Wesco International Inc (WCC) 2011 Q3 法說會逐字稿

Good morning. and welcome to the WESCO third-quarter 2011 earnings conference call. All participants will be in listen-only mode.

(Operator Instructions)

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

(Operator Instructions)

Please note, this event is being recorded. I would like to turn the conference over to Dan Braller, please go ahead, sir.

Thank you. Good morning, ladies and gentlemen. Thank you for joining us for WESCO International conference calls to review our third-quarter financial results. Participating in the earnings conference call this morning are the following officers. Mr. John Engel, Chairman, 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 website. Replays of 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 have 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'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. It is great to be with you here today. Our third quarter was excellent, and reflects a continuation of the strong business results that we have generated since early last year. Organic sales net of acquisitions and foreign exchange grew 11%, marking the fifth consecutive quarter of double-digit organic sales growth.

Notably, our backlog growth rate has exceeded our sales growth rate over those same 5 quarters. We saw consistent double-digit organic sales growth in each month of the third quarter, and our fourth quarter is off to a good start with double-digit sales growth continuing in early October. It is encouraging that our customers continue to respond so well to our 1 WESCO initiative of selling and supporting our entire portfolio, products and services, across their operations.

Sales and margin related investments are paying off, with our growth strategies driving revenue growth and increased profitability for our business. We saw organic sales growth in all 4 of our major end markets and in all 6 of our major product categories in the third quarter. Core sales into our industrial construction utility and CIGN markets grew 15%, 11%, 13%, and 8% respectively versus last year.

Construction sales in the US were up 10% versus last year, despite continuing weak construction end markets. Total core sales outside the United States grew 21% versus the prior year. We successfully completed the conversion of our CST Datacom branches to our IT platform in late September. Sales of our data communication products grew 5% versus prior year, and we entered the fourth quarter with our Datacom backlog at a record high, up over 40% versus last year.

We expanded gross margin to 20% in the third quarter against a backdrop of what continues to be a very challenging, competitive, and economic environment. These results highlight the effectiveness of our sales and marketing programs and demonstrate our continued ability to take advantage of growth opportunities while profitability capturing share and improving our market position.

On October 3 we completed the acquisition of Brews Supply, our fourth acquisition since June of last year. Brews Supply is a full-line distributor of industrial, utility and commercial products with annual sales of approximately CAN50 million. Brews has branches in Calgary, Edmonton, Toronto, and Fort McMurray, and is the exclusive distributor for several supplier lines across Canada. This is our first acquisition solely in Canada, and we are very pleased to have the Brews' employees as part of our WESCO team.

Over the past 15 months, we have acquired 4 companies with annualized sales of approximately $400 million as of the date of acquisition. On a year-to-date basis, the acquisitions of Potelcom, TVC Communications, and RECO have exceeded our expectation overall and added approximately $0.29 of earnings per diluted share to WESCO. Our acquisition pipeline is significant, and we continue to see excellent opportunities for acquisitions to further strengthen our portfolio in 2011 and 2012.

Overall, execution of our sales growth and margin improvement initiatives translate into strong financial results in the third quarter. Operating margins of 5.8%, net income of $54 million, and EPS of $1.11 were up 120 basis points, 60%, and 50% respectively over last year. The operating margin expansion was driven by a balanced contribution of gross margin expansion and operating cost leverage. Operating profit pull through was over 60% for our core business in the third quarter, well above our targeted 50%.

The strength, diversity, and operating leverage of our business model are clearly reflected in the increasing profitability of our business. Given our strong performance over the last 6 quarters, and as outlined in our Investor Day, on August 9, we are continuing to invest in our 8 growth engines and our margin and productivity initiatives. We enter the fourth quarter of 2011 with positive momentum and a robust pipeline of growth opportunities. We are prepared for any signs of slowing in our addressable end markets, but have not seen that occur yet.

A long-term outlook remains unchanged. We expect the economy to continue to recover slowly over the next several years. We remain focused on continuing to execute our 1 WESCO growth strategy, and further improve our market and competitive position against this economic backdrop. Now, Richard Heyse, our CFO, will provide results on our third quarter results in our fourth-quarter outlook.

As John noted, we had a consistent execution across the board in the third quarter, and expect to continue that level of execution in the fourth quarter. Our third-quarter sales were up 19.3% compared to last year, including a 1.1% positive impact from foreign exchange and a 6.9% positive impact from acquisitions.

Our organic year-over-year growth rate for the quarter was therefore 11.3%. This is our fifth consecutive quarter of double-digit year-over-year organic growth. Year-over-year price increases for the quarter had a favorable impact of approximately 3.5%. Sales increased 3.7% sequentially, including 10 basis points positive impact from acquisitions, and negative 10 basis point impact from foreign exchange.

Sequential pricing had approximately 1.2% positive impact on third-quarter sales. Our sequential sales growth rate reflects the momentum we saw our business, which was consistent throughout the quarter. Backlog typically ranges between 10% to 15% of our overall annualized sales, and represents firm construction oriented project orders in hand scheduled for future delivery. Our backlog provides insight into our success rate related to closing on project business and future construction-oriented sales activity.

