Wesco International Inc (WCC) 2011 Q1 法說會逐字稿

Good morning, and welcome to the WESCO Distribution Incorporated first-quarter 2011 earnings conference call. All participants will be in a listen-only mode.

(Operator Instructions)

After today's presentation, there will be an opportunity for you to ask questions.

(Operator Instructions)

Please note that today's event is being recorded.

At this time, I would like to turn the conference call over to Mr. Dan Brailer. Mr. Brailer, please go ahead.

Thank you, Jamie. Good morning, ladies and gentlemen. Thank you for joining us for WESCO International's conference call to review our first-quarter financial results. Participating in the earnings conference call this morning are the following officers -- Mr. John Engel, President and Chief Executive Officer; and Mr. Richard Heyse, Vice President and Chief Financial Officer.

Means to access this conference call via webcast was disclosed in the press release and was posted on our corporate web site. Replays to this conference call will be archived and available for 7 days. A supplemental financial presentation has been produced, which provides a summary of certain financial and end-market information to be reviewed in today's commentary by management. We posted this presentation on our corporate website and have filed it with the Securities and Exchange Commission.

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 International'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 an excellent first quarter to start the year. Execution of our growth strategy resulting in increasing momentum in our business. And the third consecutive quarter of double digit organic sales growth. Organic sales, net of acquisitions and foreign exchange, grew 17% in the first quarter versus last year, after growing 16% in the fourth quarter and 13% in the third quarter.

Backlog, which also grew double digits, was up 22% versus last year and up 9% since year end. We are encouraged with the increasing activity levels in our served markets and the strong sales and margin execution across our Company. The investments in our business and our 8 major growth initiatives are producing results.

We experienced double-digit sales growth in all our end markets, except for utility, and in all 6 of our major product categories. Sales into our industrial, construction, and CIGN markets grew an estimated 22%, 21%, and 18%, respectively, versus last year, without including TVC. Our utility sales were down 5%, but grew 7% after adjusting for the impact of the 2 customer alliance non-renewals in late 2009. Sales in our data communications product line also showed excellent momentum in the quarter, and were up 24% over last year, without including TVC. In addition, we expanded gross margin to 20% in the first quarter against the backdrop of a very challenging pricing environment. Our first-quarter results highlight the effectiveness of our sales and marketing programs, and demonstrate our continued ability to take advantage of growth opportunities, while profitably capturing share and improving our market position.

Now, shifting to acquisitions, we just completed our first full quarter with TVC Communications; and I am pleased to report that the integration is progressing well. And, our first-quarter results exceeded expectations. With the closing of RECO in mid-March, we now have made 3 acquisitions over the last 9 months. Our acquisition pipeline is in great shape. And, we see excellent opportunities to continue to strengthen our portfolio in 2011.

Overall, execution of our sales growth and margin improvement initiatives has translated into strong financial results. Operating margins are 4.5%, net income of $37 million, and EPS of $0.74 in the first quarter. We're up 120 basis points, 94%, and $0.30 per share, respectively, over last year. The strength, diversity and operating leverage of our business model continue to be reflected in the improving profit quality of our business. We also increased working capital terms, and further improved our financial leverage, and increased liquidity in the first quarter. Our capital structure is in excellent shape, providing us with the continued financial flexibility to support our strategy of above-market organic growth, plus accretive acquisitions.

Our long-term outlook remains unchanged. We expect the economy to recover slowly over the next few years. For 2011, our end-market outlook includes continued growth in industrial and CIG, initial stabilization in non-residential construction, and improvement in utilities as we move through the year. Based on our strong start in the first quarter, we are increasing expectations for 2011. Specifically, we now expect our sales growth to be at least 17%, operating margins to expand at least 70 basis points, and net income growth to be well in excess of our 20% to 25% annual target.

In summary, our One WESCO strategy of providing industry-leading supply chain solutions to our global customers is being executed. And, we're building momentum in the marketplace. We see excellent opportunities to continue to strengthen our business, accelerate our growth initiatives, and expand our geographic footprint and customer base.

Now, Richard Heyse, our CFO, will provide details on our first-quarter results, our second-quarter outlook, and our increased expectations for 2011. Richard?

Thanks, John. Good morning. First, I will share with you our first-quarter results, and then conclude with our 2011 second-quarter and revised full-year outlooks. Our first-quarter total sales were up 24.6% year over year, and were up 7.5% sequentially. Sales for the quarter, compared to last year, included a 1.1% positive impact from foreign exchange and 7.0% positive impact from acquisitions.

