some good execution as a result of the broad set of initiatives that we have launched, and I highlighted those earlier. Our additional resources that we've added, particularly our focus on EPCs and national contractors, where we are seeing their needs being more suited, better suited to our national accounts service and supply model, is really paying some nice dividends for us.

We had three new and very expanded agreements in the latter part of 2007 with large national contractors and we are expanding our relationship with a number of the major EPCs.

And I think as we've all seen, these EPC companies, engineering, procurement, construction companies. are still running all-time record backlogs as they enter '08. And there's a long tail to the business. So I think we will see those backlogs run out for a 24-month time-frame with those majors EPCs, and that bodes well for us.

And we're beginning to see as well good traction from the integration efforts with Communications Supply. So we are approaching each and every one of these construction project opportunities with a let's sell the complete portfolio of WESCO products and services, and so it's electrical plus data com products and this full suite of electrical, and wrap that in around our national account service and supply model.

So we understand the environment is going to be tougher in 2008, but based upon our activities, our initiatives and the execution in the fourth quarter and our backlog entering early '08, we are encouraged by our start.

One other comment I will make -- it's early in the quarter and early in the month, but January is off to a start that's consistent with the fourth quarter relative to construction. So again, that's another data point that supports our encouraging view.

That was very helpful. What about -- last quarter you talked about there being some initiatives around new branches. Were there any new branch activities in the fourth quarter that would have boosted organic revenue growth or is it really a same-store basis apples to apples (multiple speakers)?

It's effectively same-store basis in the fourth quarter. We have opened a number of new locations in 2007 and the revenue contribution in the first several months is not significant, but we do expect that they will begin to contribute as we move through 2008. We've mentioned a few of these locations I think in the past, but let me just highlight a couple.

We opened up an operation in the Grand Junction, Colorado focused on the oil shale, and that was in support of two of our national account customers. And that should pay huge dividends for us in the coming years. It's the U.S. equivalent of the western Canada tar sands. We opened up a new branch in LaGrange, Georgia, focused on a new Kia plant.

We have opened up in the fourth quarter an operation in Las Vegas for our data com, CSC data com business, and they are basically -- it's a branch within a branch concept, which is part of our integration plan. Where CSC did not have a presence in Las Vegas. Obviously, a large data com market, so they are opening up effectively a branch with a leader in application specialists inside of WESCO. And that occurred in the fourth quarter.

And then one other one I will highlight is Reno, Nevada, where we've opened up a new operation. Again, no material sales in 2007. They're just starting here in the first part of '08.

And that's another interesting concept, where we are opening a branch inside our D.C. in Reno, which is a model that we've used in Canada very effectively.

So to answer your question, no material contribution yet in '07, but we expect that to begin to kick in, in '08.

And if I could just -- one last question on the tax rate -- that did seem like a surprise that you are going to be -- it will be moving up as high as 34%. How set at this stage should we expect? Is that going to be an immediate step-up in the first quarter? Does it gradually increase to 34%? What's driving that?

It's Steve. When we look at the effective tax rate, we continually try to do that on a full-year basis. So we will come out of the quarter [down a bit].

The drivers that -- it's two things. One, in 2007, we had a fairly significant amount of tax initiatives that were launched previously that we saw come to fruition throughout the year that were onetime in nature that affected permanently both the effective tax rate for the period of time and, most importantly, brought free cash flow into the Company. So those go away. If you had adjusted for that in 2007, our overall rate would have been closer to 32%. And as we go forward and continue to grow the profitability of the Company, the tax initiatives we have in place that give us the lower rate than the statutory, tend to be discreet in nature and a fixed dollar amount. So as our overall profitability grows, the dollars are still there, but the impact on a percent basis are slightly less.

Thank you.

Adam Uhlman, Cleveland Research.

Steve, I was wondering if you could talk about your experience with bad debt and receivables for the quarter.

Pretty much in line with what we saw throughout the year. We've done a nice job of managing that. Overall, for the full year, slightly higher than what we saw in 2006. We are very cognizant of the environment and are staying on top of all the activities.

