Wesco International Inc (WCC) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2008 WESCO International, Inc. earnings conference call. My name is Tim, and I'll be your operator today. At this time, all participants are in a listen-only mode. We will facilitate a question and answer session towards the end of this conference. If at any time during the call you require assistance, please press *0 and an operator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. Daniel Brailer, Vice President, Treasurer. Please proceed.

Thank you. Good morning, ladies and gentlemen. Thank you for joining us for WESCO International's conference call to review the first quarter 2008 financial results.

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

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

This conference call may include forward-looking statements, and therefore, actual results may differ materially from expectations. For additional information on WESCO International, please refer to the Company's annual report on Form 10-K for the fiscal year ended December 31st, 2007, 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 Mr. Roy Haley.

Good morning, and thank you for joining us. As you know, WESCO operates in multiple market segments, and we have a pretty broad coverage of many different industry groups. On an overall basis, during the first quarter, we had good performance in most market segments, and we'll be telling you more about that momentarily.

The gains, however, that we had in most of these major market segments was largely offset by performance in two markets that are most directly affected by the housing industry turndown, and again, we'll be describing what we experienced in those areas, and some of the actions that we're taking.

With that backdrop, I'd like to now turn the program over to Steve Van Oss to give you an update on the financial performance, and highlights for the quarter.

Thanks, Roy. Good morning, everyone. Before we get into a more detailed look at results, it's appropriate to provide a few comments to put the quarter's performance into context.

There are a number of items of a one-time nature, as well as the accounting treatment for our previously announced joint venture, that are important to highlight to help provide a better understanding of the operational performance and trends for the first quarter.

In the first quarter of 2007, we experienced two one-time items. First, a $6.7 million pretax charge related to a legal settlement and fees that were recorded as SG&A expense, and second, a $2.4 million pretax gain in conjunction with our accounts receivable securitization program that was recorded as a credit in Other Expense, below the operating profit line.

The EPS impact of these two items in last year's first quarter netted to a $0.06 reduction in our reported results. In the first quarter of this year, we experienced two items of a non-recurring or unusual nature, totaling $4.5 million, recorded as SG&A expense. First, as previously communicated, on January 1, 2008, we sold a majority interest in our LADD operation to its primary supplier, Deutsch Industrial Products Division.

Effective with this year's first quarter, we no longer report the LADD results in our financial statements as revenue, cost, operating profit, etc. Our 40% interest in the new joint venture is now reported on an equity basis as Other Income, below the operating profit line.

The LADD operation is an excellent business, and our partnership with Deutsch has further strengthened the operation and financial results.

As noted in our press release, we took a one-time pretax charge of $3 million related to the divestiture of our 60% interest in LADD Operations.

We also experienced an unusual one-time bad debt expense of $1.5 million pretax, related to a utility contractor who filed for bankruptcy, and who had taken certain actions which precluded WESCO from recovery on construction jobs which we had lien rights on.

The EPS impact of these two items was a $0.07 reduction in our reported earnings for the first quarter of 2008.

On a consolidated basis, reported earnings per share for the first quarter of 2008 was $1.02. Adjusting for the one-time items, earnings per share for the quarter was $1.09. Reported EPS for the first quarter of 2007 was $0.93. Earnings per share for the first quarter of 2007, adjusted for one-time items, is $0.99. This resulted in improvement of $0.10, quarter over quarter.

Our share repurchase program was designed to capitalize on our earnings, the strong free cash flow, and achieve sustainable earnings accretion. The program is working. The EPS impact on the first quarter of 2008 was $0.13. The difference between adjusted quarter over quarter improvement of $0.10 and the share repurchase impact is due to approximately $2 million less of comparable operating earnings, due primarily to the lack of leverage on our cost base associated with a 2% core sales growth rate.

Looking to first quarter. As evidenced in our earnings release, we posted company best ever first quarter sales. Adjusted consolidated sales were up 2.9% over last year's first quarter, and organic sales were up approximately 2% in the face of challenging end markets, primarily in our utility, manufactured housing, and recreational vehicle end markets, which have been impacted by the residential construction slowdown.

Strong net income and improvements in working capital performance drove company best ever free cash flow of $80 million. Free cash flow, and the proceeds from the sale of 60% of LADD, were utilized to purchase 600,000 shares of WESCO stock, for approximately $25 million, under our current $400 million share repurchase authorization, and to pay down debt, net of cash, by over $100 million since year end.

Financial leverage was reduced to 2.9 times, from 3.1 times at year-end, and at the end of the first quarter of 2007, reflecting improved earnings performance and strong cash generation over the last 12 months.

The debt reduction and leverage improvement was accomplished while repurchasing approximately $260 million worth of shares, and spending $29 million on acquisitions during the last 12 months.

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

Consolidated gross margins, at 20.2%, adjusted for the LADD joint venture, were down slightly from last year's first quarter and up 20 basis points from last year's fourth quarter. Adjusted SG&A expense increased $6 million, or 10 basis points, primarily due to normal inflationary pressure on our cost base, $1 million of non-cash FAS123 stock option expense, and headcount growth associated with our sales force expansion.