We have closed on 3 acquisitions over the last 9 months, as John noted. Potelcom, with annual sales of approximately $25 million, was acquired on June 30 of last year. TVC Communications, with annual sales of approximately $300 million, was acquired on December 16. RECO, with annual sales of approximately $25 million, was acquired on March 15 of this year.

Our first-quarter organic growth rate of 16.5% is notable, as it is one of the best quarterly organic growth rates we have delivered in our history. Year-over-year estimated price increases for the first quarter had a favorable impact of approximately 3.5%. Sequential sales increased 7.5% and includes a 5.1% positive impact from acquisitions and a 0.5% impact from foreign exchange. Sequential sales per workday in the first quarter was up 9.1%. The number of workdays was the same on a year-over-year basis. Our first-quarter gross margin was 20.0%, up approximately 20 basis points year over year. This improvement in first-quarter gross margins was delivered primarily by an increase in our supplier volume rebate accrual rate, due to increased sales growth.

Sequentially, gross margins were down 30 basis points, due to slightly higher product margins being offset by supplier volume rebate rates returning to levels near historical norms. SG&A expenses for the quarter were $214 million or 14.9% of sales, compared to $183 million or 15.9% of sales in the comparable 2010 quarter. Approximately $10 million, or 32% of the SG&A increase, related to our 3 acquisitions. First-quarter operating profit was $64.7 million, or 4.5% of sales, versus $38.3 million, or 3.3% of sales, for the first quarter of 2010, a year-over-year increase of 69%. Our acquisitions produced an EBITDA margin of 9.6% for the first quarter. Operating profit pull-through, excluding acquisitions, at approximately 51%, was consistent with our long-term target of 50%.

Our first quarter's effective income tax rate was 28.4%, compared to the 29.5% rate experienced in the first quarter of 2010. Our previous 2011 guidance was for our effective tax rate to be in a range of 28% to 30%. We anticipate our tax rate will be closer to 30% for the remaining 3 quarters of 2011. First-quarter net income grew 94% to $37.3 million, and resulted in an EPS of $0.74 per diluted share on 50.4 full -- 50.4 fully of million diluted shares outstanding (sic -- see press release). This compares to reported net income of $19.2 million, and an EPS of $0.44 per share, on 43.7 million fully diluted shares outstanding in the first quarter of 2010.

First-quarter free cash flow was $26 million. Our first-quarter net income to free cash flow conversion rate of 70% was favorable given our strong double-digit sales growth rate. First quarter working capital days were improved compared to last year's level.

Our all-in cash borrowing cost for the quarter, including commitment fees, was 4.8%. Liquidity, defined as invested cash plus committed borrowing capacity, at $354 million, improved sequentially in the first quarter. As of quarter end, our pro forma financial leverage ratio was 3.1 times total par value debt to EBITDA. This compares very favorably to last year's ratio of 4.0 and is well within our targeted leverage range of 2 to 3.5 times.

Now, I would like to discuss our second-quarter expectations. We anticipate that second-quarter 2011 sales will increase at least 21% from second-quarter 2010 levels. This sales growth estimate includes the impact from acquisitions and our growth initiative, and assumes that pricing and foreign exchange rates remain consistent with quarter 1 level. Second-quarter gross margins are expected to be at or above 19.6%, which is up 30 basis points year over year, but down sequentially due to seasonal business mix effects.

Our second-quarter operating margin is anticipated to sequentially increase at least 30 basis points, to be at or above 4.8% of sales, as sequential fixed-cost leverage is expected to more than offset seasonal business mix. Our second-quarter interest expense assumption is for rates to be slightly higher than last year's period. Our second-quarter tax rate is expected to be approximately 30%.

Now, moving to our full-year outlook. In our January earnings call, we provided a 2011 outlook which anticipated economic growth, but at a moderating pace from 2010 levels. We had estimated 2011 sales to grow at least 12%, which was comprised of 2% to 4% end-market growth, 6% growth from acquisitions, and 2% to 3% of growth from our growth initiatives. Now, 1 quarter into the year, we are increasing our growth expectations for 2011. In total, we now expect that WESCO's 2011 sales will grow at least 17%. This sales growth estimate is comprised of 4% to 5% end-market growth, 7% growth from acquisitions, and 5% to 6% from our growth initiatives in combination with pricing and foreign exchange rates remaining consistent with current levels. We are also increasing our 2011 gross-margin target to be at or above 19.7%.

Our 2011 operating expenses will continue to reflect investments in our strategic growth initiatives. Our core business operating profit pull-through target of at least 50% pull-through remains intact. Given our improved outlook for both sales and gross margins, we're revising our 2011 operating margin target to be at or above 4.9% versus our prior expectation of at least 4.7%.

I would now like to open our call up for your questions.

(Operator Instructions) Sam Darkatsh from Raymond James.