The concern area would generally be in the construction area with contractors that have been hit by some of this downturn. For the most part, on any large projects, we have lean rights on there. There's bid bonds on the contractors, so it generally comes into the category of when you get paid, not if you get paid. So no significant change in A/R as far as performance, but I would tell you that our activity level is heightened in that regard.

We also, late '06 and beefed up in 2007, a contract administration department, that is really focused on terms and conditions, and we are trying to kind of bridge through from the customer through WESCO to our suppliers to make sure that we've got the appropriate protections that in place. So financial results, not significantly different. The attention level in the organization turned up several notches.

Good to hear it. And then, John, just a clarification here -- you had mentioned that you had a significant number of national account renewals that are coming up here in 2008. Can you quantify how much of your revenue was coming under renegotiation this year?

Yes. What I said, Adam, was -- and I'm glad you raised the question because maybe I wasn't clear with the comment I made. We actually had a record level of renewals coming up as we entered 2007. And we had 100% renewal rate in 2007. We always have renewals that occur every year. Typically our national accounts contracts run anywhere from -- they're typically three years in duration, but they can run anywhere from two years to five years, if you were to look across our complete account base. And so, that gives you a sense.

But again, the record -- the comment I made was with respect to '07. We had a record number in front of us. The team did a terrific job in executing through those. And basically entering 2008, it's a fraction of the number of renewals that we have in front of us. In fact, just to quantify it, it's well under $100 million of annual revenue.

Okay. Great, thanks.

Okay, which is up for renewal in '08, which is a fraction of -- the 2007 number was twice that.

Great, thank you.

Curtis Woodworth, JPMorgan.

Looking at your guidance for '08, top line low to mid single-digit range and kind of thinking about where your SG&A structure is right now and how the pull-through is looking, and Steve, you commented in the past that typically in downturns or upturns you don't see much vacillation in the gross margin line, it seems that it would be a very unlikely scenario, given your top line guidance and where your SG&A is right now that operating margins would go down in '08. Is that a fair characterization?

That would be fair for how we see it right now. Yes.

So the thing that would change that likelihood would essentially be if the top line falls off dramatically in the back half of the year?

Well what we're seeing -- if you think about it, we've got a top-line growth that's kind of right on the bubble of where it takes to maintain the leverage on our cost structure or maintaining that percentage in this kind of this low, mid single-digit range. We obviously like to see it up higher than that. We've done a great job over the last year and a half in a slower growth environment of keeping the costs under control and we expect to continue doing that forward.

And we feel confident that we've got enough initiatives and traction that will maintain or hopefully over time continue to expand our gross margin line. So we feel pretty confident given what we see today that we would maintain profitability and ideally continue to expand the operating margin.

Okay. And then in terms of the revenue outlook, I assume that's obviously your base case view. I would assume it would be more conservative given a lot of the macro data that's out there that's pretty bearish. What could be an upside scenario? What could potentially go right? Everyone is looking at what could go wrong, but would it be market share gains or if construction hold in better, that could potentially get you to a high single-digit revenue growth?

Well you know we talked about adding capacity to our sales force, and John mentioned that, and I'm sure he'll have some additional color to put onto that. And I think you look at the aggressiveness that the financial markets are taking and the reserve has taken to bring rates down. To the extent that that is effective, with 125 basis points here over the last several weeks, to the extent that that is effective at blunting the residential slowdown and some of the concerns, that could certainly lead to a much stronger second half than what people are forecasting right now.

So, and we are encouraged. On the industrial side, the industrial business looks pretty good. Even though the ISM data was down, you look at capacity utilization, you look at industrial production growth, it's still there and that's a very meaningful segment of our business. So that's the plus side.

The only thing I would add is -- here's how we view it. The market is very large. It's fragmented. There's many, many, many opportunities for growth, and particularly given our position in the market.

So when you begin to ask the question about what is the upside, the upside really is our ability to get quick return on all our initiatives.

I'd sum it up with the word execution. Okay? And that was -- that word -- that word was the theme at our three-day leadership meeting last week that we held.

We had the top 100 leaders in the Company. We kicked off the year. We do this every year. That was the one word, the theme, of the meeting, which said basically we've got opportunity to control our destiny. Whether GDP is a 0.5 point, a point, 3.5 points or 4, the market is large, it's fragmented. We've got all these initiatives, and our ability to execute will determine our ability to drive superior results.

