Wesco International Inc (WCC) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2008 WESCO International earnings conference call. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Daniel Brailer, Vice President and Treasurer. Please proceed, sir.

Good morning, ladies and gentlemen. Thank you for joining us for WESCO International's conference call to review the fourth quarter and full year 2008 financial results. This morning, participating in 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. Following the conclusion of this conference call, we will post on our website a supplemental financial data presentation that provides a summary of certain financial and end market information provided in today's commentary by management.

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 and 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 over to Roy Haley.

Good morning and thank you for your continuing interest in WESCO. Sales for the full year 2008 increased modestly with a new record level being established, and we maintained our backlog despite the double negative of declining end markets and falling commodity prices. Our sales performance in this environment is the result of offsetting weaker markets with greater sales coverage, increased penetration with existing customers and the development of new business with targeted accounts.

We're obviously concerned about the current economic conditions, but we are definitely not hunkering down. Our sales and service teams are focused every day on quality and service enhancements while actively pursuing new business opportunities. In prior downturns we have invested with good success in new marketing capabilities, information technology upgrades and organizational productivity initiatives such as lean. We are taking the same approach in this recession, as the challenges that we face reveal new needs and new opportunities. Our goal is to come out on the other side in a much stronger position.

The divestiture of our LADD operation at the beginning of 2008 has, for some, made quarterly comparisons a little difficult for a few of the key operating statistics, one of which is gross margin and another being the 40% of prior earnings that is now included below the line. But that issue is behind us as we enter 2009, and I can tell you with confidence that our organization has done a very good job in our base operations and in protecting margins, despite the increased competition for new business and significant commodity price declines.

Like others in our industry, we are faced with making adjustments to our operating cost structure and WESCO is responding appropriately while being careful to protect customer relationships. We're responding to market conditions in a continuous adjustment mode and will make additional changes as needed.

Assisting us in this regard is our experience with lean performance improvement techniques that began during the last downturn. With lean we're going after multiple opportunities for revenue enhancement and cost elimination. We are well-organized for this effort, and I'm confident that we will make good progress.

Now Steve is going to provide details on the quarter and full year operating results and selected year end financial ratios, and then John will follow and give you an update on major end markets before going into the Q&A session.

Thanks, Roy, good morning, everyone. I'd like to provide a few comments to put the quarter's performance into context.

Despite our diverse customer base and multitude of sales and marketing activities, we're not immune to the economic slowdown. With end market activity deteriorating rapidly, we saw quarter over quarter sales decline by just over 2%, with the entire decline occurring in the second half of the quarter.

Our response was quick and decisive. Margin actions were successful in expanding our gross margins by 50 basis points sequentially. Staffing actions, which has been underway since the second quarter, were accelerated with 100 of the 130 personnel reductions made in the quarter occurring in the month of December. Ten underperforming branch locations were closed in the quarter, and discretionary spending and capital expenditures have been deferred or eliminated.

Last quarter we reviewed the positive characteristics of WESCO's free cash flow generation throughout the business cycle. Our emphasis on cash generation, credit availability and debt reduction resulted in $42 million of free cash flow for the quarter and $236 million for the year. Our liquidity position at $382 million improved by $202 million over last year end and includes the funding of $35 million of capital expenditures, $75 million of share repurchases and acquisition funding.

We're highly confident our proven business model will again be resilient in an economic downturn, providing ample free cash flow and credit availability to fund operational and other financing requirements in 2009 and beyond.

Additionally, at the end of the year we completed the acquisition of AA-Electric, a two-location automation distributor serving diversified industrial OEM customers from their operations in Wisconsin. AA had 2008 sales of $21 million and is expected to be immediately accretive. This geographic play strengthens our position in the Upper Midwest markets and supplements the OEM sales efforts of our Carlton-Bates operations.

Take a look at the for-quarter results. Adjusting for the divestiture in the first quarter of the year and a 1.7 point impact attributable to the weakening of the Canadian dollar, consolidated sales at $1.43 billion were down 0.7%. There was no meaningful price impact on sales in the quarter. Declining end market activity throughout the quarter resulted in lower sales to customers in our Industrial and Construction end markets.

Sales to Utility customers and to customers in Canada on a Canadian dollar basis were up during the quarter. Sales per work day declined throughout the quarter with December at levels not seen since early 2006. Backlog, which consists of firm orders for future delivery, ended the year flat to 2007.

Consolidated gross margins at 19.9% improved sequentially by 50 basis points despite a substantial decline in commodity prices during the fourth quarter and a slight shift to a higher mix of direct shipment, project-related sales. Improvements in our project and stock margins more than offset this mix shift as well as offsetting lower margins associated with sales of copper-related products in a fourth-quarter environment where spot copper commodity prices declined by almost 50%.

