Wesco International Inc (WCC) 2010 Q3 法說會逐字稿

Good morning and welcome to the WESCO third quarter 2010 earnings call. All participants will be in a listen-only mode. (Operator instructions). After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Dan Brailer. Please go ahead, sir.

Good morning. Good morning, ladies and gentlemen. Thank you for joining us for WESCO International's conference call to review the third 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.

(inaudible) 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. We will be filing with the SEC a supplemental financial data presentation providing a summary of certain financial and end market information to be reviewed in today's commentary by management. This presentation will be available on our corporate website.

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. We delivered a strong third quarter, marked by positive and increasing momentum across our business. Customers are responding favorably to our One WESCO initiative to actively sell and support our entire portfolio of products and services to all customers groups.

Our third quarter sales were up 15% over last year and 5% sequentially versus the second quarter. It's encouraging to note that we experienced positive sequential sales growth at all four of our major end markets for the second consecutive quarter. Of particular note is the continued growth in our backlog, which increased to a record level in the quarter, up 6% sequentially and 18% over year end. The third quarter results highlight the effectiveness of our sales and marketing programs and demonstrate our continued ability to take advantage of growth opportunities and improve our market position as the economy slowly recovers.

Overall, this has translated into operating margins of 4.6% and EPS of $0.74 in the third quarter. The strength, diversity and operating leverage of our business model are clear and are reflected in the improving profit quality of our business, where operating margins increased from 3.3% in Q1 to 4.1% in Q2 and now to 4.6% in Q3.

We are continuing to invest in our business to deliver above-market profitable sales growth and are making good progress on our previously outlined eight major 2010 growth initiatives. Sales in our industrial and construction end markets and data communications product lines showed particular strength in the quarter, posting gains of 27%, 15% and 21%, respectively, versus last year. Sales to our government customers were up almost 30% in the quarter, and our stimulus-related opportunity pipeline increased 20% to over $460 million.

Utility sales were up 8% sequentially but declined 9% versus last year, driven by soft power demand as investor-owned utilities and public power customers continued to keep tight controls on their capital spending and working capital. In addition, we increased our global accounts opportunity pipeline to a record level of over $2 billion and expect to see strong stimulus opportunities across the balance of this year and next.

Overall, bidding activity remains very competitive, but we are encouraged by improving sales for work [day] and gross margin trends in 2010. We are continuing to take a disciplined and balanced approach to improving our asset management and deleveraging our capital structure. We increased our working capital turns, improved our financial leverage and sustained our liquidity in the third quarter. We believe that our capital structure is in excellent shape, affording the Company the financial flexibility to support our strategy of above-market organic growth plus accretive acquisitions.

Our long-term outlook remains unchanged as we expect the economy to recover slowly over the next several years. We expect economic growth to continue, but at a more moderate pace over the next few quarters with continued weakness in the non-residential construction and utility end markets.

In summary, our strategy of providing industry-leading supply chain solutions to our global customers is being executed as we focus on expanding and enriching our franchise through above-market growth plus accretive acquisitions. We see excellent opportunities to continue to strengthen our portfolio, accelerate our growth initiatives and further improve our market position as we expand our business through the recovery phase of this economic cycle. We are continuing to invest in our business and our people.

The market remains highly competitive, and our customers' needs for supply chain efficiency and effectiveness are greater than ever. The WESCO team continues to step up and meet these increased customer demands. I would like to thank all our WESCO employees for their extra effort and commitment in working together to provide superior customer service and to actively sell and support our entire portfolio of products and services to all customer groups.

Now Richard Heyse, our CFO, will provide details on our third quarter results and our outlook for the fourth quarter. At that point, we will then open it up for the question-and-answer session with Steve, Richard and me. Richard?

Thanks, John, good morning. First, I will share with you our third quarter results and then conclude with our fourth-quarter outlook.

WESCO's third quarter sales were up 14.9% year-over-year and 5.2% sequentially. Sales for the quarter compared to last year included a positive impact of 0.9% from foreign exchange and 0.7% through acquisitions. Third-quarter pricing positively impacted comparable sales by approximately 2.5% due to rising supplier products and commodity prices. The sequential impact of foreign exchange and acquisitions was negative 0.2% and positive 0.7%, respectively. There was no sequential revenue impact from pricing.

WESCO's third-quarter gross margin, which includes the impact of supplier volume rebates and inventory-related reserves, was 19.5%, up 30 basis points versus the third quarter of 2009. Sequential gross margin was up 20 basis points with business mix similar to that experienced in the second quarter. In a very competitive environment, we were able to slightly improve both our year-over-year and sequential product margins in third quarter.

SG&A expenses for the quarter were $191 million, or 14.4% of sales, compared to $168 million, or 14.6% of sales in the comparable 2009 quarter. Our third-quarter 2009 results included a net favorable impact of approximately $7 million in temporary cost reductions, which included benefit suspensions and mandatory unpaid leaves of absence. In total, WESCO had approximately $25 million of net temporary cost reductions in 2009 with approximately $12 million in the second quarter, $7 million in the third quarter and $6 million in the fourth quarter.