Third-quarter ending backlog, excluding the impact of TVC and RECO, was up 19% over last year's level. This 19% increases significantly higher than our year-over-year organic sales growth rate of 11%.

Our third-quarter gross margin was 20.0% up 50 basis points year-over-year. This marks our fourth consecutive quarter with gross margins at or above 20%. We have been able to deliver this performance by executing on our margin expansion initiatives and acquiring companies with strong product and service portfolios.

SG&A expenses for the quarter were $216 million, or 13.7% of sales, compared to $191 million, or 14.4% of sales, in the comparable 2010 quarter. Approximately $11.1 million, or 43% of the year-over-year SG&A increase, related to our TVC and RECO acquisitions. The improvement in our SG&A rate reflects our disciplined efforts to control our cost structure while simultaneously investing to grow our business. As a result of these efforts, our SG&A spending per quarter has remained essentially steady for 3 quarters, while sales have grown over 10% during the last 2 quarters.

Third-quarter operating profit was $91.8 million, or 5.8% of sales, versus $61.2 million, or 4.6% of sales for the third quarter of 2010, a year-over-year increase of 50%. Operating margin expansion of 120 basis points was driven by a combination of approximately 50 basis points of gross margin expansion and 70 basis points of operating cost leverage driven by the SG&A spending discipline I discussed earlier.

Operating profit pull through, measured by year-over-year incremental operating profit dollars divided by the year-over-year incremental gross profit dollars, is a financial metric WESCO uses to gauge the effectiveness of our operating discipline. Our third quarter core operating profit pull through rate was 62%, and our year-to-date core operating pull through rate was 58%.

Given our year-to-date results, we expect to finish 2011 with a full-year core operating profit pull through rate at or above our 50% target. As John mentioned, we refinanced our revolving credit facility and amended our accounts receivable facility in August. As part of his refinancing, we lowered our interest rates and extended our maturity by 5 years for the inventory revolver, and by 3 years for the accounts receivable facility. These efforts increased our liquidity and improved our flexibility for funding our growth initiatives in future acquisitions.

As a part of the refinancing of our new $400 million revolving credit facility, we had a $1.8 million 1-time non-cash charge for the write-off of deferred financing fees, which was recorded as interest expense. Interest expense net of this change would have been $13.3 million, a sequential decrease of $600,000 from second quarter interest expense levels.

Our third-quarter effective income tax rate was 29.7%, compared to the 29.1% rate experienced in the comparable 2010 quarter. We have been able to improve upon our forecasted tax rate by employing a number of tax efficiency initiatives. Third-quarter net income grew 60% to $53.9 million, and resulted in an EPS of $1.11 per share on 48.5 million fully diluted shares outstanding. This compares to reported net income of $33.7 million, and an EPS of $0.74 per share on 45.5 million fully diluted shares outstanding in the third quarter of 2010.

After adjusting for the negative impact of the 1-time non-cash write-off associated with our refinancing, EPS improved by $0.02 per share to $1.13 per share in the quarter. TVC and RECO contributed an estimated $0.10 per diluted share to our third-quarter results. As John noted, these 2 acquisitions, plus Potelcom, which was inquired of June of last year, have been accretive and have accounted for approximately $0.29 of our year-to-date earnings per diluted share.

Third-quarter free cash flow was $41 million, or 76% of net income, compared to $3 million in last year's third quarter. On a year-to-date basis, we have generated free cash flow of $48 million. Assuming normal seasonality patterns in the fourth quarter, we believe that full-year free cash flow will be in the range of approximately 70% to 80% of net income.

Our average all-in cash borrowing costs,including commitment fees for the third quarter, was 4.5% and ended the quarter at 4.4%. The improvement of approximately 10 basis point on the total cost of debt was a result of the refinancing that resulted in lower borrowing interest rate spreads. Liquidity, defined as invested cash flux committed borrowing capacity, was at $486 million at the end of the third quarter, compared to $338 million for 2010 year end, and $414 million at the end of the second quarter. This increase in liquidity was due to a reduction in debt from free cash flow and the impact of our new inventory revolver.

As of quarter end, our financial leverage ratio was 2.7 times total par value debt to EBITDA. This compares favorably to last year's ratio of 3.5, and is well within our targeted leverage range of 2.0 to 2.5 times. Including the payment for Brews that occurred in early October, pro forma financial leverage as the end of the third quarter would've been increased to approximately 2.8.

Copper-based products have received much attention lately. WESCO's product category of wire, cable and conduit, as a percentage of total WESCO sales, represents 18% of 2011 year-to-date sales. This product category contains many types of wire, cable, and conduit products made from copper, aluminum, steel, PVC, and other materials. Overall, copper-based wire sales represent approximately 50% of this product category sales, but approximately 9% of total WESCO year-to-date sales.

A large proportion of our copper wire sales are sold via direct shipment from the manufacturer. This method of delivery reduces the amount of inventory needed to fill customer sales. For copper wire sales sold out of stock, we tightly manage our copper wire inventory levels. As a result of these factors, we would not expect copper market price fluctuation to have more than a modest impact on WESCO's financial performance.

