Wesco International Inc (WCC) 2012 Q4 法說會逐字稿

Good morning ladies and gentlemen and welcome to the WESCO fourth quarter and year end 2012 earnings conference call. All participants will be in this 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 now like to turn the conference over to Mr. Dan Brailer, Vice President of Investor Relations and corporate affairs. Please go ahead Sir.

Thank you. Good morning ladies and gentlemen. Thank you for joining us for WESCO internationals conference call to review our fourth quarter and full-year 2012 financial results. Participating in the earnings conference call this morning of the following officers. Mr. John Engel, Chairman, President, and Chief Executive Officer, and Mr. Ken parks, Vice President and Chief Financial Officer.

Means to access this conference call via webcast was disclosed to the press release and was posted on our corporate website. Replays of this conference call will be archived and available for seven days. Additionally, relating to the morning's release of our earnings announcement, 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 a supplemental presentation with the Securities and Exchange Commission, and posted it on our corporate website. During today's call, we will be web-casting selected slides from the supplemental presentation to facilitate our view of the results. We anticipate a large number of questions today following the December closing of EECOL Electric. As a result, in order to accommodate as many investors and analysts as possible, we respectfully ask that questions are limited to one per person.

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

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

Thank you Dan, and good morning everyone.

We issued an expanded supplemental presentation earlier this morning in conjunction with our earnings press release. We will be using this presentation today to provide additional insight into our fourth-quarter and full-year results, including the results of the EECOL acquisition which was completed in the December. Our results reflect solid execution of our one WESCO growth strategy in a continued positive impact of our productivity and lean initiatives on our business. We were pleased to complete the acquisition of EECOL electric in mid-December, which strengthens our Canadian operations and establishes a solid foundation for WESCO in South America. On a full-year basis we grew sales to a record $6.6 billion, through EPS at a double-digit rate for the second year in a row, and generated $265 million of free cash flow, all while completing four acquisitions. Last year included many noteworthy accomplishments, and I'm very proud of the extra effort and results delivered by all of our associates around the globe, working together as the one WESCO team. As a result of playing offense of the last several years, we have strengthened our business and enhanced our position in the global marketplace.

In the fourth quarter, organic sales reflect a continuation of the market trends experienced in the third quarter, where strength in Canada and international were offset by weakness in the US. Sales in Canada international were up by over 10% in the fourth quarter, offset by the softness in the US and this was driven by the low single-digit decline in data-communications. Organic sales per workday varied across the quarter and were down 6% in October and were up 6% in November and were down 6% in December. The market trends experienced in the second half of 2012 are expected to continue into the first half of this year. Our first-quarter start is consistent with this expectation. With January organic sales being down approximately 2% month to date. Overall, we expect to see the benefits of our investments, growth strategy, and effective execution continuing in 2013 with the second half being stronger than the first.

We acquired four strong businesses in 2012 and eight since June 2010 and have added product and service offerings to our portfolio, expanded our global footprint and improved our overall market position. RS Electronics, Trydor Industries, Conney Safety, and EECOL Electric were completed in 2012. These four acquisitions strengthened our global business and provide substantial growth opportunities in 2013 and beyond. The WESCO and EECOL combination enhances our business mix and diversification. Close to one third of our sales will now be outside the United States. In addition, we added new supplier relationships and strengthened our general supplies and lighting controls product category.

Sales to our industrial customers continue to grow but at a lower rate in the second half of 2012. We have had 12 consecutive quarters of year-over-year organic sales growth driven by new wins and in expanding scope of supply with our global accounts and integrated supply customers. In the fourth quarter we are especially pleased to secure a major win with one of the world's largest technology companies. This was for a multi-year global supply arrangement for data-communications equipment and electrical products. We have also secured Conney Safety winds with our current global accounts and integrated supply customers. As we enter 2013, the opportunity pipeline remains robust at over $2.3 billion, excluding approximately $500 million in government opportunity.

Nonresidential construction markets remain challenged in the US, but continue to grow in Canada and around most of the world. The growing strength of the residential construction recovery is a positive leading indicator for the nonresidential construction markets later in 2013 and into 2014. WESCO is performing well against this market backdrop. Overall backlog is down approximately 3% versus year-end 2011, but remains at a healthy level. Backlog outside the United States is up over 10% versus prior year-end. Bidding activity levels have increased, particularly for upgrades, retro-fit's and energy efficiency projects. Through this point in January, I am pleased to say that are book-to-bill ratio is tracking above 1.0. As expected, organic sales to our utility customers continue to grow the fourth quarter and were up approximately 7%, including an estimated $12 million of sales associated with the power restoration efforts following Hurricane Sandy. We have had seven consecutive quarters of year-over-year organic sales growth driven by new wind and an expanding scope of supply with our utility customers.