I wanted to focus on price, if I could. The 3.5% that you received in the quarter, was that entirely from commodity inflation? I know Richard, you mentioned sequentially lower product margins. Give us a sense of what you're seeing commodities versus competitive pricing, if you could. That would be my first question regarding price.

First, as far as product margins actually moved up sequentially. Gross margins moved down overall because of lower SBR rates. But as far as the actual makeup of the price impact, it was a balanced mix of both impacts from commodity and other price increases. And overall, the cost increases we received from suppliers, we recovered the vast majority in first quarter in the marketplace. We got a pretty good track record as far as recovering any kind of cost increases that we see.

So with heavy price expected this year, 3% to 4% or so, why wouldn't you leverage that into greater gross margins on a year-on-year basis as that rolls through your inventories? And then the last follow-up on price would be your 3.5% assumption for the year. Are you assuming continued inflation or is that just assuming that copper and plastics and all that remain at current levels indefinitely?

I'll answer the latter question first. When we give our outlook, because of the commodity component on pricing, we choose not to try to project where commodities are going to be. So our outlook as far as the sales growth is simply assuming that current prices and foreign exchange rates as of the end of the quarter are maintained. So if you have any assumptions as far as inflation, et cetera, for second through fourth quarter, you need to layer that on top of our guidance.

As far as, attempting to expand margins in an inflationary period, clearly on a percentage basis, we target to at least maintain margins, but we attempt to expand gross profit. As absolute selling prices rise, if you're maintaining gross margins, you're actually expanding gross profit. So absolutely, as you said, our expectation would be to expand gross profit in a rising price environment.

Hamzah Mazari from Credit Suisse.

Just a question on your operating margins. Could you remind us what kind of incremental margins you're seeing right now, and how we can expect that to play out given your sales growth running about 17%? Any color you can give on the SG&A ramp-up going forward, due to acquisitions and your growth initiatives here.

First, as far as the incremental, as I discussed or commented in the script, our target is for, on an operating profit pull-through, to maintain a 50% pull-through. So for every incremental $1 of gross profit, we're looking to pull at least $0.50 through to the operating profit line. Again, the approach we're taking right now, we're clearly investing in growth. Those growth programs are working. We're not going to change that recipe. So we're going to continue a balanced approach of investing in growth and focusing on fixed cost leverage. What was the second question, I'm sorry, Hamzah?

SG&A.

As far as the SG&A ramp up, again, first quarter is our heaviest quarter seasonally for SG&A. We typically get great fixed cost leverage first to second quarter. So, as far as SG&A rates, we would assume to get some significant improvement first to second quarter. Last year it was almost over 100 basis points. So again, we're going to continue to focus on the 50% pull-through. Also, we expect good fixed cost leverage going into the latter part of the year.

The first wart of my question, I was asking -- I understand it's 50% but how long can you maintain that?

Hamzah, let me comment. I think you may recall that in our last several-year period coming out of the recovery, coming out of the last downturn, '01 to '03, we had established our 50% operating profit pull-through target. But there were a number of quarters where we delivered 60%, 65% and even higher. So we're getting very good productivity and pull-through across our base. Great operating cost leverage. As we went through this downturn, which was much more significant than the one in '01 to '03, we made a strategic decision because of the nature of how competition was responding to the downturn. We wanted to strengthen the enterprise. We launched our growth initiatives, we started to invest, add salespeople, add locations. We added 17 datacom locations over '09 and 2010. And we've maintained our 50% pull-through target.

But I'd say the difference here is that as we're growing it gives us the opportunity, where we see the opportunity to strengthen the Company and make more investments, to continue to deliver superior top line profitably, we're doing that. I think we see -- I'd cap it off by saying, we've got the growth equation working. We have three quarters in a row of double digit organic growth, and each quarter was successively greater than the prior. We think the investments we're making, the execution's paying off. And I think, as we move forward, we get this terrific operating cost leverage. We don't plan on stopping that. We're focused on this balanced recipe. As far out as we look, and we set this target in our investor day last year, 50 to 70 basis points of even expansion over the next three years through 2013 with 50% pull-through.

Adam Uhlman from Cleveland Research.

Richard, just a clarification on the sales growth guidance for the year of 17%. If I understand it correctly, the prior guidance did not include currency or pricing. And if I take 3.5 points and 1 point out of pricing and then that small RECO acquisition, I'm all the way back down to 12% sales growth. So it doesn't seem like the outlook has changed for the year. Can you help me put that math together?