Now I would like to turn to our fourth-quarter outlook. We have experienced strong and consistent demand growth throughout the last 6 quarters. We expect to see a more normal seasonal pattern in the fourth quarter, with a decline in demand from third to fourth quarter this year of approximately 3% to 4%, but year-over-year sales up at least 14%. This includes the impact of 1 less work day in the fourth quarter.

Consistent with our past practices, our outlook assumes that product pricing and foreign exchange rates remain consistent with the third-quarter levels. Additionally, the impact of the Brews acquisition is not expected to be material to the fourth-quarter and full-year outlook.

Given the volatility of foreign exchange in metals prices, it is difficult to forecast the impact that these factors may have on fourth-quarter sales. Fourth-quarter gross margins are expected to be at or above 19.8%. Our expectation is lower than fourth quarter 2010 results, as last year's results included significant favorable supplier volume rebate and inventory reserve adjustments.

Our fourth-quarter operating margin is anticipated to be at or above 5.2% of sales. Our fourth-quarter interest expense assumption is for reduction expense from $15.1 million in the third quarter, of which $1.8 million is related to the 1-time write-off of deferred financing fees, to approximately $12.5 million, as the impact of lower interest rate spreads from our new and amended credit facilities have their full impact.

Our anticipated tax rate for the fourth quarter is 30 % to 31%. Our full-year outlook is essentially unchanged from our last call and our August Investor Day, with full-year sales growth expected to be at or above 19%, assuming pricing and foreign exchange rates are consistent with third-quarter levels in the fourth quarter. Gross margin for the full year is still expected to be at or above 19.9%, an increase of at least 20 basis points from 2010 results. Operating margin is expected to be at or above 5.2%, an increase of 10 basis points from our last earnings call and our Investor Day outlook on August 9.

This would represent an improvement of 100 basis points on a full-year basis versus 2010, and is well above the 50 to 70 basis point improvement target we outlined in our 2010 and 2011 Investor Day meetings. Our full-year effective tax rate is expected to be approximately 29% to 30%, a modest improvement from levels projected earlier this year. We expect full-year free cash flow to be between 70% and 80% of net income for the full year, due to the strong growth we have experienced this year, and the requirement to fund our working capital needs.

In summary, we have delivered sales growth and profitability improvement through the first 3 quarters of 2011, and we anticipate closing out a very strong year. I would now like to open up the conference call for your questions.

Yes. At this time we will begin the question and answer session. We ask that you please limit yourself to just one question.

(Operator Instructions)

The first question comes from Ajay Kejriwal of FBR Capital Markets Go ahead, please.

Thank you. Good morning. Good quarter. Just maybe first on the SG&A, so good job on keeping the lid on the cost there, but, maybe talk about how we should be thinking about the SG&A trends in light of the growth initiatives. Obviously, SG&A has kind of stayed flat, even as revenues have grown, but is that how we should be thinking, or does it move up from here?

Ajay, we're again, the way that we've targeted kind of our investment is we want to consistently shoot for delivering a 50% operating profit pull through as a target. So, we've got these series of growth engines we've outlined, and we have a series of margin and productivity improvement initiatives that we're investing in, as well, and we have been investing in the business at a higher rate than WESCO had traditionally prior to the downturn.

The good news is we think that those investments are paying off. It's paying off in the form of significant top line growth, double digit organic growth now for 5 quarters in a row, and we believe we're outperforming the market, and we are managing our cost tightly, as we always have, and we're getting very nice gross margin expansion as well. So the recipe is working, and so I think as we move forward we want to maintain that recipe. We feel very good about our momentum, our backlog grew greater than our sales rate, but our target is to maintain that 50% operating profit pull through as a target. As long as we are delivering the results, it allows us to continue to invest.

Thank you, and then maybe just on the construction markets. Very solid growth, obviously looks like you're gaining share. Maybe any update on what you're seeing in Datacom, and then anything you can say about Canada?

Yes, A couple of comments. I would say construction markets overall, it's is more of the same. From our perspective the end market recovery has not started yet. I mean, let's put it in perspective. Non-resi was down double digits in 2009 and 2010. So far through September of this year, the end markets are down roughly 9%. So I would tell you the underlying fundamentals, non-resi construction market, are not that strong. We continue to look at recovery, don't expect a full recovery starting unit 2012 and into 2013. With that said, I think WESCO is performing very well. We've now delivered double-digit growth in the construction end market for those customers in that end market for the last 5 quarters. This last quarter we grew 11%, organically. Our backlog growth is well in excess of our sales growth, and our backlog is up 19% over prior year, and if you recall backlog is really project business, essentially.