Third-quarter 2010 SG&A expenses were somewhat higher than second-quarter's $186 million, but the rate as a percent of sales was 40% -- 40 basis points lower than second-quarter's rate of 14.8%. The sequential SG&A increase is primarily due to increased variable costs associated with higher sales levels. The positive impact of the SG&A investments we have been making is clearly reflected in our third quarter sales results. We expect to continue our balanced approach and disciplined cost controls and focus investments to drive above-market top-line growth.

Operating profit for the third quarter was $61.2 million versus $46.2 million for the third quarter of 2009, a year-over-year increase of 32%. Adjusting for our 2009 temporary cost reductions, year-over-year operating profit increased approximately 56%. Operating margins at 4.6% of sales is 60 basis points higher than the Q3 2009 operating margin of 4.0% and is 120 basis points higher after adjusting for the 2009 temporary cost reductions. Third-quarter operating profit pull-through, which reflects the change in operating profit divided by the change in gross profit, was 60% after adjusting for 2009 temporary cost reductions. Sequentially, operating profit increased $9.9 million or 19%, and operating margin expanded 50 basis points. Third-quarter sequential operating profit pull-through was above 65%.

The effective income tax rate for the third quarter, at 29.1%, was slightly higher than the second-quarter rate of 28.2%. It was also higher than last year's 15.8% rate, which was driven by our convertible debt exchange and a revision to our full-year tax rate estimate. Net income for the quarter was $33.7 million and resulted in an EPS of $0.74 per share versus reported net income of $33.7 million and an EPS of $0.79 per share in the third quarter of 2009. The combination of our convertible debenture exchange, temporary cost reductions and unusually low tax rate had a favorable impact of $0.34 per share upon third-quarter 2009 results. Third-quarter 2010 results therefore represent a $0.29 per share underlying improvement over third-quarter 2009 EPS, or a 64% improvement.

Third-quarter working capital days were down compared to the second quarter and are down approximately 14% since year end. During the third quarter we increased inventories by $20 million over second-quarter levels to support our double-digit sales growth. Accounts receivable and accounts payable also increased $65 million and $34 million, respectively. We continue to focus on improving our working capital position and have a particular focus on increasing customer collections during the fourth quarter.

Our all-in cash borrowing cost for the quarter, including commitment fees, was 5.5%. Liquidity, defined as invested cash plus committed borrowing capacity, was $582 million, slightly above second-quarter levels. As of the third quarter, financial leverage was at 3.5 total par value debt to LTM EBITDA and has been brought back within our targeted range of 2.0 to 3.5, after four quarters of exceeding the high end of our targeted range.

On October 15, holders of our 2025 convertible debentures had a put right to have WESCO repurchase the debentures. The holders elected to repurchase an incidental amount of the 2025 convertible debentures, leaving the balance essentially unchanged at $92.3 million. Our debenture holders will have another opportunity to put the debentures back to the Company in five years. The Company now has the ability to call the bonds any time following the required notification process.

Finally, I would like to discuss our fourth-quarter outlook. We expect fourth-quarter sales to be up over 10% year-over-year but decline 3% to 5% sequentially, consistent with historical seasonality. We expect gross margin for the fourth quarter to be at or above 19.5% and expect fourth-quarter operating margin to be at or above 4.2%. This reflects an operating margin improvement of at least 40 basis points from the fourth-quarter 2009 operating margin rate of 3.8%. We expect our full-year effective tax rate to be in the range of 28% to 30%.

Our outlook for 2011 remains consistent. It includes continued economic growth, but at a more moderate pace.

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

(Operator instructions) Adam Uhlman, Cleveland Research.

I was wondering if we could dig into the strength in the construction business this quarter. I know you pointed out the datacom business is humming along. I wonder if there's any more color on the core nonresidential business that you could provide.

First, I'd say that we are encouraged by our construction results in the quarter, and our results do not reflect the end market. The end markets are still very challenged and are challenged consistently across all the geographies in which we operate. It's -- clearly, our view remains unchanged that construction has not yet bottomed. But we are encouraged with our results.

And we've said many times before, I think what we're seeing is kind of the strength of the diversity of our portfolio at this point. We've got broad-based, positive sales growth in construction. It's not unique to one geography. Backlog grew in the quarter, and it's across many -- I'll call them a range of profitable niches that we play in across our business.

One other point of color that may help -- we saw a good, balanced contribution from both the US and Canada. Canada grew a little better than the 15%; it grew at 17% for construction. The US grew at 14%. So on a combined basis, it was 15%. And I'll tell you, interesting as well is sales to contractors in the construction segment was up for both datacom and electrical contractors this quarter. So we are encouraged that it wasn't just the strength of datacom that carried the day.

