Wesco International Inc (WCC) 2012 Q1 法說會逐字稿

Good morning and welcome to the WESCO first quarter 2012 earnings conference call. All participants will be in a 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. Now I'd like to turn the conference over to Dan Brailer, Vice President of Investor Relations and Corporate Affairs. Please go ahead.

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, Chairman, President, and Chief Executive Officer; and Mr. Steve Van Oss, Senior Vice President and Interim Chief Financial Officer and Chief Operating Officer.

Means to access this conference call via webcast was disclosed in the press release and was posted on our corporate website. Replays of this conference call will be archived and available for seven days. 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 filed the supplemental presentation with the Securities and Exchange Commission and posted it on our corporate website.

This conference call may include forward-looking statements and, therefore, actual results may differ materially from expectations. For additional information on WESCO International, please refer to the Company's SEC filings, including the risk factors described therein.

The following presentation may also include a discussion of certain non-GAAP financial measures. Information required by Regulation G, with respect to such non-GAAP financial measures, can be obtained via WESCO's website at www.wesco.com

I would now like to turn the conference call over to John Engel.

Thank you, Dan, and good morning, everyone. Pleasure to be with you this morning. We are off to a good start in 2012. Our first-quarter results reflect the continued execution of our One WESCO growth strategy. We have now posted seven consecutive quarters of double-digit sales growth and six consecutive quarters of EPS growth of well over 25% on a year-over-year basis.

In the first quarter, we generated good momentum in all of our end markets. Organic sales to customers were up double digits in Industrial and Utility, and were up mid-single digits in Construction and CIG. In addition, with the exception of Data Communication sales, which were down mid-single digits, sales for our other five major product categories increased in the quarter. Backlog also grew and was up 5% versus last year, and up 7% versus year-end 2011. Notably, we closed out the quarter with very strong results in March, where we delivered the highest sales per workday for any month in our history. So far in April, sales are up mid-single digits.

Consistent execution of our LEAN and margin improvement initiatives continues and have translated into strong financial results. Operating margins of 5.2%, net income of $53 million, and EPS of $1.03 in the first quarter were up 70 basis points, 42% and 39% respectively versus prior year. The growth in net income was well above the high end of our 20% to 25% range, which we communicated in our Investor Day in August of last year. In addition, free cash flow generation was strong in the quarter and exceeded net income.

Our investments are clearly paying off. Effective execution of our growth strategy continues, and we are pleased with our business results to start the year. In January, we completed the acquisition of RS Electronics, our fifth acquisition since mid-2010. These five acquired companies had annualized sales of approximately $460 million, as of their respective closing dates.

With liquidity increasing to over $570 million and financial leverage dropping to $2.1 million at the end of the first quarter, we have the capacity and financial flexibility to continue to fund our strategy of above market organic growth plus accretive acquisitions. Our acquisition pipeline remains robust and we see excellent opportunities for acquisitions to further expand and strengthen our portfolio.

In summary, we are operating in 2012 with a stronger and more diverse business. Stronger and more diverse in terms of customers in end markets, products and suppliers, and geographies. Our long-term outlook remains unchanged. We expect the economy to recover slowly over the next several years. We expect the Industrial and Utility end markets to continue to grow and Construction and Data Communications to improve in the second half of 2012.

We are continuing to invest in our eight growth engines and our six operational excellence initiatives. We have generated strong momentum across our Company over the last few years and are focused on executing our One WESCO growth strategy, which provides customers with the leading supply chain solutions they need that meet their global MRO, OEM, and capital project requirements.

Now Steve Van Oss will provide details on our first-quarter results as well as our outlook for the second quarter. Steve?

Thank you, John, and good morning, everyone. Our first-quarter results reflect the positive impact of our sales and marketing initiatives, combined with good operating discipline. We expect 2012 to be another solid year for WESCO. I will review the quarter results in context of the first quarter guidance we provided on January 26, as part of our fourth quarter earnings release. In our guidance, we said we'd expected organic sales to grow 6% to 9%, with acquired sales to add approximately 2% to sales growth.

Our first quarter sales increased 12.2% compared to last year, including a 2.6% positive impact from acquisitions. This is our seventh consecutive quarter of double-digit, year-over-year sales growth, while also increasing backlog.

In addition to the impact from acquisitions, we had one additional work day in the first quarter, which positively impacted sales by 1.6%, while foreign-exchange negatively impacted sales by 0.2%. Therefore, our normalized organic year-over-year sales growth rate for the quarter was 8.2%. Year-over-year price increases for the quarter had an estimated positive impact of approximately 1.5%. Sales per workday increased sequentially throughout the quarter and we were pleased to see strong sales in March as it set an all-time record for sales per workday for any month.

The growth from acquisitions came from three companies acquired over the past 12 months. RECO, with annual sales of approximately $25 million, was acquired on March 15, 2011, and Brews Supply, with annual sales of approximately $50 million, was acquired on October 3, 2011. RS Electronics, with annualized sales of approximately $60 million, was acquired on January 3 of this year. TVC Communications, which was acquired in December 2010, is now reported as part of comparable sales.

