Wesco International Inc (WCC) 2009 Q4 法說會逐字稿

Good morning, and welcome to the fourth-quarter and full-year 2009 earnings conference call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. An operator will give instructions on how to ask questions at that time. Please note this event is being recorded.

I would now like to turn the conference over to Mr. Dan Brailer. Please go ahead, sir.

Thank you, Ryan. Good morning, ladies and gentlemen. Thank you for joining us for WESCO International's conference call to review the fourth quarter and full year 2009 financial results. Participating in the earnings conference call are the following officers -- Mr. John Engel, President and Chief Executive Officer; Mr. Steve Van Oss, Senior Vice President and Chief Operating Officer; and Mr. Richard Heyse, Vice President and Chief Financial 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. 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 SEC filings, including the risk factors described therein.

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 John Engel.

Thank you, Dan, and good morning, everyone. In the fourth quarter, we delivered stable sales and margins in the face of continued weakness and highly competitive conditions in our end markets. This marks the second consecutive quarter of stable sequential sales and margins.

We successfully closed a very challenging year in 2009, having taken quick and decisive actions to reduce costs, protect profitability, and strengthen our capital structure. Overall, our performance is better than the last economic downturn and demonstrates the improvements made to our business over the last several years.

In 2009, we delivered 3.9% operating margins while responding to a 24% decline in sales, significantly better results than the 2.3% operating margins experienced during the trough of the last downturn in 2002.

As you will recall, we experienced the initial effects of the economic downturn and a decline in our daily sales rates in mid-November 2008. We responded quickly and took actions to protect profitability and stabilize the business over the last five quarters while continuing to invest in our sales growth initiatives.

A quick recap of 2009 is as follows. We maintained our 100% contract renewal rate with our national account customers for the third year in a row and registered dozens of new wins while increasing our opportunity pipeline to an all-time record level.

We strengthened our International operations by establishing new foreign subsidiaries in China, Australia and Africa. This geographic expansion strategy supports an evolution of our national accounts program to a global account management approach in response to our customers' increasing requests to address their needs outside of North America.

We opened new communication supply operations within WESCO branches to geographically expand our data communications and security products footprint. We established dedicated government and stimulus teams, supported by a centralized lead generation and qualification group to proactively target government customers and stimulus-funded projects earlier in the construction project cycle.

We conducted green and sustainability summits in major cities across the US last year to provide solutions for our customers' energy-efficient building and data center needs.

And, we invested in local markets which offer attractive share gain potential such as Edmonton, Canada and Houston, Texas in support of a One WESCO saturation strategy that more effectively combines our regional resources in selling to and servicing our broad customer base. These growth initiatives and others are helping to stabilize our sales and are expected to positively contribute to our momentum and our business results in 2010.

Now, I'd like to shift to a summary of our 2009 costs, capital structure and people actions.

First, we delivered $140 million of cost reductions last year while executing a comprehensive array of LEAN programs, all focused on improving the efficiency and effectiveness of pricing, purchasing, transportation, operations, and customer sales and service.

We've strengthened our capital structure, reducing our debt and increasing our liquidity and generated record free cash flow of $279 million. We have the required financial flexibility to support our strategy of organic growth above the market plus accretive acquisitions.

Most importantly, we continued to invest in our people. We have strengthened our organization and talent base and have the strongest team that we've ever had. Our extra effort people are our differentiator. I am very proud of the dedication, decisiveness and the leadership demonstrated by all WESCO employees in 2009.

Now, Richard Heyse, our CFO, will provide details on our fourth-quarter results. He will be followed by Steve Van Oss, our Chief Operating Officer, who will give you an update on our major end markets and 2010 growth initiatives before turning it back over to Richard for our 2010 outlook. We will then open it up for the question-and-answer session. And then I will come back at the end of that and wrap up today's call with a summary. Richard?

Thanks, John. Good morning. I would like to share with you our fourth-quarter results and wrap up with our first-quarter and full-year outlook concerning 2010.

Sequentially, fourth-quarter sales decreased 1.7%, which was better than the anticipated 4% to 6% decline we discussed with you in our Q3 conference call. This favorable result was driven by our growth initiatives and stronger than anticipated December demand across a number of end markets. Our fourth-quarter daily sales rates were again stable, sustaining a trend which started in the middle of 2009. The trends we saw in the third quarter continued with our Industrial end markets having strong sequential sales growth of 7%. Sales to our construction and utility customers were off 5% and 13%, respectively, due to both seasonal and economic factors.

Pricing, driven by rising commodity prices, favorably impacted fourth-quarter revenue by approximately 50 basis points in comparison to the fourth quarter of 2008. After adjusting for the impact of pricing and foreign exchange, year-over-year fourth-quarter sales were off 22%.

Backlog, which consists of firm contractor orders for future delivery have, like sales, been stable in part due to the success of our initiatives and ended the quarter down 10% from year-end 2008 levels. Despite very competitive market conditions throughout the quarter, we were able to maintain product margins on both a comparable and sequential basis. Our overall mix of business was consistent with the fourth quarter of 2008.

Fourth-quarter gross margins at 19.2% were equal to third-quarter margins. Gross margins were off 70 basis points versus last year, due to inventory-related charges and lower supplier rebate rates triggered by our response to the rapid contraction in 2009 demand. Full-year gross margins at 19.5% were 20 basis points less than 2008.