SG&A costs increased by $11 million or 5.7% over last year, with $4 million of the increase due to cost associated with employee severance and branch closures, another $4 million due to higher bad debt expense and $2 million due to the swing in foreign exchange gains and losses along with $3 million of general cost increase. This was somewhat offset by lower payroll cost, driven by induced incentive compensation.

Sequentially, cost decreased almost $7 million, primarily due to the lower compensation benefits and incentives. Our all-in borrowing costs are low at approximately 3.6%, and along with reductions in debt levels have allowed the Company to reduce interest cost $1.3 million sequentially and $5.8 million from last year's fourth quarter.

The effective income tax rate for the quarter was 35% versus the full-year rate of 30% and last year's fourth-quarter rate of 26%. The higher fourth quarter of 2008 was due to the mix of foreign and domestic earnings for the year. The full year 2009 tax rate is expected to be approximately 31%.

Net income for the quarter was $42 million and resulted in earnings per share of $0.99 versus net income of $61 million and earnings per share of $1.34 last year. For comparison purposes, utilizing the full-year 2008 tax rate of 30%, this year's fourth quarter would have resulted in net income of $45 million and earnings per share of $1.06.

At this time I will turn it over to John, our Chief Operating Officer, who will provide additional commentary on our end markets and initiatives we are undertaking to expand market share.

Thanks, Steve, and good morning, everyone. I will be providing a performance summary for each of our major end markets, but let me first start out with a few highlights.

Construction sales were down 5%, Industrial sales were down 3%, while Utility sales were up 7% versus the fourth quarter of '07, resulting in an overall WESCO consolidated sales decline of 2%. The quarter started out with sales up 4% in October, but momentum degraded as we moved through the latter part of November into December.

We responded quickly and executed a series of cost reduction actions, and we will continue to evaluate end market demand and take further cost reduction actions as required. Despite the economic slowdown, our markets are large and our customers are increasingly looking for ways to streamline their supply chains and improve their productivity. WESCO is well-positioned to provide value-added solutions to our customers, taking share against this tougher economic backdrop.

Moving to a summary of our major end market segments, and let's start out with construction, sales to construction customers were down 5% in the fourth quarter versus last year with most geographic regions experiencing a slowdown. The Nonresidential Construction market is forecast to decline double digits in 2009, and there are an increasing number of project delays and cancellations that are being announced.

Despite these forecasts, the Nonresidential Construction market is large and with our size and capabilities, we have the opportunity to increase our participation rate in the available business and expand share. Our construction sales and service initiatives are focused on large regional and national contractors, particularly those involved with hospitals, educational facilities, data centers, energy and government infrastructure and defense-related projects. We're using our size and capability as differentiators in securing new awards from multi-location contractors who are bundling projects and exploring alternative means of procuring, staging and installing our products.

In the current environment, contractors are heavily weighting the financial health and stability of their potential distributors in their supplier selection and project award criteria, and this bodes well for WESCO.

Data communications sales posted an overall decline of 2% in the quarter, despite strong sales to government and enterprise customers, which were more than offset by softness in low voltage, audiovisual products and industrial wire and cable. Our sales and marketing initiatives are yielding positive results, as evidenced by a number of government and health care wins in the quarter. During the second half of '08 we opened seven CSC locations within the existing WESCO branches to expand our data communications geographic footprint. This branch-within-a-branch expansion strategy is low-cost and rapidly deployable and increases cross-selling and service opportunities in our blue-chip customer base.

We remain focused on expanding market penetration and expect to see sales opportunities for data center, health care, education and government-related infrastructure spending in 2009. Our long-term outlook is for increasing bandwidth as customers migrate to higher-capacity network architectures, invest in data centers, improve the security of their facilities and IT networks and seek green solutions that are both cost-effective and reduce power consumption.

Now moving to Industrial, sales to our national accounts and integrated supply customers showed positive growth in the quarter and were up 2%. Bid activity remains high, and our national account opportunity pipeline expanded to an all-time record level in the fourth quarter. Purchasing executives at our customers are becoming increasingly concerned about supply chain integrity, and we believe our activity levels reflect their heightened concerns.

We maintained our 100% contract renewal rate in 2008 and currently have a majority of Fortune 500 companies as our national account customers. Our customer-facing initiatives are concentrated on providing value-added services and selling the complete WESCO portfolio of products to serve our global customer needs in MRO, capital projects, OEM materials and value-added assemblers.

Now moving to Utility, in the fourth quarter sales to Utility customers showed positive momentum for the third consecutive quarter. Overall, Utility sales were up 7% versus the fourth quarter of last year. Sales to investor-owned utilities were up double digits. Public power customers were flat, and utility contractors were down. Utility spending weakened in December, and customers remained focused on prioritizing their capital spend towards transmission-related and alternative energy projects.