And then Richard had mentioned moderate growth is expected for 2011. Any kind of color you guys could provide on your expectations by end market, or maybe a little detail on what moderate, is would be helpful.

We typically will provide more specific expectation setting in our Q4 earnings call relative to -- by segment. But, I would say, overall, we've established an outlook. We communicated it in August at our investor day. That remains unchanged. We think that the end market demand's going to remain solid except for non-resi which we think won't really have a meaningful recovery until 2012 -- for us, from an end market perspective, for WESCO, where we play in the cycle. Utilities should enter a recovery phase in 2011. We think industrial growth continues. It moderates a bit, but does continue. And we've said that stimulus would increasingly be a potential upside in Q4 as we move through 2011.

Thanks.

Deane Dray, Citi Investment Research.

I'd be interested, John, in hearing some first commentary from you regarding potential -- or, not potential; it looks pretty clear that you're gaining market share in this fragmented market, because by our measures, you're outgrowing on the top line. So can you just provide any color in terms of where you think those share gains are coming and where we go from here?

Well, thank you, Deane, and thanks for that comment. As we look at the quarter, we kind of see an extension of how we performed in Q2 with some increased momentum. But, if you look at it by end market segment, we are particularly pleased with our industrial performance. You know, we were at 25% growth in Q2 for industrial end market segment, our largest end market segment. We are here at 27% in Q3. And it is our largest end market segment, and we absolutely feel like we are taking share in industrial, serving multi-site customers with our business model, and focus on MRO plus OEM and capital projects.

In construction, I think there's absolutely -- it's absolutely clear we are also taking share. We were pleasantly surprised at how strong our construction business was in Q2, and now we sit here at Q3; we've sequentially grown our backlog in the quarter 6%. It's up 18% versus year end, and we delivered strong double-digit growth in construction. And it's not just driven by datacom, Deane. So I think datacom is particularly strong, at north of 20% at 21%, but sales to electrical contractors also grew. And it's relatively broad-based, so I think we feel pretty good about relative to competition we are winning.

Maybe give you a little more color on that -- the resi contractors appear, the small and medium-sized-oriented resis, appear to be aggressively bidding commercial construction projects. The larger contractors are not really engaging in the low-price battles. And we see ourselves really winning with the large contractors, the mid-size contractors, and we don't have this resi bias, as you know. So we feel good about it.

I think, finally, government -- government is -- it grew close to 30%. We're basically at 30% growth through the first three quarters. And part of that is stimulus, but it's not just stimulus-driven. It's broad-based, and we feel particularly good about that. And I already mentioned datacom.

So I think, on balance, we are getting good, balanced contribution.

Just while we're on the end market commentary, and I was just thumbing through the supplemental financial package; there's a lot of good color and data points. But the one that jumped out at me was in utility. Sequentially, it looked to be one of the stronger performers within your end markets. And I know you're not expecting a recovery until 2011, but what's driving the sequential growth? It looked like some of it was the utility alliance, but you said maybe some stimulus. But how would you characterize that?

I'll make a brief comment and ask Steve to give a little more color. You will recall in the last quarter, we did outline our expectation that utility would sequentially grow from Q2 to Q3. We did not expect it would grow 8%. So we feel like we're actually gaining some very nice momentum. And to your point, Deane, the year-over-year base is it's down 9%. We had mentioned previously that late last year or earlier this year we had lost two major alliance renewals because we chose not to fight the price battle. If you were to normalize for those, we actually grew utility 3% in the quarter. But on a pure reported basis, it's 9%.

So -- but I think what your question was, is actually spot-on, on what we are seeing. We're still seeing utilities having tight spending on capital, maintenance spending, etc. But we are winning alliance agreements on the generation side, and we are also expanding relationships, expanding our whole scope of the relationship where we already have alliances in place.

And if I could just sneak one last question in regarding the inventory build, and I know you said that was to support the double-digit sales growth -- does this constitute restocking? Are you worried about stock-outs, or are you just anticipating some seasonal demand? But just put that inventory build in context, please.

It's not restocking. It doesn't represent concern about being stocked up. You will recall through this dramatic recession that we've fought through, starting in late 2008 through 2009, we used to spotlight in those earnings calls that we tried to maintain our inventory position focused on availability as the key optimizing metric, and then fill rates. But we did not cut our inventories to the degree that some other of our competitors did, but at this growth rate -- double-digit 15% -- this is consistent with supporting the business and maintaining availability and fill rates.

And from a days -- from an inventory turns or days basis, we got excellent asset management and we are getting good, I'll call it asset management productivity on a daily basis.

Yes; our turns are moving up first to second to third quarter, so we are actually -- the productivity and turn right on our working capital is increasing.

Scott Davis, Morgan Stanley.

You made a comment on the call that was intriguing. You said bidding competition is still tough, and that certainly doesn't surprise anybody. But, can you give us some context into how tough, I guess, versus maybe sequentially a year ago, when it was really hard? Is it getting better, or is this kind of the new world that it's going to be tough until, really tough until commercial and resi really turns up?