We are continuing to invest in programs and sales personnel, which we feel will provide superior growth as we move forward. We will continue to drive our cost containment programs, utilizing [lean], and for the remainder of the year, we are targeting a net reduction of personnel from current levels, while still maintaining a bias towards sales additions.

Our all-in borrowing costs are low, and at approximately 4%, have allowed the company to reduce interest expense by over $2 million sequentially.

With liquidity at over $270 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.

During the last half of 2007, we acquired three companies--Cascade Controls, J-Mark, and Monti Electric Supply. Cascade serves original equipment manufacturing customers for automation applications in the Northwest. J-Mark serves the manufactured housing end market, and Monti serves the contractor market in the Gulf Coast region.

Cascade and J-Mark have been fully integrated into our operating model, and we anticipate that Monti, our latest acquisition, will be fully integrated in 2008. We continue to evaluate other opportunities, and expect to balance share repurchases and acquisitions in line with free cash flow and leverage targets.

On April 14 this year, we announced our intention to acquire Industrial Distribution Group, a provider of integrated supply services and a distributor of industrial MRO products, with annual sales of approximately $540 million.

We saw a good strategic fit with our business, and upside financial performance, based on our proven acquisition model of integration and profit enhancement.

IDG is a public company, and was being actively pursued by several other buyers. We have a comprehensive and disciplined acquisition program, encompassing identification, valuation, and integration processes. Our April 14 bid of approximately $130 million of enterprise value, which was our second bid, was, in our opinion, a full and fair valuation. On April 22, it was announced that our bid had been topped, and we withdrew from the process.

Let's now focus on our first quarter top line results. Consolidated sales were up approximately 3%, with sales from core operations up 2%, in line with the lower end of our expectations for the quarter. Sales per workday increased sequentially throughout the quarter. Adjusting for the negative effect of the Easter holiday and a positive impact of foreign exchange, our core sales were up 1% for the quarter.

We are seeing good momentum in our end markets that are not significantly impacted by residential construction. Our utility, manufactured housing, and recreational vehicle markets have been negatively impacted by lower residential construction activity.

Our core sales growth rate, outside of these markets, was over 6% for the quarter, reflecting the success of our ongoing sales and marketing initiatives.

Backlog, which consists of firm orders for future delivery, increased 11% over both last year's first quarter and year-end. The increase in backlog was well balanced over most regions. This signals what we believe to be sustainable demand for our construction end markets for the next several quarters.

Sales to customers in the industrial commercial construction end markets were up in the low to mid single digit range. We continue to see the negative impact of residential construction market slowdown, and so, sales into the manufactured housing and recreational vehicle markets were down high single digits, and sales to customers in utility end markets were down double digits. Sales to customers in the datacomm end markets were up mid single digits, and in line with expectations.

April sales, on a month-to-date basis, are stronger, both on a year-over-year and on a sequential basis, than what we saw last quarter, aided somewhat by the timing of the Easter holiday.

Actions to increase the capacity of our sales force have been effective, and we've added approximately 120 sales or sales related support personnel since last fall, with over half of those positions added this quarter. While this has added to our SG&A costs, we believe this course of action will allow us to outperform the market and gain share in the upcoming quarters and years ahead.

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.

Thank you, Steve. Starting out with a summary of our performance for each of our major end markets. Industrial sales were up 6%, and construction sales were up 5%, offset by utility sales, which were down 12%, reflecting continued softness associated with the downturn in residential construction, and a challenging utility comparable of 11.5% growth in the first quarter of 2007.

Our emphasis and focus in 2008 remains on sales and marketing execution, and in investing in the capacity expansion that we initiated in the second half of 2007, while keeping tight controls on overall cost structure.

Now moving to commentary on our specific major end markets.

Sales to utility customers remained soft in the first quarter, consistent with the trend experienced the previous three quarters. Overall sales were up 1% sequentially versus Q4, but down 12% versus Q1 of last year. Sales to investor owned utilities were up 5%, which were more than offset by declines with public power customers and utility contractors.

Utility spending continues, but customers have shifted a percentage of their spend towards transmission related capital projects, which are primarily being served direct by manufacturers.

Despite the decline in sales, and the expectation that demand is expected to remain soft in 2008, the utility market remains active, with bid requests and key alliance proposals for traditional distributor sales, as well as emerging integrated supply opportunities.

Implementation of our integrated supply program with one of the largest utilities in the U.S. remains on track, and I'm happy to say, we secured two new investor owned utility wins in the quarter.

We're confident our share in this market is steady, and we remain well positioned to capitalize on the forecasted future increases in spending on the maintenance, expansion and automation of the nation's electric power grid infrastructure.

Now, shifting to construction. We saw positive momentum, with sales growing 5% versus the first quarter of 2007. Backlog strengthened in the quarter, and ended up 11% versus year-end and the first quarter of last year.

