Wesco International Inc (WCC) 2010 Q1 法說會逐字稿

Welcome to the WESCO first quarter 2010 earnings call. All participants will be in a listen-only mode.

(Operator Instructions)

Please note that this event is being recorded.

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

Thank you. Welcome to this conference call to review the first quarter 2010 financial results. Participating in the earnings conference call this morning 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.

This conference call via webcast was disclosed in a press release, and was posted on our corporate website. Replays of this conference call will be archived and available for seven days.

This conference call may include forward-looking statements, and therefore actual results may differ materially from expectations. Following the conclusion of this conference call, we will post on our website a supplemental data presentation providing a summary of certain financial and end market information reviewed in today's commentary by management. 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.

We delivered a solid quarter to start 2010. It's encouraging to see the improving momentum compared to last year. Our sales and margin initiatives are gaining traction, and are contributing positively to our results, which exceeded our expectations and were better than historical seasonality. Our first quarter sales were up 1.4% sequentially versus the fourth quarter, and our gross margins expanded 60 basis points sequentially, marking a strong start to the year. Of particular note is our return to positive year-over-year sales growth in March. This is our first positive monthly sales comparable since October 2008, and this positive momentum has continued into April to date. Overall, this has translated into operating margins of 3.6% and EPS of $0.50 in the first quarter.

In addition we increased our working capital turns, reduced our debt, improved our financial leverage, and increased our liquidity to a record level in the quarter. Our cost position and capital structure are in excellent shape, and we have the required financial flexibility to support our strategy of organic growth above the market, plus accretive acquisitions. We're continuing to investment in our business, while targeting and prioritizing our previously-outlined eight major growth initiatives. Sales to our industrial, government, and datacom customers showed particular strength in the quarter, posting gains of 13%, 31% and 6% respectively versus last year. We increased our global accounts pipeline to an all-time record level, and grew our construction backlog 4% since year end. Overall, we believe that our diverse portfolio and the decisive actions we took over the last 18 months have positioned us well to outperform the industry, as we move into the recovery phase of this cycle. We're seeing the benefits of our cost reductions taken last year, and we continue to execute a comprehensive array of lean programs focused on improving the efficiency and effectiveness of pricing, purchasing, transportation, operations, and customer sales and service.

Our current outlook is for the overall economy to recover slowly over the next several years. This positive momentum in industrial and government end market is expected to continue. However, further pressure and contraction in the nonresidential construction and utility markets will continue to extend throughout the year. Specifically for second quarter, we expect to see a return to normal seasonality, with sequential sales expected to be in the low single-digit range.

These market conditions provide opportunities for share gain and accretive acquisitions by WESCO. We're seeing excellent potential for value creation, as our customers and suppliers are looking to do business with a smaller number of larger, more capable partners, in order to improve the efficiency and effectiveness of their supply chains. Our ONE WESCO initiative focuses the efforts of the entire WESCO team of marketing, sales, product specialists and service personnel on partnering with our suppliers, all focused on actively promoting our complete portfolio of products and services to all customer groups.

Now Richard Heyse, our CFO, will provide details on our first quarter results and our outlook for the second quarter. He will be followed by Steve Van Oss, our Chief Operating Officer, who will give you an update on our major end markets and our 2010 sales growth initiatives. We will then open it up for the question-and-answer session. Richard?

Thanks, John. Good morning.

First, I will share with you our first quarter results, and then conclude with our second quarter outlook. WESCO delivered solid first quarter results that outpaced expectations. First quarter sales were up 1.4% sequentially, driven by our sales initiatives across a number of markets, as John noted. Year-over-year sales were down 2.6%, inclusive of a positive impact of 1.8% from foreign exchange. Through the quarter, we saw favorable trends across a number of our end markets.

Industrial end markets led the overall performance, with strong sales growth both on a year-over-year and sequential basis. Sales to nonresidential construction contractors were down compared to last year, driven by a lack of new starts, partially offset by retrofit projects and growth in Government spending. Utility demand, while seeing some pickup related to February storms, was down, as capital and maintenance spending restrictions continued due to soft electricity demand. Product pricing, driven by rising product prices and our margin improvement efforts, is estimated as positively impacting the year-over-year first quarter sales by approximately 1.7%. Sales per work day increased through the quarter, and the Company posted positive year-over-year sales growth in March.

Despite very competitive pricing pressures experienced in the market, we were able to generate improved product margins on a sequential basis. When combined with other positive factors, this results in a first quarter gross margin of 19.8%, which is 60 basis points higher than fourth quarter levels, above our first quarter guidance, but clearly consistent with management's 2010 goal to restore gross margin to the average level experienced in 2008.

SG&A operating expenses for the quarter were $180 million, compared to $188 million in the comparable quarter, and $168 million in the fourth quarter of 2009. Our SG&A expenses were consistent with our guidance when adjusting for the increased variable expenses associated with increased sales and margins. We have maintained, and will continue to maintain, our cost discipline.