Our integrated supply capabilities are in high demand and are increasingly being used by utility to improve the efficiencies and effectiveness of their supply chains. In the fourth quarter, we were very pleased to secure another major win with a large investor in utility. In this case we will be providing procurement, warehousing, vendor managed inventory and logistics services for their T&D operations. Sales to our CIG customers include schools, hospitals, property management firms, retailers, financial institutions, cable companies and governmental agencies. Sales in the fourth quarter were down due to a large data-com government project that shipped last year.

Bidding activity remains active in the commercial and institutional markets. Government bidding activity also continued and our opportunity pipeline is strong at approximately $500 million, despite government budget constraints. Through our expanding international footprint, we are gaining traction with global government contractors, which is helping offset other slower growth segments. In the quarter we are pleased to sign a master service agreement with the government prime contractor to provide electrical products to US government military bases but they are supporting around the world.

Now Ken Parks will provide the details of our fourth-quarter and full-year 2012 results, and our outlook for 2013. Ken?

Thank you John and good morning. I will review the results and the context of the outlook we provided in October, during our third quarter earnings call. To do so, I will first address those items not included in that outlook. As John mentioned, in December, we completed the EECOL acquisition and redeemed are $150 million 7.5% high-yield notes. The impact of these two transactions, along with two weeks of EECOL results, had a net EPS drag of $0.11 in the quarter. EECOL sales were $24 million during that last two-week period of the year a seasonally weak time period against operational earnings during this period, we incurred interest expense on the acquisition financing. In addition, we incurred approximately $4 million of nonrecurring SG&A acquisition related charges during the quarter.

The redemption of the high-yield notes resulted in a one-time debt extinguishment charge totaling approximately $3.5 million. The charge is comprised of two components. First, the prepayment premium of approximately $1.9 million, and the second, the non-cash write-off of deferred financing costs totaling approximately $1.5 million. This charge is identified separately in the P&L. After factoring in these adjustments, our adjusted EPS was $1.06 in the quarter. During the third quarter earnings call we expected fourth quarter consolidated sales to grow between 2% and 4% year-over-year, with acquisitions that have been completed at that time contributing 2 to 3 points of the growth. Consolidated sales in the quarter were $1.64 billion, an increase of 3.5% year-over-year. This included 4.3 percentage points of growth from acquisitions and an estimated 50 basis points favorable foreign exchange impact.

Organic sales declined 1.3% versus last year's fourth quarter. And sequentially, organic sales declined 2.4% which is in line with our typical seasonality. The net sales impact from Hurricane Sandy was approximately $12 million benefiting our utility business. We believe we are well-positioned to participate in the catch up of deferred projects, as well as the commercial and infrastructure rebuilding of the storm affected areas across the Northeast.

For the full year, sales reached a record level of $6.6 billion, a 7.4% increase over last year. Acquisitions contributed 3.3 points of that growth while FX was a drag of 25 basis points. Organic sales growth for the year was 4.4%, including approximately 1 point of pricing. Backlog remains at a healthy level with backlog outside the US up over 10% versus the prior year-end. Core backlog declined approximately 3% from year-end 2011 and 4% sequentially from the end of Q3. In the October earnings call we estimated the fourth quarter gross margin would be at or above 20.2% and we came in at 20.4%, excluding EECOL. A decrease of 20 basis points over the prior year, but 40 basis points higher than the first half of 2012.

We continue to focus on our longer-term gross margin target of 22%, and feel good about our progress during the quarter. For the full year, gross margins were 20.2%, and flat to last year. Reported SG&A for the quarter was $240 million compared to $228 million in the fourth quarter of last year. Included in the quarter's SG&A were approximately $4 million of nonrecurring EECOL related acquisition charges, as well as $11 million of SG&A from the 2012 acquisitions. Core SG&A for the quarter at $225 million was $3.2 million lower year-over-year, and 14.3% of core sales. That is the same as last year. Core employment levels were up 1% year-over-year, as we continue to selectively invest in support for our growth engines. But they remained unchanged overall from the end of the third quarter. Sequentially, core SG&A increased $5 million from Q3 and that is primarily as a result of the nonrecurring acquisition related charges.