Sequential sales for the first quarter increased approximately 1%, and were down approximately 0.6% after adjusting for the one additional work day in the first quarter. We believe our sales and marketing initiatives are continuing to result in market share gains as historically sequential sales in the first quarter are down approximately 2% to 5%.

Our guidance on gross margin said it had been expected to be at or above 20%. Our first quarter gross margin of 19.9% was negatively impacted by mix, driven by stronger project sales. We continue to work on gross margin expansion efforts, and believe we have additional upside of 200 basis points over time.

SG&A expenses for the quarter were $228 million, or 14.2% of sales, compared to $214 million, or 14.9% of sales, in the prior-year quarter, and $228 million in the fourth quarter of 2011. Approximately $5 million of the year-over-year SG&A increase was related to our RECO, Brews Supply, and RS Electronics acquired businesses. We continue to make tightly manage SG&A expenses, maintaining our overall cost discipline, while investing in our growth engines and productivity initiatives.

Our operating margin guidance -- we expected to be at or above 5%. Operating profit for the first quarter at 5.2% of sales was $83.5 million, up 29%, or 70 basis points over last year's operating profit of $64.7 million and 4.5% of sales. Our target for 2012 is to increase operating margin by at least 40 to 60 basis points through a combination of gross margin expansion and fixed cost leverage.

Operating profit pull-through, measured by year-over-year incremental operating profit dollars divided by year-over-year incremental gross profit dollars, is a financial metric WESCO uses to gauge the effectiveness of our operating disciplines. Our objective is to achieve an operating profit pull-through of 50% or greater. Our first quarter operating profit pull-through rate was approximately 56%.

In the first quarter, our capital expenditures were $4.5 million. We believe our investments in people, technology, and facilities are paying off, and we expect to continue these internal investments to support the growth of both our sales and profitability.

Interest expense reported for the first quarter was $9 million, versus the $12.6 million for the prior year. We favorably resolved a long-standing tax appeal with the IRS for the period of 2000 to 2006. As a result of this tax appeal resolution, there was a reduction in non-cash interest expense of $3.2 million in the quarter. Our tax rate guidance said we'd be approximately 30% to 32%. Our first quarter's effective income tax rate was 29% compared to the 28.4% rate in the first quarter of 2011. The quarter's tax rate was favorably impacted by $2 million of discrete items.

Net income for the fourth quarter increased 42% to $52.9 million, and resulted in an EPS of $1.03 per share on 51.3 million fully-diluted shares outstanding. Earnings-per-share net of the one-time non-cash interest expense adjustment were $0.99 for the quarter. This is our sixth consecutive quarter of EPS growth of over 35% on a year-over-year basis. This compares to net income of $37.3 million and an EPS of $0.74 per share on 50.4 million fully-diluted shares outstanding in the first quarter of 2011.

Free cash flow for the fourth quarter was $53.8 million compared to $26.2 million in last year's first quarter. We continue to target free cash flow conversion of at least 80% of net income during 2012.

Our average all-in cash borrowing cost for the first quarter, including commitment fees, was approximately 4.7%. Liquidity, defined as invested cash plus committed borrowing capacity, was $572 million at the end of the first quarter, compared to $354 million at the end of last year's first quarter. Net working capital days for the first quarter sequentially improved approximately 10% and were consistent with last year's first quarter.

Our financial leverage ratio at year end was 2.1 times total par value debt to EBITDA, which compares favorably to last year's first quarter ratio of 3.4 times. This quarter's leverage is the second lowest reported leverage ratio in our history as a public company. We are close to the low end of our targeted leverage range of 2 to 3.5 times par debt to EBITDA.

Moving to our outlook for the second quarter, we expect second-quarter total sales growth of approximately 10% to 12% above last year's second quarter. This sales outlook includes acquisitions sales of approximately 2% and assumes the same sequential pricing impact in foreign exchange rates. We believe second-quarter gross margin should reflect the positive impact of our margin initiatives resulting in gross margin at or above 20%. We expect operating margin to be approximately 6%, and maintain an operating profit pull-through in the range of 50%. The second quarter's effective tax rate is expected to be in the range of 30% to 32% for the quarter.

We continue to believe the pace of economic recovery will be slow, and that we are well-positioned to take share and outpace economic activity in a slow growth environment. Last quarter, we stated our full-year outlook for sales growth was 7% to 11%, with at least two points of growth coming from acquisitions. Based on a stronger start to the year and our current momentum, we are raising our full-year sales guidance to 8% to 12% growth. I would now like to open up the conference call for questions.

We will now begin the Question-and-Answer session. (Operator Instructions) Deane Dray; Citigroup.

Special good morning to Steve. Welcome back as Interim CFO. Our first question is, the significance of hitting or coming close to 6% operating margin? I know long-term, you're looking for an 8% goal. But you said before you have to hit 6% before you get to 8%. So just talk us through where the significance of hitting 6% in the second quarter?

Yes. I think, 6%. Dean, and good morning, by the way, and I know, Steve thanks you for that. That warm welcome back. But it was really an important mark for us to get back to for the entire team and I'd even say for me personally. I joined the Company in mid-2004, and the best we had ever done up to that point, being a public company for five years, was 3.X% EBIT.

