Wesco International Inc (WCC) 2013 Q3 法說會逐字稿

Good morning and welcome to the WESCO Distribution third-quarter 2013 earnings conference call.

(Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to Dan Brailer, Vice President Investor Relations and Corporate Affairs. Please go ahead, sir.

Thank you, Danny. Good morning, ladies and gentlemen, thank you for joining us for WESCO International's conference call to review our third-quarter 2013 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. Ken Parks, Vice President and Chief Financial Officer.

[The means] to access this conference call via webcast was disclosed in the press release and was posted on our Corporate website. Replays of the conference call will be archived and available for seven days. Additionally, relating to this morning's release of our earnings announcement, an earnings and webcast 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 presentation with the Securities and Exchange Commission and posted it on our Corporate website. During today's call, we will be webcasting selected slides from the presentation to facilitate our review of the results. As John and Ken go through their prepared remarks, they will reference specific page numbers that relate to their comments. In order to accommodate as many investors and analysts as possible, we respectfully ask that you limit your questions 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 included -- including the risk factors described therein. To make the year-over-year comparisons more meaningful, we have adjusted the nonrecurring favorable items from 2013. The reconciliation of the adjustments is shown in the appendix of the presentation. For the remainder of today's call, John and Ken will reference the adjusted amounts.

As such, the following presentation includes a discussion of certain non-GAAP financial measures. Information required by Regulation G with respect to such non-GAAP financial measures can be obtained on WESCO's website.

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

Thank you, Dan, good morning, everyone.

We posted record sales and operating profit in the third quarter and are seeing the positive impact of our on WESCO sales, productivity and lean initiatives on our business. We are pleased to see a return to organic growth in the quarter driven by improvements in construction in CIG, growth in data communications and lighting and continued strength in utility. Organic sales grew in all four end markets versus prior year.

We continue to invest in our eight growth engines and six operational excellence initiatives while maintaining operating cost discipline. In the first half of 2013, we added over 100 personnel under our global accounts, integrated supply, utility and safety businesses, as well as our pricing and supply chain management functions. In the third quarter, we added over 75 additional personnel into these areas while maintaining year-to-date core headcount growth at 1%. These continuing investments position the Company for a strong entry into 2014.

Meanwhile, we continue to execute our lean productivity initiatives and manage an active acquisition integration process and pipeline. Conney Safety grew over 10% in the third quarter after growing at half that rate during the first six months of the year and has been fully integrated into the Company. The EECOL integration is also progressing well and we remain on track to deliver our full-year EPS accretion expectation of $1 in 2013. In the third quarter, our market stabilized in Canada with constant currency sales up 2% versus prior year for both WESCO and EECOL in Canada. In addition, backlog in Canada grew sequentially as initial recovery and rebuild efforts in Alberta began in the quarter.

Operating margins expanded 20 basis points to 6.4% driven by the continued affect of cost controls. And net income and EPS grew double digits. Overall, gross margins were flat, but core gross margins took a step down versus prior year driven by a reduction of supplier volume rebates and the business mix impact of large utility and data com wins. Free cash flow generation remained strong at 90% plus of the net income in the first three quarters and continues to be directed to debt reduction. As a result, leverage is now within our targeted range on a pro forma basis and we see excellent opportunities to further expand and strengthen our business portfolio over the next year. Our fourth quarter is off to a good start with month-to-date sales in October at the high end of our 2004 -- Q4 outlook range for both the core and WESCO overall. Backlog is at a record level and our book-to-bill ratio is tracking above 1.0 at this point in October.

Now moving to our industrial performance on page 4. Sales of our industrial customers improved in the quarter versus the sales declines experienced in the first half. Channel inventories appear to be in balance with current demand and third-quarter bit activity levels remained strong. Notable customer trends of increased outsourcing and supplier consolidation are continuing. Our global accounts and integrated supply pipeline increased over $2.5 billion, and we remain focused on providing a one-stop shop for our customer supply chains needs. As a result, in the third quarter we renewed a long-term contract with a large Canadian mining company. The scope of supply includes electrical MRO and project-based materials with the opportunity to expand the service footprint outside of Canada.