The market does remain active with bid requests, and interest in our national account and integrated supply opportunities and capabilities remains high. We anticipate that market levels in early '09 will be down as Utility customers evaluate power demands and reduce their inventory levels in capital spending accordingly. We are well-positioned to expand share as utilities look to rationalize their supply chain.

In summary, we are continuing to make the necessary adjustments, including more aggressive cost management actions. Despite an economy that is weakened, our emphasis and focus in '09 remains on sales and marketing execution and capturing new opportunities for growth while keeping tight controls on our overall cost structure. WESCO is a different company today than during the last downturn, in 2001 and 2003. In addition to our capital structure being in excellent shape, today's WESCO is a much stronger company across multiple dimensions.

First, customer base and market position and penetration. We expanded relationships with global blue-chip customers and strengthened our national accounts, integrated supply, international and local service and support business models. And, we have built an innovative set of marketing capabilities that are focused on demand creation.

Second, portfolio -- we have a broader portfolio of products and services coupled with new supplier relationships, including data communications with CSC, electronics and OEM with Carlton-Bates and our newest acquisition, AA-Electric; mechanical and Asian sourcing with Fastec and J-Mark, automation and controls with Cascade Controls, and lighting solutions and a strengthened Gulf Coast presence with Monti Electrical Supply.

Third, lean -- we are in year six of a decade-plus lean journey, and our operational/execution foundation has been established. A lean continuous improvement mindset is promoted internally for all that we do, from front-end sales to back-end customer delivery, service and support. It's pervasive.

Fourth, information technology -- we have an extensive and powerful suite of data and information management applications that we use to manage the business and provide real-time visibility.

And finally, team -- we have expanded and strengthened our organization and talent base. We have the strongest team we ever had, and our extra-effort people are our differentiator.

With that, we remain confident in our ability to execute in this tougher economic environment and are committed to exit this downturn an even stronger Company.

Now, back to Steve.

Thanks, John. I would like to comment on pricing, and then take a look at 2009.

As previously discussed, we estimate there was essentially no overall price impact on sales for the quarter as the impact of previous general price increases were offset by lower commodity prices. Continuation of current copper price levels will negatively impact sales of copper-related products for at least the first three quarters of 2009, similar or above the amount we saw this quarter.

We have an established policy of marking up our inventory to current market levels, and we are generally able to sell through commodity price declines. We do not anticipate taking any inventory write-downs in 2009, based on the current price levels, although margin levels on these products will likely be compressed over the next 45 to 60 days as we sell through the higher-priced inventory.

Look at 2009; given the volatility in virtually all of our served markets, we will not be giving quarterly sales or earnings guidance. We remain confident that our sales and marketing initiatives and our leading market position will enable our company to perform better than the end markets as we maintain or improve current positioning and grow with new customers. At this time in our best estimate is for top-line revenue to be down in the range of 8% to 12% for the year.

Our near-term focus is on real-time right-sizing of the business and maintaining ample liquidity and credit availability. As mentioned in our press release and in John's comments, we're making additional reductions to staff levels of approximately 350 persons or 5% of our workforce in the first quarter. We expect the annualized cost savings associated with these actions to be approximately $18 million and anticipate taking $3 million pretax in severance charges during the quarter. Therefore, we will not see the full cost savings of the personnel reductions until the second quarter of 2009.

Additional cost reduction actions such as temporary labor and overtime reductions, the impact of branch closures in 2008, travel restrictions and salary merit deferrals are expected to generate additional savings of $20 million to $25 million on an annualized basis. Our capital expenditures will be reduced by over 50% and are expected to be in the range of $16 million for 2009.

Another facet of looking at 2009 and beyond is our debt facilities, which are in good shape with our earliest maturity occurring in May 2010 for our $500 million accounts receivable securitization facility. We have utilized securitization programs since 1998 and intend to use them as part of our capital structure going forward. We are in the process of renewing the current program with a multi-year term beyond 2010.

Also, in late 2010 we have the potential to have our $150 million convertible debenture put back to the Company. This redemption can be readily financed through our current debt capacity or free cash flow over the next two years.

In summary, we had a good quarter against a tough economic backdrop. We remain confident in our ability to increase market share, and we are working hard on the margin front. We will proactively address our cost structure in the face of declining end market activity. The Company is in a strong position to execute in a difficult environment, and we're confident we have the balance sheet and liquidity to allow us to further strengthen our position with customers and suppliers.

Michelle, would you please open up the call for the question-and-answer session?

(Operator instructions) Adam Uhlman, Cleveland Research.

You had mentioned that sales trends decelerated through the final six weeks of the quarter. Could you provide a little bit more clarity on how sales developed by month, and then what you're seeing so far in January?

We saw a pretty rapid and sudden deterioration, I'd say, in the middle of November, starting in the middle of November, extended through November into December. In October we were up about 4% in terms of sales growth. November ended up flat, and December ended up down double digits for overall reported results for the quarter.