In terms of your question on US versus Canada, very balanced. We grew 10% -- our construction sales grew roughly 10% in the US, so we are double-digit. In Canada grew at a higher rate. We have very strong business in Canada running at record backlog, specifically for Canada. If you look at the outlook for the Canadian construction market, and you look at that over the next several years, for non-residential construction in Canada, it is forecast to grow in kind of the mid-single digits. So a little different story than the US. In terms of your question on Datacom, we finished the conversion by the end of the third quarter. That's a substantial amount of work to get done. It is no doubt it is disruptive. With that said, we exited the quarter with record level Datacom backlog. We still grew 5% in the quarter. We feel very good about it, and we're getting some very nice wins in data centers, and I'll call it, broadband build-out kind of opportunities.

Good job, thank you very much.

Thank you, Ajay.

Our next question comes from Sam Darkatsh of Raymond James.

Good morning, Richard.

Good morning.

I want to ask a question, I guess it's on all your investors minds, which is you mentioned expectations of things slowing, but I guess you're not seeing it yet, at least with respect to the backlog, as you are referring to, John. I mean, are there other things that you're seeing or you're hearing from customers that give you that sense? I mean, are vendor lead times shrinking, or post-quarter orders, maybe they're coming off a little bit, or you're hearing from customers that perhaps they're waiting for their fiscal year end budgets to snap over before they change their spending patterns, or is it just you're looking at the macros and saying things have got to slow because of PMI and that kind of thing?

I would tell you that, first of all we are not economists so we don't predict what the overall economy is going to do. We can see all the same macros as you can see, Sam. We're not seeing it in our activity levels and the results we're generating. In fact, we just went through all our detailed operating reviews in the last couple weeks, and really drilled into this, and we are not seeing any signs of it, and it's really across all of our core end market segments. In October I mentioned that the momentum was continuing. So I'll tell you, as we sit here today, overall we're growing double digit organically so far in October, and our book-to-bill ratio is above 1.0. So we're building backlog faster than sales.

When we look at the quality of our results in terms of balance, it's not driven in one region in the US. I mentioned, in response to Ajay's question, the results in the US versus Canada. Our growth outside of US is 21%, as Canada and the rest of the world. So we are getting very nice growth there. That's an international growth engine. In terms of industrial, we're seeing some capital spending beginning to kind of rebound. Industrial companies are spending on CapEx versus adding headcount, and that we are seeing across our customer base. We've got very good balanced growth in our industrial business, and our global accounts and integrated supply business models have very nice traction. So we do not see it., We will move with great speed if we do see it. We are not going to predict whether we are going to see or not. All that we can do is react. I think we did show in the last downturn that we moved very quickly, if in fact we do see a reduction in activity levels.

Thank you.

The next question comes from Deane Dray of Citi.

Thank you. Good morning, everyone.

Good morning, Deane.

One of the surprises that came out of your analyst meeting in August was your willingness to look out into 2012 and give a base scenario of an actual EPS number, the 440. Now a lot has transpired since then, but both in market nervousness, but your momentum clearly has been sustained. So maybe you can address some of the assumptions about 2012, since you've already put a line in the sand and put out what we consider to be pretty healthy guidance there.

Sure, Deane. I think If you look at the outlook we gave in our Investor Day in August, it was based on a fundamental assumption that GDP grows somewhere in the 2% to 3% range, 2%, 2.5%, and if you look at the consensus of economists, that we can see right now, the consensus is still in that range. So, as John noted, we haven't seen any signs from our customer base of slowing activity, outside of what you would normally see seasonally as construction season winds down. So if you go through what we talked to, it was a balance of share gain, market growth, and acquisitions, and so our overall expectations are unchanged from what we presented in our Investor Day.

Yes, Deane. I would say what we have presented, and that was the first time we had given that kind of early look, it is unchanged as Richard said. We will continue to look at that as we move through the fourth quarter, and we will obviously give an update in our next earnings call, but our outlook for the fourth quarter is for more of a seasonal pattern, more traditional seasonality, let me say, as opposed to we did last year, which was absolutely break the trend of what is typical seasonality for us over a long period of time. I think it will be interesting to see how the fourth quarter unfolds. Again, we haven't seen any slowing our activities. December will be an interesting month to see if industrial companies do anything with respect to extended holidays. We have not heard of any evidence or planning to that effect as of yet.

Great, and then if I go and look at the supplementals, you provide on Slide 6 a terrific breakout by end market sequentially year-over-year and year-to-date. So it is a big help. Looking at that, what would you call out in terms of how did mix play a factor in the outcome in the third quarter year? I mean, I can see industrial up big, I can see utility up big, but within those product lines, how did mix play a factor?

Yes, I would tell you -- let me address mix a couple of ways. In terms of end market mix, we have been growing industrial at a greater rate than construction for some time. We feel good about our construction growth, as I mentioned 5 quarters of double digit organic growth in construction. We have been provided this type of chart now for several years. If you look back for industrial, we have grown double digits organically for 7 quarters in a row, and our growth rate industrial has been our largest growth rate. If you look at page 5 of the supplemental, what we did was typically we only update this at the end of the year, but we thought it was important to update this through September year-to-date, and that is our mixed in.