Despite forecasts of a decline in construction starts this year, the non-residential construction market continues to present project opportunities across the major market segments that WESCO serves. Tighter lending conditions, high commercial office vacancy rates, rising commodity prices, and a continued contraction in residential construction raise continuing concerns across the commercial segments, which are forecasted to contract in 2008.

Infrastructure related construction segments, which are generally longer cycle, such as power, energy, communication, medical, and higher education, are expected to show continued strong demand in 2008. We're gaining traction with national and regional contractors, including engineering procurement construction companies, or EPCs, by applying our national accounts model to service their increasing project management and supply chain needs across their many locations.

And finally, we continue to add sales personnel and increase our sales coverage in the first quarter in attractive growth verticals and geographies, while also executing senior management sales engagement programs to drive additional penetration with both new and existing customers.

Shifting to industrial, now. Sales to our national accounts and integrated supply customers showed good strength in the quarter, and were up 7% and 6% respectively. Despite the recent performance in the ISM index and the GDP rate, feedback from our customers in the industrial MRO market continues to be generally positive, consistent with our high levels of capacity utilization and industrial production. Bid activity levels remain high, and the national account opportunity pipeline is at an all time record level.

Our national accounts business model continues to demonstrate its effectiveness in customer renewals and in new Fortune 500 wins in the quarter. We're placing a priority of providing value added services to our customers, and selling a complete WESCO portfolio of products to serve their needs in electrical and non-electrical MRO, capital projects, and OEM materials and value added assemblies.

Now, shifting to datacomms. We saw positive momentum in the first quarter, with datacomm sales growing 5%, and backlog growing double digits. Our sales and marketing initiatives remained focused on combining CSC's expertise in network infrastructure, data communications, audio/visual, and IP based physical security products with WESCO's electrical and power capabilities, our geographic footprint, and our national accounts position. That enables us to provide a more complete solution for construction and industrial customers.

We're gaining traction and we're encouraged by new business secured in the quarter, including three new data center wins, and a cross-selling opportunity with a current WESCO aerospace national account customer, where CSC was awarded a three-year contract to provide datacomm to their facilities.

Our outlook is for the demand for bandwidth in commercial government and residential applications to continue to grow, as customers migrate to higher capacity network architectures, such as 10 gigabit Ethernet, invest in data centers, and improve the security of their facilities and IT networks.

So in summary, we consider most of our end markets to be in good shape, except for utility and manufactured structures, which continue to be impacted by the lower residential construction activity, which is not expected to recover any time soon.

Our sales and service operations serving the utility and manufactured structures markets are strong, with good cost controls and profitability performance. Our immediate sales priorities are targeted at increasing our penetration at existing customer accounts per utility, and targeting new customers and expanding the product offering for manufactured structures. We expect these actions to have a positive impact across the remainder of the year.

Overall, we're making the necessary adjustments, which include more aggressive sales execution, and targeted cost reduction actions. And we're confident in our ability to execute in a tougher economic environment.

Now, back to Steve.

Thanks, John. A couple of quick comments on commodity pricing, and then we'll look at the second quarter and the full year of 2008.

Commodity prices, primarily copper, were relatively stable during the last two quarters of 2007, and the first quarter of 2008, averaging around $3.40 a pound, and have averaged around $3.80 to $3.90 a pound for March and April of this year. While the commodity spot market has been quite volatile, the street price of copper based products has not moved in concert with the spot markets. Manufacturers' price sheets have just recently been adjusted to reflect the recent run-up in commodity prices, and we would expect to see improved pricing later this quarter, assuming the trends hold.

Top line revenue results are comparable for sales of products in this category, sequentially, and are up quarter over quarter. Margins for this product set were up slightly sequentially, and quarter over quarter.

Look at the rest of 2008 now. Typically, our seasonality is such that the first quarter has the least sales, 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 for the remainder of the year. However, we believe that our sales and marketing initiatives and our strong market position will enable our company to perform better than the market throughout 2008.

For the second 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 $24 million in the second quarter of 2007, therefore, we expect to see sales in the range of [1.54 billion to 1.56 billion] in the second quarter.

Gross margin percentage should be maintained sequentially, and operating margins are projected to be 20 to 30 basis points below last year's second quarter. Joint venture income should be similar to what we saw last quarter.

Depreciation and amortization should be consistent sequentially, and interest costs should decline by approximately $1 million, reflecting lower debt and lower average rates.

Our tax planning activities have been very effective. At the present time, we anticipate that the 2008 full year tax rate will be around 32%.

Working capital productivity should be maintained, and free cash flow over the next several quarters will be directed at debt reduction and WESCO share purchases. Based on share purchases to date, share count for the second quarter of 2008 is anticipated to be approximately 44 million shares.

In summary, although this quarter's results were down slightly, we are looking forward to setting record-breaking performance and best ever earnings per share for the year. Our view for the remainder of 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 single digit range for the year, even given a more difficult environment than 2007.

We believe that the utility end markets will stabilize in 2008, and that we are well positioned to participate in the forecast increased spending on the nation's electrical grid when it occurs.