And we had set a target to get to 6% operating margin, which we did as a team. And then we had to deal with the challenge that we've been managing our way through. And hopefully we are on the other side of that. We see ourselves on the other side of that now, this global recession. And we had margin contraction through that.

So getting back to the 6% was really an important mark for us as a team. We've got our sights set on it. And I think the good news is we've got very good momentum that we've built up over the last couple of years, executing this strategy. And we're going to continue to plug along. We said once we get back to 6%, we've got to reset our sights to get to 8% over time. And that's something we will be talking about at our Investor Day in August of this year.

And then on end markets, can you comment on utility sales? Really strong. And then, follow up there also with some color regarding expectations on a reacceleration on Construction and Datacom picking up in the second half?

So, we are very pleased with the results that we're posting in Utility. Energy demand was up last year after being down in 2009 and 2010. Similar to what we've seen in really this last three quarters in a row in particular. We feel good about our momentum.

We've got three successive quarters or three consecutive quarters of double-digit sales growth. What's notable about the first quarter, as what was notable about the fourth quarter for utility, we have three major end market customer categories inside Utility; investor owned utilities, public power, and utility contractors. So, as was the case for Q4, Q1, and Q1 as well, all three grew double digits. So, I think that speaks to a nice balance.

From our perspective, I'll tell you that the recovery is transmission led. But it is including generation -- new generation and environmental upgrades and some grid spending. We are currently supporting multiple transmission projects and communications infrastructure projects with material supply and logistics services. So, we saw -- Utility was a challenge for us as we came through this recovery, and the Utilities reacted pretty aggressively. We were hopeful we'd get a return to growth last year and it is really performing nicely for us. So, we feel good about that.

Maybe one fine point on Utility that to add is, we are seeing the benefit fundamentally of increasing our scope of supply and services with our current customers. But we've also had some nice new wins. And we typically don't talk about that. But there's one I'd like to highlight that we had in the latter part of 2011. And it's a win with Tennessee Valley Authority. I think it is just reflective of an integrated supply model and we're implementing that across TVA's entire fleet of over 50 power generation facilities.

I know I went probably a little bit longer on Utility. I know there probably will be a lot of questions around it. It is not that we are seeing in the end market, where we play in the power chain really driving our growth, as much as we feel very good about our execution. And it was encouraging too to see Hubbell's results. They came out today as well and had strong results. So, that's encouraging I think for all of us that serve Utility.

In terms of Construction, our view's unchanged. We think the markets are in a bottoming process. They were somewhat stabilized at a low level, but the reality is a broad-based expansion has not yet begun.

Actually, one could take a look at Q1 and say it is actually a little more concerning because non-resi starts were down double digits in 2009 and 2010. They were down mid-single digits in 2011, low to mid single digits. They are down double digits in 2012. That data came out earlier this week in terms of starts. And it is across all the verticals inside of non-resi. I'll tell you the underlying fundamentals are still weak.

With all that said, our performance has been extraordinarily strong against what I would call headwinds. And we had thought headwinds would start to moderate. At this point in Q1, they have not. We posted eight sequential quarters, or eight consecutive quarters, of sales growth in Construction against markets that have been down. We grew our backlog again after growing it the last two years in 2010 and 2011.

I'll tell you the results are balanced for us, both US and Canada. And in the US, we had good balanced growth across the regions, and not really any pockets of softness. So, I feel really good as we have felt good I think over the last seven to eight quarters about our construction performance.

It is our view that the underlying fundamentals will improve as we move into the latter part of the year and in the next. If they do, if they don't, I think we're still executing our strategy and we are showing the ability, I think, to deliver against that.

And I think your last question was Datacom, and let me hit that kind of head on. When we had our last earnings call, we told you we started off soft in January. The softness continued in February and March. It was down mid-single digits in the first quarter. It did grow sequentially, though, versus Q4 low single-digits.

It was fundamentally driven for us. So, I'm not going to say this will be true for everyone else in the market. It remains to be seen. But it was fundamentally driven for us to government. The Datacom sales of government customers really drove our decline. Overall our government sales were up 9%. Which is very nice results. But the Datacom piece is where we experienced the softness.

At the recent International Security Conference in Las Vegas in late March, and from a variety of other sources, I think people are really kind of confirmed weaker demand than expected for Datacom in the first quarter. So, a positive indication for us is that we grew our backlog, and our backlog is up over 20% in the first quarter for Datacom versus prior year, and versus end of year. So, that is an encouraging sign. And the final point I'd make is that CBC, we've had over a year now. It's performing very well, and grew mid-single digits in the quarter. So, we are pleased with those results.

Great. Thank you. And congratulations on that TVA win. That's a huge customer to bring on board.

Yes. Thank you, Deane.

David Manthey; Robert W. Baird.

First off, for Steve, when you mention that the pricing impact you expect in the second quarter to be similar sequentially, do you mean the rate year-over-year? Or, if the overall pricing environment remains the same could we actually see that diminish a little bit against more difficult comparisons?

I really was talking about year-over-year. We are seeing normal price increases coming out of the supply base. Different than what we saw previous 18 months when we were getting more multiple price increases. And this is despite a back drop where copper impact has dropped. Copper was -- actually had a negative impact of about $10 million or so, or 1.5 points in the first quarter. So, put that in the backdrop of an overall 1% to 1.5% up. So, we think it's going to be more of a normal pricing environment going forward.