For the full year, reported SG&A including EECOL nonrecurring charges of $4 million, and acquired SG&A of approximately $30 million, was $925 million versus $872 million in 2011. Core SG&A excluding the charges and the acquisitions was $891 million or 14% of sales. That is 20 basis points better year-over-year. As our growth moderated in the second half, we tightly controlled our SG&A investments, maintaining overall cost discipline while investing in our growth engines and productivity initiatives. Also, in our October earnings call we estimated fourth-quarter operating margin would be at or above 5.6%. Operating profit in the fourth quarter excluding EECOL and the acquisition related charges was $89 million or 5.5% of sales, down 30 basis points from Q4 of last year. That was a tough comparison, compared to last year, including the favorable impact of supplier volume rebates and projects. Acquisitions other than EECOL added 10 basis points to the quarters operating margin. For the full year, operating profit reached $373 million, excluding the nonrecurring charges or 5.7% of sales. That is a growth of 12% and 30 basis points, compared to 2011.

And our investor day in August we outlined our objective to expand operating margin by 40 to 60 basis points annually through the combination of gross margin expansion and operating cost leverage. We continue to make progress towards that objective. Operating profit pull-through measured as a year-over-year incremental operating profit dollars, divided by year-over-year incremental gross profit dollars, is a metric WESCO uses to drive operating margin expansion while investing in the business for growth. Over time, our objective is to consistently generate core operating profit pull-through of approximately 50%. Our reported operating profit pull-through was 42% for the year, excluding the nonrecurring charges. And operating profit pull-through for the core was 51% for the full year. Interest expense in the fourth quarter grew to $14.7 million versus $12 million in the prior year, as a result of the acquisition and financing. Our weighted average borrowing rate for the quarter was 4.5%, and that is flat to 2011.

The fourth quarter effective income tax rate was 28.7% and was 29.5% on a full-year basis. Net income for the fourth quarter was $48.6 million, which includes the impact of the nonrecurring acquisition in debt extinguishment charges, excluding these items, net income was essentially flat to last year. Reported earnings per diluted share for the quarter were $0.95 and adjusted EPS was $1.06 excluding EECOL and the nonrecurring charges. For the full-year, net income was $224 million, up 14% from last year's net income of $196 million. 2012 reported EPS was $4.38 per share and that is up 10.6% over 2011. Excluding EECOL and the nonrecurring charges, adjusted EPS was $4.49 or 13.4% growth year-over-year.

ROIC was 11.6%. That is down 30 basis points from 2011. Through the third quarter, ROIC had shown steady growth, improving 70 basis points during the first nine months of the year. While the EECOL acquisition had a negative initial impact on ROIC, we remain committed to our long-term target of 15%. Free cash flow for the fourth quarter was strong at $95 million or 195% of net income, compared to free cash flow of $86 million or 157% of net income in the last year's fourth quarter. For the full year, we generated $265 million of free cash flow. That is 118% of net income, compared to $134 million or 68% of net income last year. We exceeded our 80% target of free cash flow to net income in every quarter of 2012. Capital expenditures were $3.6 million in the fourth quarter and $23.1 million for the full year. We continue to invest in our people, our technology and our facilities through both CapEx and operating expenses.

WESCO has historically generated strong free cash flow throughout the entire business cycle as a first priority we redeployed cash through organic growth and acquisition initiatives to strengthen and profitably grow our business. Second, we work to maintain a financial leverage ratio of between 2 to 3.5 times EBITDA. The completion of the EECOL transaction and redemption of our $150 million, 7.5% high-yield notes, were financed by combination of an $850 million term loan and $425 million drawn under our existing credit facilities. The weighted average cost of debt for this financing was approximately 3.8%. As a result of the acquisition financing, our leverage ratio at year end stepped up to 4.7 times, but remains less than 4.0 on a pro forma basis.

Liquidity, defined as cash, invested cash plus committed borrowing capacity, was healthy at approximately $300 million as of the end of December. We expect to reduce our debt to our targeted range of the next several quarters while we prioritize cash flow to debt reduction in the near-term. As a result, we expect to be back in our target range of 2 to 3.5 times before the end of 2013. As previously communicated, we expect to EECOL to be accretive to WESCO's earnings per share by approximately $1 in 2013. That acquisition will be accretion from EECOL is coming from the addition of a well-run, profitable company financed with low-cost debt and certain ongoing tax synergy's. EECOL will be run as a dual brand go-to-market operation and therefore we have not assumed any sales our cost synergy's. The synergy's we have included relate to benefits that will be achieved relative to the ownership structure utilized in the transaction.

I will now turn to 2013 first-quarter and full-year outlook. We believe the pace of economic recovery will continue to be slow, particularly in the first half of 2013. We are confident that our value proposition, especially in low growth economic environments, favorably positions us to take share and outpace economic activity. We expect first quarter consolidated year-over-year sales growth of approximately 12% to 14%. Excluding EECOL, we anticipate sales to be relatively flat, in the range of down 1% to up 1% in the first quarter. Sequentially, organic sales are expected to be flat to down 2% from the fourth quarter, while different from last year, this is consistent with our longer-term seasonal pattern. In the first quarter, we expect gross margin to be at or above 20.6% and operating margin to be at least 5.5%. The first quarter's effective tax rate is expected to be in the range of 27% to 29%.