Tim, would you please now open up the call for the question and answer session?

Yes, sir. (Operator instructions)

And your first question comes the line of Deane Dray, from Goldman Sachs. Please proceed.

Thank you. Good morning. I'd love to get some commentary regarding the attempt to acquire IDG, and frankly, from the outsider looking in, we'd be puzzled why you would go after an industrial distributor when your specialty, obviously, is in specialty electrical. So just within the context, it looked outside of your core focus.

And then, the fact that you were topped by a nickel, which was less than $500,000 nominally, was also puzzling, why categorically that was too much for you to consider pursuing this asset.

So just help us put that in context, if you could.

All right, Deane, this is Steve. First, the bulk of IDG's business is in the integrated supply area, which is a core strength of WESCO's. Roughly 60% of what they did was in that business.

Additionally--so, strategically, it fit our business well, and they have done a good job, we believe, on those type of programs with smaller customers, where WESCO's programs tends to be with much larger engagements. So it gave us a very good strategic fit there.

Additionally, they had a number of specialty businesses, some which lined up nicely with WESCO's strengths, such as the manufactured housing area, where we could leverage our infrastructure nicely and bring in some new product sets to get better penetration, so strategically, it fit pretty well.

And when you look at the rest of WESCO's business, although we primarily came from an electrical background, today, we sell in the neighborhood of $0.5 billion of general industrial MRO, so this, again, added some more critical mass. We saw some nice benefits potentially being available on the procurement side.

So that--from a strategic standpoint, we believe it made good sense, and that with our infrastructure, we had a good opportunity, not only commercially to improve the business, but from a financial perspective, to have a significant upside based on their performance. They had relatively steady performance over the last half-decade, although at a much lower level of profitability than WESCO's.

As it relates to the--and I certainly appreciate your outside view of walking away for $500,000--that was our second bid. We had been involved in discussions since the fourth quarter of last year. Our--if you looked at their proxy, we were Bidder D in their proxy, and we had an earlier offer on the table at $11.00 a share. So our second offer was up by almost $8 million.

It got topped, and as you saw a day or so ago, the single largest shareholder of IDG put in an additional offer now at $12.10, so--you know, we have a very disciplined program. We thought we had a full and fair valuation out there, and we're not about to chase the price up.

So it wasn't all about a nickel. We had already moved, throughout the due diligence process, to a level we thought was full and fair. So I hope that answers your question.

It does, Steve. But just--I want to make sure I'm clear, on the value of an integrated supply addition to the equation, because just the idea of distributing machine cutting tools seems so different from what you're doing today. What if it were auto supply? So how far outside of electrical are you willing to go, in order to go after integrated supply?

Today, our integrated supply program is primarily non-electrical. About 10% of our $800 million of integrated supply would fall into the electrical category. And actually, cutting tools, abrasives, and those type of products, is something we do quite a bit of today, in integrated supply. So we don't look at that as a step out from what we do today.

Great, that's helpful. And then, the comment on your guidance about utilities, expecting to stabilize, and that--in terms of where they would tend to be buying more within--through distribution, as opposed to direct ship from the OEs--what's that assumption based on, in terms of changing back to a more normalized buying pattern between transmission and distribution?

Well, there's a couple of things in there. Primarily, what we're talking about is, we expect to see throughout the rest of this year, it stabilize, but not necessarily recover. And John can add some color to this.

But we've seen, in the public power side, a pretty significant reduction in the buying activity, some of that related to inventory builds from previous times, but basically related to the lower level of construction activity.

So what we would expect to see by the end of the year is no further deterioration, kind of on a quarter over quarter basis, but we are not expecting the end market to change dramatically, nor the mix between direct and what goes through the distribution channel.

I understand, and just--last question, just to clarify the point on copper. It is now beginning to adjust to these high $3.00 levels. Would that imply that there would be an inventory gain potentially in the second quarter?

There could be, yes.

Could you care to size, based upon if we don't get any change in pricing today, what that inventory gain would be?

It wouldn't be--if you go back to 2006, you may recall throughout the year, we had a rapid run-up, and we had--you know, in the teens, of millions of dollars of improvement. In that, we're already--if you look at the average prices, $3.40 or $3.50, if we get a 10% gain on it, we're probably--for the year impact, looking in the neighborhood of a couple million dollars.

And that would be for the second quarter?

No, that would be for the--we got a little smidge this quarter. It's just not a material amount.

Understood. Thank you.

Your next question comes from the line of Matt Duncan from Stephens. Please proceed.

Good morning, guys.

Good morning.

The first question I've got is with regard to your construction business, and the 11% increase you saw year-over-year and sequentially. John, I'm wondering if you can maybe give us a little bit more information about what type of projects those are, kind of some of the end markets that are driving that growth? And is there any one big project in there, or is that kind of spread out?

This is John. Good question. We're encouraged by, first of all, the number, because it does represent low double digits, 11% sequentially versus the end of the fourth quarter and also year-over-year. It does represent positive momentum, is the first point.