It hasn't gotten better, and I'm not going to -- we're not going to be so bold as to forecast, this is kind of a new normal. Who knows how it will evolve going forward? It's going to be based on really supply-demand in every end market. But it is not better than a year ago. It's not better than earlier this year or a quarter ago.

I think the comment we made about resi contractors -- because residential has not recovered, and that's a big part of the distribution market, those players that are in that value chain are trying to go up and get the little commercial work that there is or the retrofit renovations or upgrades. We also see contractors focusing on service, on service work, because the projects are just not there overall.

So it's tough, and we're trying to maintain our pricing disciplines. With that said, the market is still large. And I think -- we've said for a long time, we focus on customer selection as a key to profitability. Not every customer you can serve profitably because they don't value what you deliver and you don't have an efficient business model to support it. So that has been, I think, one of the keys of our success this year.

Makes sense, and maybe just to follow up on that question and some of the other questions the guys have been asking about share gains, I would agree that it appears you are gaining share, although it's tough to get overall data in the industry until the quarters are all done, but -- for everybody, nonetheless. But what are the one or two things that you would isolate, not to make a big 15-minute spiel out of this? But I know you have been trying to go to these global accounts and consolidate your government contacts and stuff like that. But what are these one or two big things that you would identify as tangible things have changed year-over-year that makes WESCO a share gainer?

I'll give you two and ask Steve to expand. One is the eight growth engines we laid out. We outlined those in the fourth quarter last year. We said they would offer substantial growth opportunities, above market, and we are getting great traction.

Two, we are investing in the business. We have been, we even did during the downturn, and we are accelerating. I'd ask Steve to kind of expand on that. But it's those two key items.

Yes, I would really expand on the invest in the business component of that. Growth engines have definitely contributed in a specific area, but the beauty of it is, it's broad-based. If you look at what we are doing in 2010, by the end of the year we will have added 25 new locations of the Company to our footprint, focusing primarily on datacom, but also in the distribution area and kind of our core branches.

And the other component of the investment has been on our sales force and our capacity. We talked about that a couple of times. But we've been adding to the tune of 3% to 4% as we move forward. A disproportionate amount of our headcount additions have been focused on sales and sales support. It's across the board.

Okay, that makes a lot of sense. Just lastly, just a little bit of a free cash flow/debt question. When you think in terms of the next 12 months cash generation, which should be pretty substantial, do you pay down the revolver? Are there pieces of more expensive debt that you can take out? What are your options for -- and thinking just in context, your revolver debt probably cost you almost nothing right now.

I think, as we talked at our investor day, the first priority for use of cash is to invest in our own business. The second priority is to look for M&A targets that supplement our growth. We then said, we would use -- third priority is to delever, then re-leverage the business. And right now, our 2029 convert, it's fixed; there's no -- we can't pull that back. High-yield bond is also not called to this point, so the cash flow would go toward the asset-backed facilities at this point. But, clearly, we would prefer to (multiple speakers) --

So that makes it touch more attractive to go out and make acquisitions, then, at the margin; right?

Correct.

Okay, makes a lot of sense; thanks, guys.

And we feel good, too, that -- and we did signal this before, we thought would be within our leverage target range by year end, and we are now, as we essentially exit the third quarter and enter the fourth quarter. So we're encouraged by that.

Yes, for sure, thank you.

Matt Duncan, Stephens.

This is actually [Stephen Gregory] at [Mandalay] Research; a couple of things, guys. Two months ago in the Wall Street Journal, there was an article written -- they were talking about distributors in 2011 were going to be more getting away from the brick-and-mortar, possibly going more online to improve margins, reduce cost, just overall improve revenue. Can you provide some color on the call today -- what are your e-commerce visions going forward? How do you plan to sell more on your web site to garner more revenue and competitive strength?

The comment I would make is, the distribution industry is very, very large and fragmented. And the reality is, when you can take any one of our customer relationships and look at how we serve them -- what is our service model? The service model includes, I'll call it multiple layers of how we serve them. It leverages our branch footprint, it leverages centralized account management capability, it leverages e-commerce and e-business capability. So it's not either/or, it's both. And that's current state, and we do not see that changing for the foreseeable future.

The requirement to have physical resources close to and living within our customer facilities is an absolute requirement and key to success. It's the fundamental difference between a wholesale distribution model and retail. Wholesale distribution, you go to a customer's facility and you serve them on their turf, so to speak. And we've developed these capabilities where we do a very good job of that. In addition, I would say we are integrating lean and implementing lean and running these lean initiative in their facility, which require even a greater real-time presence. So -- and the branches support that.

And what are you guys doing to drive more people to your site? Obviously, you've got a lot of great market presence. How are you getting more people to the site, improve revenue to your shop online, WESCO Direct?