Operating profit for the first quarter was $41.7 million or 3.6% of sales, compared to $43.5 million or 3.7% of sales in Q1 2009. Due to higher sales and gross margins, operating margins exceeded our first quarter guidance of being at or below 3.4%. Backlog, which consists of firm contracts or orders for future delivery, and represents a forward-looking indicator for our construction business, increased by more than 4% from year end. It is notable that despite contraction in construction markets, our current backlog is consistent with levels seen last summer.

The effective income tax rate for the first quarter at 29.3% was in management's expected range of 28% to 30%, and is comparable to the first quarter of 2009. We anticipate maintaining our effective tax rate in the range of 28% to 30% over the next several years, barring any major changes in tax regulations. Net income for the quarter was $21.7 million, and resulted in an EPS of $0.50 per share versus net income of $23.3 million, an EPS of $0.55 in the first quarter of 2009. WESCO's diluted share count of 43.7 million shares for the first quarter increased by 800,000 shares from fourth quarter 2009 levels. This was a result of our improving average quarterly share price, and the associated dilution impact from our convertible debentures and management stock appreciation rights. If our current stock price is sustained, during the second quarter our fully diluted second quarter share count will increase by approximately 2.5 million shares from first quarter levels.

Free cash flow for the quarter was $67 million, reflecting working capital base improvement versus year end. Our goal continues to be to convert at least 80% to 90% of net income into free cash flow. We continue to apply free cash flow toward the reduction of debt in the quarter. First quarter total par debt value decreased by $57 million from year end to $817 million. Our all-in cash borrowing rate at quarter end, including commitment fees, was 5.1%, versus 4.9% for the fourth quarter. End of quarter liquidity, defined as invested cash plus committed borrowing capacity, was $511 million, another high water mark for the Company. Our debt leverage ratio declined to 4.0 from 4.2 at the end of last year. We have previously stated that our leverage ratio target range is 2.5 to 3.5, and we are continuing to prioritize returning to that target range.

Our second quarter outlook is for sequential sales growth to be at 2% to 4%, with gross margin rates and SG&A expense similar to first quarter levels. This expectation is based on our assumption that the economy will recover slowly across the balance of the year, with continued but less dramatic growth in industrial markets, somewhat offset by the long-term downward trend in construction demand.

Management's outlook for 2010 year-over-year end market demand, excluding price and foreign exchange effects, has improved from the previously provided view of down 3% to 5% to a current view of flat to down 2%. Finally, management's expectation of the second quarter operating margins will be approximately 4.0%.

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

Thank you, Richard.

First, I will provide some commentary on the major end markets we serve, and then we'll focus on WESCO's 2010 major growth initiatives. On a positive note, we saw overall sequential sales growth over the fourth quarter of 2009. Normal seasonality typically results in a 3% to 5% sales contraction. Sales growth was driven by sales to industrial customers, which were up 9% sequentially and 13% over last year's first quarter.

A weak economy has continued to slow investment in nonresidential construction by US businesses and Government agencies. This trend is expected to lead to an overall decline in nonresidential construction starts of up to 15% in 2010. Accordingly, we saw sales to contractors and utility customers decline both sequentially and from last year's first quarter, affecting weak commercial end markets, lower allow occupancy rates, and lower electrical demand. Trend wise, the architectural billings index, or ABI, improved almost 2 points to 44.8 in February of this year, the second-highest ABI in the last 14 months, and inquiries for new projects remain positive.

While we believe 2010 will be another year of reduced activity levels across a number of end markets, we are confident in our ability to capture share in what remains a very large and highly fragmented market. To that end, we have focused on a series of growth initiatives in 2010 and beyond to drive overall growth in sales and earnings. The targeted initiatives are global accounts and integrated supply for WESCO as the clear industry leader today; data communications and low voltage products, where we are leveraging our North American footprint and our extensive data [common] and security capabilities; BPCs and contractors that benefit from our extensive sourcing capabilities, and extensive branch network; utility, distribution, and generation opportunities that utilize coordinated integrated supply solutions; Government agencies that are positioned to benefit from the release of stimulus funds; health care and education organizations, which control spending across multiple facilities; international activities that are focused on energy-related projects; and lighting, which represents a large category of spend that is well positioned to benefit from State and Federal energy efficiency initiatives and stimulus funding.

Let me now give some color on the size and activity level for four of these growth priorities. We'll start with global accounts and integrated supply. The effectiveness of our programs and our customers' desire to control and consolidate MRO spend resulted in global account bid activity levels that were 40% over last year. Additionally, our opportunity pipeline expanded to another successive record level, with growth in the discovery and proposals [to phases], due in part to a growing number of integrated supply, OEM, and global oil and gas opportunities.