Now taking a look at the full year. Consistent with the first quarter, we expect first half sales growth to be flattish, excluding EECOL and up mid-single digits second half of the year. Including EECOL, we expect sales to grow between 16% and 18% for the full year. This includes no additional acquisitions beyond those already completed. Gross margin is expected to be at least 20.7% and operating margin to be at or above 6.2%. As a result of the acquisition of EECOL, the full-year effective tax rate is expected to be in the range of 27% to 29%. Putting all of this together, we expect full-year diluted earnings per share to be at least a $5.75.

With that, I would now like to open up the conference call to your questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session.

(Operator Instructions)

David Manthey of Robert W. Baird.

First off, the overall baseline guidance looks like it implies 50 basis points of gross margin improvement and 50 basis points of EBIT margin improvement in 2013. Should we assume negative SG&A leverage earlier in the year like you are guiding for the first quarter and then turning positive in the back half? Is that generally what we should be thinking about?

Yes, that is exactly the way the you should think about it. Clearly in a lower growth environment we're going to get not much leverage out of the SG&A line. It will happen in the second half.

Okay. And then just quickly the assumption of minus 1% to plus 1% in the first quarter, but yet you're minus 2% so far. Was the first week significantly worse than what you have seen in subsequent weeks in January?

Yes. As we move through the month, we have had a nice improvement trajectory in terms of lessening the decline versus prior January. We have maintained a very healthy book-to-bill ratio throughout the entire month, with a nice margin above 1.0. So that says we are booking more orders and we're shipping sales out the back door. So the number that we gave approximately 2% or a little under 2% is through couple of days ago. The last couple days can be somewhat nonlinear at times. But I think you have got a sense of the momentum.

All right. Thanks very much.

Deane Dray, Citi Research.

Just to stay within the question line on guidance, just kind of big picture. Very ambitiously you said the guidance for the year back in August. And that is $5.40. EECOL gives you $1 and that would imply $6.40, but obviously the world has changed. And maybe if you can address the ways the end markets have changed for you? Expectations on volume, expectations on price and maybe more color regarding the end markets? So bridge for us and the revised guidance from on a base level, volume price and then color around end markets.

Deane, let me first set that context for the answer. Just think about 2012. For us it ended up being, which is not what we expected as we entered the year or moved through the year, kind of a two-speed year I'd call it. The first half we had very high single-digit organic growth at the 9% plus level as you recall.

We had our investor day in early August, at that point we had some look into the July results, which we shared at the investor day. As a moved through the third quarter and into the fourth, we experienced really just a completely different set of results. We saw the end markets slow down in a meaningful way and it was really all end markets.

With the exception of the utility which we continue to post strong results as we move through the year, which is what we had expected. And so we close out the year with a second half, if you look at the entire second half, roughly flattish organic growth. A little bit above flat, but roughly flattish.

So we go from close to 10 in the first half to flat. It is our view that the first half of this year will be similar to the second half of last year. So kind of flattish organic growth. Obviously we're doing everything we can with our sales initiatives, our demand creation to try to do better than that, but that is our current view and are planning construct.

And our planning construct for the second half is returning to a more, what we would expect to deliver throughout this recovery, a mid single digit organic growth. And when you put a first-half, second-half together, that would suggest that organic growth for the year that would be low single digits. Whether it's 2%, 3%, 3% plus, 4%, it would be in that kind of range. And then layered on top is the EECOL acquisition.

A final comment I would make with respect to the end markets, Our view is that, industrial continues to grow. The growth rate has slowed down. We are very encouraged with our pipeline, and we are very encouraged with our new wins and global accounts and integrated supply. And we have seen some customer destocking efforts.

So we have not seen indications that they have started to restock as of yet, but we are hopeful that they will return and that affect will occur at some point in the first quarter, hopefully, or the second quarter of this year. In terms of utility, we would expect it to continue to perform nicely through the year.

We still view the end market for where we play, which is more distribution clearly than transmission, to be low single digits this year. We feel very good about our share capture initiatives. We had one very large win in Q3 as we mentioned in the last earnings call and now another large earnings in Q4.

So it is our view that we will be mid to high single digits is what we will deliver in utility organically this year. And with some upside potentially on that, I think that will determine what we can do really in the second half as these new customers come online and we are ramping because we are in a implementation phase.