So we're encouraged by that. We're also encouraged by the mix of that backlog, and what do I mean by that? What we found is, it's relatively balanced across the regions, so across the U.S., in all our major regions, we're seeing backlog growth literally across all the regions--some higher than others.

And I would say that it's not one or two large projects. It's balanced, and so that gives us some confidence here as we go through and enter the second quarter.

John, in terms of project types though, I mean, is this hotels, is it strip malls, is it government, is it energy? Kind of, what are some of the project types?

Okay. The--I will tell you, we're seeing some spotty delays in commercial, light commercial, midsize commercial. You can't pick up the paper without seeing some press about some large cancellations here and there. That has not affected us at all. We've not had any cancellations in the first quarter, it's not affected our backlog.

What we're seeing is, the backlog growth is being driven by the infrastructure related segments of construction, which match up very well with our strengths and our capabilities. So it's energy, it's power, it's communication, it's hospitals, specifically, it's higher education.

Okay, great. That's helpful. And the next thing I've got--Steve, you guys kind of shifted your free cash use a little bit this quarter and started paying down some debt, not quite as much stock. I'm wondering if you can give us a little feedback on kind of what the thought is there.

Yes, I wouldn't say it's obvious, but if you think about--we were heavy in the hunt on an acquisition, spending around $130 million, and we have done a good job in the last several years of putting together a balance sheet that's pretty rock-solid, and today has, I would call it, fairly significantly below market rate structure. And so, we're weren't about to open that up and have to go outside to do any additional financing, so we were creating capacity under our existing lines.

So we will continue to look at accretive acquisitions, and we'll balance that with share repurchases going forward.

Okay, the last thing, and I'll jump back in queue--you guys talked a little bit about what you're hearing from customers, but I'm wondering if you can give us a little bit more detail, on the industrial side specifically, what you're hearing from your customers, what end markets look like they're going to stay strong the rest of this year, and are you seeing any meaningful changes, any slowdown in some end markets?

Well, in general, I'd say that the MRO activity levels across the industrial markets that we serve are generally healthy, and that's evidenced by the fact of our--both our national accounts and integrated supply sales being up 7% and 6% respectively.

I can say that when you look across the various end market segments, or verticals that we serve inside industrial, we're seeing particular strength in oil and gas, metals and mining. And there's strong double-digit strength in those segments, which you would expect.

We're not seeing a lot of those segments decline, so when you look at the customer mix that we serve in national accounts and integrated supply, it is a good, broad cross-section--represents a good, broad cross-section of customers across 14 or 15 end market segments.

We are seeing a little bit of softness in pulp and paper, and transportation, in the low single digit range. But I would say overall, we're seeing good, balanced strength across our national accounts and integrated supply customer base.

Okay, thanks for the feedback.

One last comment, to add to it--paper was mentioned, but the timber industry also is significant, and WESCO has a strong position in paper and in timber, so we see some of that affecting us in Canada, for example. But with what John mentioned, and maybe some spottiness in selected aspects of some areas of food processing, by and large, the--we have some good markets growing nicely. John didn't mention the aerospace and defense, but we're doing well in that arena as well.

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

Good morning, gentlemen--how are you?

Good morning, Sam.

A lot of my questions have been answered, but I'm looking at the SG&A. I know the divestiture makes this a little difficult to analyze, but if I back out all of the one-time stuff, both last year and this year, it looks like there's some deleverage on the pullthrough this quarter, and you're still modeling for that to continue next quarter.

First off, does my math hold, and secondly, if it does, why aren't you leveraging the SG&A perhaps a little bit better than you had in the past?

Okay, let me address that, Sam. First of all, I think we're doing a pretty good job of managing the SG&A. There is a little bit of deleveraging going on. If you do the--there's a fair amount of moving parts, let me put them in perspective.

If you look at the reported results, our SG&A is up less than 2% on about 3% of sales. You go through the obvious components up in there, of the legal, and the LADD divestiture, and it looks like it's up over 3%. There's a couple of parts under there that I think, really where we're--the apples to apples, we're net 1.5%, 1.8% on about 3% sales growth.

The other items that are in there, the three acquisitions that we did in the last half of the year, add about $2 million to the SG&A, so that brings you right down into the--kind of a 2.25% range. We did have some non-cash charges that we'll be continuing for stock option expense on FAS123. And although we haven't talked about it, we've initiated an incentive program to try to accelerate profitable sales growth, and that's adding about $1 million a quarter of incremental. That will be paid out if and only if we see a pretty significant uptick in our sales and profit programs, which we'd be very glad to pay out this program if we get the targeted results. If we don't get the targeted results, that could reverse itself.

So the other component you always have in a first quarter run is the additional benefit costs, and we do have about $0.75 million of costs that relate to the sales force additions that we should start seeing traction on in the second half.

So we know exactly where the cost increases are. There's malice aforethought on several of those, and you'll see--I think we'll see the rate, as an SG&A expense rate, drop by at least 100 basis points as we go into the second quarter.