We're also encouraged by our global account customer wins in the first quarter, where we added a total of six new customers across four different industries. We currently have a majority of the Fortune 500 companies as our customers today. We are seeing an expansion of interest in quote activity by large organizations, in consolidating their entire MRO spend with an integrated supply solution. Sales to customers utilizing our integrated supply programs were up 10% sequentially and 15% year-over-year. 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.

Data communications project activity in our opportunity pipeline and enterprise cabling and security are solid, and our sales and marketing initiatives are continuing to yield positive results. Sales were up 6% over last year's first quarter, and backlog improved to 40% over last March and 9% over year end. Sales growth is being driven by project activity, while discretionary day-to-day business with contractors has continued to be below historical levels, reflecting the continued soft economic environment. Key wins during the quarter were posted in the Government, health care and education verticals, with nine project awards in excess of $1 million.

Our data communications geographic expansion program utilizing existing WESCO facilities has continued in 2010, with six new branched opened in the first quarter of 2010, and another dozen planned during the remainder of the year. This is in addition to the 11 new branches opened since this program started in 2008. The program resulted in immediate market share capture, and incorporates a model which results in profitability in the first year of operation. This branch within a branch expansion strategy increases cross-selling and service opportunities into our blue chip customer base.

In Government and stimulus, our Government team maintained momentum on sales and marketing initiatives, resulting in a 31% increase in sales, primarily through the contractor channel, versus the first quarter of last year, and we're up slightly on a sequential basis. Sales growth was driven by key wins at multiple military installations and hospitals, as well as new State and local contract wins. We remain optimistic as we enter the second quarter of the Government and stimulus pipeline in excess of $340 million.

We will continue to focus our efforts on Federal initiatives, State and local and international Government business, and stimulus related opportunities in 2010. Our online stimulus clearinghouse continues to grow, and now encompasses over 66,000 potential projects. This target list of stimulus-related projects increased significantly throughout 2009, and is expected to grow in 2010. We have booked over $50 million of stimulus-related orders.

The last targeted growth priority I will cover is contractors and engineering procurement consulting firms. Contractor end markets are projected to be down again in 2010 by as much as 15%. For WESCO, we believe our actions to further leverage our supplier relations, inventory positions and geographic coverage, especially with the large EPC groups and contractors, have improved our penetration in the large commercial construction market. Sales to these end markets were down slightly sequentially, and were down 10% from the first quarter of 2009. Our construction backlog is up over 4% from year end, and is down less than 2% from the last year's first quarter.

We are cautiously optimistic concerning our construction business in 2010, due to the momentum we bring into the year and the backlog of project business. Our project opportunity pipeline for large, complex projects valued at $220 million remains robust, and is actively being pursued by our construction global accounts team. Our share gains will be obtained by creating and delivering more value to our existing contractor customers, and by adding new accounts in geographic growth areas, and targeted vertical market segments.

We've created programs that give us the competitive edge in the marketplace, with our lean value-added solutions. For example, WESCO is taking the lead in green and sustainability solutions, providing electrical contractors the expertise and service to help their clients save energy, while at the same time making a high return on their investment. We work directly with our customers to evaluate energy needs, to look at possible lighting retrofits, and renewable energy investments.

In summary, while our expectations are that economic activity for 2010 will be -- continue to be weak, we believe we are well-positioned through our numerous growth initiatives, strong financial position, and acquisition capabilities, to take advantage of the recovery by delivering above-market organic growth as well as accretive acquisitions.

At this point, Operator, would you please open up the call for the question-and-answer session.

(Operator Instructions)

Our first question will come from Matt Duncan from Stephens Inc. Please go ahead, sir.

Good morning, guys, congrats on a very good quarter. First question I've got for you. Just two quick things, on the industrial business, how much of that 13% increase do you feel like may have been tied to restocking at your customers, or do you think that is a good indication of end market demand? And then the other thing, if you could help us put brackets around what drove the 70-basis point increase sequentially in your gross margin? Is pricing getting any better, or is that just mostly better overhead absorption and mix?

This is Steve, I'll take a stab at your inventory restocking question, and let Richard address the gross margin. Probably impossible to tell exactly how much impact. We feel there was some impact. We saw particularly in the OEM segment where customers had dropped inventory down, and stressed the supply chain, things like air freighting products in to get it back in line. So we believe there was some. I don't think it was an inordinate amount, and it was probably a little bit in the first quarter.

The way I would look at that, we look at our April activity to date, and it is still continuing the positive trends we saw in the first quarter. So it's not indicative that there was a one-time restocking major impact.

Okay, thanks.

Hey, Matt, on the margin improvement, roughly half of the improvement was related to our margin initiatives and a little bit of seasonality; the other half of the improvement was related to better rebates, inventory cost management, and some mix. So it's roughly half and half, management actions and the other half is return to more normal levels on the inventory and rebates.