Okay. And then second question, in terms of the gap between distributors that have advanced service and geographic capabilities and those that don't, I'm wondering if you can give us any tangible evidence around your success in global accounts and integrated supply? And then just as somewhat related, maybe not, but if you could just give us what you're seeing in terms of the shift from stock to special order to drop ship business since the start of the cycle?

Dave, I'll kind of touch the first one. One of our eight growth engines is global accounts and integrated supply. And, again, that is, call it, some variations of the business model that serve multi-site customers. We had very strong results in Q1, to address your question directly. We were up over 15%. And that's organic with those quote, unquote business models into the multi-site customers. So I think we are continuing to show very nice results with those capabilities. Steve, you want to talk about the mix a bit (multiple speakers) drill on that?

Yes. We saw a higher mix in the first quarter on the project side than we were anticipated. Net nets really was the delta on -- at or above on the 20%. So with that adjusted, we've been slightly above it. To tag onto what John said, what were really seeing in particular in our global account customers is a healthy balance sheet and a resurrection of project activity.

And we think that if you look at that as a differentiator between the locally dependent distributors and what we are able to do across wide geographies with these large customers, they are the ones that are spending the capital. And I think that is also helping our above market growth rates in the non-residential construction. So, both the initiatives in our global accounts and our position I think with a large company with a strong balance sheet on large projects, is helping out. And it is driving a little bit more of mix toward project business for us.

The only other thing I'd say is, just to tag on maybe another fine point on Industrial. The trends that we've seen where a customer is outsourcing, and I'll say and Steve touched upon it, but I'll say specifically spending capital now versus adding head count. We see those trends continuing.

They clearly continued based on our customer relationships we have with our customers in Industrial in Q1. And our expectations are much higher on behalf of our customers, not just for supply chain process improvements and savings, but just overall integrity of the supply chain. And that bodes well for us. So I think that's some of the underlying drivers that are enabling us to really work and get traction with those business models.

Ajay Kejriwal; FBR Capital Markets.

Good morning. First on the gross margin goal. Over time, you expect it to improve. But maybe remind us, what's the biggest opportunity near term? And then, what would be the two or three buckets you'd be looking to improve on over the next 12 to 18 months?

Yes, Ajay, there are numerous items. I think the good news on that is there's a lot of areas that we attack in that arena. So it includes pricing mechanisms and how you stratify various customers. A big part of this is we are working with our people on customer selection. Doing business with those type of customers that appreciate the value that WESCO brings to the table, both in terms of scope of product and scope of geographic reach. And then in the area of procurement, making sure that we are appropriately leveraging our spend across the regions. And we've been doing a fair amount of work within our procurement organizations to better position the Company to do that.

And then we are always working, I think it is important if you look at the size of our Companies, we continue to grow via the double-digit organic growth, and adding the acquisitions onto that, it improves our position with our suppliers. And so, it allows us to take advantage of the various rebate programs that they have. So, it is a multitude of things. And I would say that they all take time and that you would see that starting to ramp up and it is not one quarter, but it is multiple quarter impact.

Got it. Thank you. And then on Datacom. I know you said backlog improved nicely. So it sounds like you expect things to pick up. But maybe if you could give us a little bit of a broader picture of how you think about this market?

We've seen kind of a little bit of choppiness last couple of quarters. Is this a pause and then you expect growth to resume? Or is there something more going on with regards to how customers are thinking on how to spend on new projects and upgrades?

Yes. I'll tell you, we are still, in terms of the end market, and the applications, we are still bullish. Very bullish. And when we look at our play, it is broader than data communications. Communications and security, is one of our eight growth engines. And communications is composed of both Datacom and Broadband Communications. So, there has been, I think depending on what sources you want to look at or site, some choppiness in the data center driven parts of the market over the last couple quarters.

Industry analysts that specialize in Datacom are still predicting growth rate in the high single digits. It has come down a bit. And I'm talking about a CAGR, high single digits over the next couple years. It has come down a little bit. Then there's key opportunities like, which is not insignificant, and I think it was a few calls ago that Deane Dray cited what was in the paper that week about the Federal Data Center consolidation that is going to close 1,200 data centers by 2015. And they are going to be replaced by larger energy-efficient data centers, cloud computing, et cetera. That's going to provide significant opportunities for growth.

And fundamentally, when the construction markets begin a meaningful recovery on the non-resi side, structured cabling footage sales, quote, unquote, increase based upon construction projects. So, I think we are still very bullish mid to long-term. Our growth engine is communications and security. I might mention that our security products and capabilities, we've never broken that out. We are going to put a little more spotlight on that in this year's Investor Day in August. It clearly is an area where some competitors have delivered some very strong results over the last couple of years.

But I'll tell you the security market, the IP secure and physical security market are still growing double digits. And our sales were up double digits in the first quarter. That's buried within our Communications growth engines.