With every customer relationship we have, we continue to talk about our, let's call it our electronic business capabilities, and we're positioned to serve that customer completely electronically if they choose us, or, or with more of a standard model or some other variant. So again, I think -- I'd leave you with this. There is no one global optimum solution. We have so many different customers and so many different end market segments, they all have differing needs. I think one of our focus points is, how do we optimize the relationship that works for that customer?

I guess what I mean is, how are you guys going in and finding those people, rather than giving them the tools to find you as well? Are you doing better searching optimization? Are you doing any type of mobile app so your customers or soon-to-be customers can download iPhone apps or ANDROID apps, etc.?

Yes, we've developed a number -- today, we are tied into the social medias, and so we're doing things on the Facebooks and the Twitters. And we have that capability. Today, it's not how the bulk of our customers do business, but they are migrating slowly that way. We have that capability. For our larger customers, we are also helping that by creating customized catalogs down to the employee level. So at the branch level or at the factory level, a person can have their own customized catalog. I normally buy these 12 things; I'm going to put the same order in, except for add two, subtract three. So we are really enabling our customers to do business the way they want to, and we are [nudging them] towards that direction. It's not a sea change or a revolutionary, it's an evolutionary process.

And one other question -- are you guys running metrics on how much revenue is coming off, directly, WESCO Direct, as compared to your branches? Can you break those down?

We do that, but that's not something we've disclosed publicly.

Okay, so where would you like to be in the next couple of years, in terms of gaining strength on WESCO Direct?

My suggestion is, if you could call Dan off-line and we could take you through it in more detail, because, again, we answered it by saying, we are going to support how the customer wants to do business. We have a full range of capabilities, from standard support, feet on the street brick-and-mortar, up to full electronic, no person in the loop. And so we can play anywhere on that spectrum. It's completely focused on what the customer desires and needs and the best way to serve them.

Okay, all right, thank you very much.

Hamzah Mazari, Credit Suisse.

Just first question -- could you maybe talk about how much of your incremental operating margin that you refer to you have already seen, given the work that you've done during the downturn? Have you seen two quarters of it, three quarters of it? And when does that begin to normalize, given the top-line growth you are seeing? Can we expect this operate -- incremental margin to continue into the end of next year? How should we be thinking about that?

It's a great question, and I'll ask Richard to expand. The answer is yes, because what we did was, we have excellent operating leverage in our model, and what Richard outlined in his script is, what operating leverage we have effectively delivered in the third quarter -- we had very strong leverage in the second quarter, in the form of operating profit pull-through at the 60% rate. And so, Hamzah, exactly to your question, it is working. And that we would expect and we would drive the business for that to continue to work to be north of 50%. That's how we operate. It's an inherent characteristic of our business model. And that's -- now, we can do better than that, to the extent we get stronger top-line growth. But this is not a one-time, okay, we've got this one-shot deal and it kind of dissipates.

And I think, Hamzah, it's like we discussed at our investor day -- through 2013, we don't see anything that would be a barrier to our fixed cost leverage model. And, as John commented, we would expect to see the type of pull-throughs we are seeing through the next several years as we leverage our fixed cost structure.

This was part of one of the things that we -- at our investor day, we outlined. If you look at us coming out of the last downturn, over a four-year period, through organic market share, captured plus acquisition, we doubled our top line. We more than doubled our EBIT, and we more than doubled the return on invested capital. The EBIT expansion was a recipe of gross margin expansion plus operating cost leverage. That balanced -- and so we got very good operating cost leverage through that. And our point is, at this point in this part of the cycle, it's a deeper downturn, but the Company is in much stronger shape. And so what we outlined from now through 2013 and [what we] reviewed on August 10 at our investor day is we have the opportunity to essentially do what we did before, starting from a stronger base.

That's very helpful. And then, on -- we talked about share gains on the call and your top line sort of coming back. You talked about looking at acquisitions. Just curious, what kind of acquisitions are you looking at now, how aggressively are you pursuing them? And at what point do you decide to get into some of the higher-margin industrial distribution business and add that within your branch, within the branch strategy, going forward?

We have a very robust pipeline of M&A opportunities. I would make the statement, it has never been as robust as it is today. We have turned our acquisition engine back on with the acquisition of Potelcom at the end of June. We took a break during this downturn, but this is what we did in 2001 to 2003/2004 as well.

Again, I'll refer to a chart we used at our investor day. Steve Van Oss presented it. It was our acquisition chart/strategy chart, and it showed the, I'll call it the MRO ski slope, which showed the electrical category, industrial and various other categories. And on that page we highlighted a few of the categories that are attractive to us over the next three to four-year period from an acquisition perspective, in addition to electrical. So your question is a good one, Hamzah; we think our business model extends into other, let's call it horizontal adjacent distribution categories, and we're absolutely continuing to evaluate those.

So I think it's going to be completely a function of right deal, right time at the right price.

Fair enough, thank you very much.

Ajay Kejriwal, FBR Capital Markets.