Thanks, guys.

Our next question will come from Hamzah Mazari from Credit Suisse. Please go ahead.

Thank you. if you could just comment on you inventory levels right now. It seems like demand is picking up, especially in industrial. You raised your guidance a bit, feel better about the market. Are you going to start building inventory levels here, given you're anticipating a slow recovery? How should we think about that? And could you also just elaborate on your comment where you said Q1 saw greater than normal seasonality, and then at Q2 you are projecting a return to normal seasonality? Just if you could, just elaborate on what you mean there as well?

Okay. Well, I'll take the inventory question first, Hamzah. Again, we're going to be focused on maintaining service levels, but also optimizing our inventory levels, so we might increase inventory a bit. I think we pretty well are in a good spot right now where our inventories are. As you can see, the dollar value didn't change much in the quarter from fourth quarter levels.

Our seasonality is such that first quarter is typically down sequentially versus the fourth quarter. That's our historical seasonality, and in our last conference call you'll recall that we had guided to that level. And so this turned out to be a pleasant surprise as we moved through the quarter, really driven by industrial. It's kind of the strength of the industrial end market segment. You look at that sequential growth, we were up 1.4% sequentially.

As we move into the second quarter, we see ourselves performing consistent with normal seasonality. And as Richard outlined in his comments, in the 2% to 4% sequential growth rate.

Okay, thank you.

Our next question will come from Scott Gaffner from Barclays Capital. Please go ahead.

Good morning, guys. Congrats on a good quarter. I just wanted to get a little bit more color on the competitive dynamic you're seeing right now. How much of the outperformance, or just the better than expected performance in the first quarter do you think was related to market share gains? And how much through the years should we expect from market share gains? Are you seeing any significant price competition still from your smaller competitors?

We're absolutely seeing continued challenges in the pricing environment. We're not seeing that ease up at all. It's something we've been seeing for many, many quarters in a row. And quite frankly, we don't see that easing as we move through this year. We are encouraged by the pickup in margins sequentially.

Relative to overall how we're doing versus the market, there is no overall one report you can point to in terms of what the market does. We think we're gaining ground, and we think we have been gaining ground versus the market over the last couple of years. How do we benchmark it? There's a number of our competitors, we get supplier feedback. Overall, we're getting positive results of our initiatives, across the US and Canada in particular.

Are you hearing any sort of anecdotal data around some of your smaller competitors not being able to ramp up inventory levels to meet the higher demand?

What we'll need to see, and it's going to be hard to get a sense of this, but I think as our other supplier partners report, we'll get a general sense, and from other organizations such as [DISK] on how the broad-based electrical market did in the US. Electric [does not] publish data on the Canadian market. I think it remains to be seen whether -- how much of the sequential pickup the industry is seeing. We saw strong pickup. But I think the phenomena you're outlining is something we would expect to see as the recovery continues to build.

Thank you.

Our next question will come from Adam Uhlman from Cleveland Research. Please go ahead.

Hi guys, good morning.

Good morning.

A couple of questions on the guidance. First of all on the revenue line for the second quarter, it seems somewhat conservative going to growth of 3% versus a decline of 3% this quarter; the comparisons from the last year seem to be getting a bit more easy, and then looking at the full year of flat to down a little bit, again, the comparisons are even easier in the second half. Can you talk about where you're a little bit more cautious on the outlook? It seems like you have a lot of good traction with your internal initiatives to offset the weaker market.

I agree we have good traction on our initiatives. And clearly, the industrial markets, MRO, OEM, have been performing nicely. But as we discussed on the call, there's also nonresidential construction is on a downward trend. Utilities are under pressure due to lower electricity demand, and they're cutting back spend. So you have a couple of different factors that are offsetting each other, and we think the guidance we gave balances those two factors. And we are more optimistic than we were in the fourth quarter call. But there's a balance of factors and it's going to take time to work through them.

Okay. And then longer term, when I look at the pull through rates for the first quarter, it was somewhat low at 17%, and the guidance for the second quarter is still kind of a low level of gross profit pull through. I'm just wondering, given all the work that you guys have done on your structural cost basis, where do you see your gross margin pull through rates coming through over the medium term?

The pull through rates actually, if I put it on an apples to apples basis, was quite phenomenal for the first quarter. You may recall last quarter that we discussed what I call a reload on some of the temporary cost reductions we did, particularly on the employee benefits area, and those have all been put back into the first quarter. If you were to adjust for that, you would see a pull through on the high end of the range of what we kid in the 2004, 2005 and 2006 time, when we were expanding the gross margin growth. We would anticipate on an adjusted basis being back in that 50-plus range.

Great, thanks.

Our next question will come from Ajay Kejriwal from FBR Capital Markets. Please go ahead.