Now with respect to construction, again we are encouraged with the residential recovery, it is meaningful and underway. It is actually and some degrees kind of strengthening as we move to the right, which is encouraging. AVI has been above 50 for a few months and there is a little bit of noise that it moves around month to month.

But we are hearing from contractors and even when work with design architect firms is that there's work starting to be -- that activity level is increasing, our bidding activity level is starting to increase. Our book-to-bill is above 1 so far in January. But I think when we look at how we think it is going to manifest in the year, we really see it as more back half loaded.

We have all been hoping and watching and waiting for the fundamental non-residential recovery for construction. Resi is the precursor and we are finally seeing that. So I think that hopefully now we're at a place where we see that the meaningful way and second half and to 2014. And CIG, interestingly enough, we have got some healthy bidding activity levels.

Government actually grew a few percent in the quarter. So we did actually a very good job relative to the backdrop. It is the same story we have talked about, quite frankly, for a few years now. We still represent a low share in a large market. So even though spending constraints are increasing, we are doing a disproportionately better job in what is still a large market with a lot of addressable spent. Does that help?

It is a fabulous landscape coverage there of end markets. If I can just a sneak one more in. The idea of the increase in bidding activity and still a softer first-half outlook and one of the dynamics that I know is important within WESCO is your willingness not to chase low-quality business. So maybe, are you seeing low-quality business and you are passing on this? You're willing to take some lower organic revenue growth? But just hearings those dynamics and that's it for me.

I have been of the company since middle of 2004 and I know Steve as here many years before me. And it has been our priority and now we have got Ken helping out clearly. It has been our priority to get fundamental product and gross margin expansion. We work hard on it for a long, long time. The last two years in investor days we have given greater insight all the various pricing increasing levers that we are working.

As we reflect upon and objectively analyze 2012, I think we can say that in what is a relatively tough set of end markets, tougher in the second half because we really pushed hard and still had flattish organic growth. We think we have done a very nice job in terms of gross margin expansion. And I think that we are beginning to really see meaningful, sustainable traction in our gross margin improvement initiatives.

And that is from our perspective is absolutely a testament and an indication of our discipline around customer profitability and the tightness of orders we are willing to take. We have always had that discipline. What we have not had for years is getting the fundamental margin expansion in a tough environment. I think that we are starting to get it now. And you can see with our outlook for 2013, we have another step up in fundamental gross margin expansion.

I think you can really see it when you look at the first half versus the second half of 2012. I commented on it and the earlier remarks. We talked about this along the way that it is not going to come from huge incremental chunks. It is going to come from all of the work that is being done and has been done over the last three years of investment in the supply chain, as well as pricing. And we felt good in the third quarter that we saw a step up and margin and the fact that we saw it hold at those levels in the fourth quarter tells us those initiatives are really taking hold.

Great thank you.

John Baliotti, Janney Montgomery Scott

John or Ken, I was just wondering, you are able to add inventory given your balance sheet and just given the size of the company. Wondering to that to the extent that you're long-term focus on improving gross margin, is that helping your relationship long term with your suppliers? That you can add to your -- even though end markets are sluggish and lack of visibility, you are still able to add in?

That's a good question John. Maybe a will give you a multi year view of this. And we talked about this at length, Steve and I, as we managed through the global recession we were facing the precipitous declines. We took about $100 million of inventory out when we lost 25% of our top line several years ago at the trough of that recession.

But we did not take out as much inventory, and we are very thoughtful about what we took out relative to what some competitors were doing and we were particularly focused on high availability of the fast-moving SKUs that we thought our customers would want.

And then as we've come out of the recovery, we have done eight acquisitions now, we have been applying lean to working capital processes. I think we are more efficient and more effective. But we're positioned where we've diversified the portfolio, and we have added new supply relationships and we have been able to selectively add inventory in both our distribution centers and selected branches in support of our suppliers' new product development and introduction plans, planned efforts.

We are increasingly hearing back from suppliers that they value that in their relationship with us. And we've used the term playing offense. For them what that means is two-fold. Adding inventory versus -- everything relative, versus maybe some of their other channel partners. And also adding sales force in local and regional markets where particularly we saw we have joint opportunities we could go after.

So our description of playing offense from a supplier lens, is those two levers you asked about inventory. So I think yes, we are clearly hearing that back from them. And I'll tell you, the overall trend that we have talked about, consolidation occurring across the value chain, we are absolutely hearing from customers that they would like to do business with a smaller number of larger suppliers. That bodes well for us.

But we are hearing it from suppliers now increasingly that they would like to do business with a smaller number of larger, well-capitalized, more disciplined channel partners and with the consolidation that is occurring in the supply base, major moves last year, ABB buys T&B, Eaton buys Cooper, that just makes that relationship even more important from both our perspectives.