And January is off to a start that is consistent with December, a little bit worse than December. And our view is as follows. We were getting increasing reports of extended and new plant shutdowns. It's clear that the buyers in our customer base have been directed to reduce discretionary spending, and we clearly are seeing those effects through December into January and I think also coupled with some of the challenging weather conditions we've had across the country, I think, has added to the start in January.

So that's the picture, 4% flat, double-digit down in December, continuing into January so far.

On the backlog levels, the growth rates there have slowed up quite a bit. Have you seen any cancellations out of the backlog? And how firm is the book right now?

We have seen a few cancellations but nothing meaningful. We are seeing more deferrals at this point. The backlog is still at a very healthy level. Entering 2009, it's equivalent to a level that we had entering 2008. But it did decline in the quarter. So that's what we are seeing at this point.

Part of that is seasonality, but we are clearly seeing some deferrals, some cancellations. We are focused very much on our initiatives to working our opportunity pipeline. I mentioned that, and one thing that we are hopeful that we'll see as we start moving through 2009 is our opportunity pipeline for national accounts, like opportunities in integrated supplies, is at an all-time record level. That hasn't translated into backlog yet, but we're seeing increasing requests from customers that come in. As they look at cutting their spending and driving productivity, they are looking at rationalizing their supply base, and we are very well-positioned to come in with a national accounts integrated supply model to provide those kinds of cost savings.

So that pipeline, Adam, the backlog is flat, but the pipeline is at an all-time record level as we enter the year.

Sam Darkatsh, Raymond James.

Steve, what are your thoughts in terms of your ability to refinance the receivable securitization at this point?

We have a very high degree of confidence, based on the relationships we have as a company with the folks in that area and what feedback we've gotten. It's a very tough environment. We believe the window is open now and we would expect to have, in the next 90 days, to have something to report on that.

Near-term gross margins -- with the deflation of copper it's a bit of a black box for us on the outside to look at what the impacts might be on near-term gross margins. Based on what you are seeing right now, I know you almost hit a 20 in Q4. How do gross margins look, at least at this point, in Q1?

We would expect to continue the success we had this quarter with offsetting the downward pressure on that. There is a bit of a lead lag with that; we did see the impact of the drop of commodity prices impact the volume in the fourth quarter, and we expect to see maybe the full impact of that in the first couple three quarters of 2009. But we were able to offset the margin drop on that. I've got to commend the organization for doing an excellent job of selling through the inventory, and we expect to see that continuing into the first quarter.

And Sam, I would add, we have been working hard at margin for a long time, and it's our top priority. We're banging away at it every day. We're encouraged by the results in the fourth quarter, and January is off to a nice start in terms of being a slight uptick versus how we exited the year. So it will remain our top priority as we grind through the challenging economic environment.

Two more quick questions, if I might. Steve, the free cash flow, $42 million in the fourth quarter, roughly approximated net income. With the downward swing in demand, would you anticipate that free cash flow in 2009 would exceed net income? And if your top line does decline by 8% to 12%, what would that generally translate from a free cash flow standpoint?

Yes, we saw roughly 100% in the fourth quarter. We expect to see more than that on a full-year basis. As the sales decline, we have a quicker drop-off in accounts payable and a little challenge working through the inventory in that first quarter, and that's what we saw in the fourth quarter.

So I would expect to see in that 110% to 120% of net income, and that's similar to saw in the 2001 downturn.

And the last question, the $18 million that you were referring to in terms of, I think it was charges -- is that what we should be modeling for 2009?

No. The $18 million should represent the annualized favorable impact on the salaries, benefit, incentive compensation. We anticipate taking roughly a $3 million onetime charge during the first quarter related to approximately 350 people.

So the $18 million is the 2009 savings incremental to '08?

Related to that group of personnel, yes.

Scott Davis, Morgan Stanley.

First, when you look at your accounts receivable, it looks like you have made some pretty good progress there. But have you made adjustments or have you had to make adjustments for increased bad debt allowances for payables, or receivables, excuse me, that just may not come through?

Yes and yes. We had a higher rate of accruals as well as absolute write-offs in the fourth quarter and for the year, to the tune -- the year was around $7 million. And we have taken our accruals up. We have done a very good job over the last couple of years. The receivables are in excellent shape. On the days outstanding, we were well below where we were in the previous downturn.

So very concerned about it, we're watching closely, particularly in certain sectors, and we have been proactively reducing our exposure in those areas. And the reserves are in as good a shape as we can -- based on what we know today.

And a follow-up, and part of this is just how I'm trying to still learn your company, but when you think about how your business is transitioning in a down cycle like this, where you're likely to have a decrease in bid activity but maybe MRO is a little bit more stable, but how does that mix shift change? How does it impact margins? Maybe we can start with just, if you can tell us, the current mix delta between MRO and what you are selling through from contracts and bids.