If you referred to page 5, our market mix is 1 pie chart and our product category mix is the second chart. If you look at that, industrial is now, and this is through the first 9 months of this year at 43% of WESCO sales, and so we have very much been focused on the industrial market and at 3 value streams. MRO, that not just electrical but industrial, OEM, plus capital projects, and not just new construction, renovation upgrades. So I think we feel very good about our traction there. We also feel good about our construction end market, and I will tell you, utility, we had been saying and forecasting that the second half of 2011, things would pick up for us. I'm happy to say that we are now seeing those results. We grew double digits for utility in the third quarter. Even if you take out the Hurricane Irene sales, we are still north of 10%. So I think we are encouraged by utility beginning to pick up, as well.

Hey Dan, just last question from me. I couldn't help but notice the comments are pretty enthusiastic about the M&A opportunities, both the balance of the year into 2012. Your leverage is back into the 2.7 times. You have had success with the last 4 deals, and just talk a bit about the pipeline and the expectation that those could also have the same economics in terms of accretion.

Yes, I think we mentioned in our Investor Day, we have a little insight into that, that we've added some dedicated resources, we are working it aggressively, the pipeline that is. The pipeline is very significant. The quality of it is the best we've had. It is at a record level, and so now it is a matter of, do we find the right deals that offer the right type of synergy and we can get the deal done at the right price. We are very encouraged with the 4 deals have done since June of last year, and if you look at those, by and large, they've kind of expanded our product and service categories, and that is strategically what we are looking for. We are not looking to roll out pure play electrical distribution houses or locations. So it is a big part of our value creation, period. Primarily, our first leg of value creation is organic growth above the market. That is our objective. The second leg of our value creation is accretive acquisitions, and these, the 3 that we did since June of last year are accretive and Brews Supply is expected to be accretive as well.

I think 1 point I'd like to add to that, too. Both for Brews and RECO, those were acquisitions where we self-developed the opportunity versus a book going out from a banker, and those type of bolt-on acquisitions where you self-develop, reach out to a party, and work out a deal, are very value creating, and so that's where part of our enthusiasm is coming from is that we have proven that we can go out, make contacts -- the approach we are using is working, and can find accretive deals that help expand our market position very rapidly.

That is also true of Potelcom, Richard. If you look above these 4, and obviously, we like it when it is a non-marketed transaction. We are a strategic buyer. We are an integrated operator, and so that situation sets up better for us. We would like to drive that more than a marketed deal, but we will look at marketed deals as well. So I -- Deane, hopefully, does that answer your question and give you some insight?

It certainly does, we will stay tuned. Thank you.

Okay, thanks.

The next question comes from Adam Uhlman of Cleveland Research

Hi guys. Good morning. Congrats (multiple speakers).

Good morning, Adam.

Richard, the gross margin on the quarter came in a little bit better than you guys were expected. There were some headwinds that were expected to come through on inventory reserves and rebate levels. Did those occur or have they just been shifted to the right?

No, I think we, with our margin initiatives, we helped mitigate some of those headwinds, and overall shipment type mix was a bit better than expected. That probably helped about 10 basis points, but, as I think as I commented in my portion of the script, we are seeing some traction from some of our margin expansion initiatives, and those helped maintain the third quarter margin at very nice levels.

Okay, got it, and then the inventory levels were down a little bit from last quarter with revenues being up a little bit. Can you talk about some of the dynamics happening there, and how you are thinking about inventories going into the end of the year?

I think as far as inventories, we have been executing much better this year. Our inventories are right at our targeted levels as far as turns rate. That has been one of our areas of focus this year, is inventory management, both from an inventory adjustment expense and from an overall working capital level, and we would expect to keep our inventory levels at the current turns rate through the fourth quarter. So you would see some absolute reduction in the dollar values, but as far as inventory turns, that is what we really target so we maintain service levels.

Great, thank you very much.

(Operator Instructions)

We would also like to remind you to please try and limit yourself to just one question. Thank you. Our next question comes from Anthony Kure of KeyBanc.

Good morning, guys, how you doing?

Good morning, Anthony.

I just wanted to keep going on the acquisition front. Just wanted to dig down a little bit. When you are looking at these companies, let's call them in your pipeline here, are these typically companies that are at company average gross margins and maybe a little bit below average for WESCO, when you compare them to your profile, and then you acquire them and improve them, or is your backlog of opportunities really companies that already have higher gross margins than WESCO?

I would tell you that if you look at the companies we have acquired historically, the gross margins have been at or above WESCO's gross margins. If you look at these last 4 in particular, that is absolutely the case. So, a lot of times the companies that we have been acquiring, if you think about it, they're nowhere near the size and scale of a WESCO. They are very focused with a set of solutions around a particular set of products or an end market vertical, and they are constrained to a certain geography, and so historically they've had very nice gross margin characteristics. That is very attractive to us. I mean, our goal is to go in and not upset that recipe, so to speak, but then leverage all the other synergies that are the breadth and depth that WESCO can bring to the table, and so obviously if we can acquire companies with fundamentally better gross margins and operating margins, and then have our synergies layer on top of that and adding incremental value, that's what's driving the incremental value creation for us.