During the fourth quarter, we successfully completed our planned cost reduction programs. These programs delivered our $140 million year-over-year operating expense reduction target. Over the last five quarters, we eliminated approximately 1200 positions or 16% of our employee base.

As a result of our headcount reduction and other cost-saving initiatives, fourth-quarter 2009 operating expenses were reduced $36 million or 18% versus last year. After adjusting our 2009 operating expense rate for $6 million of severance costs, our 2009 operating expense rate was 14.9% of sales and reflects our continued commitment to have an industry-leading cost structure.

Fourth-quarter 2009 operating profit at $42.6 million or 3.8% of sales compares to $73.2 million and 5.1% of sales in Q4 2008. Operating margin for the full-year 2009 was 3.9%.

In the fourth quarter, our all-in cash borrowing rate on total par debt value was approximately 4.9%. This rate is somewhat higher than the 3.8% rate experienced in the third quarter, primarily due to the full-quarter impact of our new 2029 debentures. But it's consistent with the 4.8% end-of-quarter run rate we provided during our third-quarter conference call.

The effective income tax rate for the quarter was 26.6% versus last year's rate of 33.4%. Our tax rate trended up from Q3 levels as we expected and discussed in our last conference call.

Net income for the quarter was $21.8 million and resulted in an EPS of $0.51 per share versus net income of $39 million and an EPS of $0.94 per share last year.

As WESCO's new CFO, as I step back and look at the favorable progress made in the last several years in our business model and appreciate what we've accomplished, it really stands out to me that WESCO's fourth-quarter EPS is nearly 4 times the average quarterly EPS rate delivered in the recession of 2001 through 2003.

The fourth-quarter increase in inventories to support increasing stock sales to our Industrial customers, combined with seasonal decreases in payables and receivables, caused fourth-quarter free cash flow to be a slight use of cash. However, in 2009, we generated a record $279 million of free cash flow, which was used to reduce debt levels.

In addition, in 2009, WESCO renewed our accounts receivable securitization for a three-year period and conducted a successful convertible debenture exchange. The combination of these capital structure actions greatly improved WESCO's liquidity position and financial flexibility. At the end of the fourth quarter, liquidity, at $442 million, was at record levels, providing WESCO with ample capacity to handle anticipated future funding requirements.

At this point, I would like to turn the call over next to Steve Van Oss. Steve will provide additional details on our end markets and 2010 growth initiatives. Steve?

Thank you, Richard. Good morning, everyone. I will be providing some insight on the activity levels for each of our major end markets and our actions relative to those markets. For the year, sales were down 24% with Industrial sales down more than construction and utility. Based on feedback from our customers, suppliers and market data, we believe we were successful in improving our overall market share of the available market in 2009.

Turning to the fourth quarter, sales were slightly lower on a sequential basis and better than what we would normally expect to see with traditional seasonality. On a positive note, we experienced 7% growth over the third quarter with our Industrial and OEM customers. Our Industrial business represents a significant part of our sales, and we closely monitor the manufacturing -- Purchasing Managers Index. Manufacturing grew for its fifth straight month, reaching its highest level since April 2006.

We believe that the improvement in the index, along with what we are seeing and hearing from our customers and suppliers, is a positive leading indicator for our served Industrial end markets, which represented over $1.7 billion in sales in 2009. Purchasing executives at our customers are concerned about supply-chain integrity and are looking for large, financially strong companies to mitigate their risks. We believe our increased activity levels reflect their heightened concerns and overall favorable assessment of WESCO.

Reflecting expansion of our national accounts business model, outside of North America, we have changed the name from national accounts to global accounts. The effectiveness of our programs and customers' desire to control and consolidate MRO spend resulted in global account bid activity levels that were up 40% over last year. Additionally, our opportunity pipeline expanded to $750 million, another successive all-time record level.

We are encouraged with our global account customer wins in the fourth quarter, where we added a total of seven new customers across seven different industries. For the full year, we added 28 new global account customers. Additionally, we maintained our 100% renewal rate for the 14th quarter in a row, renewing three customers. We currently have a majority of the Fortune 500 companies as our customers with multi-year contracts.

We were also seeing an expansion of interest and quote activity by large organizations and consolidating their entire MRO spend with an integrated supply solution. Our Industrial integrated supply and OEM customers, most of whom are diversified manufacturers, were impacted the most by the overall weakness in the Industrial market in 2009. Consistent with the PMI data, we saw a strong rebound in the fourth quarter with these customers.

We are investing in expanding the capacity of both our global accounts and our integrated supply platforms in 2010 and see these as significant drivers of profitable growth and market share gains.

Now let's turn to construction. Sales to construction customers were down versus last year in virtually all geographic regions. Sequentially, sales were down 5%. Backlog, which includes construction-oriented firm orders, declined slightly in the fourth quarter, but at a rate lower than historical seasonality. The Architectural Buildings Index has continued to reflect declining activity and reinforces the widely held belief that there will be a slow and prolonged recovery in design activity. Nonresidential construction expenditures are expected to be down in the mid teens in 2010.

Let's now take a look at some of our specific construction activities. Our construction sales and service initiatives are focused on contractors, particularly those involved with health care, educational facilities, data centers, energy and government infrastructure-related projects, where we expect to see the most activity over the next four to six quarters. For example, we have increased our emphasis on programs to deliver more value and secure more sales in a multibillion-dollar outdoor area lighting market as LED technology innovations and stimulus funding provide catalysts for increased spending. In addition, we see significant opportunities due to stimulus funding in waste [modern] treatment facilities, low-voltage security, and other infrastructure-related products.