So, hopefully I've given you a little bit of color. It's our view that we'd see some improvement in the latter half --- latter part of this year, second half of this year, that is. And I'll tell you we still have a little bit of residual learning curve issues on our system conversions. So, as we look at the quarter, it's clear that what drove our performance was government customers for Datacom. We've had some -- actually some other good results inside that. I think, fundamentally, it was down driven by that. And it's both a combination of market and a little bit of our learning curve residual issues.

Yes. That's very helpful. Maybe one last one from me, just on the April sales, if I got that right, you said mid single-digit growth. So, maybe any color on that? What you saw? Is there is any impact from holidays? And then, if you can tie that with your second quarter sales growth overall.

Yes, I'll comment. Steve may want to add onto it. As we've done, what has been our custom, when we do our earnings call, we don't put out monthly sales results. But we clearly give you the view of what we've seen so far in the current month. We are mid-single digits right now in April. And, yes, the Easter holiday occurred earlier this year than last, so --- but we are not adjusting for that at this point.

We've got a view of the second quarter. We reflected that in our guidance. And I think it's a reflection of and an indication of the execution that we've been delivering for one or two or three quarters, but really 2010 through 2011 and the first quarter of this year. Steve, I don't know if you want to add anything.

I think you covered it real well regarding the holidays. I'd just say, we have a confidence level in our forecast which goes beyond this holiday season. So, nothing else to add.

Excellent. Thank you very much.

Sam Darkatsh; Raymond James.

Three quick questions if I might. First off, could you give us, John, an update on the CFO search with respect to the timing, or the type of candidate that we might be able to expect? I know you're looking externally.

Yes. We have -- I won't give you a number of candidates who have been in to Pittsburgh so far. But, let's just suffice to say, it's more than a half a dozen. So I'll give you -- it is interesting from this perspective. I think the market is yielding some excellent talent. And -- number one.

Number two, I think that our increased transparency as a Company over the last few years, and the fact that if you look at our Investor Day materials, our strategy that's out there. And then the result in our execution, I think is boding well for us as we talk to candidates and discuss not only what they are bringing to the table clearly, because we have our spec, and we're going to make sure we meet our spec. But also the value proposition, the value creation opportunity.

So, with that said, we're grinding through the process. We have gotten exposed to some nice talent. But we are going to be very thoughtful with it. And I think what's good from my perspective, and I know from Steve's, that we've got the bench strength to continue to run the Company well as we conduct this search. So, I'm not going to put a timeframe on it. But as soon as we've landed a candidate and we've gotten them through our board as well, we'll be public with that.

Next question. Steve, you mentioned the project mix was higher this quarter. Reminds me of a question I used to ask you back in the day, which was your out of stock versus your direct ship mix. What is that overall now? And if you could remind us as to where it typically is in a cycle and what that might tell us about where we are in the overall cycle?

You know, it's interesting through the cycle it doesn't change dramatically. But as you know, a couple of points can have an impact on our gross margin percentage. So, it was up a couple of points. To put it in perspective, our Project business, or what we call Direct Shipment, generally ranges in that 40% to 45% range.

The Stock business ranges in a similar number, and then the remainder is what we call Special Order Sales, which has characteristics of both. It can be a Project business that needs to be brought into our Company and staged, therefore it becomes special order because it runs through our warehouse. Or it can be a normal, what would be considered a normal day to day stock item, but for a customer that we don't routinely stock.

So, the Project business tends to jump around three or four points over a year's period of time. Last year, weather-wise, I think was a little rougher. We had a little milder start that may have been part of the win. But I think a part of the delta coming into the first quarter this year with the project being higher, I think the real thing driving it is really more of us winning better with our big industrial global account customers.

One thing I'd like to add. We're talking about 10 basis points off of our 20 plus where we expected, or what we were driving to get to deliver for the first quarter. It is absolutely mix. It is a little bit on shipment type mix, which is where your question was, Sam. The other mix impact is business mix.

And with a very strong Utility sales results, 20% plus, and a very strong, and I mentioned earlier as a response to a question, integrated supply and global accounts. And they each were above 15%. But integrated supply in particular, that business mix drives it a bit.

I think what's real interesting is again that's gross margin. We've always said the incrementals were excellent. We delivered very strong EBITDA's expansion. We had pull-through above 55% on a reported basis. And if you were to adjust for the acquisitions, it's north of 60%. And so, it just shows again the power of the operating leverage of the model.

Last question, if I might, and if I missed this, I apologize. Could you talk about the international markets a little bit? Canada, Latin America. Not only what are you seeing but where are you in the expansion of that growth initiative Company wide?

Yes. Very good results in Q1, double-digit growth. We feel really good about the traction we are getting in our international markets. I think we spotlighted that more than we ever had previously in last year's Investor Day. Les Kebler went through that. We are increasingly getting requests from customers to provide solutions to their operations where we are ready serving them, we are serving them well in the US, Canada, or Mexico for that matter in other locations.

It's not just global accounts, it's integrated supply, as well. So, I think we've got a terrific opportunity pipeline. I will tell you, we are still very much throttling and governing that to make sure that as we're growing double digits there and it is nice and it's profitable. But we want to make sure that we manage that growth well and the top priority, as I've said for some time now, remains in our front and backyard, which are these large fragmented markets in US, Canada, and Mexico.