Just wanted to follow up on that investing in the business team. So you added 25 new locations, and you are adding to headcount. That's all good. Maybe give us some flavor of what to expect over the next several quarters, how much headroom you have there, where you are versus plan. And then, I would imagine part of that is related to end market growth, but then to the extent you have share gains in mind, how should we think about locations and headcount additions from here?

I think you look at it a couple of ways. First, just recall that we've historically been a low-cost operator in the business. We don't intend to give that up. Our view of the end markets is unchanged in the last three or four quarters. We think we are entering into a longer, slower, protracted recovery. So the actions you've seen us take, and we discussed this a month or so ago at our investor day, was, one, aimed at taking market share. We've got the eight growth engines that we're operating quite well. The investment is going to be on a consistent basis going forward. We are going to look to get productivity through lean of our sales force, follow a little bit with some GDP growth and then put in the machine, organic growth machine or mechanism that will drive towards double-digit organic growth, which, following on to the previous question, we would intend to augment through accretive acquisitions.

From a facilities standpoint, we have had a tremendous success in what we've dubbed our branch-within-a-branch program, which was focused on our data communications product set, which has now been expanded to include OEM-focused business solutions. We would be looking at in 2011, at least our preliminary look, is a similar number of new facility or branch-within-a-branch locations, as we did in 2010, and to continue what we are doing this year as it relates to headcount support and direct sales feet on the street to drive market share.

So, 3% to 4% on headcount; is that a fair number?

3% to 4% on sales headcount, not on total.

Got it, good; then moving on to pricing, so positive year-on-year sequential flat and other moving pieces in there across products, but maybe if you can help us with some color around what you saw by end markets and by product.

I'll cover on the product, and we don't break out by end market. But on the product, if you look at the 2.5% year-over-year change, that was roughly 50-50 weighted between products that have a strong commodity content, like conduit or cable, and other products. So roughly the price increases were equally weighted between copper-driven and commodity-driven and other price increases. But they're pretty broad across all products.

Okay, good, thank you.

Noelle Dilts, Stifel Nicolaus.

Hi, good morning, and congratulations on a nice quarter. Bumping on the last question, really, given the continued increase in copper we've seen through the quarter, can you comment on what your expectations are for pricing in the fourth quarter and what you have built into your guidance?

Again, that would -- we would have to be predicting where copper is going to end up. I think if you look at, for example, third-quarter sales, roughly about 20% of what we sell -- the products have a strong commodity content, whether it's PVC piping, copper wire, conduit, etc. So if you look at third-quarter price increases, again, about 80% of our portfolio had about half the dollar increases, 20% had the other half. So you'd look at copper prices year-over-year; we're up about 20%. So roughly on that -- that 20% commodity increase drove maybe a 1% change in our overall pricing. So we have to emphasize, it's copper commodities is a driver, but not a majority driver in our revenue line. It really affects a small minority of our products.

And the only other comment is, sequentially, Q2 to Q3, pricing had a negligible impact. So -- and we feel, based on everything that we see and know at this point, we expect the same kind of sequential performance in Q4 versus Q3.

Correct.

Okay, great. And then, looking at this continued margin improvement, operating margin improvement you've seen throughout 2010, can you comment and try and break that down a little bit more into some of these management actions you've been taking or margin initiatives versus what is a return of volume to the business, and if you could just give us a little more detail on some of what's driving the improvement there?

Return of volume would not be the driving factor, because it's not really being driven by an overall economic strength; and this is market share gains. What I would say is, as we've alluded to earlier, the pricing pressure is intense as ever, if not extremely high. And we have a multitude of initiatives around margin from pricing, customer class, industry class, end market particular areas as well as procurement activities slated at getting a better product cost going into it and trying to protect that in the market. So it's really widespread across all of our operating groups.

Okay, great, thanks a lot.

Matt Duncan, Stephens.

Good morning, guys, thanks for taking my questions. This is [Jack Atkins] on for Matt. First question here is, looking at your industrial customers, do you think the inventory restocking cycle that we've seen over the past 12 months has ended, or do you think it's still ongoing?

Ended.

Okay, and then secondly, could you guys give us some color on how you think your sales trended month to month in the quarter?

We disclosed previously that we grew 11-plus, 11%-12% in July. August was a bit better than July, September was a bit better than August. So we build momentum through the quarter. Now, that is not atypical, because when you look at the third quarter and when you look at the shape of sales in the quarter, we've seen that type of build historically, so not unexpected.

Okay, great, and then, looking at both your industrial MRO and construction end markets, could you maybe give us some color on which types of customers are the strongest right now and which ones are the weakest, just so we can get a sense for that?

I'll tell you, and we've gone through this before, in our -- a majority of the Fortune 500 companies are our customers. We look at our industrial business through 15-plus different end market segments. At our investor day, we actually outlined what all of those are and how we think about segmenting the market. We had very good, strong sales growth across this -- basically, it was very broad-based across our industrial end markets. It was more heavily driven in metals and mining, in diversified manufacturing and OES.