Our big drivers on the mix tends to be project business versus what we sell out of stock. The stock tends to be more oriented towards daily activity, maintenance repair, operating supply type of items. We don't see big swings in a short period of time, typically. Over the years we have moved more and more with our national account programs, our integrated supply programs, an emphasis in utilities and industrial markets away from project business, when we spun the Company out more than a decade ago. But we won't see dramatic swings, that I'm aware of, so the mix should not change dramatically. We typically see -- which we saw this year -- as you get late in a cycle, we see a higher project business, which we saw growing throughout 2008, which has some downward pressure on it. So we'll just have to see. We still see decent project activity. Near-term, we'll see some slowdown quicker in the stock items, so we have put some downward pressure on it. But again, we are working margin initiative across all fronts.

In addition to just the mix of business, there are certain areas that relate to our gross margin that are in addition to what we sell the products directly for. So we have what we sell our products for, and then there are additions or subtractions to gross margin based on activity levels, to a degree. So we have full absorption accounting that comes into play. You have supplier volume rebates that come into play. And typically, when you see a slowdown in business on a relative percent base and you'll have a little bit less rebates as a percentage of gross margin, and the full absorption accounting, when we grow our inventory, helps expand gross margin. And when inventories come down, it contracts a little bit in gross margin.

So there could be a 30-50 basis point type of range of headwind that we'll need to overcome with our margin initiatives. Again, we were able to do a good job of that in the fourth quarter, and we are off to a good start in the first quarter.

One thing I would like to add is, we have been working for some time at maturing out our activity-based costing model and how we apply that and use it in terms of improving customer profitability. We know which customer relationships are profitable. We know which ones we want to put more of our time, energy and effort in. And so our focus is to sell more of our WESCO products and services to those customers we have strong relationships and we have -- it's a win-win in terms of they value our service and it's profitable, as reflected in the price.

And I think we'll see that trend. We are seeing it. We saw it in the last downturn, and we'll see it this time. As they look to rationalize and streamline their supply base, we have the opportunity to grow with our current customers and expand.

Shannon O'Callaghan, Barclays Capital.

You mentioned price being flat in the quarter. Can you give it a little feel going into '09? Do you expect price to be a negative contributor? How do you expect it to play out?

I think it will be slightly negative. We had in 2008 an unprecedented amount of price increases in the first half of the year, which we were able to pretty much get through the channel at this point in time. So we'll see a little bit of favorable as it relates to the first half of the year. That will probably more than be offset by the commodity area, both steel and copper. But we are not looking for a significant drop-down. We don't see any issues with our inventory. We don't see any issues with taking any write-downs on the value in our inventories today. I believe we will be able to keep it stable at the gross margin percent level. It certainly will have an impact on the top-line sales, though.

And how is that playing out with your supplier base, given how the world has changed, in terms of how you approach them?

I'm not exactly sure of your question, but I will attempt to answer what I think you asked. We are in a very, very strong position with our supply base. With our national accounts and integrated supply programs, we are probably the number one customer for our top 20 suppliers. Our relationships have expanded dramatically over the years. Our balance sheet is in very good shape. We take advantage of every cash discount. We have a multitude of touch points with the supply base, and we believe we are the distributor of choice, given our productivity and the strength of the balance sheet. And where there are discretionary moves where they can push business on projects, we believe we are getting at least our fair share of that.

So if that's the question you are asking, that's the answer.

Just as you're seeing your pricing come down and as you are selling out, just your ability to get that kind of leverage against your suppliers, and if you are starting to do that.

On the commodity side, that's pretty much real-time. We work in concert with our suppliers. Where we see, outside of the commodity structure, if there is a step function down in a product category group, we work very closely with our suppliers and generally are protected on that. So we'll go back and get our inventory repriced.

How about your inventory levels? Your inventory came down in the quarter. Do you have a target for that next year, and how are you approaching your own destocking to the new demand level?

The stocking area -- we really work on that from an availability and a day's supply of inventory. And we match that relatively quickly to the sales activity level. So we have a performance target more than an absolute dollar target. With the rapid decline that John talked about that really hit exactly midpoint in the quarter, accelerating in December, we are a little behind our performance numbers, although we did reduce the dollars. We will catch that up pretty quickly.

So that will play out in the first and second quarter?

It should.

John Baliotti, FTN Midwest Securities.

Maybe for John or Roy, is it possible to go through the three main segments, and do you have any color on where you think your customers' inventories are for the products they buy from you? Are they, in addition to their [slur of] activity in December and January, do you get a sense that they have a mandate just to work through whatever they have got, or do you think they may have some stuff left over from a prior quarter?