The only thing I would add, Sam, is--you know, again, utility and structures were both down significantly in the fourth--in the first quarter. If they had been flat--they weren't flat, but if they had been flat, we would have had 6%, upwards of 6% core growth.

So we've made the strategic investments, we signaled that in the third quarter of last year. We feel good about our sales force additions, and a number of new branch openings. We feel we're getting good traction in our industrial and construction end markets, and we're--we still remain bullish in utility over the mid to long run, but we're grinding through this trough, so to speak.

Right, next question. This is probably splitting hairs here, but I'm just trying to understand exactly what happened.

It said, consolidated sales grew 2.9% after adjusting for the divestiture. Organic sales grew 2%, and then in your prepared remarks, you said that internal sales grew 1%. I'm confused as to the difference between the three numbers.

No, there's three components. First, you adjust for taking the sales out, on a comparable basis from LADD, from last year. And that's where you get the 2.9% and the 2% sales growth rates, consolidated and organic.

The 1%, I was trying to normalize for everyone, was taking in the effect, the impact of the timing of the holiday, and the foreign exchange impact from our Canadian operations. We felt we had a negative impact due to the timing of the holidays, first quarter versus second quarter, and foreign exchange was helpful to the result. So that was taking it down to more of an operational growth, taking foreign exchange out.

Gotcha. And, John, if you mentioned this in your remarks, I apologize if I missed it. Overall project versus MRO for the company--are you seeing any changes in those trends, speaking broadly, from where we've seen the last couple of quarters?

Yes, Sam, I did not specifically mention that. Good question. We're not seeing a meaningful shift. And again, I think when you look at what our construction--our sales into the construction end market did in the quarter, and the sales to industrial did in the quarter, and being relatively balanced, you can see where that would be the case, you know? In terms of 5% and 6%, respectively.

So the specific answer is no, we're not seeing a meaningful shift.

Okay, and last question. With respect to the copper passthrough, that you're expecting either the tail end of this quarter or maybe into the second half, your gut feel of the ability to pass it through, and the ability of customers to take on the higher prices, based on the end markets and based on specifically where the copper is going to be needed. You feel pretty good about that right now?

Yes, we do, and if you think about it, we've been doing it since the big copper spark started in 2004, so I mean, we do it not only in copper, but in any commodity class. And we deal with both markups and markdowns, so we've got a good system, a good process in place, and how we motivate the sales force to pass that through or to hold onto it on a down trend. And basically, we try not to be speculators, and we try to manage those inventories tightly.

And so, it's not easy, it's a lot of work, but we've got a good track record on that, Sam.

So the level of promotional activity in the industry, and/or aggressive bidding activity, isn't to the level where you would feel uncomfortable trying to pass through copper inflation?

You know, I think it depends on what end segment you're talking about. For wire and cable categories, there's one type of competitive dynamic. Our national account customers are on the other end of the spectrum, and there our value proposition is at a different level. And we obviously are not selling based upon day to day spot pricing, but an overall set of products and services, and then providing value in terms of their productivity and supply chain efficiency.

So as Steve says, this is something we deal with every day, all virtually continuously. Suppliers are trying to hit us with price increases, and gain our support in pushing price increases through, and there's not a customer that doesn't push back on that.

So I--we feel very good about our process, our model, and our operating system around that, Sam. And we'll see what kind of traction we can get in the second quarter, but we don't see it being materially more challenging than what we've faced in the last several years.

Thank you, gentlemen.

Sam, as a--I guess, as just a key point of strategy, our view is that we are always attempting to work on value added selling and profitable sales growth. So simply reacting to, or trying to adjust down in a competitive market to get the sale, if you will, that's just generally not a strategy that we want to encourage or support over any kind of extended period of time.

So basically, all pricing strategies are generally around trying to make sure that we do the right thing in every market that we operate in, and that we push hard to capitalize on opportunities, if there are any, but more than that, to protect ourselves from being squeezed in the marketplace.

Very good. Thank you, folks.

Your next question comes from the line of David Manthey, from Robert W. Baird. Please proceed.

Hi, good morning.

Good morning, David.

Steve, in your commentary, with the guidance, you referenced the year-over-year change in EBIT, I think you said, down 20 to 30 basis points. But just as a point of clarification, what is the base we're talking about? Is it the 6.6%?

As reported, EBIT for last year--I'd tell you to look at, also, the--when you get below that, you have the joint venture income to roll into it, so once you get below there, you're looking at a fairly comparable IBT.

Year-over-year?

Last year--yes, last year our LADD business was reported at the operating income level. Now it's--our 40% ownership is reported below that. So holding to last year's rate on--you know, if you take operating profit and add joint venture, it actually shows some improvement in the base business, above 2007.

Okay, I'm not following you. The number you're referring to, I think there were some foreign exchange gains in there that actually had that number in something like 6.8%, and when we factored it out, we ended up at 6.6%, including LADD. Are you saying that it's a number that does not include LADD, that was--so we're not talking GAAP reported, or even adjusted last year? We're talking against LADD?