On the 17%, it's roughly 7% from acquisitions. And then, as we discussed, the actual combination of our share gain initiatives, or as I mentioned share gain initiatives plus price and FX, is up to 5% and 6%. Where, at the fourth quarter when we gave our four-year outlook, that number was more 2% to 3%. If you look from the end market demand, we expect end market increasing up to about 4% to 5% growth. The combination of prices as they stand today, exchange rates as they stand today, and the impact our growth initiatives are going to have in combination is now 5% to 6% versus 2% to 3% last quarter. So I think it's a combination of, again, what's been realized in price and foreign exchange, just rolling it through the balance of the year, plus we think the outlook for demand is increasing.

Okay. Just to switch gears a little bit. On the non-res strength, very strong. Is there any other color that you guys can give on the growth that you're seeing there, retrofit activity versus new build, commercial versus industrial construction, or even large versus small projects? Any kind of additional color would be really helpful.

A couple comments. We're very encouraged with the traction we're getting with our construction oriented initiatives and the results we're seeing. The momentum is actually building well in excess, I'd say, of what we're seeing in the end market. First, let me say the non-residential end market, in total, is very large, it has many facets to it, but still represents a head wind. When you look at the overall non-resi aggregate market data for the first quarter, it did not grow. Now, there's pockets in there that are offering some growth. With that backdrop, we feel good with our increasing construction momentum and with backlog growing.

Directly to your question, it's broad-based. As we look across the geographies, we're not seeing one region in particular that's overdriving. We're actually seeing growth across all of the regions in the US. We're seeing even slightly stronger growth in Canada versus the US, but the US still has very strong balanced growth. In terms of the types of wins we're seeing, we're still seeing significant contributions from data centers whether it's new data center build outs or retrofit or upgrades. Waste water treatment facilities, healthcare and hospitals. Significant improvement in lighting. We didn't talk about this in the script but I'll share it. Lighting on a product category basis grew a little over 20% in the quarter versus prior year. We've been focusing on lighting as a product category for some time. And that's principally retrofits including some LED lighting retrofits.

So what I think is probably most encouraging is it's not isolated to one region. It's not isolated to one type of project. We're get going broad-based support for the results we're delivering. And our view is that as we move through the year, things should start to get better. This head wind should peter out, become no wind, and then we're hopeful as we move into next year it becomes a tail wind.

Maybe one thing I'd like to add is I'd caution using WESCO as a barometer for the non-residential market. Our growth initiatives are working. We're taking share. So where we're seeing strength, others may not be. Overall, we've done very well on that part of our marketplace.

Deane Dray from Citi Investment Research.

Thank you. Good morning, everyone. Just to follow up on that last question about the end markets, could you also touch on government and utility? I know utility, the comps are tough because you've got that alliance partner adjustment. But just broadly what you're expecting in terms of CapEx on the utility side.

Let me start with government, Deane. Government for us in the first quarter was effectively flat versus Q1 last year. We didn't spotlight that in the script. I was going to make sure we got to that point in the Q&A. However, we still expect government to contribute very strongly to double digit top line growth, that is sales to government and government agencies in 2011. The pipeline's over $400 million for stimulus. We had a particularly strong quarter in Q1 last year. So, as I said, we still have very strong expectations government will be strong for us. Double digit growth on a full-year basis.

We mentioned that we thought this year would be a very strong stimulus year. The value of our stimulus wins as of the last earnings call was just a little bit better than $150 million, and now it's north of $175 million. So pipeline's good. We're getting good results and a good broad base of results in governments. And it remains one of our top eight growth initiatives and we continue to invest and prioritize it.

In terms of utility, on a reported basis from a segment, end market standpoint, we were down 5%. But if you take the two non renewals, the alliance agreements, out of last year, we grew 7%. We're encouraged by that. Our view is that the broad-based utility market is not growing at that rate yet. And, we're starting to see some improvement in end market, increased activity in terms of bidding, bidding for alliance agreements and other I'll call it upgrade projects. And as we move into the second quarter, Deane, and third and fourth, we don't have the challenging comparable of the losses anymore. So our expectation is, and we did signal this coming out of last year into this year, and we're re-signaling, that as we move forward, that utility should provide sequentially improving momentum as we go.

One final point to cap that is, utility demand, end market demand, ended up being down essentially two years. No one thought it would be down one, let alone two. But it began to recover in late 2010 and we're seeing it recover in 2011. That is really driven principally by the industrial recovery. So I think what we'll see is exactly what we saw in the downturn. Utilities don't respond in lock step with that demand increase, there's some time lag. That's the basis that supports our hypothesis that utility will improve as we move forward.

That's real helpful. Just a clarification on the pricing. The 3.5% to us shows that WESCO's distribution model is one of the few where inflation is actually welcome because you have the ability to put through price increases. But sometimes there's a bit of a lag, but it didn't sound like that there was much of a lag in the quarter in your ability to get that price increase. Is that true?