Thank you, good morning.

Good morning.

Just wanted to follow through on the gross margin question, very impressive sequential improvement. Maybe if you can provide insight on the pricing cost spread, pricing you mentioned was positive in the quarter. But if you bring costs in the equation, I would imagine your purchases were also at a higher price. So did that spread improve in the first quarter relative to the fourth quarter?

And also if you can comment on the mix. I would imagine construction being down. That would have helped the margin mix. So if you can comment on those two?

Richard mentioned about an equal contribution between what I'll call core product margins and then various components between product and gross margins. Let me put a little finer point on that. We're working very hard. Our margin initiatives in fact are focused on all our core product margins, improving those, and the various levers that impact gross margin. Our product margins sequentially grew actually 40 basis points of the 60. So we had good, fundamental expansion in our product margins sequentially, Q4 to Q1.

Mix had, actually, a very minor impact. It's less than 10 basis points. It was slightly favorable, but less than 10 basis points. The remaining 20 basis points that totals up to 60 basis points improvement was between product/billing margin, what we call billing margin, the manufacturer calls product margin, and gross margin. And it's a combination of, as Richard alluded to, a little bit of improvement in inventory charges as well as some supplier volume remix. All in all, very nice composition, but really driven a little bit more by core product margins, which we're encouraged by.

Good color. And maybe to clarify, did I hear your right on the full year gross margin goal, 19.8%?

Right, we had talked about that in previous calls. Our goal or objective year was to get gross margins back to their 2008 levels.

And you clearly achieved that in the first quarter, and you've said second quarter similar to first, so sounds like straightlining of margins from here?

That would be our goal.

Good. And maybe on the second quarter top line guidance, 2% to 4% sequential improvement, I imagine industrial is better sequentially, and so would be commercial institutions and Government. What about construction and utility? Utility I would imagine goes down sequentially, but construction, would it be flattish?

On your comments, I would tell you on the utility side we certainly on -- fourth quarter sequential to first, and over last year we were down. You can see the guidance, the history. On a sequential basis, we would expect to see our utility business flat to up from where we ended the first quarter, and we've got a tremendous amount of programs and initiatives going on that, and we think we've seen some stabilization on that regard.

On the construction side, that's going to be end market driven. The starts are forecasted to be down up to 15%. We certainly going to work hard with our programs not to completely follow that trend, but we believe there'll be a fair amount of pressure on that. If you looked at 2009 and dissected our business, you would see our best construction quarter was the first quarter and it declined throughout the year in line with the end markets. Probably we didn't get hit as bad as the end markets. That is not traditional seasonality that we would see. We still have the -- even though we're seeing the rate of change of negative slowdown, the absolute numbers such as I mentioned, the ABI, the architectural billing index, while it improved a couple of points, it was still negative slightly.

So we believe that 2010 is going to be a continued year of shakeout on that side of it, and we're going to do better than the competition, but it will still be down.

I would add one comment. Remember, nonresidential construction starts last year were down north of 25%. And depending on how large the project is and what the cycle is, the put in place and when we get involved in a construction project lags the start, depending on the size and complexity of the project.

So I think the real question is going to be, how does that bleed through the whole value chain? And the offset as we've said before, which we're encouraged by the results, is stimulus, and we're getting good traction there. So I think there's a couple of effects that are occurring, and we'll see how that plays out as we move through the middle of the year.

(Operator Instructions)

Our next question comes from Matt McCall from BB&T Capital Markets. Please go ahead.

Good morning. So John, I think your mentioned stimulus and the numbers that you've thrown out sound like they're much higher, both the pipeline and the orders booked. Can you refresh -- I think the pipeline was referenced a little more than $100 million, now it's north of $300 million, if my memory is correct. And then your orders booked have gone up from 40 to 50. If those numbers are correct -- and I think you said that pipeline is expected to grow further, what's the expectation for both the pipeline and for the orders? And is the expectation for orders based on a certain win rate that you're recognizing thus far?

The order rate you talked about is accurate. We talked in the 40 range last call, and it's now exceeded 50. The pipeline is a combination of two components. When we talked about the pipeline last time, we were talking $100 million to $120 million range. That was strictly stimulus-related pipeline. The $340 million number I discussed included other Government projects, non-stimulus related.

If you look at the stimulus-related pipeline on an apples to apples basis, we went from about $100 million to $120 million at the end of the year, and at the end of the first quarter, we're in the $180 million range on stimulus. It's definitely having an impact, and we do expect that to ramp up through the year. We saw a very slow minimal activity in 2009. We projected it actually slowed things down in 2009 and we'd ramp in 2010, and that's exactly what we're seeing.

Okay, thanks, Steve. A little bit of pricing, specifically on the wire and cable side. I'm curious to hear the update there. I've heard it described as pushing on a rope. Is that still a good description of what the pricing environment is like for wire and cable now?