Great. Thank you very much and good luck.

Sam Darkatsh, Raymond James.

Two really quick questions. First off, a clarification question. Steve, the incentive comp accrual, the reversal on the accrual in the fourth quarter -- can you quantify that for me if you could?

That was -- no reversal on that. This is something we watch all year long and we start out the year obviously on kind of on planned targets, which are generally fairly aggressive, and so there's full accruals at that point in time. And we adjusted throughout the year. We have a very sophisticated process of looking at all the locations, where they're at and where the forecast is and challenging whether that's accurate or not. So there were adjustments throughout the year. And from a plan perspective, the fourth quarter was kind of the final truing up of that. So it wasn't significant. But it's probably $1 million, $1.5 million, that type of a range.

Okay, thank you. The second question -- I don't know if this goes to Roy or John, but if you take a look at your order-book and particularly the long lead-time orders over the next six to 12 months, is it about the same as where it was this time last year, or better, worse? I respect the fact that you said that over the next two or three quarters you feel that you have sustainable demand, but I'm just trying to get a sense of whether you are starting to see on the cusp of the longer lead-time backlog that things are beginning to slow down a little bit.

Excellent question. No, we have not seen that. We have not really been impacted by projects cancellations, project slip-out. Our construction -- our backlog entering 2008 is higher than it was entering 2007. And I think Steve made the comment the quality of our backlog is better.

And what do we mean by that? When we just look at kind of the distribution of it. We feel good again given our fourth-quarter performance and our current state as we enter 2008 and so far the initial results out of the gate in January, which are consistent with the fourth quarter. And again, we have not seen that slippage to the right.

Thank you much.

David Manthey, Robert W. Baird.

You say you are on track to add these 200 people over the next 18 to 24 months. Could you talk about the number of salespeople you have added both in the third quarter and in the fourth quarter, just to give us an idea of how that's tracking?

Yes. We've added several dozen, so more than two, less than five, less than four. So we've added in that range and we are off to a good start. And these are net additions. So we have a turnover rate that we deal with traditionally anyway. But these are true net additions to the sales force, and they are targeting our growth initiatives and our end market verticals and certain geographies where we see attractive growth.

And that's new for us. I mean if you look at our performance over the last four-plus year period, we were essentially holding flat headcount and we were not expanding our sales force. And that's why we made this comment in the middle of last year that said we're embarking upon this path and really the opportunity we saw in front of us was to kind of increase our number of initiatives and our sales force coverage on these opportunities that represent strong incremental growth for us versus our current position.

So we feel good about it. Again, we frame this up over a 1.5 to two-year period and you've got a sense of how SG&A performed even given that net sales person addition.

Okay. And when I do the math, it would come out to be something like 25 to 30 people per quarter and you are saying several dozen. It sounds like it's even more than that. Are you front-end loading this?

We are on track. When I say several dozen, it's 3 plus dozen over -- since we started, which was really -- we announced it in our second-quarter earnings release last year, but it takes some time to get traction on these initiatives with -- and so for all intents and purposes, that's the results of fourth quarter and a little bit of the third.

And I wouldn't look at it as necessarily a linear function; that's the first point. The second point is we're monitoring the end markets and the economy and we're going to be very careful that if we need to throttle this a bit to keep SG&A under control, we will. So we are on track and we feel very good, Dave, about the start.

Okay. And then, John, you've talked about the backlog being up over the beginning of the year or year end '06. Could you talk about a percentage? I think last quarter you said that backlog was up 2 to 3%. Is it still in that type ballpark or where is backlog year over year?

When we exited the year, backlog was up 5%.

5%?

At the end of '07 versus the end of '06.

Okay. Great. Thank you very much.

John Baliotti, FTN Midwest Securities.

Maybe this is a combination question for Steve and John. But I was just curious, it sounds like, based on your last comments, that you have discretion over the pace of the initiatives in terms of hirings and so on. And I was wondering, is there any color you could give us in terms of underlying what you think, ex the initiatives, ex recent deal that you -- how the profitability looked in the quarter?

Could you repeat that question? I missed part of it.