With that as a backdrop, I would like to take some time to walk you through our construction business and the way we approach, sell, and execute in this market.

For WESCO, the construction market, defined as sales to contractors, represented over $1.8 billion of our 2009 sales. However, it is important to note that there are multiple underlying customer types in the construction market, each with varying degrees of correlation with the business cycle. Overall, WESCO's construction business can be considered midcycle-oriented, serving contractors and end markets such as data communications, healthcare, modular housing, natural resources, and power, to name a few. Although the construction market remains under pressure, it is large and includes many diverse segments, which provide opportunities for market share gains.

Switching to activities around our data communications offerings, project activity in our opportunity pipeline in enterprise cabling and security remains healthy as our sales and marketing initiatives are continuing to yield positive results. Key wins during the quarter were posted in the government, financial services, and legal accounting service sectors with six project awards in excess of $1 million each. Our data communications geographic expansion program, utilizing existing WESCO facilities, has resulted in the opening of 11 Communications Supply locations since this program started in 2008.

This program has resulted in immediate market share growth and incorporates a model which results in profitability in the first year of operation.

We're planning on further expansion of this program in 2010 with over 15 new locations planned throughout the year. This branch within a branch expansion strategy increases cross-selling and service opportunities into our blue-chip customer base.

Now I'd like to comment on our actions to grow our sales to federal, state, and local governmental entities, as well as provide an update on our stimulus-related initiatives.

In the fourth quarter, our government efforts continued to show positive results. Sales were up 20% for the quarter and over 10% for the year and we have positive momentum going into 2010.

In 2009, we expanded our government team and invested sales resources to capture the growing opportunities generated by the American Recovery and Reinvestment Act. We are adding more sales resources targeting the federal, state, and local level to take share in each of these markets in 2010.

As previously communicated, due to project timing considerations, we did not expect the industry to experience significant benefits from the stimulus plan investments in 2009, and in fact, we believe the stimulus plan may have delayed projects as customers waited for qualifications of projects for stimulus funding.

Now, almost a year after the bill was signed into law, the potential and timing of the opportunity is becoming clearer. In early 2009, we acted swiftly and mobilized dedicated stimulus sales teams and launched our online stimulus clearinghouse. The online clearinghouse provides our branch personnel with a centralized repository of qualified project opportunities in their local geographic markets.

This target list of stimulus-related projects increased significantly throughout 2009. The target list now contains more than 47,000 projects for the products we sell. We booked over $40 million in stimulus orders last year and have a solid pipeline totaling over $120 million as we enter 2010.

Now moving to Utility. As indicated during last quarter's call, Industrial demand for power continues to be reported at an eight-year low, resulting in our Utility customers addressing primarily only the required maintenance activities. Transmission-related and alternative energy projects remain a priority for our customers over the mid- to long-term. These markets are generally served direct from the manufacturer.

We have responded by expanding the scope of our existing alliance business model to include high-voltage product categories and combining our integrated supply and project managed service models to increase our scope of supply for available spend.

We see an increasing number of investor-owned utilities and public power customers apply for federal grant money under provisions of the stimulus plan, specifically targeting energy-efficient lighting, systems upgrade, and smart grid programs, which will require our products sourced through the distribution channel.

We estimate that there will be over $500 million in addressable opportunities over the next few years resulting from stimulus funding grants and utility matching funds for these types of products.

Unfortunately, the lower activity levels have heightened an already competitive environment. While we were successful in renewing, expanding, and adding business with over 20 alliance customers in 2009, we lost two large alliance agreements last year to competitors willing to operate at lower margin levels and provide cost savings guarantees that we considered unacceptable. The market remains active with bid requests. And interest in our integrated supply capabilities and LEAN Customer Value Creation programs remains high. We are making investments in sales talent and remain well-positioned as utilities look to rationalize their supply chains and improve their inventory management processes.

For 2010, we expect the overall utility market demand for the types of products and services provided through the distribution channel to be down. We believe that the lower demand, coupled with the lost alliances, will be partially offset by new programs and customer wins and that our utility business will be down in the mid-single digits for the year.

Now moving to our International operations, over the last two years, we have stepped up our investments in higher-growth economies outside of North America, increasing both the caliber and quantity of our personnel resources and opening new entities in China, Australia, and Africa. We significantly improved our project managing and sourcing capabilities in 2009. The result, despite the worldwide economic slowdown, was a single-digit top-line sales gain and increased profitability. In 2010, we plan to strengthen our warehousing, inventory and procurement functions to support ongoing projects, and our model of business can further grow these businesses.

Our Canadian operations continue to outperform the markets in 2009, with the fourth quarter representing our strongest quarter last year with sequential sales gains of 5%. Backlog is solid and near record levels. We are seeing strong mining activity, capital projects, and improvement in residential construction activity. We took significant market share in 2009 and our expectations for 2010 are for a modest improvement in economic activity and continued share gains.

In summary, we performed well in an unprecedented and very challenging economic environment, growing overall market share while adjusting the organization to a much lower level of economic activity. We are stepping up an industry-leading marketing capability to further penetrate and expand with new and existing customers.