I would across the board pricing, that's a good analogy to use. I say sometimes pushing spaghetti. But it's always a challenge. We have a lot of programs around that. We're seeing general price increases from the manufacturers. And they're actually harder than the ones that are more commodity-related because those are more visible. But it's still a very tough pricing environment. That's why we're particularly pleased to see our product margin expansion in the first quarter, in light of a very tough pricing environment. So that's not going away, but we deal with it every day.

Okay, I don't want to break the rules out of the gate here, but just any more color you can provide on the CSC share gains? I think you said immediate share gains; any more color on what the expected ramp -- you talked about the new branches expected this year. What's the ramp like with those to get to kind of average run rate for the branches? Is it a couple of years? Or are you seeing better success than that?

There's two points on that, real quick. The average is not a good one to go after, because those are the branches have been around for 15 years and kind of covering big MSA opportunities. The new branches generally start up in a year. They're profitable and just kind of a range, kind of $3 million the first year and you go to $6 million to $8 million the second year. So if you roll all 20 of those in the full year impact, you can be looking at a 10% plus growth rate for that piece of our business.

Our next question will come from Sam Darkatsh from Raymond James. Please go ahead.

Good morning, John, Steve, Richard, how are you?

Good morning, Sam.

Just a couple here. You've mentioned this real briefly, Steve, the commodity issues or at least impacts. What were they in the quarter? And what trends are you seeing there?

Second question would be regarding the flat expectations for gross margin going forward, I would imagine that you would think that gross margins would continue sequentially to improve if for no other reason than you're getting additional volume rebates.

But the final question would be, your largest supplier recently announced a real large project win, a $500 million win over the next couple of years. Are they going through distribution for that or are they going direct for that? I was just curious whether you would be able to participate in that at all?

Maybe in reverse order, I don't believe that project will be through distribution. But there's always opportunity on any project of that size to be engaged through a variety of products that go around, it's not just one supplier when those things do, and it certainly is good on the MRO basis after that. So we view all that as positive and we work very close with our supplier partners, whether we are directly engaged on the initial order or not, so that was an easy one.

On the commodity component, there's been a fair amount we'll say the copper word, there's been a fair amount of movement in that. But if you look at it, you go back into 2008 third and fourth quarter, you're kind of at a copper throughout most of 2008 that was in the $3.00 to $4.50 range, it had a drop in the fourth quarter, and then that's billed into the first quarter of 2009. You know how we work that, we're very aggressive when prices are going up to bring our inventory levels and force our organization to sell to at a higher level. As we've discussed before, we never took any markdowns. So for WESCO, our value in our inventory were kind of in that high $2 range to low $3 range, and it continued that way into the first quarter 2010. So long answer, it was a very small impact on copper, a couple million dollars sequentially in quarter over quarter. So not an impact on that.

Gross margin, we would expect to see, and certainly our goal is to continue to improve that throughout the year. On the rebate question, our rebate dollars were actually less in the first quarter of 2010 than they were in the first quarter of 2009, because we had the dramatic decline throughout the year, and we adjusted -- you may recall, we adjusted our rebates down fairly dramatically in the second half of the year. So we think that the dollars will probably be similar year to year, but the mix will be more even in 2010 than there was in 2009. So that will create some challenges on that, but we think that the trend ought to be up unless there's some mix shifts in our business.

But sequentially your rebates would improve throughout 2010, wouldn't it?

No, right now we've pegged them -- the activity levels, we've pegged them to be relatively flat, and we're doing that evenly versus last year it was a lump. The other thing on the gross margin, and then I'll get off of that, we are seeing a very, very adoption of our programs in integrated supply, which have a very nice EBIT, but as you may recall the gross margin of that business is down, and as that grows faster than the rest of our business, it will put some challenge on the percentages overall on a consolidated basis. But we'll still be working to get them up.

Thanks much.

Thank you. Our next question will come from Brent Rakers from Morgan Keegan. Please go ahead.

Yes, good morning. I guess first with all the initiatives I was hoping you could give us a better sense on maybe what the sales force numbers have done maybe on a sequential quarter basis and then also year-over-year, and also if you can do the same maybe on a companywide head count basis?

It's Steve. On the sales force, unfortunately on a year-over-year basis it's down. We took 1,200 people out of the work force. Sequentially our head count was nominal -- essentially the same, and was up a few heads. We are having a bias on additions that relate to customer service and obtaining new business, and we are -- we do have a -- kind of an open checkbook to a degree for folks to be adding high caliber sales people, as well as the support to have excellent customer service. But head count hasn't changed much sequentially at all, and if you looked at the overall mix of the people we took out, we were able to take out on a percent basis a little bit more of the administrative side than we did the customer facing side.