When you say double-digit, you're talking about excluding the acquisition of some of that business?

Yes.

Anthony Kure; KeyBanc.

Just wanted to touch on the 2012 Outlook. You mentioned the change to the positive on the sales side, but wondering if you could also maybe put that in context on the gross margin, or maybe operating margin target if there is any update there.

Yes. I think if you look at what we've done historically, we provided an outlook at our Investor Day. And then when we went through our Q4, full-year 2011 earnings call we gave an updated outlook for the year --- what we saw for the year. We gave an outlook for Q1 which had a little higher sales growth range for the quarter. We've come in now and we are above that range. We've given a range for Q2 that is a bit up. And as Steve mentioned in his opening comments, we've taken the sales range up just a bit for the year.

But we've not communicated how that blows through. I can tell you this, and the way to think about it would be, we continue to maintain our 50% pull-through as our target and drive for that. And as has been our custom the last couple years, we'll give a more fullsome update after we get through Q2 in our Investor Day in the early part of Q3.

I think what's going to be important, really, is to see how the second and third quarter develop. For us, that's going to determine the year, clearly. We feel really good about our execution and results to start, and again we grew our backlog. But non-resi being down double digits in Q1 is a bit surprising to us, quite frankly, after only being down single digits last year. We would have expected single digit declines and then beginning to move towards flat. But that has not -- that has not started yet this year.

Okay. Thank you for that clarity. And then just a little bit more on pricing. It sounds like another large distributor, maybe not a direct peer for you guys, but a large distributor, raising prices in February. Just wondering, with your lower price contribution for the first quarter and maybe the second, any expectation or insight as to your pricing trends and the ability or latitude to raise prices here going forward?

Yes. I would say past is prologue in that arena for the most part. Pricing, particularly in a lot of the categories we're at, when you get into any area with commodities almost goes on a weekly basis. Very competitive market out there. And we've got programs in place too to drive those -- any cost increases through and we are looking to expand that, as well. But I would say it would be normal price type environment. More stable, more normal for 2012 than what we've seen in the past.

Okay. And then last question is just on interest expense. Obviously a little bit lower in the first quarter due to that discrete item, or due to that one-time item. But going forward, what would be a good number to model for the remainder, more along the lines of the normalized interest expense from 2Q and beyond?

You'd be looking at, take the first quarter, normalize that for the adjustment and then work cash flow into it down. So, it would be a minor slow decline as the year progresses.

Steven Tusa; JPMorgan.

Can you just maybe talk about what you're seeing in the automation channel in the US?

Solid results. And I think the only thing I'd like to spike out is, as we move through the quarter, in Q1, and I think you are referring to industrial automation and (multiple speakers). So my comments are with respect to that, Steve. As we move through the quarter, and then moved into Q2, I would say momentum building and strengthening.

Okay. Great. Thanks.

Matt Duncan; Stephens & Co.

Congratulations on a good quarter. First question I've got is going back to the gross margin outlook. You talked about the 200 basis points of improvement you think you can get there. Can you detail a bit more about, specifically, what that's coming from? And then secondly, if you could maybe put some numbers around how quickly you think you can ramp it from the 20% area up to that 22% goal?

Sure. If you go back to the last two Investor Days that we did, we had a little bit of a breakout on that. And you can think about, and it hasn't changed, it's pretty specific formula. And you can look at there's areas that relate to two components of that. We are talking about a gross margin expansion. The basis of that starts at billing margin which is what we net acquire a product for versus what we sell it for. So we've got initiatives around that.

I mentioned earlier, we're still working on the cost side equation. I also mentioned what we are looking at customer selection and the ability to categorize size and nature of customer and try to do some on the price side. There is a series of items in between what's known as billing margin and gross margin. We call it our spread. And those would be supplier volume, rebates, transportation, cash discounts and the like. And we've got initiatives based at that. So, it'll be a blend and a balance between the product side of it and then the program side of it.

Okay. Thanks. And then on the leverage. You got that down to 2.1 times now. You noted that is the second lowest in your history as a public company. Can you talk a bit about what the plans are for the balance sheet? I know you guys are actively looking at acquisitions. If you don't close something soon, is there any thought around maybe returning some cash to shareholders? Or would you rather keep that in the coffers for acquisitions?

We've got this question. We have increasingly been getting this question over the last two quarters. We have a very strong and robust acquisition pipeline. It's a key part of our value creation strategy. It's great that we are down near the low end of our range. But we are down near the low end of our range because of the operational execution. And shows the operating leverage of our model.

It gives us even greater flexibility to continue to work the acquisitions. And we've done five since June of 2010. We feel great about, and as we've mentioned, we put dedicated resources in place and we are working away at that. So, we've gotten this question increasingly, and what we've said is we'd have to be below two, well below two, and be there for a sustained period of time and not have acquisition opportunities before we would seriously consider that.

John, are there any larger acquisitions in that funnel right now? Or are they all more like the Brews-type size that you've been making recently?