Additionally, we are investing in sales capacity directed to those end markets with positive growth momentum and to take further share in challenged end markets.

At this point, I would like to turn the call back to Richard Heyse, and Richard will provide additional detail on our general outlook for 2010. Richard?

Thanks, Steve. First I'll give our general outlook for 2010 and then the specific outlook for the first quarter.

For the full year, we expect that the economic recovery will be slow and market trends in 2010 will reflect gradual recovery in Industrial, International, and Government markets, offset by contraction in non-residential construction and utility markets. In total, we anticipate that demand in our served markets will drop 3% to 5% from 2009 levels.

Our growth initiatives are expected to somewhat offset that decrease. There is potential for pricing and foreign exchange rates to be positive influences on 2010 sales, but given recent commodity and foreign exchange price volatility it's difficult to predict the full-year impact.

Despite competitive pressures, we anticipate modern improvement in gross margins as inventory charges related to slow-moving inventory are reduced and supplier volume and rebate rates recover to historical norms.

While we will not reduce our focus on operating expense cost controls in 2010, with stability returning to a markets and the desire to focus our teams on our growth initiatives, we currently have no plans for mandatory unpaid leave of absence or benefit suspensions in 2010.

These and other temporary cost containment measures had a $29 million favorable impact on 2009 operating expenses. The $19 million incremental benefit from 2010 full-year impact of our permanent cost reduction will not be large enough to fully offset restoration of temporary spending cuts and funding of our growth initiatives. Our full-year 2010 operating expense will, therefore, be somewhat higher than 2009.

Our capital structure is sound. Three-quarters of our debt is fixed rate, and we have no near-term maturities beyond our remaining 2025 debentures, which we expect to be put to the Company in the fourth quarter of 2010. This put of debentures is expected to be funded with free cash flow. 2010 interest expense rates should, therefore, be stable to slightly higher.

During 2010, we expect our tax rate to be approximately 28% to 30%. Historically, WESCO has been very effective in tax planning in 2009 with no exception. In 2009, we executed a number of tax planning strategies, and we are in the process of completing several additional initiatives during the first half of 2010. Barring major changes in tax regulation, these efforts should enable WESCO to sustain a 28% to 30% tax rate for a number of years.

2010 CapEx will be approximately $20 million in support of our growth initiatives. Finally, we are targeting to convert 85% to 90% of 2010 net income into free cash flow.

Now, looking at the first quarter, historically, first-quarter sales have been 2% to 5% less than fourth-quarter sales due to weather-related impacts in the construction utility market. We anticipate the positive impact from our sales initiatives, improvement in market prices, and continued strengthening in our Industrial, Data Communication and International end markets to partially offset seasonality in demand contraction in the Construction and Utility markets.

Overall, we anticipate that first-quarter 2010 sales will be 1% to 3% lower than the fourth quarter 2009, and that gross margins will be in the mid-19% range. The first quarter is typically our highest operating expense quarter. Due to this seasonality and the factors offsetting our full-year outlook, we anticipate the first-quarter operating expense will be $5 million to $9 million higher than fourth-quarter 2009 levels.

Given these expectations, first-quarter operating margins are expected to be at or below 3.4% of sales. Finally, our first-quarter interest and tax expense rates are expected to be consistent with our full-year assumptions.

At this point, I would like to open up the call for our question-and-answer session. Operator?

(Operator Instructions). Shannon O'Callaghan, Barclays Capital.

Can you just go a little bit more into -- within the Construction bucket, you have a datacom, prefab, resi. What are you seeing in those -- the other parts of that segment other than the non-res piece?

We look -- kind of break that big number down into the multiple of underlying end markets like residential, which we see is a nice improvement coming on a relative basis into 2010. We're not a huge player there, but we have a lot of initiatives that wrap around that. Transportation would be another segment with automotive being a component of that on a relative basis is showing some strength.

You got wastewater treatment, security, office, commercial like retail shopping centers, hotels, amusement, recreational. Those would be in office, and the commercial and amusement recreational would be -- tend to be some more of the later-cycle things towards the business cycle. Not a large part of what we do, kind of maybe in that 15%, 20% range.

The areas where we see some good activity and opportunity, particularly as it relates to the stimulus plans would be in healthcare, education, and things like that. And then you've got manufacturing and highway and streets and infrastructure areas that ought to show a little bit of activity.

So it's a pretty diverse component for WESCO. We've traditionally not talked about it in all those elements, but we certainly have initiatives across all those, really focusing on where we see money being let or being queued up to being spent. And there'll be various timelines on that, depending on the release of the funds and then the staging of those projects.

So a lot of activity and a lot of opportunity, but that will be amidst a backdrop of a general, overall lower spend, but we think we are pretty well positioned to negate a lot of that with our initiatives.

Shannon, I would add one other point that Richard mentioned that construction overall as we define it, which is roughly 39% of our portfolio was down 5% sequentially. But we were lumping commercial, Institutional, Governmental into that. If you were to spike out the CIG market, we were down 1% -- we were down less sequentially. And if you were to look at datacom, which is roughly 12 to 13 points of our mix for the portfolio, that actually grew sequentially in the quarter. So just to kind of put a fine point on construction is broad. It's made up of many different segments.