So that helps their cost structure and therefore you are able to share on the benefit?

Yes.

Then on the other side of the chain with your customers, as a number of distributors have talked about, some of their customers especially the back end of December, destocking a basically shutting down until they used up everything on the shelves. Are you anticipating them coming to you more frequently? Or do you think that they are going to build more of that back to a more steady level on the shelves? How do you see that interaction with you going?

So the first part of your question or your comment, we did see that. We saw similar effects that the other distributors you have referenced in there are a host of them. We just don't -- we're not going to hang our fourth quarter on that. There is volatility. I have been of the company eight years now and every December there's always some special cause reasons why it is better or worse than what the prior year was. But I think that is the state of affairs and I wanted to make the comment.

Right now, what we're seeing is more of real-time support. We have not seen a meaningful or sustained restocking cycle start. Do we think one could and will start? I think it is completely a function of, and this is our belief, of the end market demand our customers are seeing and to the extent that they see that, and they feel that they are confident that it is going to continue, I think the restocking cycle would happen in a more meaningful way. We are not betting on it, which is what is reflected in our first-half outlook. But if it happens I would tell you clearly that is an incremental upside.

Just finally, could you argue that if they didn't restocked but they did more real-time interaction with you that that would actually be better for you in terms of your competitive advantage?

I think it is better for us absolutely in the mid and long term and you could even argue in the short term because the fact that where we have sticky relationships and we can leverage our large supply, base our large inventory, the first question you had, it makes us ever more -- There is a greater interdependence and it is occurring on both ends of the value chain. We're in the middle. We have customers on one end, suppliers and the other. So yes, to the extent that the restocking occurs, that would be incremental sales off of what our outlook is for the first half.

Okay thank you.

Adam Uhlman, Cleveland Research.

I was wondering if we could dig into the data-com business and maybe little bit more color on the trends you are seeing. But more importantly, how you see 2013 unfolding? Thanks.

Q4 I mentioned we were down low single digits. And I think Ken has been helpful with this. In retrospect of the new CFO, he's taken up objective look hard at last year this year. I think our level of what I will call a financial analysis around the quarter and the composition of the quarter versus prior years and sequentially has stepped up a level. So I compliment Ken on that.

But I tell you when you look at Q4 of 2011, there was one very large data-com project that benefited that quarter. We also had [SVR] that benefited the quarter and it was north of $20 million. You I can tell you, if you adjust for that -- you always are going to have big puts and takes, but this is a unique one-time non-recurring projects that had some unique aspect around it. Data-com would have grown in the quarter; it would have grow the low to mid-single digits.

So we work very hard on data-com. I can tell you the market is challenged and remains challenged. Our feedback from suppliers and other sources confirm weaker than expected demand in the fourth quarter. And the outlook is that is going to continue here. At least in the first couple quarters.

Data center growth is continuing. I think there are fewer green fields though. There are more retrofits, more [co-lows]. As we have spoken in the past, we can offer both electrical and data as a combined offering, so we think we are in a unique position and have an advantage to offer versus some competitors.

But I'll tell you that I think the first half is somewhat challenged. Our view of the second half is we are hopeful we will begin to see some recovery. I think that will be tying more to the non-residential construction recovery. Which is the way we are looking at it.

For the Internet protocol called IB and physical security markets, as a percentage of our overall data-com business is not as large as some of our competitors. David Bemoras at investor day spiked that out.

I do want to cite that because I did not mention that in our comments yet, we had double-digit sales growth in the fourth quarter and for the full year 2012 we would expect that to continue in 2013. So we're getting very nice results. And our broadband communications business had a very solid fourth quarter. It was up right around the double-digit range versus prior-year. And that was encouraging.

But all in all I will tell you that the challenges that the data-com market is experiencing and I think we are seeing from other major supplier partners and competitors, they're talking about that as well. That it is our expectation that, that would continue at least the first couple quarters of this year.

Great thank you.

Noelle Dilts, Stifel Nicholas.

First, was wondering when we look at these on the utility side, when we look at the Sandy-related sales should we view that as incremental? I heard some other folks much of that there was so much Sandy work that core distribution work was actually down a bit. And excluding Sandy we are looking at a flattish year-over-year growth in that market. Can you comment on the trends you're seeing in distribution versus transmission excluding Sandy?

I'll hit the last part first, Noelle. I think the core distribution market is at best a very low single-digit growth. I made those comments. We have been having some nice new wins. We feel very good about the utility business with or without Sandy in the quarter. So we are optimistic and bullish about our value proposition and our ability to deliver results there.