I would say that it remains incredibly challenging to push these through. We're very fortunate that we have terrific supplier partnerships and we actually work that jointly with them, specifically with customers. As part of our One WESCO initiative, we're increasingly trying to sell more and more of our portfolio to each customer. That makes us more critical, hopefully adding more value to their operations and supply chain. Which puts us in a better position to support price increases. So it's awful tough, though. And your supplier price increases have been stepping up measurably as we move through the year, but they actually started last year. It's something we constantly work on, Deane. We're not declaring victory on that.

We are very focused on trying to do a better job on that every day, and it's a moving target because it gets tougher every day. We've got a lot of work to do, I think, to improve in that regard. And we think we fundamentally have some significant margin expansion opportunity over the mid to long term. We filleted out that framework in our investor day last year. And a big part of it is this. I think we've got to continue to work real hard at that. I'm not happy yet.

Last question from me relates to the M&A outlook. Richard, that was real helpful walking through which deals have come through, and where you are on leverage. So it begs the question, what's the capacity of the management to drop these additional distributors in because you've got some balance sheet room still. But what's the overall capacity? My guess is Steve Van Oss has plenty of gas in the tank.

Two comments. I'd say that we're very pleased with the three we've done already since we turned the engine back on last June. Potelcom in June, TVC in December, an most recently RECO. It's about $350 million on an annualized basis. We're also very pleased that our accretion commitments out of the gate were tracking very well against those commitments. We're continuing to show the ability to find good partners to acquire to strengthen our portfolio and deliver value. So far so good. We've been a good acquirer over the years. We've done 35 acquisitions since we spun out in '94.

To your capacity question, we've gotten down to a 3.1 leverage ratio on a pro forma basis. And we showed this last time, as you'll recall, coming out of that downturn, '01 to '03. We started doing larger acquisitions. Carlton-Bates, and then CSC and a few others. As we get the models working, we're improving EBIT sequentially. Our leverage ratio drops quickly. We didn't think we'd be at 3.1 this week, but it's great at be at 3.1. We're at 3.1 because we've been exceeding our expectations. In terms of capacity, Steve as COO is really focused operationally. He's still supporting acquisitions, as do I and Richard. But we put some dedicated resources in. That's the new action that we initiated coming out of, really, mid-2010 coming into 2011. So I would say we've always been focused on acquisitions, we think we do an okay job. But I'd say now the pipeline's as robust as we've seen.

Ajay Kejriwal from FBR Capital Markets.

Thank you, gentlemen. Just a couple longer term questions. And John, you alluded to this a little bit that your growth initiatives are helping you gain share. Maybe build on that a little bit and talk about the portfolio, how is it different versus last cycle with datacom now obviously a much bigger portion. So how does that position you on growth and margins?

Thank you. Maybe I'd like to take a second quickly and look at our business through two separate lenses. A first lens would be end market segments and the customers we serve in those segments. So call that lens one. For lens one, I think many of you will recall that when we spun out of Westinghouse, we were essentially 85%-plus construction in predominantly non-residential construction. Today our largest end market segment is industrial. It's over 40% of the portfolio. Followed by construction, again predominantly non-resi. And then utility. And now increasingly CIG. CIG with our government growth and CIG with the contribution of TVC to certain customers in that segment, as well.

From an end market perspective, we're much more balanced. We've made the argument over the last several years that when we were construction you could think of us as late cycle. I'll set the clock back over a decade plus ago. Now we see ourselves as a much better balanced mid to late cycle play, depending on what segment you're looking at, industrial versus construction.

If you take a second lens, which would be product and service category, which is what you alluded to in your questions, use that lens. We really worked hard on that. You look at our 35 acquisitions, by and large, we didn't really try to buy geographic position. In some ways we strengthened some end market positions but predominantly what we did was expand the product and service portfolio. So our largest end product category is supplies. It's a third of our portfolio. And it's not just electrical, it's broad-based industrial plus electrical supply. And I think that's a point that's lost on many. Now we have communications which is broader than just datacom. It includes broadband communications with TVC. That being essentially 19%, 20% of our portfolio. I think if you look from a product and service lens, we really like the balance. But we're not done. We want to continue to try to work to diversify our product and service portfolio. And the partnerships with our suppliers because many of these acquisitions give us new supplier relationships. And then plow that through our business models, whether it be global accounts, integrated supply, et cetera.

That's really helpful, and then great point on supplies which is a third of the portfolio. Maybe talk about the opportunity for global sourcing and private label. I know you talked about that a little bit last year. But any updates? What's the run rate?