All right, last year, the number I'm talking about being below was the 6.8% reported number, okay? And then, what you have to--if you want to think about, how do I reconcile that decline, a piece of that is the joint venture accounting that you would need--similar to this year, if you wanted to say I took the $2.7 million, converted that to a 20 or 30 basis points of operating profit percentage, you could add that back to be apples to apples.

So from an accounting perspective, it's reported below the line. But it's cash, it's earnings--we treat it as--internally, as Other Income.

Okay. I just wanted to follow up on that. With--in regard to SG&A, in dollar terms, I think you mentioned in response to a question that you thought SG&A would decline by more than 100 basis points, quarter over quarter. And when I run the numbers through, that looks like SG&A, in dollar terms, is going to be down--I forget what it is, $5 million or something.

Is it safe to say that you're expecting your SG&A dollars to decline through the year, through headcount reductions, and lean--maybe offset by sales adds, etc.?

Yes, I think that's pretty safe.

Okay. And then, finally, as you look out to the non-res construction arena, when you--you've talked about this being a more difficult environment. But as you look forward into the back half of this year and into 2009, do you see an inflection point anywhere out there, or is it as--I think a lot of people are expecting it's going to get gradually worse from here over the next year, year and a half.

David, this is John. I think it's going to become more challenging, and I think we're going see it at commercial, various segments of commercial, light commercial on up.

You know, in terms of our position, what we feel good about is, our position with the large infrastructure related segments, where we've got national accounts positions, we feel good about our ability to serve growth in those segments.

And by the way, those customers don't have financing issues. They're trying to meet the demand of their customers, so I think that bodes well for us, and that also speaks to the strength of our backlog.

So, look, we clearly have a view that the market is challenging, and it's going to get more challenging. What we take some confidence in is that our current capability and our exposure, given our customer mix and the infrastructure related projects, puts us in a good position to deliver solid sales results for construction.

Okay, just as a follow up there. When you look at infrastructure as a segment, you're talking about all of these--the energy, and the communications and things?

Yes.

What percentage of either the total business or of the construction business is related to those industries?

I don't have a good number off the top of my head, but I will tell you that that's where WESCO's deep roots are. That's where we get pullthrough, through our national accounts relationships. By and large, we are geared towards serving the midsize, the larger size projects.

In addition, we've had an initiative underway for over the past year, specifically focused on large regional and national contractors. And as that industry pulls together and consolidates, it bodes well for us to take our national accounts model and apply it. And that would serve a range of different project sizes and types.

Last year, in the second half of the year, we secured agreements with three of the national contractors, to apply a variant of our national accounts model. So I think that's going to bode well, in terms of kind of a broad mix of various project types and sizes.

Thank you.

Your next question comes from the line of Brent Rakers from Morgan Keegan. Please proceed.

Good morning. A couple of housekeeping questions first, if I can.

In the first quarter, I haven't heard you disclose a specific contribution from price, and then maybe in terms of a revenue contribution to price, and then maybe some guidance in terms of what you'd expect the second quarter, even the second half to be.

On the price side, maybe with the exception of a couple of the commodities, it's less than it's been in the past. So I don't--you know, which exception may be the copper category, we're not seeing price increases generally coming through. We're seeing some surcharges on transportation costs, things like that, that we are passing through. But that wouldn't be showing up in the top line, Brent.

And as I said before, on the commodities side, we're really just seeing the manufacturers get more solid behind the price increases. We expect to see more of that take place later on in the year.

Steve, would you care to quantify to what degree that might be, and the timing of when some of these price increases are being announced for?

What we're seeing right now, in April, we're seeing the price sheets start to kick up a little bit in that regard. But when you look at the total sphere of copper products in our business, it's in the 15% range. And so I really don't have--I don't know how long it will hold up.

But it would be in the neighborhood of--it could be in the $10 million, $15 million, maybe $20 million a quarter going forward, if it holds. So I think we have to wait and see.

Okay, and then kind of back to the LADD. I don't know what you're comfortable--or what you're allowed to talk about, in terms of the gross margin and SG&A contribution in the past. But I guess, just to clarify, there's nothing else in the Other Income line other than the LADD equity interest, right?

That's correct.

Okay, and could you give us--could you remind us again what the gross margins would have been in the year ago first quarter, excluding LADD?

Yes, we had--you know, under our agreement, we can't give discrete pieces. Obviously what we have to report becomes public knowledge, and that's our 40% interest in the profit stream.

I can tell you that in general terms, it has higher gross margins than our average business, and at or slightly below on the SG&A. The--kind of the overall impact was about 30 basis points or so, on our gross margin line. And on the SG&A, it's not large enough to make a big difference.

Okay, and then last question, I think, for John. You mentioned--you talked about some data center wins at CSC. Could you maybe provide some scale in terms of the significance of those wins? I don't know how many data centers CSC may have been active with last year. Could you maybe throw out some numbers to help us there?