The government -- the public projects we're seeing more momentum with and stimulus should kick in this year. And for us, in particular, we've had a significant emphasis on datacom, which we've been lumping traditionally into construction. But the drivers for that and the type of solutions we are delivering are really kind of operating to a different cycle, and we're seeing very good results out of our initiatives.

So you've said non-res. expenditures down mid teens. But I guess that's what I'm trying to get at is that construction bucket is a lot more than just non-res. What do you expect, as you look at the way you define construction, what do you think that bucket will do next year?

I think overall we believe we're going to continue to take share. We're highly confident we did in 2009, and we don't expect to be down the full 15%. But given the order of magnitude total end markets down that much, we'll probably be fighting to be down in the low to mid single digits.

That's for just the non-res. piece or the whole construction piece?

That would be for the entire construction piece.

Okay. And then, you mentioned pricing could be positive. You're talking about intense competition on some things. Can you clarify that a little bit? Why do you think price can be positive?

I'll make a comment and then Richard may want to as well. If you look at a specific area of the pricing with commodities, pricing is rising throughout the year, that should be positive as we go into 2010 on a full-year basis. Copper has moved up dramatically through the entire year and been stabilized for a period of time and the same thing on steel.

So I believe, we believe, in our discussion with our supplier bases, that there will be modest price increases in 2010, driven primarily by commodity-related pricing that's been in place for the last couple of quarters.

Okay. Yes, that's kind of what I figured. So ex. the commodity component, you're assuming pricing kind of flat next year?

Yes, essentially. And I think the other point to make is that we've been recovering any cost increases through pricing. So at this point, we haven't had any difficulty in recovering cost increases through pricing increases. So the commodities are difficult to predict, as I said. And our expectation is that any increase in costs will be passed through.

Okay. Thanks a lot, guys.

Christopher Glynn, Oppenheimer.

Just wondering how you're looking longer-term at the opportunity for the global branch expansion now that you're getting your feet wet in some interesting places, and if it's an area where we could see an opportunity for the CapEx budget down the line?

Yes, here now, we look at International. Maybe a little comment to give the backdrop. The reality is WESCO has been in the International market for many, many decades. It goes back into our history and our deep roots in Westinghouse. And we have been putting more emphasis in international opportunities. Principally, it's been a follow your customer strategy.

Our global account customers, whether it's kind of a national accounts like program or an integrated supply program are increasingly asking us to give them proposals and look at extending our value proposition to operations that are outside of North America.

So we look at that as an excellent opportunity over the very long term. And, but I will say that we are taking a very thoughtful, measured approach with our global expansion. Our business is growing nicely, as Steve mentioned, and we are profitable. And so I think we've got good sets of controls around managing that expansion and ensuring that business stays profitable.

With that said, you got to be there and establish a presence to understand the local market and begin to build on that competence to be able to take advantage of the customer opportunities. And that's what we are doing. So we've been laying some investments in a number of regions where we see attractive growth; we've spiked out three in this call that we've done over the last 15 months.

And we think given our current Fortune 1000 customer profile of where we see better GDP rates, that those regions in particular will contribute to a greater extent as we move forward. We are not signaling a dramatic or aggressive global expansion. Because again, I think we are balancing the profit equation.

Okay. And then one other on the stimulus opportunity. I think you talked about $120 million currently. Is that the kind of current pipeline you expect to continue to grow? Or is that the 2010 opportunity? And is it adjusted for an assumed win rate so to speak, just some color on those?

That's a pipeline number that we are entering into 2010, that we can say very firmly that we've had a tie-in to a specific project that's been qualified through our lead generation. The number is probably, in reality, higher than that. And we would expect to see that growth throughout the year.

It has been growing literally month by month as we move through -- let's say the second half of 2009. And we would expect that number to grow and honestly, accelerate -- the growth to accelerate as we move through 2010.

That number does understate the total opportunity pipeline that we have captured in our stimulus clearinghouse. What that is is a very small subset. But that subset has been put through, as Steve mentioned, our dedicated lead generation qualification group. So these are bona fide, qualified, funded projects that are in our sweet spot. What does that mean? The products and supplier relations that we have, we're in a position to go after those very aggressively.

There's two things really moving here. You've got the money finally starting to be released and sent to the people that will spend it, number one. Number two, we've refined our lead generation prospecting process. Number three, we've added to, in 2009 and will continue to add in 2010, additional resources as well as a reallocation of existing sales resources to focus on that segment of the market.

Thanks. That's very helpful. I guess just one follow-up. Any idea what percent of your stimulus benefits would be driven by the lighting which you've emphasized in that vein?

That's tough. It's definitely a significant category. The energy efficiency -- the LED lighting, particularly in the outdoor area, is receiving a lot of attention. That's -- it's probably in that 20% range of operating -- it's a significant category. It depends on the win. If it's a highway or city type of a project, it's probably high. If it's a wastewater treatment, it's going to be low. So --

I would like to make a -- maybe just a tag onto that -- make a comment about lighting and lighting solutions in general as an opportunity for us. And I think that if you take a look at our supplemental, we introduced -- and we've reintroduced it here -- we introduced it last year at the Baird Industrial Conference, a page that lays out eight growth engines. One of those is lighting.

We have a terrific lighting business, and a terrific set of capabilities, and we have been applying additional resources and investing in our capabilities to offer a more complete lighting solution. That's independent and was prior to the stimulus.

The stimulus, if you look at our addressable opportunities, lighting is a large addressable opportunity.