In general, yes; yes to the fact that we are clearly getting indications from all our large customers across all our major segments. Like us, they are putting the screws to their spending. Capital projects are getting kicked out and deferred. And in terms of other discretionary spending, they are looking at reducing those and burning off and riding current inventory levels as a general trend across our customer base.

We clearly saw that. Let's go specifically by segment. Specifically in Utility, starting with Utility, we saw that clearly in December. Some municipals and co-ops consciously took their inventory levels down. With that said, we still had very nice performance in our Utility end market segment, and our IOU's were up double digit. And that's the strength of let's call it our alliance integrated supply model, where we have some new and expanded agreements.

On the Industrial side we are seeing it pretty much across the base. That was reflected in our December sales results. It's reflected in what we are seeing so far in January. We would see that as being somewhat -- not going to be permanent and not going to be consistent. So, as our inventory levels come down and it normalizes with our production rates, they are going to ultimately have to replenish to keep their output, to support their output and their shipment. So we would expect to see that be somewhat temporary.

And on the Construction side, it's much more, let me say, project-driven. As I mentioned, our backlog is still at very healthy levels. We really haven't seen any meaningful impact in terms of cancellations. We are seeing some deferrals. But we are noticing that, in particular, some of the large regional and national contractors, our customers, are looking at bundling more products together, bundling projects together. And they are concerned about the integrity and reliability of the distributor base., i.e., our competitors.

So Steve talked about the strength of our balance sheet. We are getting feedback directly from our large contractor customers and our large suppliers that they want to do more with us because of our financial strength, our breadth of capabilities and the fact that we have staying power.

I would think, also, if the inventories started to go down in the customers in utilities and you were up 7%, that the delta there has to be some of your competition having a worse fourth quarter than you did, the small guys, I would assume.

Again, we do feel -- even -- look, we can't control where the end markets are and how much the end markets are down. But are focus is on expanding share and taking ground. We are confident that we held our ground/took our ground across all our segments in the fourth quarter and in 2008.

I would think that that would tie your relationship with them, that would get stronger, once things do come back, if, once they are just flush of inventory, then they are going to be pretty reliant on who does actually have the product.

Yes.

Just one housekeeping, maybe for Steve. Without getting into '09 specifically, how do you look at tax rate, let's say, going forward? It kind of bounced around a little bit this year, and this last quarter looked like it actually cost you some earnings that were meaningful, I guess, relative to where you looked in the third quarter. Are we flattening out at some point here, or how do you look at that for, let's say, the next couple of years?

We have seen some quarterly movement on that, John. Basically, the tax rate, if you look at the full year -- we were at 30%, a very, very, very good, effective tax rate, substantially below the statutory rates. We continue to make -- maintain the ground we've gotten on the tax initiatives to date, and I think we are going to be right in that ballpark, 30%, 31%, next year. Some of this happens as you go throughout the year; it's a lot like rebates and everything. As you get to the end of the year, you have a very precise answer on where your earnings are going to be and where they are going to be by country.

Even though we don't have a huge international presence, there are significant rate differences with the US being one of the most highest corporate income tax rate countries, unfortunately, where it is. So that was some of the movement in the quarter. The quarter [rates] bounce around, the year rate doesn't move as much, but we made the adjustment late -- to your full-year rate late in the year, it has more impact on the quarter. But we should be around there.

Dan Whang, B. Riley.

First question was regarding your plans for, I guess, the additional 5% of headcount in the first quarter. I think, just going back to the last downturn in '01, over those few years you had about a 15% reduction in headcount, which actually was in line with a similar decline in revenue. So could we see possibly additional headcount? Just thoughts around that would be great.

The 15% you talked about was over a three-year time period, and playing a little bit of the historian, we chased it hard and it took us a couple of years, really, to even get kind of caught up. In the last year, when we finished off getting the 15% down, we were only down 1% on the top line.

We are much better positioned to today. We started, if you think about it, we started in the second quarter this year adjusting headcount down even while we were adding to our sales force and growing the top line, and we accelerated that to almost real-time with what we saw happen on our top line in the November to December time frame. So we do have this identified, and we are taking actions. We are well on the way as we sit here at the end of January, we are in good shape.

As part of our process we have gone through the exercise in working on the 5% that we are talking about in the first quarter. We identified a population of 10%. If we continue to see -- and took action on half that, the 5%. If we continue to see the activity levels like they are in January, we will continue to work on the cost base. We will see a tighter correlation this year or this economic downturn to reacting to the top line revenue and our cost structure.

Dan, we have been saying consistently over the last several quarters with this question that we would act very quickly, quick reaction, quick response. We did that in the fourth quarter. We will be down, by the end of the first quarter, 500 people over a four-to-five-month period. So we are moving very quickly. We will always maintain our bottom 10%, and we will continue to react based upon where our end markets demand levels are.