In addition, we saw food processing tick up. I'm not going to say that's absolutely end market, but we had very nice growth with the food processing companies. And we also had nice growth in pulp and paper, surprisingly. But I'm not just spiking those out; I'd say it was driven -- diversified manufacturers, OEMs, okay, metals and mining very strong. But across the segments, we really didn't have pockets of weakness, which we are encouraged by.

Okay, great, and the last thing I have here, and I'll jump back in queue, is looking at the balance sheet, I saw that the accounts receivable was up 9% from the second quarter, but sales were only up 5% sequentially. Richard, could you maybe give us some more color on what's driving that? Is it tied to the fact that you guys are doing more business with larger customers that have maybe longer payment terms? Or maybe you could just provide some color on that.

It's tied right to what John was just discussing, as far as the sales momentum through the quarter was ticking up each month. So, again, if you look at DSO, DSO was relatively stable. We just had a strong September.

Okay, great, thanks guys.

Christopher Glynn, Oppenheimer.

John, you mentioned the stimulus going forward could be a source of potential upside. Just wondering about potential supply rebates in the fourth quarter, given the volume trends, if that's an opportunity.

As we move through the year, we true up every quarter. So we should -- on every given quarter, we reflect what we think the full year looks like, and we've got to be properly stated. The only way it represents I'll call it an incremental upside is if we end up over-delivering sales versus what our expectation was, and then those programs have accelerators in them. Or if you hit that particular point with a particular supplier because you had particularly strong sales in the fourth quarter that you didn't expect, that could cause some upside.

But to answer your question directly, we are properly stated at each and every quarter point.

Got it, and then within the datacom growth, is it possible to split out for us the contribution of the branch-within-a-branch as a proportion of that growth?

It's a nice piece of that. The startup branches generally get into a couple million dollar range in the first year and breakeven. So we're kind of balanced, and we were doing about 15 or so this year; 11 of those were open already. So those branches had a nominal impact. The ones we opened up last year probably contributed 3%-ish type of number.

Points.

Point, 3%.

Three percentage (inaudible) (multiple speakers) --

Of the growth, of the 21. Of the 21% growth.

Leaving 18% for core growth?

Correct.

And then just dig a little deeper into some of the share gains dynamics, I wondering within the construction exposure, if maybe a lot of the sales additions have focused more on renovation/remodeling relative to your historical exposure?

That's a good question. I would not -- I don't want to send that message or signal that. We have obviously worked very hard on retrofit/renovation/upgrade markets for many years. We think we are very well positioned to provide solutions to those customers that are -- like, in the terms of lighting upgrades, etc. So we are well-positioned there.

There's no way to calculate the absolute mix between that. We don't have that level of precision. I would tell you that the general sense from all our detailed reviews as we closed out the quarter that Steve and I do with all the various branches, etc., was there was a balanced mix. There wasn't a mix shift.

Okay, and then just lastly, in the past you've made a specific intention of talking about the national account pipeline, how that's rolling in, and on occasion sized the opportunity but lacking some detail on a time line for what that pipeline opportunity has been stated at. Are you seeing that accelerate the roll-in?

Our pipeline has been increasing quite nicely, and we look at it in kind of four phases -- a target, a discovery, those are on the front end, feeling out where there's really going to be an opportunity. It moves into a proposal phase and a negotiation phase. And we have seen improvement across all four of the categories. We had a nice improvement in the final one in the pipeline of about 20% or so in the negotiation phase on the dollar. So we are encouraged that things are getting closer to that component.

Then the question becomes, how fast is a customer able to roll out? We are generally able to roll out rapidly. Depending on the culture of the company, they will go slow or they will go -- kind of go knife-edge switch. But not a dramatic change, other than we are putting more in the pipeline.

And you will recall, at our investor day on the 10th, we actually gave color to the pipeline, where we -- with $2 billion, approximately, and we broke it out, dollar-ized each phase. And as Steve said, we are seeing the pipeline continue to expand and increase. We are encouraged by that. Now, some of these are longer -- take longer development cycles, or they maybe not even go forward, if you're in the early phases.

Great, thanks a lot, very helpful.

Scott Gaffner, Barclays Capital.

I guess I was just looking at -- it seems like construction came in a little bit better this quarter. I would have expected maybe some gross margin pressure due to the better construction mix. Did you do something to mitigate that, or did it just not happen this quarter? Can you maybe just give us a little bit more detail there?

I think the short answer is, mix didn't change dramatically. Dollars are bigger. And I think Steve mentioned this, and even Richard -- we're aggressively working pricing, sourcing, supply chain initiatives in parallel, which has effects across our entire business. It's not with respect to one end market or customer type.

Okay, and how much -- the Canadian dollar was actually better in the quarter. Was there a significant benefit on the gross margins from the better Canadian dollar? And do your Canadian businesses buy from US companies and get a margin benefit from that?

No, we don't -- there's an impact on the revenue line, but it doesn't impact our margin line.