Yes. Well, first let me say, CSC has been focused for some time on the data center market, and we've identified it as one of the growth opportunities that we were going to go after aggressively after we acquired CSC.

We're encouraged by our results. Right now, I'll tell you, we've got a very strong pipeline of opportunity, and projects for data centers, and we're focused on kind of going after those with an expanded product line that includes power and cooling for data centers.

And we did have three wins in the quarter. I'm not going to mention the customer names, but they ranged in size from $2 million up to $5 million, to give you a sense of scale, so they were very sizeable wins. And this will continue to be a focus increasingly for combining CSC's and WESCO's capabilities for both the data and power and electrical side of data centers, going forward.

Again, it was one of our key growth initiatives that we focused on as a result of the integration activities, and we feel good about our initial progress.

I'm sorry, and then one other, I guess, unrelated question. Did you give a number in terms of what the company's incentive compensation may have been up or down, year-over-year, in the first quarter?

No, we did not, but it wouldn't have changed significantly. The way we run our programs is based on a -- it's the combination of prior year performance and budgeted results, and so we start out the year in both cases with a month or two of data, and the rest of it projected on budget or reforecast results.

So not a significant change, year-over-year.

All right, great. Thank you.

Your next question comes from the line of Robert Maloney from Morgan Stanley. Please proceed.

Quick question for you guys on IDG. I think the increased bids took me and a number of investors by surprise. I'm just wondering whether you've seen a change at the margin on the M&A front--in other words, are the PE firms getting back in the game again?

No, I wouldn't say there's any significant difference there. The private equity firm that was interested in this had also acquired about--earlier last year, another integrated supply. So for them, it--they were--you could almost consider them to be a strategic buyer on this one, and so I think that gave them a little bit more stretch in where they would be able to go. And then the absolute size of the purchase price probably wasn't one that was going to strain their financing.

And the other bidder is a 15% shareholder--also a fund, and we really don't know a whole lot about them. But we're not seeing--take IDG aside, we're not seeing a reemergence at this point in time of the sponsor group, given the credit markets.

That's good to know. How does the M&A pipeline look at this point?

We generally have a fairly active pipeline that we're looking at, ranging from smaller companies to more meaningful. And the challenge always is, they remember the peak multiples they used to get paid, and the earnings where they were or where they will be, versus where they're at today. So it's kind of a courtship process, as you go through that.

But we've got a good track record, we've got a great process of integration and performance enhancement. It's been demonstrated--I mean, if you look back in the last 24 months or so, six acquisitions, we've added about $1.1 billion to our top line, and close to $1.00 or more on EPS.

So I think we have a good program, and I hope that the IDG scenario proves out that we are a disciplined acquirer, and we're not going to force something in just to get top line growth, or to meet some type of perceived outside target.

Sure. So, just one more question? You guys mentioned that you have an accelerating order book. I'm just wondering if you can help me understand, in past cycles, how solid those orders have been. In other words, have you seen those orders cancelled in the past?

In the past, we've had some--I would say, minor elements of cancellation. What is more likely to happen, it's not our firm orders that Steve has reported on, but activities that we have been working on, and it could be that we have been working on them for years, or certainly for months, that get to a stage, and they tend to start dragging out, as opposed to getting finalized and placed.

That's a little harder to track, because at that stage, you're into continuously trying to gather competitive information, continuously selling, perhaps adjusting bids, oftentimes going back to the drawing boards again to reengineer the projects to meet the owner's requirements, and so forth.

So that one's a little more difficult to put your finger on, but even so, I'd say that John's comments, about infrastructure related activities, are--they're very strong right now, and we see lots of opportunities.

And I would tell you, several years ago, we did not have that kind of visibility at project related--future project work, for a variety of reasons. Some of it has to do with the increasing customer base that we have, and the relationships we have with those customers. And certainly a part of it is the extensive outreach that we have into many markets in the country with our management team out in the field, on a much more extensive basis than we've had generally, five years ago.

So a lot of changes that have taken place have given us a much greater sense of what the opportunities are, and how to step into situations that we become aware of.

Well, with that, I think we've reached the appointed hour of noon, and just to maybe close this up, we do acknowledge the weakness in utility, which for us has been a very significant market segment with lots of strengths over a long period of time. I guess you could say that we should have seen it coming, and in retrospect, it's pretty clear, the linkage directly to the housing market. But even the old-timers around our place have not seen the kind of connection between the resi market and what we've done over the years, and the utility market.

So with that said, the utility business that we conduct is strong, it's well run, it's profitable--in fact, all of the different markets that we operate in, if you take the aggregate of the sales to the branches, to the regions and groups and industry segments, all of our segments are profitable, and they are profitable at higher levels than they were back some time ago.

So we're pleased with the strength of our business--most importantly, we're pleased with the excellent results achieved in some markets--big markets, that are under scrutiny--the industrial and contractor oriented markets. And we expect to keep working hard to make sure that we continue to develop additional business in those segments.

We thank you for your time today, and for your support. We look forward to seeing you soon. Have a good day.

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