With that said, we don't take a consistent across-the-board approach. We are very targeted. We are very -- we take a scalpel precision approach and look at those parts of the business where we can take the cuts and we want to take the cuts. First is those that offer growth opportunities, and that's our approach. So that's the approach we have been taking. It's the approach we've taken over the last couple months. And as Steve mentioned, we are monitoring the end market conditions in real-time. So as we move through February and enter March, we're executing the actions we have outlined and we'll take additional actions as required and appropriate, if end market activity levels remain significantly depressed.

(multiple speakers) point to that, Dan. You may recall Roy mentioning earlier about how we invested in the previous downturn. Even with the 500 or so folks John mentioned in the last four to five months, the investment we made in the sales force, we are still net up in our sales force as we speak today. So we believe we are doing the cuts in the right places, and we will be in a better position than our competition to emerge strongly.

And we will continue to invest in marketing. We have got -- we see green and sustainability as a major growth driver, even in this challenging economic environment. And customers more and more are looking for solutions. We're investing in more training for our workforce. We have six new training programs that we have launched within the last 18 months, and we are expanding that. So we will continue to invest in our talent, and we will continue to invest in those vertical market opportunities that offer us the strongest growth opportunities.

Government is one, in particular, that we've spoken about and our opportunity is significant because we have -- our government sales across WESCO are just a few percent of our total annual sales. And we've got one overall leader who is coordinating our efforts to go after the government opportunities and integrating what we have for CSC and across all the WESCO operations. We think the government-related growth opportunities will be particularly significant for us, given our current position and what our capabilities are and the additional spending and stimulus plan that looks like it is going to take effect here shortly in terms of additional infrastructure, related spending and IT spending in the US.

In order to accommodate in the last ten minutes those still remaining in the queue, I would ask if we could limit it to one question, and we will try to swiftly move through and respond to your questions. And then I'm happy to take your calls off-line.

Christopher Glynn, Oppenheimer.

Any observations you could offer around visible signs of stress with the smaller competitors, such as dumping of product in certain markets, or things like that?

I would say that -- nothing that we want to point to or cite. But I would say that our reaction is one of -- we are not focused on competitors, we are focused on customers. And we are focused on partnering with our best supplier partners and serving our customers. That is our focus. We think we are taking share. Our plan and commitment is to take share, but we think that's the right approach.

Brent Rakers, Morgan Keegan.

I think you started to talk a little bit around the headcount reductions. But if you are going to reduce about 500 people, could you give us a sense for what the mix of support personnel versus sales would be?

Secondly, in terms of the branch closings, could you give us a sense for both the branch closings and the headcount reductions, what you anticipate the lost revenue would be from those?

Just to clarify, the 500, the 500 -- I'll say approximately 500 -- will be the staffing adjustments that we will make, starting -- we've already started -- starting November, through the month of November, December, through the first quarter. (technical difficulty) so we are lined up, that's the duration or the timeframe that the 500 is going to (technical difficulty).

And Brent, we've taken an approach and looked across the entire operation. There is virtually no area of the business that we have not looked at in terms of how to adjust our staffing levels. And I'd say that in certain parts of the business we have taken more aggressive actions, and it makes sense. When you take a look at manufactured structures, manufactured structures has declined for eight consecutive quarters. We have a very good view into what those end markets have done over those eight quarters. We know what our sales results are, and we are highly confident that we have taken market share.

But we have aggressively, we have aggressively resized that business, given our view of the end market realities. I didn't talk about it specifically, but manufactured structures was down a little under 40% in the fourth quarter. That's against a weak Q4 in 2007. So we have taken much more Draconian staffing adjustments actions in manufactured structures then we have in other parts of the business, where we are seeing great growth opportunities.

I mentioned that we opened up seven CSC locations inside WESCO branches. That's a net addition, okay? So I think that's important to understand our approach.

Secondly, your question related to the branch closures. We have talked about 10 branch closures that we executed in the fourth quarter. The sales is roughly $25 million a year. And our approach when we closed the branches -- again, we have an activity-based costing model. We know which customers were profitable with that value what we do. We obviously don't -- we try to preserve the revenue and the relationship with those customers; that's our value.

I would say that, depending on which branch you looked at, our plan is to retain 50% to 100% of the revenue, depending on which of the branch locations. And the way we would do that is by servicing those customers with other branches that are in the geographic proximity.

David Manthey, Robert W. Baird.

What was the AR securitization balance as of year-end?

Just slightly below $300 million. Typically, Dave, we keep that one fully utilized. With the rapid exchange in LIBOR and the challenges, weakness in the commercial paper market, that was not our cheapest facility. So we shifted some to the revolver. But it's a $500 million facility. Between that and the revolver, we utilized the maximum on the one that's most effective to the interest rate.

And Second, could you talk about differentials in pricing as it relates to your different segments? If you look at Datacom versus Non-res Construction versus Industrial, were there any material differences in pricing between the segments?