Okay, great, and just 1 more comment, maybe on October. You already talked about the trends there, but if you were to compare October trends from an end market perspective to maybe your chart and how you describe the prior quarter, the third quarter, any change there materially among end markets from a growth perspective?

Yes. Look, we don't have a good view of that in terms of -- because it is very early in the quarter, and the months and the quarter are never linear. So the only thing I want to speak to, Tony, is kind of overall, and that the overall aggregate level, and it is just typically been our practice in our earnings call, we would kind of give an update on the current month as we sit. We are double-digit organic, as I said, so far through this part of October, and our book-to-bill ratio is above 1. So on balance, I mean, essentially it looks like the third quarter. It looks like an extension of the third quarter at the overall aggregate level and I don't want to speak to anything underneath that at this point. It looks like the trend line is very consistent.

Okay, and then from the seasonality perspective there, end of October, is that normally you're sort of flat from the prior quarter and then it trails down through the quarter? Is that normally how the fourth quarter works for you guys?

If you look at how the fourth quarter historically goes, and what is historical now, given the downturn we just went through, but if you were to look over a decade plus time period, typically, the fourth quarter is down overall versus the third quarter, 2% to 3% to 4%, in that band, and starting in October, October sales rates would start coming off. September is typically the best -- let me say it that way. On a sales per work day basis, and normal seasonality, September is the peak. I think if you look over a longer run, you will see Q4 over a longer term, Q4 again is down a couple percent maybe up to 4% again.

So, I did not mention what October was versus September. Ii is to early to look at sequential. It is roughly in line with normal seasonality. It typically drops off a little bit on sales per work day basis. What's most relevant is year-over-year. Now, we'll see as we move through the quarter, we are forecasting sequentially down, as Richard mentioned, but our fourth quarter last year was, we really bucked typical seasonality. So I think it will be interesting to see how the quarter develops.

It's a bit hard to predict because some of it is weather driven. So as you get into November and December, it depends on the rate that winter sets in, the cold weather, how it affects construction projects and, as John mentioned earlier, typically at Christmas time you'll get some industrial customers who take shutdowns for Christmas. I think the difference last year, what we saw in December, was our industrial customers kept operating right through the Christmas holiday season and that was highly unusual.

In a relative sense, Richard, right? I mean, not all of them. Some still took shut downs. In a relative sense, versus what was normal. There was less of a shutdown impact than what was typical.

Last year. This year, it remains to be seen.

Okay. Well, great. Thank you for the color.

Next we have a question from Matt Duncan of Stephens Inc.

Morning, guys. Congrats on the great quarter.

Thank you.

2 quick things from me. First on the construction revenue growth. John, can you maybe speak to the impact of stimulus on that?

Yes. Maybe I could just take a minute, and hopefully this won't be too long an answer, but give you kind of our framework for that. We said for a long time that 2011 would be our strongest stimulus year. We are clearly seeing that. We are seeing, still seeing, very nice stimulus wins. Our opportunity pipeline for government plus stimulus, of which stimulus is a part of that, is still upwards of $400 million. So still got a very nice pipeline. The bidding activity for new stimulus projects has trended down slightly sequentially. So the momentum's ticked down. However, a lot of these projects that are still some to be awarded and some to be executed, will extend out and impact our sales through 2013 and 14. So, the tail of stimulus sales for our project, some of those will impact us literally through 2014.

I will tell you that 40% of the targeted program funds for stimulus are still with the federal government. There are even more funds held at the state and local level, and so Department of Energy projects and broadband-related projects, in particular, still have significant opportunities for projects to be let and executed. We talked before about -- we've got a very detailed database of these projects that we are tracking, and we are using that same construct now for all different types of construction projects beyond stimulus. That is a capability we built 3-plus years ago, and we are extending it to other parts of our business. If you take, for example, the Department of Commerce, the agency that manages the BTOP Program, Broadband Technology Opportunities Program, 80% of those funds remain to be spent. 80%.

I'll just take the opportunity to highlight 1 significant win that stimulus and broadband-related, and this is public and it was in August. There is an electric co-op in New Mexico called Kit Carson and this is in ARRA funded project. It is a broadband fiber to the home project in northern New Mexico, and the winner of that contract was announced in August. WESCO is responsible for materials management and procurement. The products that we're delivering are a combination of utility, CSC Datacom and TVC communication products.

So it is a great example of 1 WESCO plus stimulus, and our service offering, this is essentially a highly customized integrated logistics and supply model, that uses our utility alliance, our global accounts type structure. It includes transmission planning and logistics type capability, and it is an integrated supply model. So this is a stimulus opportunity that we had in our pipeline over 2 years ago, literally. It just got awarded here in August, and it is substantial. And so that gives you a sense of how we manage this, and I will tell you that we are encouraged, again, by the depth and breadth of our pipeline. We feel very good about our execution, and stimulus doesn't stop impacting our sales in 2011. That was the point.