Your comment about incremental, the utility sales we experienced in the fourth quarter related to Sandy are absolutely incremental and you consider those one-time in nature because it is in support of immediate real-time store restoration. Outside of what we experienced in utilities, we did not cite any other net sales impacts. In other years, depending on if you think back five or six years, where we had major hurricanes rip through the Gulf region, we have had broader-base impacts on other parts of the business.

For this, net/net it was kind of a push. You could even argue somewhat it may have been a slight drag. But let's say net/net that is a push. The way to look at that for utilities is you get purely incremental and not non-recurring. Now, what is interesting is, some of those sales were with existing utility customers. Some of the $12 million was with utilities that we don't have the equivalent of a global accounts agreement, we call it an alliance agreement or an integrated supply relationship.

So what is interesting is come back to John Baliotti's question, because of our inventory position we're a national utility distributor -- it is only it's an HD Supply. We are able to move inventory around the country and we had a team that works 24/7. We moved people, product and transportation assets into the Northeast region to support Sandy restoration. We had a number of customers that were not our customers that we were able to support with real-time sales. So we hope to build that into a potentially future business.

Okay great. That helps a lot. Thanks so much.

Josh Pokrzywinski, MKM Partners

Just want to walk through EECOL a little bit here if we could. So the dollar that you guys have reiterated. Are there any assumptions that have had puts and takes underneath that dollar? I guess that's my first question will follow-up from there.

Nothing of any size whatsoever. Clearly, as we go through all of the finalization of the deal, we are estimating intangibles and doing all of those things that you do on the accounting side. But I can tell you that the model that was built behind it is spot on where we are today.

Okay. So that includes the financing? Because it looks like you guys got a pretty decent rate at close on that.

Yes it is very close to what we had anticipated. Remember as we started the financing, the summer was strong and we ended up exactly where the financing was at the time that we started.

Okay and on a sales basis, can you give us a sense, what really is forecasted in for EECOL? Are you modeling it flat with 2012? Up? Down? Given not a lot of experience with the seasonality there, or the recent trajectory other than the generic response that it has been solid and up. Can you help us with what's assumed in EECOL and maybe some seasonality?

The seasonality, it is probably not significantly different than the seasonality that we see. We will certainly go through the year and look at seasonality as they begin to report to us on a quarterly basis. But as far as growth, we are certainly anticipating growth to continue in that business. It is a growing business. And what we're looking at for 2013 is growth in the mid-to-high single-digit range on EECOL. And that is what is built into the outlook.

Got you. That is helpful. And then just going back to the base forecast in the $5.75. It seems like under EECOL then, you guys are low singles organic. I would imagine that with construction in general, with resi catching a bit here, that maybe some of the pricing pressure that you guys have seen over the past couple of year quarters starts to abate, not as much competition on project pricing. I would think that with an electrical distributor typically outpacing GDP anyway, should I think of that backdrop behind that as flat GDP?

Our planning construct is the first half is flattish organic for WESCO overall. Non-resi construction remains challenged and we don't anticipate and we have not seen it yet. January is not even over yet. But we have not seen any pricing pressures abate at all. And our planning construct would suggest that we would not see those in the first half.

It is our view that non-resi hopefully starts to begin to build and grow in the latter part of 2013 and into 2014, which supports our overall construct of, if we are mid-single digits organic for WESCO overall, that is the 2% or 3% to 4% organic for the year. For WESCO

Got you. That's helpful. Just one last one. I know that particularly the third quarter you guys were able to rein in investment and keep a little bit more of that margin. If I'm interpreting it right, you guys are looking more to go on offense here, with the expectation that things pick up in the first half? So should we see typical operating leverage here going through, as opposed to that outsized claw-back in the third quarter?

Ken and his talking points and we can follow-up later, too, Josh, and we can go through in some detail. If you take a look at fourth quarter and you look at it sequentially and then you take out the one-time non-recurring costs, the conclusion that we would suggest you should reach is that, this tight cost control of productivity initiatives remained in place. And they are remaining in place and we're putting the gas pedal down on those as we move through the first quarter.

We have the ability to play offense. We are playing offense selectively in different parts of the business. In some areas, and I'm not going to disclose where, but there other areas where we have authorized significant headcount additions that are occurring as we speak, but net/net, we're keeping a lid on the overall headcount growth. So our headcount only grew 1% in fourth quarter. Let me put it in context. The first two quarters were 2% to 3% headcount growth. Last year we were a point or so higher than that.

We would like to get back to the 3% headcount growth on the core, but we are not going to do that until we are confident that we're generating a core organic top line growth. So we're going to keep the cost control and productivity initiatives in place.