I would say let's put that in the category of a significant opportunity over the mid to long term. I'll tell you, we did our first full-blown investor day in New York last year and we're going to be doing that on an annual basis. Our focus last year was on let's make sure we lay out our growth agenda, what markets we're going after, our growth initiative/growth engines. As you'll recall, we picked three in particular that we did a vertical drill-down on. In Steve Van Oss' presentation, he also laid out a nice framework for I'll call it fundamental gross margin improvement over time. And part of that is working purchasing and supply chain and sourcing globally, as well as potentially, let's call it a branding strategy, and then pricing and a series of other initiatives. We've not given a lot of color on that yet. Over time, we'll provide more color as we move forward. Our focus predominantly has been on, let's make sure we're investing in the right places and working aggressively the profitable top line and the pull-through and playing offense while the market was recovering. The short answer is, put that in the category of absolutely upside over the long term. Not much to say at this point in terms of details.

Noelle Dilts from Stifel Nicolaus.

I was hoping that you could provide a little bit of an update on TVC. It sounded like the business outperformed your expectations in the quarter. Maybe you could give a little bit more detail on where that outperformance came from. And maybe also where you stand on the integration process, have you been able really yet to start to leverage your West Coast footprint and cross sell some of the datacom products.

I would say we're in the early days of leveraging the footprint and cross-selling. We have a couple of nice interesting success stories out of the gate. Honestly, part of it is because we worked so hard at CSC and those synergies. That took a couple of years. I think we're a little quicker now with TVC, so that's encouraging.

In terms of the integration, terrific. I can't say enough about the TVC management team. And the cultural fit has been outstanding. So I think TVC plus CSC together, and then part of the overall WESCO enterprise. We're taking an approach we've taken on the other acquisitions. We have dedicated acquisition teams for different functional areas and end market opportunities. They're co-led by WESCO and then a TVC leader. So we're taking that similar approach. But I would say the esprit de corps, and the teamwork. And part of it's the One WESCO initiative. We're very encouraged with what we see in the first hundred plus days.

Then could you provide us with an update on your plans for new datacom branches in '11?

Yes. We haven't ever given a forward or prospective view of that. I will share this with you. We've opened 17 in 2009 and 2010 combined. So 17 across two years. We opened up two new ones in the first quarter. So that strategy remains intact. We're well on our way to essentially doubling the footprint of CSC when we had bought them, which is what we stated in our investor day. So as has been our practice, Noelle, as we go forward, we'll talk about what we did, when we did it. So now we're at 19 total when you go through Q1.

Matt Duncan from Stephens Inc.

This is Jack Atkins on for Matt. My first question is on your global account initiative. Could you maybe talk about what the sales growth has been like among those customers? Then how many global accounts did you sign up in the first quarter?

Yes. I would say the global accounts, and global accounts and integrated supply growth rates in the first quarter were consistent with the overall Company, consistent with industrial. In terms of wins and renewals, which was your question, we had three new customer wins in the first quarter and we had four contract renewals.

Okay. Great. Then just as a follow-up, as far as the M&A landscape, I know you went into some discussion about that earlier, but could you maybe talk about exactly the types of businesses that you're targeting, both the size of transactions and then the types of products or geographic overlaps that these targets would have?

We've never really talked about that in detail by excluding certain. We laid out a nice chart that we outlined in our investor day, been using it in all our conferences that shows, I'll call it, the MRO ski slope. Industrial MRO and all the categories were $500 billion-plus market in the US last year. So what we tried to highlight is where we are today and where we could potentially play. We don't have an arbitrary criteria or constraint around size and/or product category. So I think with our added resources that we have focusing on the pipeline development and scrutiny of the pipeline and seeing where things fit, we don't want to put these arbitrary thresholds on it at this point. We're taking a more, I'll call it holistic and comprehensive approach. The only thing I would say is it's been our practice not to give a lot of insight going forward because we don't want to mistakenly take anything off the table. I just think the opportunity's there. We said we'd turn the engine back on last year. We're pretty pleased we've done three in nine months.

Adam, we look for good properties that bring something to WESCO. So I think our key focus is finding quality properties regardless of size that could add something to WESCO that we can leverage. As John commented here, we're not backing off on that demanding, looking for things of quality.

The only comment I'd make, and this is consistent, and it goes back. Roy Haley clearly had this strategy from day one. Again, having done 35 acquisitions. We look for well-run companies with very good management teams that are performing well. By and large, we try to find companies that have higher EBITDA rates than we do, as we did with these last three. So I think we remain very consistent to that, call it, core set of priorities around acquisition screening.

Brent Rakers from Morgan Keegan.