To put a point on that, in the fourth quarter versus third quarter sequentially, lighting was down under 2 points. And if you were to look at what we have in our supplemental, we posted our new market and mix and product portfolio for 2009. If you were to compare that to what we had in 2008, lighting is a point higher -- a 1 percentage point higher of our mix.

So is general supply has also increased. And datacom increased 2 points. So if you look from a product portfolio perspective, wire and cable down 2 points. Datacom, up 2 points. Lighting is at a point, General Supplies is up a point. And Distribution Equipment flat. And Controls & Motors was down a bit.

So that portfolio shift to what I will call higher value-added and we believe higher-margin characteristic products, is very consistent with our strategy.

And so again, lighting -- you will hear more about lighting as a broad category as we move forward. Steve was spiking out just one piece of that, which is the highway lighting, street lighting, which is a particular area that's funded by stimulus.

Okay, thanks a lot.

(Operator Instructions). Matt Duncan, Stephens.

The first question I've got is with regard to your inventory. I think on the last call, you guys had thought that that might be flat, maybe down a little bit, but you had also sort of hedged your bet a bit by saying if you saw demand in proving, actually start to build inventory because you didn't want to lose out on fill rates. (technical difficulty) take the sequential increase in inventory from the 3Q as a sign that maybe you did see things move along a little bit better during the quarter than you had previously thought?

Correct. So, if you look, as I discussed, our Industrial sales were up 7%, which was a great result. And our Industrial stock -- since this is fairly, more inventory intensive, so we wanted to make sure we maintained service levels and so we built some inventory in the latter part of the quarter.

Okay. That's helpful. And then a couple of quick follow-ups then and I will jump back in queue.

First, as you look at your cash, how do you guys want to balance cash and available borrowing capacity? Your cash, specifically looking at debt reduction; working cap needs now that you're kind of thinking the Industrial piece is going to be growing; maybe potential stock buyback. I know you've still got some of that authorization out there; and acquisitions, as you think also about your leverage level, which has now crept up over 4 times, and I know you guys like to keep it below that. How are you balancing all that out?

And then last thing after that, if you could just talk about the competitive environment. Are you seeing any of the small guys going away?

I will handle the use of cash or the cash question, and then Steve can handle the competitive one. As far as the stock buyback program, that terminated in September and was not renewed by our Board. Our priority for use of cash as we stated is debt reduction with targeting getting our leverage ratio down in the 3's. And I think for the near future, that's going to be our first priority for use of cash. And [we straight up answer], and then Steve you want to come back (multiple speakers)

(multiple speakers) environment remains just that -- it's very competitive. We are seeing more stress and strain [on our call] in the smaller players. The larger regional players are holding up okay. The smaller players are having more difficulty; typically don't have access to funding as well. But they've not gone away yet.

On I guess a positive note, we are seeing a little bit more interest of the small regional players and perhaps looking at WESCO as a potential buyer of their business or some type of alignment. Particularly as we continue to be very, very successful with our global account activity and integrated supply, those type of programs are what I call dis-intermediation programs. They do knock the status quo out. And when we win a global account, which may have 10 to 20 different geographic locations associated with it, it's the small, independent, undercapitalized regional players that typically get knocked out on that.

So, I think you'll start to see additional pressure as things stabilize and when they start to move up, because the cash flow characteristics of the small distributor are such, similar to WESCO's, that when things are going down, you're generating cash out of your inventory you're not generating out of the earnings.

When the cycle starts to flip, they're going to be I think very hard-pressed to reinvest in their business. And they're going to ask themselves the question, is this where I want to be long-term?

Okay, great. Thanks for the color, guys.

Deane Dray, FBR Capital.

Thank you. Good morning, everyone. I really like the addition of the slides. It's very helpful and a lot of good data points. So that's a big help.

And, the question is, if we can go back to some of Steve's comments on the utility market, if we could, and basically it's a two-part question. The first is, kind of take us through the macro assumptions that you are baking in, in 2010 for power gen and distribution, which seems to have the most headwinds and then transmission seems to be positive. So what are the macro assumptions? And then we'll -- got a couple questions regarding how that affects WESCO for the year.

Obviously, we've not changed our outlook in the last quarter on what we thought 2010 was going to be like -- the macro trends, really driven by the lack of industrial demand and a five-year decline in the residential side, kind of knocking out new developments, that the demand is going to be on the weak side. And that the utilities are really going to be focusing on required maintenance in general. So that's kind of a general pneumatic backdrop.

On the positive side, could be. We've not -- we've seen the activity levels start on the discussion phase, but not really pulling the trigger as it relates to stimulus-related funding. And it's available.

The caveat there is the utilities need to match for the most part a lot of these grants. To the extent that they've had programs and modernization in what we call smart grid opportunities; we think we will see those perhaps accelerate because they can get kind of a two-for-one on that. That should be good for the distribution side of it.

The power generation, we don't expect to see a lot of activity there. The transmission side is -- we've seen projects delayed. But we've also seen a slight sequential jump in the project opportunities and the requests for proposals and bids. It's probably up in the neighborhood of 10%, fourth quarter versus third quarter. Those tend to have a bit of a long lead time and we'd probably be looking at late 2010, early 2011 projects.

Deane, the only thing I would add is -- and I think alternative energy too, whether it's wind or solar, we'd also expect to see positive sequential demand.