And with that kind of top line growth, i.e. no top line organic growth, the pull through remains very challenged, very challenged. And we have gone through that before. And we have to have a general cost inflation base, the people cost is our number one primary cost structure and transportation is two. And even with flat headcount, and merit increases and based comp increases and that whole set of changes in medical etc., that is going to go up 2% plus so we have that as a headwind.

What we have done in the second half of last year is our current posture as we move through Q1. We're doing everything we can to drive the organic growth higher. Through all of our demand creation in sales initiatives. To the extent that we see it, that gives us the ability to begin to earn the right to invest a little more organically. We made substantial investments on the acquisitions in 2012 and that we have to keep our eye on that ball and make absolutely sure that we work on the integration and leverage the opportunities with a one-WESCO strategy as priority number one in 2013.

Understood that's helpful. Interest expense on the year, it sounds like you guys are running low $20 million range for the quarter for on a quarterly basis. Is that about right?

Yes that's about right. All of the debt instruments are publicly filed out there now and I think if you take a look at it you would come in exactly what you are indicating.

Okay. Thank you much guys.

Thanks, Josh.

Tony Kure, KeyBanc.

I just want to talk about that given the second-half organic demand in the fourth quarter or I'm sorry the second half of 2012 being a little bit more sluggish, is it fair to assume that the true ups that the were no true ups in the fourth quarter as it relates to value rebates from your vendors or was that actually headwind on the gross margin side?

No, as you know, we saw the volume changes as we move through the second half of the year. So we came in exactly where we projected.

So that positive affect that we saw in Q4 of 2011, because we substantially outperformed our outlook that we gave in the third-quarter earnings call of 2011 as you will recall, we bucked normal seasonality where you actually grew slightly sequentially, organically in 2011 to really significant supplier volume rebates in the fourth quarter of that year. We did not have that effect in 2012. Clearly.

And no negative.

And no negative effect either. Because we ran essentially the second half was flattish organic growth and that's how we have been running it through the third quarter into the fourth quarter.

Okay great thanks. And just looking at the line item EECOL EPS accretion paid to your synergies, $0.30 or so on the EPS line, could you just remind us, maybe walk through a little more color, a little bit more detail what they all involved in the synergies line?

Right. As we referred to kind of generically, it is all about ownership structure. What it is as we're using some more commonly used tax transactions or tax structurings for cross-border arrangements between the US and Canada. That is the biggest piece. And then it is the deductibility of the interest in the US at the higher tax rate. Those are really it.

Okay great. Thank you so much.

And to be clear Tony, just because we want to make sure that you understand, that everyone understands this. Those are the synergies built into the dollar. We do not have any operational or cost synergies otherwise built in, top line our bottom line.

Right. Got it. Thank you.

We have time for one more quick question.

Matt Duncan, Stephens.

I just want to dig in a little bit more on EECOL to make sure we understand the seasonality. If I'm doing the math right, and the guidance that you have for the quarter, for total sales and then excluding EECOL looks like you have EECOL doing about $210 million in the first quarter. First of all, is my math right there? And then, I seem to recall that business is doing just under $1 billion in annual run rate when you announced it back in October. Just help us think through maybe Ken, the shape of the year in the business.

Well as far as for 2012, EECOL would have on an annual basis come in at about $900 million to $925 million. Seasonality-wise, we are estimating that it is fairly ratable throughout the year. Little bit heavier in the second and third quarter.

Okay that's helpful. And then last thing on the EPS guide, the $5.75 number, just to make sure I'm hearing all the line items right. The interest expense is going to run in the low 20%, but if I take it at that level, with operating income and 6.2%, even at the high end of your revenue guidance, I'm still maybe a shade below the $5.75. So is it really that the $5.75 would be more at the midpoint of the revenue guide? Or just sort of help me think through that.

The $5.75, the way that we modeled it out is the floor. As we have said, that is $5.75 plus. But if you look at the range, it is close to the midpoint.

Okay. All right. Thanks guys.

I ladies and gentlemen, that will conclude our question-and-answer session for today. I would like to turn the conference back over to Mr. John Engel for his closing comments.

Thank you for your time today in your continued support. We are continuing to execute our strategy of investing in our business and our people. And we're focused on delivering above-market organic growth plus the accretive acquisitions. We enter this year with a much stronger and more diverse business.

I know we didn't get all of your questions today and I can tell you that Dan and Ken are available throughout this afternoon and evening and we will make sure that we follow up with every one of you. We do have a list of who was in the queue. We apologize that we weren't able to get all of you. But we did figure that this would be a robust call given the major EECOL acquisition. Thanks again and have a great day.

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.