Just two quick questions. First, and I think the last questioner asked a little bit of this, but if you could maybe talk about the growth rates experienced in the US market versus those in non-US markets. And the second question, if you could maybe give some color within SG&A in terms of the payroll components to the growth in SG&A year-over-year versus some of the nonpayroll components?

I'll take the first piece. I'll let Richard handle the second, Brent. Good morning, by the way. Canada was, in essence, slightly higher than the US. When I say slightly, within 1. So now the US, that's the answer. Good strong growth in Canada, good strong growth in the US> Again, as we talked earlier, particularly with construction, balanced, you look at industrial, well balanced. And then the backlog. We gave an overall backlog number but the backlog US versus Canada is still tracking extraordinarily well. At record levels.

John, before we go on, how about Mexico and some of the more emerging markets?

Also, our sales outside the US and Canada, so just take US and Canada, extract them from WESCO, our growth rate outside the US and Canada is also in the mid-20%-plus range, so tracking very, very well. We've been focused on that, and we've been focused on, and we increasingly have a set of what I'll call high quality customer opportunities. We've used this follow your customer strategy, and using a customer as a catalyst to hire additional talent and begin to build capability in other countries. We had some nice wins in the first quarter in China and Australia. We don't talk a lot about that, it's still not a large part of the portfolio. Over time, I think we'll give more color on that as we move forward. But we feel good about the growth we had in Q1 outside the US and Canada.

As far as the question on payroll versus nonpayroll SG&A expenses. Nothing to highlight or note this quarter. They were consistent with normal ratios and we're simply investing in our growth, and those investments are balanced and consistent with our historical rates.

David Manthey from Robert W Baird.

Good morning, guys. In trying to square the circle of the guidance here in terms of the growth rate. Now, you're saying the market growth rate is now 4% to 5%. That was previously 2% to 3%. Is that correct?

Correct.

Okay. Then you're also saying that your growth, your Company-specific growth, will be 5% to 6% versus 2% to 3% before?

Correct.

Could you just, Richard, could you just explain how much of the increase in that final factor was related to FX and commodities? Because, again, I know you're saying you're not extrapolating anything from here, but there must be a difference in where FX and commodities are today versus where they were a quarter ago. Could you just help us understand how much of that increase was related to those two factors?

The change from 2% to 3% going to 5% to 6% is mostly impact from FX and pricing. What we wanted to do on the 4% to 5% is keep clear what we're seeing in demand. Our outlook, particularly for the market demand, and the industrial markets particularly is improving. What we're seeing in the industrial economy in the US. So that's the way we decided to parse it is just keep that market demand clean, not mix the price and FX into it. So the 4% to 5% is a clean demand number, and the 5% to 6% is a mix of what we are expecting from our growth initiatives plus price and FX.

That makes sense. Second, in terms of pricing this quarter by segment, could you give us, if not numbers, could you give us an idea of where the pricing was concentrated across industrial, construction, utility and CIG, or was it pretty broad?

It was broad. More would be aligned along product categories. Some, clearly they have commodity content at higher price increases than other. But again, across the board we had very good cost recovery as far as price increase. Like I said, the vast majority we received price increases to cover cost increases. There wasn't any differentiation across markets as far as our price recovery.

Okay. Then the final question. Could you talk a little bit about the competitive landscape. Is it getting easier as markets firm or is it getting more difficult?

I would say it's not getting more difficult but it's not getting easier. It's tough. I'll give you our view. Until construction market truly recovers, and when I mean construction, I mean overall construction, both residential and non residential, until those markets recover and sustain a recovery in a meaningful way, I think we're going to continue to have a very, very challenging competitive and pricing environment in the US in particular. The reason is, we have so many different competitors. There's over 10,000 competitors. We've not seen a tremendous amount of rationalization of that. I'll call it that capacity in the value chain. The capacity being distributors and electrical and general contractors. We just haven't seen tremendous amount of rationalization of that yet. Our industrial customers, when we face this downturn, when they faced it, moved very quickly in rationalizing their capacity. They reduced the number of ships, shut down production lines, laid off workers, shifted some capacity offshore or capability offshore. But we have not seen that through I'll call it the construction oriented serve value chain yet. So until that happens, we still got an awful lot of players that are fighting for a smaller piece of business. And that just stokes up the pricing intensity. So it's tough. You got to maintain your discipline if you're going to hold margins and improve margins and that's what we're very much focused on doing.

Satish Athavale from KSA Capital.

Wanted to go back to the question of government sales. Can you tell us how much of your sales this quarter came from those government market?

We've never disclosed that, I don't think, Dan, have we? Broken out government sales in total. But let's say -- I don't have the exact number in front of me, Satish, but it's roughly on the order of $100 million plus or minus. I don't have that number in front of me.