Just to give you a number, because you do know what our head count was at the close of the year. Our head count was up 45 people in the first quarter, sequentially versus year end, and I'd say predominantly the mix was much heavily weighted toward sales and I'll call customer account management and service personnel. And that was our plan.

We entered the year -- as Steve said, year-over-year it's down, because we took 1,200 people out as you'll recall over a five-quarter period. I think we do see good opportunities with our initiatives. We're out there, obviously, where we can add to our talent base. We are seeing increasing the opportunity to really pick up some terrific talent in the marketplace, which we're highly encouraged by, and that just helps feed our growth initiatives even further.

And guys, I apologize if this was already answered, but you disclosed the pricing in the quarter; but I believe as last year went on, the pricing decreased over the course of the year. If you can give us maybe a sense of what the year-over-year price increase might look as of right now in the second quarter, and maybe even the second half of this year?

The year-over-year for the first quarter, one point that I think is notable is about 75% of the price -- the impact on sales from improved pricing was not in commodities, it was in other products. The commodities made up about 25% of the impact. And as Steve mentioned and John, it's a clearly competitive market, but we're going to stay very focused on any price increases that we accept from suppliers will be passed through.

And then any sense whether it be non-commodities or commodity-class products, what the pricing might be up year-over-year? Are we talking a 3%, 4%, 5% number in Q2?

No, I think at this point it'd be too hard to guess. It's going to be modest.

Thank you.

Our next question will come from Steve Trusa from JPMorgan. Please go ahead.

Good morning. Most of the questions have been answered. I'm just curious, within industrial, can you talk about maybe some of the end product lines there and how they did, the makeup of the 13%, what was stronger and what was weaker when you look at the different product accounts?

I think on a positive note, it was -- we saw it was pretty broad-based across most of the industries, and it improved throughout the quarter. So I wouldn't be able to pick out particularly one industry and say that was really driving. It was generally across the board, the end market components for the industrial, day-to-day MRO business, and it did ramp through the quarter, and right now it's continuing -- it looks like it's continuing into April.

Great, thanks a lot.

Our next question will come from David Manthey from Robert W. Baird. Please go ahead.

Thanks, good morning. Guys, back on the GP, looking at it seasonally, in a lot of years it's degraded from first quarter to second quarter. And I would imagine it has a lot to do with what's going on in the mix. I was just wondering, as you look at it, even though non-res construction will be down year-over-year hard, seasonally it should be up and improve as a part of the mix. I'm just wondering if you're looking at that, what would be the offset that's going to get you back to flat relative to the first quarter?

Again as we mentioned, we have a number of initiatives we're pursuing on margins. As you noted, there tends to be somewhat of a seasonal pattern in some of the product margins due to construction, but again construction is a lower percentage of our overall portfolio this year, so that impact should be less. Again as we mentioned, it's a goal we set for ourselves, and it's going to be a combination of the initiatives which are succeeding at this point offsetting any kind of downward trend due to mix in the seasonal business.

Okay, and in a similar vein here, if we're talking about the cost side, the SG&A, are you cutting costs still in construction and utility that offset some of the higher variable costs you might be seeing in industrial right now?

Yes, we're very cost-focused, so we're selectively reducing costs where it's appropriate. If you look in the first quarter of this year, about -- there was about $7 million that was attributable to cost reduction programs in the first quarter relative to the first quarter of 2009. So we're going to stay focused on costs, but at the same time stay focused on putting resources where we can grow.

Okay, thank you. And then just last question, I believe you said that you expected continued but less strong growth in industrial markets. Correct me if I heard that wrong; is that what you said, and if so, why? It seems like the comps are getting easier and the momentum is going here; why would you expect slower growth?

We're just talking about sequential. The rate of growth, the rate of change will not be as dramatic. Part of our view is that what we've seen of fourth and first quarter was simply that inventory destocking stopping and demand becoming in line. So the demand, the industrial growth rate will be less. But still, there'll be favorable trends going forward.

Got you. Okay, thank you.

Our next question will come from Steven Fisher from UBS. Please go ahead.

Nice to see the construction backlog up. Does your view of the pipeline at this point give you the confidence that you could see continued growth in that backlog? I know Steve, I think you had mentioned $220 million of something. I wasn't sure what that was?

That's the large projects we track through our global accounts team, and that's opportunities, that was not backlog necessarily. We would typically see our backlog grow this time of the year, and we did see that happen against I think a weakening end market. So I think that is the positive.

If you remember, the last year for the markets in total, as well as WESCO's specifically, construction declined throughout the year. The fact that we were able to maintain backlog essentially flat to last year's first quarter is a positive indication for WESCO, but I would say we probably don't have a positive view for the overall market. So it's going to be a challenge. As I said before, we don't want to participate in that up to 15% down, but we do see pressure, downward pressure.