Solar, not necessarily in terms of utility grade. That will be more of a -- think of it as a construction play. But, I do think the trend there is positive.

And as we've mentioned in the past, we have been working our capabilities to serve the T of T&D up through substation with our high-voltage-related products, packaging services, etc.

And what's the impact from losing those two alliance accounts? And just take us through what the offsets are expected against that for 2010.

We constantly are going through the portfolio and we have adds and losses. And we don't really break those out specifically. I would expect to see on balance though, the new programs we have take a significant chunk of the offset, but it will be at a run rate basis towards the latter part of the year. It will take us some time to offset that.

But there's a -- it's not material, but it was a meaningful amount of business. We don't spike those out independently.

Was it a question of being someone underbidding? It wasn't performance; is that correct?

It was a very, very competitive bid placement. We were the incumbent. We knew the cost to serve. We knew what the levels were, what we could do with our supply suppliers. In the case of one of them, it was a large alliance we'd won three to five years previously, and it just came to a level that we just did not want to be at. So I would qualify it primarily as a too low of acceptable margin for our targets.

It wasn't just initial pricing. It was again, on the nature of the alliance agreement was aggressive entry pricing. So it wasn't just a price of admission issue. It was the service and cost reduction guarantees over the long run. When you put those two together, and put it into a financial model -- and we've said time and time again, we will -- and we have the intestinal fortitude -- to step away from business that does not meet our profit expectations. We've also said that relative to acquisitions. If we can't find a deal that meets our expectations.

Thank you.

Steve Gambuzza, Longbow Capital.

Good morning. I was wondering if you could just call out what the kind of headwinds from supplier volume rebates was in 2009.

Sure. If you look at the FCR rates, they -- again, that was the primary driver if you look at 2009 versus 2008. So it's again 20, 30 basis points year over year. And again, we said we expect our gross margin rates next year to be in the mid-19s. And so overall, and it should be -- it's really more balanced. This was the latter half of the year. We had the impact and it should recover in the first half.

So I guess with the outlook you've provided for sales, kind of -- or markets down 3% to 5% and hope to exceed that, is -- do you, given your expectations for inventory, think that supplier volume rebate should be flat in 2010?

The supplier volume rebate should go up 2009 to '10. Some of the programs in essence have volume ratchets in them. So the decline in volume from 2008 to 2009 lowered the rates. In 2009 to '10 with volumes being fairly equivalent, those rates should recover.

Okay, thank you.

Sam Darkatsh, Raymond James.

Richard, Steve, how are you? Most of my questions have been asked and answered. There's just a couple of nitpickies. First off, I don't recall you giving the expectations for the industrial and CIG segments for 2010. If you could help quantify those expectations.

The second question would be are you seeing anything in either the MRO versus project or big customer versus small customer that helps you get a sense of the economic bottoming process or how long it might take to come out of this based on your experience?

And the third question would be, how much is the recent inflation in copper helping existing results? And if copper were to come back and deflate a bit, would you be able to maintain gross margins?

You had three questions there and the operator said you're allowed one, Sam, so --

But I framed them in a very long-winded way.

I know, and we will get it into there. Let me take the first couple as it relates to Industrial, the big and small customers. As we talked about, we had a nice sequential improvement in our industrial business -- was up 7% sequentially.

Our feeling, our discussion, with customers as well as suppliers is that we believe we are seeing the bottom of the industrial activity. Inventories in that area are still somewhat low if you look at the purchasing managers who reports on that.

Our expectation are to see modest improvement in the industrial economy in 2010 and we think we are extraordinarily well positioned to benefit from that.

As it relates to larger and smaller customers, we've got big exposures with large customers to our global accounts program. A lot of those were off dramatically in 2009. If you look at the manufacturing side on the OEM, direct materials piece of our business, you saw dramatic declines as people adjusted inventories and adjusted to the lower production rates. That inventory phenomenon we think is pretty much corrected at this point in time.

Hopefully it will snap back the other way. And people are starting to -- the manufacturing rates have picked up somewhat. So expect to see that relatively positive in that.

Regards the energy sector, we saw slowdowns in the mid-and latter part of 2009. Expect to see that stabilized in 2010.

So on the Industrial side, and the CIG as that relates to a lot of the government stimulus, we expect to see that to be neutral to positive in 2010, offsetting somewhat of a very, very difficult environment on the nonresidential construction, as well as some of the other contractor markets. And Richard, do you to comment on --?

Maybe the only thing I would say, Sam, we've said for a number of quarters now, and as we get closer to 2010, I think it turns out it's starting to play out that way. That industrial would represent an opportunity to become a tailwind, and we are seeing that. And we said CIG overall has the opportunity to become a tailwind, particularly the institutional and government piece of CIG. And we've said construction would be overall a headwind, but there's elements that are inside construction that, given our share capture and investment represent a tailwind. And then utility is a headwind. So I think it's very consistent with what we thought would happen. It is happening. And I think the fourth-quarter results bear that out.

As far as copper, copper affects a relatively small portion of our portfolio. As we talked in the last call, we had sold through the copper price changes and had not done any repricing downward early this year. And it indicated our cost of inventory and market prices came back in balance during the third quarter. As I mentioned, we've been able to recover any cost increases in the fourth quarter with price increases. So copper could be a small uplift in the first quarter. But I think it would be relatively modest. And as I said in my notes, difficult to quantify at this point. The markets have been pretty volatile.