Most of our Canadian business is sourced in Canada (multiple speakers) actually sourced in Canada for the Canadian sales, for the most part.

All right, and then looking at the guidance, I guess the guidance was for normal seasonality to occur in the third quarter. You're seeing normal seasonality again in the fourth quarter. Are you just being conservative, or is there something else that you're seeing there?

No, we are not being conservative. I think that's typically what you see as the construction season runs its course, that third to fourth quarter sequentially is about 3% to 5% down. If you look year-over-year, as we mentioned, we're still looking at very favorable comps year-over-year and continue our momentum in the fourth quarter. It's simply, we are expecting to see that normal seasonality. As John commented, growth rates are slowing down in the overall market demand.

Well, but it seemed like growth actually picked up during the quarter, is what you were saying (multiple speakers) --

Yes, let me add some color. Again, you can't look at our results and say, that's a reflection of the end market, per se. So we've got a very clear view of what the end market is doing. I think we've got enough data points that we are able to triangulate in on what the markets are doing. We've articulated that. We are highly encouraged with our results. And we did have improving sales per workday throughout the quarter, inside the quarter, month to month, but that's typical. Typical seasonality would suggest that Q4 sales were down 3% to 5% versus Q3, as we've said.

I think the question will be, really, an industrial one, and what will the industrial companies do when we get to the latter part of November and December relative to shutdown and those decisions that are made. And this is something we face every year, and typically they plan their shutdowns, and that's why we see that seasonal decline.

In addition, we enter winter, and depending on how strong the winter is can impact certain construction projects. So there's a whole number of factors. Our view is consistent with normal seasonality because we think that the market has reached that kind of state where it's behaving more consistently with normal seasonality.

Okay, and were there any factory shutdowns in industrial that normally would have happened in 3Q that got shifted to 4Q? Is there anything there that would cause that to occur?

No.

No, not that we are aware of.

Okay, and then just lastly in the slides, you had utility -- this is slide number five that I'm talking about. You sort of expanded this slide to talk about momentum into 2010 and 2011. I think it just said 2010 before. And now you have utilities sort of flat. Is that more a matter of because you expanded to 2011, or are you more positive on the utility markets in general? I think you had that arrow pointed down before.

Thank you for highlighting that. What we were signaling before was that chart was -- we established that chart for 2010, and the arrows were an indicator of end-of-market among momentum for 2010. For this earnings call, we expanded our view to include 2011. You can see that the arrow on construction, non-resi construction, remains unchanged because our view was that bottoms would begin to recover in 2012. But we did shift the arrow on utility because, as we've stated, we believe utility enters a recovery phase next year. So it was good you picked that up, and the answer is yes, it reflects the recovery off of where we are today.

Appreciate it; congrats on a good quarter.

Matt McCall, BB&T Capital Markets.

Hey, Matt, this is Dan. Before we get started, if could you just keep it to one question? We've got a couple minutes until noon. We want to keep the call timely, so if you could keep it to a quick question.

Absolutely. This is actually [Jack Simick] filling in for Matt, by the way. Staying on slide five, I had a question about if you guys are seeing any increase in EPC business. It seems like there have been some pretty large awards, or pretty large contract awarded recently. I was wondering if maybe you could give some color on if you have any plans to take advantage of that, kind of look into that market, add some salespeople, that kind of thing.

First of all, the answer is yes. So let me say the short answer is, it's contributing to our construction sales results. It's one of our growth engines. It's part of our construction-oriented growth engines. We have been adding resources, and so any uptick there we would expect to see, in fact we are seeing it. So the answer is yes.

Okay, thanks.

Anthony Kure, KeyBanc.

On that government stimulus, it seems like there's -- some of your comments as far as the 4Q upside, there might be some better visibility. And I just get the sense that -- is there more of an urgency on the government end to get some projects done? Or maybe what is driving what sounds to be like a little more clearer picture on the stimulus front?

No, there's not an urgency on the government to get them done in Q4. In fact, the government fiscal year end (technical difficulty) at the end of September was the end of Q3. But we have been consistent with our view of stimulus. And we said this a year and a half ago. We said stimulus opportunities would increase as we move through calendar year 2010 and that they would be stronger as we move [through] (technical difficulty) they would be strong in 2011. But we are not trying to signal when we see this market uptick in Q4, per se. It's just our view is consistent with what it has been, and our pipeline is growing, our sales have been increasing. It's a natural progression. We would expect that to continue through next year.

Okay, thank you.

Okay. Well, thank you very much. We do appreciate you taking time today, and we thank you for your continued support. There's an excellent opportunity for share gain and value creation by strong, well-capitalized and innovative companies like WESCO as the overall economy recovers over the next several years. We're encouraged by our positive momentum and results and are continuing to invest in our business and our people, and we remain focused on providing superior customer service, maintaining our efficient cost structure, strengthening our organization and producing improved shareholder returns.

Thanks again for your time, and have a great day.

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