Sure, John, that's very helpful. Thank you, and then the last thing I've got, and I may be splitting hairs a little bit here, but just looking at the revenue guide, it looks like the growth rate is slowing a bit in the 4Q. I know you've got a little bit tougher comp, number 1, and 1 fewer selling day that's probably about 1.5% kind of headwind. Is there any structural reason that you would expect growth to slow from how it has trended for you to date, or is that really maybe the things I have already mentioned plus a little bit of conservatism on your part?

I could not have said it better than you said it, other than the conservatism. I won't comment on that. Look, we have 1 less selling day, 1 less work day in the quarter and that is 1.5 points, roughly, and then our Q4 last year -- if you recall, Q3 earnings call a year ago, we had a certain outlook for Q4, and we substantially outperformed that.

Yes.

And so we have a tough comparable. Again we will see how that unfolds, as Richard mentioned. Weather impact and shut down impacts et cetera. So we are not singling a slowdown in, quote unquote, overall momentum relative to outperforming the end market and/or our competitive period.

Okay. I didn't think so. Just wanted to be clear. Thanks, guys.

The next question is from Hamzah Mazari of Credit Suisse

Thank you. Just a question on pricing. If you could talk about how we should think about the sustainability of pricing above 3%, when we have seen pricing above 3% since Q2 last year, and the economic environment remains uncertain, and then if you could also, on pricing, just remind us with the acquisitions in Datacom, how you're pricing is not correlated to what is going on in the copper markets again? Thanks.

Let me address pricing overall and ask Richard to address copper. If you look at our estimate of price impact over the last 7 quarters, it ranged from 1.5% to 3.5%. Over the last 6 quarters, it has been 2.5% to 3.5%. So, Hamzah, I think as you have noted, we know what the external pricing environment has been. So we have been able to effectively drive and manage price increases at the range of 2.5% to 3.5% over the last 6 quarters. I would say, if you look at that relative to WESCO historically, I would say that is markedly better than what we had done prior to this global recession and downturn. I say markedly, not by a point, or 1.5 points, or 2 points, but by 0.5, plus or minus. So we feel pretty good about our ability to manage price.

What are we seeing right now? Price increases are not stopping. Right now we have a whole raft of supplier price increases lined up in October, and they range from 2% up to the 5% 6% 7%, depending on the product category. In the category of lighting, in particular, for fluorescent lamps, all the global lighting suppliers continue to aggressively push price increases through to the market. With all that said, it's not easy to get the market to accept the price increases. We've not seen any material supplier price increases. I'll say that. Take commodity products aside, like copper wire, et cetera, because they move like the commodity markets. So, that is a general picture of pricing. I think we focus very hard on trying to get price realization and push it through. We are actually aligned with our suppliers on that. We try to work that jointly and effectively sell that story to our customers. It's as hard as it has ever been, pushing them through, but I think we feel good about our execution. Richard, on copper?

Sure, on the copper. I think part of the point, like I was trying to make in our script, there is a perception out there that WESCO sells a lot more copper wire and cable than we actually do. So part of what we want to get out there is just that, if you look at this year, copper-based wire and cable is only about 9% of our sales. So when you start looking at the impact, if you look at price increases in total, the price increases we have realized this year are proportionately in that other 91%, and so, in not that copper does not affect that 9%, but it is really a secondary impact overall to our pricing, and we just wanted to clear that perception.

Also, we get a lot of questions on inventory levels also and the change in value of inventory, and as I mentioned, a significant proportion of our sales of copper-based wire are direct shipment, where the inventory and the product never passes through our warehouses. So if you look at the copper-based wire inventories, our percentage of overall inventories, it is even less than that 9%. So, I think with that, people can analyze the copper effect. We frankly get way too many questions on that topic.

Fair enough, I appreciate the color. Thank you.

Next question comes from Matt McCall of BB&T Capital Markets

Good morning, guys. This is actually Jack [Phoenix] filling in for Matt today.

Morning, Jack.

Within the CIG group it looked like there is a nice acceleration growth for the quarter and I'm sure part of that came from some of the broadband stuff that got pushed back last quarter, that communication stuff. But just as far as I know, you've talked about your outlook for stimulus and how that remains strong, but maybe, as far as day-to-day government spending goes, where do you see that going in maybe Q4 into next year? Is that something that you expect to slow, or to maintain or kind of what is your view on that?

I think there is no doubt that government spending is under tremendous scrutiny and that there will be reductions in overall government spending. And so the question is what areas are going to be targeted, and over what time frame will those spending cuts occur? So I think there is no doubt about that. From our perspective, however, we are not very focused on that for this reason. It is an extraordinarily large market. The amount of spend that comes out of the US government, and in the state and local government is significant. It is huge, and we focused on government as a growth vertical well before stimulus was even conceived, and we have said for a long time that our government sales were a disproportionately small percentage of our portfolio versus other competitors. That is why we began focusing on it, quite frankly, 4-plus years ago, 5 years ago. So we are making very nice progress taking share. I think there is still a tremendous amount of spend that is available to capture, and so that is our view.