Thank you.

Anthony Kure, KeyBanc.

(technical difficulty) on the datacom trends, obviously, pretty positive in the fourth quarter. Do you think that's really organic growth based on secular trends overall in datacom, based on sort of some of the longer-term trends? Or is there maybe an element of budget flush in the fourth quarter that could have maybe goosed the fourth-quarter growth rate a little bit?

It does not. This is Steve. It does not appear to be a budgetary issue of some people having money left to spend. And I would say near and long term, the organic trends would be positive as we are seeing more and more demand, more data centers, more bandwidth requirements, refreshing of enterprise systems.

For WESCO, the specific positive is we talked about, we opened up new facilities from '08 to '09, and we've got a very aggressive plan to continue that successful program into 2010. And we believe based on, certainly, on the new openings and communications with our key Tier 1 suppliers, we are absolutely taking market share.

So I would say the biggest aspect we believe in the improvement is the actions that WESCO is taking and the market and trends are moderately positive in that segment.

Okay, great. Thank you. And just a little bit of a finer point on the restoration of the expenses. So the SG&A, $6 million to $8 million coming back, higher than the fourth-quarter rate per quarter. Maybe you could, based on your 2010 growth forecast of the market being down 3% to 5%, I guess with your SG&A estimate, what does that assume on your growth side overall, maybe at the midpoint? Or maybe you can give a more fine range there.

Just -- how we've given guidance or talked about in the past is assuming stable sales because there was a piece of our SGA that varies with sales. But assuming stable sales, that $6 million to $8 million is simply the restoration of benefit programs.

But as I also mentioned, we're going to get on a [quarter] as well, so you're going to get the benefit of our full-year impact of our permanent cost-reduction. And that should somewhat offset that. If you look net net, it's probably $2 million to $3 million incremental -- differential.

So overall, like we gave in the guidance for the first quarter, there's a number of impacts going into that. That $5 million to $9 million is the right number to use for the quarter for Q1, taking all those factors into account.

Okay, thank you.

David Manthey, Robert W. Baird.

Thanks. Richard, you might have answered both of these already, but just to clarify, when you talk about a mid-19% GP in the first quarter, and then for the year, you're saying an increase modestly from fourth-quarter levels. I'm trying to put those two pieces together and understand. Are you saying that looking back seasonally, it looks like sometimes you get a pickup in GP in the first quarter. Should we expect GP in the first quarter to be a little bit higher and then be a little bit lower quarters two through four? Or is it pretty much a straight line through the year as you see it right now?

I know that's we're mincing words here. But I want to be clear on the difference between mid 19's and modestly higher than 19-- (multiple speakers).

In our guidance for the first quarter, we're not assuming any mix improvement. If there was mix improvement, that would be an upside. But as far as the guidance is assuming that again supplier rebate rates revert to their norms. And again, the second half of the year, due to slow-moving inventory, we recorded some inventory charges and put up the appropriate reserves (technical difficulty). So again, that guidance for the first quarter is really for a nominal type effect; mix could be an upside.

All right. And then second, in terms of the SG&A, so I'm clear on that, where you're talking about adding back the $5 million to $9 million or the $6 million to $8 million incremental quarterly SG&A run rate, since we're talking about relative to the fourth quarter as we look at the first quarter, doesn't that already include the full benefit from the cost reductions last year? So when you were talking about getting a tailwind, that's true for the full year. But when you're talking about a run rate relative to fourth quarter, it's already in there.

So I guess the question is, the incremental $5 million to $9 million or $6 million to $8 million quarterly run rate, does that include both the costs coming back, as well as your spending on growth initiatives?

Yes. The $5 million to $9 million is an all-in number. So if you look at the combination, we have a bit of decline in sales decline. You've got the restoration of the temporary spending. You've got the permanent impact all in that number.

Plus the first quarter is traditionally our heaviest quarter from SG&A because there's some benefits and other expenses. So instead of trying to break out each piece, we thought the best way to approach it is just give you the guidance for the total impact of all those factors in the first quarter.

All in. Great. Okay. Thanks much, guys.

Well let me take over here now and wrap up. I understand there's still a number of you that are in the queue. We've actually gone past the hour here. Dan is available and we are available this afternoon and we would be happy to follow up separately to address your questions. And so please reach out and accordingly.

Let me wrap with the following. Thank you all for your time today and your support. Our current outlook is for the economy overall to recover slowly over the next several years. We're beginning to see signs of positive momentum, as we said, in the industrial and government end markets, but expect continued pressure and contraction in non-residential construction and utility in 2010. The market conditions and expected duration of this downturn provide opportunity for share gain and acquisitions by stronger, well-capitalized companies like WESCO.

Our Company is larger, more diverse, more profitable, and financially stronger than during the last downturn, and as a result, well-positioned to gain ground during this period. We see excellent potential for value creation in 2010 as our customers and suppliers are increasingly concerned about the integrity of their supply chains. And they're looking to do business with a smaller number of larger partners. We continue to partner with our suppliers in providing leading supply chain solutions that address our customers' needs.

Finally, I will say we remain focused -- absolutely focused -- on providing superior customer service, maintaining our cost leadership position, strengthening our team and delivering improved shareholder returns. We're very confident in our ability to operate effectively through this downturn and exit an even stronger Company. Thank you. Have a good day.