There's a wide range. And you know, look, we are always looking at midsize and larger size, too. But that doesn't mean anything would be imminent, if ever. So, it's a very robust acquisition pipeline. And I feel, and Steve may want to comment, I feel better than I ever have about our ability to strategically manage that pipeline and proactively work the targets. What's really ideal for us is to work the opportunities and to acquire these in a non-marketed transaction. And I think we have a pretty darn good track record, particularly since we put these additional resources in place since mid-2010 of doing that.

The only thing I would add to John's comment, if you take a look at the progress we've made with our big models, our global account, our integrated supply, and then the operational excellence we've been able to do in our operations, it's created more flexibility for us to look more broadly and strategically at product channels and the like to add to the toolkit that we take to our large customers. And they are really looking to continue to consolidate their spends.

And a final point on our cash flow direction, acquisitions is certainly a target, but our first use of it is to funnel into our ability to grow our Company organically and to drive our core businesses forward, and then acquisitions. And we are in good shape at this point in time and I don't see changing that formula in the near term.

Steven Fisher; UBS.

One follow-up on the acquisition discussion. Is there anything changing in the gestation period of acquisition, say from the time you identify a target to the point of agreement?

No. There is a wide variation. So, a classic answer to that is, it depends. It depended previously, it still depends. It really does depend on that particular target. What the governance issues are. I would say if you look at it, and aggregate it, and analyze it over time, there is no notable changes.

It ranges from multiple months to multiple years.

Okay. So, we shouldn't interpret the reduction in leverage instead of acquisitions as being anything more challenging about getting deals done?

No.

Absolutely not. I think what we've done is we've out performed our core operational expectations. And so, we had excellent cash flow in the first quarter where we exceeded net income. So, it's the operating leverage, it's the cash generation that's been above our own expectations that have brought that down quickly. And that's with doing these five acquisitions, $460 million of annualized sales since June of 2010.

Okay. And then just to clarify, are you reflecting an assumption of slower growth in industrial markets in your sales outlook for the rest of the year?

No. But that doesn't mean that -- we don't give guidance by segment as a customer category, cluster segment, industrial utility. But fundamentally, the industrial market that -- we've seen some slowing in terms of activities. And as we move through 2011, into the early 2012 in terms of the end markets, but they are still growing. So, our Outlook is basically more of the same. They are still going to grow at this moderate rate. I'm talking about end markets and applications.

Our focus is how do we increase our scope of supply, capture new customers, leverage our global accounts integrated supply business models, this One WESCO strategy of selling our whole portfolio, that remains intact. And we think that's the driver behind our performance versus the market.

Ryan Merkel; William Blair.

Just one question from me. I just wanted to get your thoughts on the US manufacturing renaissance theme and low nat gas story. Is that something you are seeing and could benefit from?

Yes and yes. I think -- we are very much looking -- first of all, from a --. I think it's terrific for this country. But put that aside. For us, as a business team, it represents excellent opportunities for us. And I put this in the category of, this is an outstanding asset that's going to be operationalized and monetized in the US. It's like tar sands is to our Canadian business is what it is to our US business. Absolutely outstanding growth prospects over the mid to long term.

Christopher Glynn; Oppenheimer.

Steve, just in your comments on the sequentially flat organic, better than normal seasonality for some negative trend there. Attributed that to share gain. I'm just wondering, if you continue to outperform normal seasonality is that your expectation? Or why wouldn't -- 1Q may have been some just inversion of normal seasonality?

I'm not exactly sure what you mean by inversion of normal seasonality. But I believe there certainly was share gain. If you look at our global accounts business and the pipeline of activity there, it continued to grow off of a historic number in the fourth quarter. That's continued to move forward.

I think what we are seeing, and John said it a couple of different times, it's successful execution of our growth engines. It's a business model that we think is playing better and better in an environment where people are worried about the supply chain and we would expect to see that to continue.

The comment I would make, and we are going to need to continue to string some quarters together and see what those results are to have enough data points to support what I'm going to say. But you'll recall that, think about Q3 to Q4 the last two years, where we had a certain expectation and we really outperformed versus what had been historical seasonality. I think what we are beginning to really see is the nature of the positive aspects of how this new portfolio performs. And our portfolio has different characteristics to it in terms of end markets.

Industrial is clearly our largest end market, and construction is not anywhere near the size it was. And Utility has now grown. And then through the product category lens, you look at our product categories, and we've laid that out for all of you. But I think we are beginning to really see. Now it is going to take again more quarters and continuing to do this to see it, but I think we are seeing the indications of that.

Okay. And then on the linking up of the electrical product package to the Datacom side and those types of projects, is there a lot of heavy lifting to do left to link those? Or are you all kind of set up there?

We are set up.

Okay. Great. Thank you.

It's in execution mode.

Adam Uhlman; Cleveland Research.

I was hoping to just get a little bit more clarity on the utility numbers and how we should think about that business as the year progresses. There is a lot of data points that you've thrown out there. The transmission projects that are helping the sales growth now, but I assume that those will start to tail off as the year progresses.

And you're indicating the distribution industry is going to be up low to mid-single digits for the year, and your supplier, Hubbell, is expecting 4% to 6% growth for the year. So, if you could just help me to understand how much of the growth now is coming through the transmission activity? How much from these new account wins? That would be (multiple speakers)?