We comment, we put government in a market segment that's commercial, institutional and government combined. And so year-over-year, that increased about 18% excluding acquisition. 8% sequentially but we did note in our supplemental that at the federal level, federal sales to federal government agencies and contractors were essentially flat. We're seeing a strong stimulus pipeline, but overall just on the federal level, they were essentially flat.

Okay. Thank you. And if I remember correctly, throughout last year, I think your sales to the government have been up in the 30% range?

Satish, maybe let me help with a little bit of the history, I think. I'll set the clock back to 2005 and moving into 2006. When we acquired CSC. The WESCO US government sales, whether it was federal, state, local, et cetera, to government and government agencies. It was roughly $50 million a year. And CSC was a $600 million-plus acquisition in sales and about $100 million roughly was government. So when we acquired CSC in late 2006, we closed on them in the fourth quarter of 2006, we went from $50 million in government sales to essentially, I'm going to round it, it's an estimate, $150 million. We began focusing on government as a growth opportunity well in advance of ARRA, or the Stimulus Act. Part of the reason we did was, and it is officially one of our eight growth engines now, is because we looked at some other of our distributor competitors and they had substantial government businesses. So we had a disproportionately low proportion or share of government versus what our capabilities were. Number one.

Number two we had good gross margin characteristics. By the way, the government typically pays their bills. So we focused on that, and we've been seeing very nice growth and we've essentially increased the size of our government position 2.5 times plus since then. As Richard said, and as I said earlier, government sales were flat in Q1, and it's a portion of our CIGN market segment. But there's also a portion of government that goes into our construction end market, if it's a major construction project. It could be to a contractor that's doing work for the government end user, but the actual customer for us is a big contractor. So those sales would show up in either CIG or construction. We're still very bullish on government for this year and it's not just this year. Even when stimulus winds down, we see government should be a more meaningful percentage of our portfolio. Does that help?

Yes, it does, but just to clarify. So you are saying that this quarter your sales to the government in general were flat compared to last year?

Compared to Q1 of last year?

Q1 of last year, yes.

Direct sales to the government. But for the year, for the year, we still expect it to grow double digits and we're confident.

My question is what gives you confidence that for the full year your sales will be up in the double digits?

Our opportunity pipeline for government is north of $400 million. Opportunity pipeline is not backlog, it's not orders on the books. It identifies specific government projects and specific government pieces of business that we are tracking through a five stage phase gate process. Think of it as new business acquisition, new customer business acquisition. And our value of stimulus wins is increasing. We do believe strongly, when you look at stimulus-funded projects and where we play in the value chain, we've maintained all along that 2010, 2011 would be the two strongest years. That was our position when stimulus first was enacted. We said 2011 would probably be stronger than 2010 fundamentally, and that is our view.

But my question is, if sales were flat this quarter, and just in light of the overall news flow coming out of government, you are expecting then your sales to actually accelerate from here?

Satish this is Dan. We're running up on the hour, so if you call me, we'll deal with it offline.

And our next question comes from Sam Darkatsh from Raymond James.

Just a quick follow-up. I understand time is of the essence here. Specifically as it relates to Q2, it looks like your guidance suggests some sequential moderation in the year-on-year organic growth rate. And I understand your language is at or above, or at least, or something like that. Your book to bill is over 1, utility business is going to be stronger year-on-year in Q2 than it was in Q1, you're showing some terrific sequential growth on a two-year stack. So is it conservativcy that you are suggesting some mild sequential moderation in the year-on-year growth rate, or is it something that you're actually seeing here in April, early May?

Good question, Sam. Thank you. Look, I think we laid this actually out in our last earnings call, and we're very pleased with how we're able to execute in Q1. But just to put a fine point on it. Q1 last year we shrank 3% on the top line, sales contracted 3%, versus prior year. So 2010 versus '09. Q2 we grew 9%. Q3 we grew 15%, Q4 we grew 18%. So we have had four quarters, now five, of sequential momentum improving. So our comparables do get tougher as we move through the year. With that said, we're very pleased with our ability to build backlog and execute. We didn't mention April yet. Since you've brought it up, I'll mention it. April's off to a solid start, in line with what our first quarter was. So, so far so good in April. But the comparables do get tougher literally as we move month to month through 2011. That is, the comps in 2010 are tougher.

Okay, with that, thank you all again today. We had some excellent questions. Let me just wrap the call by thanking you for your time today and your continued support. We are encouraged by the increasing positive momentum in our business and results in the first quarter. We're continuing to invest in our business and our people and we're encouraged that those investments are paying off. We remain very focused on producing improving shareholder returns, and looking forward to delivering another strong year in 2011. Thanks a lot and have a great day.

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