There has not been any significant change on a sequential or a quarter-over-quarter basis, no.

Matt Duncan, Stephens Incorporated.

First of all, Steve, you gave us revenue guidance for 2009 of down 8% to down 12% but I didn't catch any earnings guidance or even operating margin guidance. Maybe if you could just give us a few comments to help us there?

And then the second question is, if you could just talk a little bit about what you are seeing out there in the Non-res Construction market right now. John, I know you said backlog was down sequentially. Maybe if you could quantify that decline, and then talk about bid activity and if you are seeing any cancellations or deferrals.

As far as the guidance, the 8% to 12% is a pretty wide range and we really aren't going to give the EPS numbers on that right now. What I would tell you, based on what you have gleaned or what we've said, is that we would anticipate being able to, for the most part, to maintain the improvements we saw on gross margin. Depending on the velocity, which quarter, how much it drops on the top line, there will be a bit of a lead lag on the SG&A costs.

For example, in the first quarter, we expect to see sales down in the double-digit range. We are taking significant cost structure actions, but we'll also be taking a one-time charge. We really won't see the benefit of that until the second quarter. So I think that's what you're going to have to look at as you go forward.

In terms of bid activity level, we are still seeing -- bidding has not stopped. There are still projects out there. We have a very strong opportunity pipeline, and also what we are finding is there may be projects that are out there that move out, they get deferred. We expect to see, we are beginning to see some repricing activity as well. It's going to happen. Commodity prices have come down. It's going to create some additional pressure.

We have dealt with that through the fourth quarter. We expect we are going to face that kind of environment as we move, really, through the better part of 2009.

Steven Fisher, UBS.

Can you just talk about what types of projects have been deferred versus what types have been canceled in terms of end markets?

We have seen, as I mentioned, when you look at our Nonresidential Construction sales, and I mentioned in my commentary that we've seen it across most regions in the United States, it's pretty widespread. So it's not contained to any particular segment. We did have three geographic regions in the US that grew in the fourth quarter, grew from a Non-resi Construction standpoint. And we had, actually, very nice results that were heavily construction driven, in Canada, and Canada grew nicely in the fourth quarter in terms of -- on a local currency basis.

So it's not really isolated or can be isolated to one or two categories. We are seeing a widespread slowdown. And you can't pick up the paper any given morning without seeing projects that have been deferred or canceled. It's widespread.

If I missed it, did you talk about what your outlook is for M&A activity?

No, we did not talk about that. We just finished a real nice addition to our OEM and industrial automation business. We remain active in looking at new opportunities, but two things I'd point out. One is we are very protective of our liquidity and credit availability position, and we are going to maintain that as we continue to get a better view on 2009 from an economic activity and a credit availability. So that's weighing heavy on our thinking.

Two, we are entering into a period here where things have moved down dramatically, that the ability to get a good, hard read on the future stability of the earnings stream or free cash flow from the acquisition is making valuation a little bit more difficult on our part and a little bit more difficult on the sellers' part of saying I want to get paid on what I did the last year, not on what you think I'm going to do the next year.

So I expect to see it slow down for awhile, one based on what we are willing to do; and two, on what the seller may be willing to let his business go for.

Ladies and gentlemen, this does include the question-and-answer portion of today's conference call. I would like to turn the presentation back over to Mr. Roy Haley for any closing remarks.

For any of you who did not get into the Q&A session, please give Dan call. We are happy to respond to your questions.

We mentioned that it has been, at least for the last couple of downturns, we have invested during these periods. We're continuing to do that. I am pleased to say that the investments that we have been making over the last several years are reaching certain stages of maturity and development, and we're doing well in a number of different areas. We've strengthened our organization, and I spend a lot of time out in our field organization with customers and suppliers and our own personnel, and I can tell you that we've never been stronger in that regard. We have the same sort of activity in departments all across the Company with a lot of good ideas for continuous improvement.

Our customer and supplier relations are extraordinarily strong right now, and I'm bullish about that. We have also made, over the last couple of years, some major investments with people and other marketing initiatives in new market development, and we are beginning to see those result in either new customer wins or project opportunities.

So the investment side of our business is something we are committed to. John commented that, even while we are taking staff reduction initiatives in some areas, we are also boosting staff in others. We didn't talk a lot about what the stimulus package may yield. That, of course, is still very uncertain about the timing. But most of what is talked about certainly sounds like it could be favorable for our customers and for us. So we'll be working all aspects of infrastructure opportunities and projects on a going-forward basis.

I think we'll be well-positioned as we proceed through 2009. Again, I'd like to say I think we actually had pretty darn good performance in 2008, including the fourth quarter, all things considered. And we entered 2009 with a lot of challenges, but we are up to it. So we thank you for your support and hope to see you soon. Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference call. This concludes your presentation, and you may now disconnect. Have a great day.