That's a very good question. Our view again when we look at Utility, we look at the entire power chain, generation through transmission through a substation through the distribution grid. And we are more distribution grid-biased versus transmission, and that's just historically how the industry was structured. But also generation represents an outstanding opportunity for us, either MRO supplies to keep a generation network running, or new construction retrofits, renovations, upgrades.

So, our view is that the recovery in the overall utility market is clearly transmission led. But we don't benefit very strongly in that. With that said, we are increasingly participating in some transmission projects. But it is a fourth or fifth driver out of five in terms of what's driving our results. What is driving our results are increasing scope of supply and also new customer wins both on the ends of that power chain, generation, and the TVA example I mentioned earlier, and that's a generation integrated supply application for MRO, and then the distribution grid.

Our view on the distribution grid end market is it is growing low single digits, hopefully nudging up to mid-single digits as we move through the year. So, we're not getting the benefit of strong market growth. Residential construction, even though it's grown a bit, is still at an anemic level in terms of new housing starts. The way to think about that is what's new meter growth look like? It is very nominal.

So, we are very pleased with our Utility results. We expect it to perform well versus that market backdrop. I'll tell you, we are doing a lot better than we thought. To grow north of 20% in Q4 and in Q1 now, that's better than we thought we'd do.

Yes. That's very strong. And then, secondly, somewhat unrelated, but I guess if you look at the cost growth and strip out the acquisitions, your expenses have grown maybe 4%, against an 8% organic growth rate. I'm wondering if that ratio is sustainable as we go forward.

Again, I would use as our optimizing variable, we target to 50% pull through. That's kind of our all in optimizing metric, and we are very encouraged that as we've made incremental investments in sales resources, as Steve alluded to, and some new locations, we increased our sales force 5% in Q1. We had not mentioned that until now.

So we continue to invest in our sales force, new locations, expanding the product categories, marketing resources. As we do that, we want to make sure we deliver that pull-through and we are really encouraged. We have strung many, many quarters together now where we've delivered, soundly delivered, against the 50%. We've been above it.

Great job. Thanks very much.

Matt McCall, BB&T Capital Markets.

Thanks for fitting me in guys. This is actually Jack Stimac filling in for Matt. I had one quick follow-up on Datacom. I know you've talked about that quite a bit. But with the backlog growth that you're seeing is that a recovery from government spending or is that coming from somewhere else?

It's broad-based and it's not government driven.

Okay, and then (multiple speakers).

Your question is on backlog --- backlog composition, right? I wanted to make sure I had it.

Right. I was just wondering, it sounded like you got some good growth there, if that was kind of a snap back from the government or if it's (multiple speakers).

No, no, it is broad-based. I would not say that's government driven.

Okay. Then if I could ask one more quick one. Maybe if you could just talk about what you're seeing from your Lighting business. We have heard that LEDs are either at or nearing margin parity with traditional lighting, maybe if you could just give us a little color on that? Thanks.

Yes. We grew our lighting growth engine high single digits. I'll give you a number, 8% essentially in the first quarter. It is one of our eight growth engines. We actually feel good about those results. Again, that's without any acquisition. Nice solid core growth.

And we're increasingly seeing lighting, let me say solid state LED opportunities, both indoor and outdoor. So, we actually, we're very fortunate in that we've got a terrific set of global leading suppliers that we partner with. And I'll mention, it's a Philips, it is a Cooper, it is a Hubbell, it's an Acuity and others. And just terrific world-class companies we get the chance to partner with and bring complete lighting solutions to the marketplace.

And it's not just indoor again. The LED outdoor we are also seeing some nice applications. So, I think if you talk to any of the lighting manufacturers, what they would tell you is that the rate of LED introductions versus what they had expected is exceeding their expectations in terms of the mix.

Okay, great. Thank you.

Hamzah Mazari; Credit Suisse.

This is Chris Parkinson on behalf of Hamzah. Most of my questions have been answered. I just had a quick follow-up longer-term. With regards to your long-term gross margin guidance, could you just add a little more color there and parse out some of the moving variables? I imagine it's a confluence of factors, but where do you see the greatest areas for upside, so to speak?

I think I'd comment, I'd just point you again back to what Steve did in our last Investor Day in August of last year, where we exploded out the pricing related initiatives and levers, the cost side supplier management related issues and levers, and a series of other factors. I think we are working all those in combination and had some margin improvement pilots going on across the Company. We don't typically get into that kind of depth in our quarterly earnings call, but it's something that we plan on.

We went through that in detail last year. It is something we are going to explode out in this year again. Give an update and go in more detail. Kind of peal the onion back even deeper. So, it's very comprehensive. We work on that aggressively. But we've got a large diversity to our mix, whether it's product category, customer applications, suppliers. And so there's an awful lot of, there's a number of initiatives we are working. Thanks a lot for that question, Chris.

I think that's it for today. We may have gone just a minute or two over. I'd like to close by thanking you for your time and your continued support. We're encouraged with our start in 2012. And we've got good positive momentum that we've carried out of the last two years into this year. And we feel good about that. We are continuing to make our investments in our business. We think we've got a strategy and operating model that's working. And we are focused on producing improved shareholder returns. Thank you very much. Have a great day.

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