Sure. Underlying in the quarter, do you have a sense of what the core margin of the Company, whether it's gross profit or overall operating margin ex the initiatives you're working on that are going to have more of a longer-term benefit?

I don't really think you can really dive into it that way. We have numerous initiatives spearheaded by our Lean process that attack a wide array of activities from working capital performance, to margin expansion, to sales productivity, to warehouse productivity that I put us in a colloquialism, the death of 1000 cuts or the improvement of 1000 cuts type of thing. We don't look at it that way. We don't have and traditionally have not done huge step-out initiatives, where we would have a major investment and say our results about these major investments were X, Y or Z. The closest thing that comes to that is what John talked about earlier on the sales force expansion. But even with that, we try to balance that on a net basis that we don't have a big impact on the Company. We continue to get more efficient with Lean and take out some costs in administrative area to kind of help fund some of that growth on an overall basis. So I really can't give you a good answer on that, John.

Okay. In terms of then maybe another way to look at it is going forward, do you have a feel or a goal in terms of the period that you expect us to sort of start to reap the benefits or get the tailwind from it? Is it more of like a year benefit, a two-year or is it just sort of a layering effect so your other initiatives are going to kind of come in as these are paying back?

John, the way we look at it, it's very long term. Basically what this involves is building in a pattern of continuous improvement in sales productivity, that is the productivity of everyone that's already in the organization; and simultaneously, layering in on that, a perpetual program of bringing more into the organization.

If you look at it in that context, we're going to continue to be working on this type of activity over a long period of time. Now sometimes or occasionally you will see greater results coming out of the improvements in productivity based on initiatives that we've got. Other times it's going to be more because we have greater capacity and we're going after additional markets or market segments. I look at it as a long-term issue now.

Having said that, we have high expectations of getting our sales personnel up to an average performance level within 18 months or so. And so we recognize that in the initial six to nine months, they're going to be under-performing. We will, in fact, have some, in effect, net costs associated with that. However, after that point in time, we expect that we will be begin to see them, in effect, producing at rates that cover all the costs and then start making contributions. So the way we have to look at this is not on a short-term basis, but really a long-term, building it into our capability, our average cost structure.

And we've had a lot of experience with this because when you develop training programs and you bring lots of people in and do a lot of that kind of training, you have to be able to absorb those kinds of costs into your structuring organization. We've done that with marketing programs. We've done it with all kinds of initiatives. And we will be doing this the same way on a longer-term basis with sales resources.

Okay. That makes sense. Thank you.

John Emerich, Iron Works Capital.

It's a small line item, but can you just walk me through the I'll call it either volatility or seasonality in the D&A number? It bounced around a lot.

Well, it's bounced around a lot and if you go back the balancing, as you call it, started really in 2005, when we began acquisitions after a period or two of none being in there. So you had the roll-on of two acquisitions, a small or medium-size and fairly large one at the end of '05. That moved around. Then in '06, we had a very large acquisition with CSC, and then a couple of smaller acquisitions -- three this year.

The delta going from fourth quarter to the first quarter really relates to primarily the drop in that relates to the way we will account for our investment in the LADD operation into an equity basis versus fully on our balance sheet and our P&L. And that's the delta.

But once we get past that, the acquisitions that we did in '07 were relatively small and you should see that -- barring future acquisitions -- it should be relatively stable.

Great, thank you.

Maria, we will take one more question, please.

Christopher Glynn, Oppenheimer.

Thanks for squeezing me in. The guidance, if I heard it correctly, kind of an interesting twist to it, I think low singles top line in the first quarter and low to mid for the year. But that's against another comment with kind of better visibility for two to three quarters out. Could you just explain that discrepancy a little bit?

There really shouldn't be much of a discrepancy. We're kind of talking about the first quarter being in line with what we saw in the fourth quarter, which was about 3% growth on an organic basis. And we're saying low to mid, so read that 3, 4, 5% for the year. And we talked a fair amount today already on the initiatives. We've got -- John covered a host of initiatives in the industrial and the commercial markets and data communications. That, combined with the continued expansion of our sales force, we believe, will help drive that up, in face of what kind of the consensus of the prognosticators and economists saying that the 2008 is going to be a tougher year. So we've kind of got a blend and a balance between better execution and more capacity into a tougher economic environment.