We will watch along with you and everyone else to see ultimately when those spending cuts are determined and how they materialize, but it is kind of similar to the construction market. Here's my analogy. The non-residential construction market is still going to be roughly $270 billion of spending on a starts basis in the US this year. I mean, you are still talking a very large market. So, I think we are showing our ability to do very well against an overall government construction market that is declining in terms of the overall market, but is still very large in terms of actual spend that is occurring in the current year. The other final point that I would make is that the government is clearly investing in information technology to cut costs.

I think in our last conference call, Deanne Dray brought up the question about the government closing down a number of data centers, and moving to new data centers and taking advantage of cloud computing, and so that trend we are seeing, and I think that bodes very well for WESCO with our expanded Datacom broadband communication play.

That is helpful and if I could ask 1 more quick question. So, just with where things are within the industry, with some of the customers trying to consolidate suppliers and things like that, do you actually think that if economic growth was to almost be slightly down, and some of the smaller players were kind of squeezed out, are you almost immune to the economic cycle, just because of the share gains that are out there from kind of taking away business from smaller players?

I will never say we are immune to any economic cycle. It is really a function of what happens and to what degree, what is the peak to trough swing aid where it manifests itself. We absolutely felt the painful effects of this global recession we just came through, and I think we managed our way through that very well, and we are trying to play offense as we come out the backside of that. So we are not immune. I will tell you, though, that our planning construct is, again we are not economists, but we have had this view, and we have had it consistently for a few years now, literally, 2-plus years, it is going to be a long slow recovery with a bunch of little fits and starts and we expected a GDP rate that was going to be low, very low, and our view is, and it internally in the Company, is our execution mantra is, look these are large markets with a lot of opportunities whether GDP is 1%, 1.5%, 2.5%, or 0.5%, or flat. The market is still large. There is a lot of spending, let's go get our unfair share.

All right, great. Thank you.

The next question is from Noelle Dilts of Stifel Nicolaus

Hi, guys, and congratulations on the (multiple speakers) quarter.

Morning, Noelle.

Good morning. I think because I'm coming in late here I can actually comply with the question role, but I was actually just wondering if you could dig in a little bit more into the utility market growth, 10% ex the storm gains? Can you talk a little bit about if you're making some progress in really breaking into the transmission market and then what you are seeing with the lower voltage distribution?

Okay, great question. I don't think I mentioned this yet, so fundamentally what we are seeing is -- well first of all energy demand's up this year after being down 2 years. So we are beginning to see and we thought it would occur, the market beginning to recover. The growth in demand that we are seeing is driven by, really a couple areas. 1 is supply change management solutions, I will come back to that for investor-owned utilities and public power companies, and at transmission and alternative energy projects.

I did not mention we have 3 fundamental customer segments in utility, in overall utility end market. Investor-owned utility, public power and utility contractor, and we experienced growth across all 3, in all 3, Noelle, in the third quarter. So we are very encouraged by the balance, and it is not just standard distribution. There is some nice opportunities relative to, I will call it alternative energy projects and substations to support that, plus high voltage as it supports transmission feeding the substations. And I think that Kit Carson opportunity is an interesting opportunity as well, that kind of looks at the synergy between TVC Communications, our business model and our utility business plus Datacom content. Is that a utility win? Is that a broadband communication win? Is that a Datacom win? Yes.

Okay, great. Thanks so much.

Now we have a question from Luke Young of Robert W. Baird.

Good morning, guys. Thanks for taking my call. Just real quick, wondering if you could maybe comment relative to your comment that you're prepared for signs of slowing, but not seeing that yet. Just if you could talk about what signs you would be looking for, specific things within your business.

Yes. We've faced this before. As a public company, we face the downturn in '01 to '03, and we've faced this recent 1 with just managing our way out of, and so we look at all the macros, but fundamentally we look at our sales activity levels. So we look at our daily book-to-bill ratio's, and we don't just look at that in the aggregate. We look at that across all of our business. Literally, Richard and myself, Steve Van Oss, and our management team, all the way down to the branches, get this daily report. We know what our book-to-bill ratios are, we know what our daily sales rate are, we know what they are for direct ship versus stock and SO, and so we know what our activity levels look like.

Also, we get very interesting intelligence from our customers and our supplier partnerships. For many of our suppliers, we are their largest customer, we are a channel partner. And so, through our planning sessions and strategic review sessions we get good insight. Finally, I would say, because we serve a majority of Fortune 500 companies, I think we got a very good insight across virtually any key end market vertical, and we've got 16 end market verticals that we look at under our global accounts and integrated supply business model, but in terms of leading indicators, I would say we use our integrated supply business, which is an MRO business model, and we look at our OEM business relationships.

Fundamentally, we would see those begin to show signs of slowing first, and we monitor, again on a daily basis. I think that was the last person in the queue and we have 1 minute left. I would like to thank all of you for your time today and continued support. We are encouraged by our positive momentum and the strong results in the first 3 quarters of 2011, and we are continuing to invest in our business and our people. We enter the fourth quarter with a record pipeline of opportunities, and look forward to closing out a strong year in the fourth quarter. Thanks again and have a great day.

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