Sure. And then separately, do you think there could be maybe an acceleration of M&A activity in the space to get ahead of improving earnings here that could raise prices of acquisitions?

I won't comment what we could see in the space. I will take the point to respond by saying we've positioned ourselves, we've shown ourselves to be a very attractive acquirer. We've done 32 acquisitions since we spun out from Westinghouse in 1994. We've got a very active acquisition pipeline that we're working. So we continue to look for those opportunities, and I would comment though, I think one could look at it and say there's probably going to be increasing opportunities to work the acquisitions to improve the portfolio. We're very focused on that.

Okay, thank you.

Our next question will come from Anthony Kure from KeyBanc. Please go ahead.

Good morning, guys. Just a couple of quick questions. On the utility spend, could you just maybe parse or differentiate the penetration of global accounts and integrated supply and utilities, versus what I think is a more sort of developed program in industrial?

I think -- okay. I'll try to answer what I thought I heard here. The global accounts management team, as I kind of call the hundred killers that are out there really working across customers that like to see coordinated programs across a lot of geographies, have been engaged in concert with our core utility team. Utility tends to be more of a local business. Power is local; you don't have national players that go across huge geographies, but there are multi-region, multi-city utilities out there. So we have teamed up the skill set with our core utility team. So they are engaged in that.

But the global account business, I would say if you backed up three or four years in WESCO, it would have been kind of a proxy for our industrial business. Today, it's much broader than that. There's a fair amount of construction activity, some utility activity, integrated supply activity, as well as the industrial focus. So it is truly a global geography and across our product sets.

Okay, great. And then just -- if I didn't catch this, I apologize. I know the construction markets are expected to be down about 15%. Did you give any sort of expectation, given your market share gains and backlog, what that's supposed to be here in 2010, or at least second quarter what you're looking at from a growth perspective?

No, we did not.

Okay. You expect to improve on that, though, correct?

Our comment was that we are going to work hard not to do what the market did. A 15% drop, if that happens, is pretty significant, and it would depend on the areas that has happened. We are encouraged with our backlog position, I'll leave it at that. Okay, thank you.

Our next question will come from Bob [Cornell] from Barclays Capital. Please go ahead.

I hope this doesn't sound like an echo, but just continuing along that last thought process, looking at the industry as opposed to WESCO, I mean you talked about the first quarter of last year being the strongest, and declining through last year and still coming down. You referenced some of the industry numbers, and is it possible at this point to look at when the industry might trough? And that down 15% perspective, is that a perspective that sees sequential declines through the year, or as I thought you might have said, maybe a bottoming at midyear? Is there a perspective there you could help us with?

Our perspective would be sequentially it'll continue to be moving down, but at a declining rate. Our view, and I think the industry view, this is a market that recovers probably sometime in mid-2011.

So the trough is mid-2011, is that what you're saying?

We expect to see some improvement at that point. Troughing out maybe in the latter part of this year.

We've not been definitive on the -- externally where we think the trough is. It's clear we'll be down double digits this year. As Steve said, nowhere near the rate that we were down last year. Just looking at starts --

You guys seem to have a better feel for it, honestly, than the other people I've talked to, that's why I'm asking.

Then you have put in place, which is a timeline depending on the size of the project, the project could be six months, 12 months, or 18 months or greater if it's a much more complex project from start to put in place. So we've not been definitive on that. I think our focus is taking share, not dropping as much as the overall market; we did that in the first quarter in construction, we're encouraged, and we increased our backlog. As we move through the year, I think we'll be able to have a better developed view in terms of whether the trough occurs late year or at some point in 2011.

Got it. Thanks very much. Good quarter.

Our next question will come from Brent Rakers from Morgan Keegan. Please go ahead.

Just one follow-up. There's a $2.5 million other income line. Is that all the equity income? Or is that something else in there?

The equity income is in there, and some other items also. But it's primarily -- one of the contributors is the joint venture we have, and the income from that.

Is that joint venture -- I believe the run rate was more $500,000 to $1 million last year kind of during the recession. Is that number expected to be this elevated in the next several quarters?

It wasn't that bad. The last year was in that $1.5 million to $2 million range per quarter. It was up certainly versus the fourth quarter of this year. They've had sequential improvements. Kind of the level it's at now is a good run rate.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to John Engel for any closing remarks.

Thank you for you time today and your support.

I'd like to close by saying we have an excellent opportunity for share gain and value creation in the markets we serve by strong, well capitalized and innovative companies such as WESCO. And that particularly is going to be true as the overall economy recovers slowly over the next several years. We're encouraged by our positive momentum and results to start 2010, and are continuing to invest in both our business and in our people, and we remain focused on providing superior customer service, maintaining our cost controls and cost leadership position, strengthening our team, and producing improved shareholder returns. Finally, I'd say we're confident in our ability to deliver improved operating results in the second quarter.

Thanks again, and have a good day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.