Okay. And then that overall guidance, of course, that's after taking LADD out, correct?

Yes.

Okay. And just finally, do you know what price was roughly in the quarter?

Not much. We sell such a wide range of products, it's a little bit of an art at best. And in the past, the big drivers have been commodities and we've seen that's been relatively stable. So --

Maria, I will yield my time at any summary. So why don't we take another question or two and we'll round it out after that?

[William Nodler], [Atlanta Slovener].

You mentioned the three tax items and one was for U.S. export sales, another was for foreign deferred taxes and the third, Canadian. WESCO doesn't really have a large international business. So I was kind of intrigued and surprised that the foreign area or international area had so much of an impact. Can you expand on that -- a little color on how much of your business now is overseas and why this would have been a plus factor?

The business level -- you're right -- overseas, is not -- is very meaningful but not significant as it relates to our total WESCO business. These particular tax initiatives relate to multi-year type of studies we did primarily on the export sales and recapture in that regard. And then there were some tax law changes in another country that resulted in a onetime rebalancing of deferred taxes. So multi-year impact on an area that's not that large, but had a onetime favorable impact.

And the Canadian piece, we do have a very significant operation in Canada. We've talked about this in the past. And this was just our time for full year timing adjustment that got caught a little bit extra in the fourth quarter.

Okay. And also, I gathered you bought 1.1 million shares after the second authorization for $44 million? Was that the number?

Correct.

So I would assume that subject to everything changing or variabilities, whatever in the credit environment and your cash flow, a million share buyback per year would not be inconsistent with your plans and thoughts?

You said a million share per year.

Per quarter.

You may have meant per quarter. But we're looking at a measured process throughout 2008. We've got the capacity. We obviously -- we believe that the current levels the stock is extremely undervalued from what we believe that the organization has delivered and will deliver. So we would intend to kind of balance free cash flow and share repurchases and looking at accretive acquisitions at the same time. But that's a reasonable assumption.

Right. Congratulations on an excellent call and an excellent fourth quarter.

Thank you.

Okay, last call or last question, rather.

Brent Rakers, Morgan Keegan.

Good morning. Just thought I would follow up a little bit more on the -- you've talked a lot about the sales force additions. I think, John, you've talked primarily about it. But I wanted you to also address where the overall headcount has gone. I know you've talked in the past about adding headcount, but maybe subtracting other personnel so maybe the net addition is zero. Is that still the plan?

Yes. Brent, it's Steve. We were successful -- like when we started our movement in adding the sales force actually in the third quarter, we were net-net down slightly the fourth quarter on a net basis. We made good progress on the sales and we were up slightly. So if you looked at '04, '05, and '06, we had a tremendous productivity increase and headcount was relatively flat. So we're going to continue to try to balance that. We will see some modest headcount increases. It could bounce around a little bit in the quarter but we're not looking at any dramatic changes.

And then, Steve, just one other follow-up question. I think you had commented on the incentive comp issue in the quarter. I think the last two quarters, if I'm not incorrect, you averaged a drop of about 5 to $6 million year over year. Are you saying that this was 1 to $1.5 million in addition to that or that was the total down year over year in the quarter?

When you look at some of the drops in the second and third quarter, which you might be relating to, we had some pretty nice-sized foreign exchange benefits that showed up in SG&A, would have been probably the lion's share on kind of a quarter over quarter drop.

And last question --

But if you look at our overall, our absolute incentive compensation, for example, '07 is not going to be dramatically different than '06 in that we have a large organization and still have record performance. It's just not running at the rates that we would see if we were way, way over our plan. But some of that timing was a little heavier in the first half than in the second half.

And then just last question. Steve, do you have a number handy as to what the core salaries and variable commissions were up year over year?

No, I do not.

Okay. Great. Thanks a lot.

Okay. Thanks to all of you for your participation and we look forward to hearing from you, I know we will, over the next several days. So have a good day and we will talk with you soon. Bye.

Thank you for your participation in today's conference. Ladies and gentlemen, all parties may now disconnect. Enjoy your day.