Moving to construction. Nonresidential construction market remain challenged, but we -- but have begun to show initial improvements in the US and Canada. The continuing strength of the residential construction recovery this year is a positive leading indicator for future improvement in the non-resi construction markets later this year and next. Sales to construction customers improved in the quarter, marking the first quarter of growth in construction since Q2 of last year. We experienced another quarter of solid growth in lighting driven by LED and retrofit applications. Notably, we also saw a return to growth in data communications in the third quarter, after experiencing sales declines in the previous fourth quarters extending back to Q2 of last year.

Entering the fourth quarter, backlog remains healthy and is up approximately 8% versus year end 2012. Bidding activity levels have increased as well. And the non-resi construction market, despite its challenges, remains large with opportunities for new construction as well as retrofit for innovations and upgrades.

Moving on to utility. We continue to be pleased at the strength of our utility business and delivering above market sales growth. Organic sales to our utility customers grew 11% versus last year following the double-digit growth we experienced in the first half. The third quarter marks the 10th consecutive quarter of year-over-year organic growth driven by new wins and an expanding scope of supply with our existing utility customers. Customers are embracing the efficiencies offered by our innovative supply capabilities as they seek to find ways to improve their supply chains.

We continue to implement the new customer wins and we're rewarded a high-voltage infrastructure project for material supply, logistics and procurement management services for a large IOU in the quarter. The project scope for this effort includes multiple transmission segments, substation upgrades and underground power lines. We are proud of our utility team and the strong customer relationships that they have built over the last several years. We'll be hosting an Investor event at PSE&G, a large IOU at the Roseland, New Jersey facility on Monday, November 11. We hope you will consider joining us for this customer visit. If you have any questions, please contact Dan Brailer.

Now moving to our CIG performance on page 7. Sales improved in the quarter, marking the first quarter of growth in CIG since Q2 of 2012. Sales growth was driven by broadband communications and improvements in commercial and institutional, which were partially offset by continued declines in government due to budget constraints and sequestration. Despite the challenges in the overall CIG market, we continue to secure new wins, including the award of a multi-year contract to provide electrical materials and supplies to a large US airport. This customer consolidated their distributor base and selected WESCO as their preferred supplier.

With that, I'd now like to hand it off to Ken Parks. Ken will provide the details of our third-quarter results and our outlook for the balance of 2013. Ken?

Thanks, John, and good morning.

On slide 8, I'm going to review the Q3 results in the context of the outlook we provided during our second-quarter earnings call. And as Dan indicated at the beginning of the call, I'll speak to the 2013 results adjusted to exclude the impact of the nonrecurring items.

During our Q2 conference call, we estimated third-quarter consolidated sales would grow between 17% and 19% year over year with 2% to 4% organic growth. Consolidated sales in the quarter reached $1.93 billion, an increase of 16.6% year over year. EECOL sales were $233 million and accounted for 14 percentage points of the overall growth. EECOL sales grew 9% sequentially from the second quarter. On September 30, as previously disclosed, we sold EECOL's Argentina business to the local management team. Annual sales for that business were approximately $7 million. We do expect South America to be a long-term growth platform with EECOL's business in Chile, Peru and Ecuador as the core.

Organic sales increased approximately 3.2% in the third quarter and foreign exchange was a headwind of 0.7 points of growth. Normalizing for the impact of one additional work day versus last year third quarter, organic sales grew approximately 1.6%. Organic sales per work day grew 2% holiday adjusted in July, grew 3% in August and were essentially flat in September. Sequentially, third-quarter organic sales increased 2.3%. Backlog at the end of September was up 2% versus the end of the third quarter of last year and sequentially from the end of Q2. Year to date, backlog has grown approximately 8% since the beginning of the year. Overall pricing was essentially flat in the third quarter.

In our July earnings call, we've estimated that third-quarter gross margin would be at or above 20.8%. We were short of that at 20.5% and flat to last year's third quarter due to lower supplier volume rebates and business mix. We're disappointed that core gross margin declined 90 basis points year over year, slightly more than we had anticipated. Two primary factors drove that decline. First, was lower supplier volume rebates across WESCO, and particularly in Canada, where we had ramped up new distribution centers in 2012. The opening of both the Edmonton Wire Center and the Toronto Hybrid DC required initial stocking of inventory in the prior year. This initial build, combined with the ongoing efforts to reduce inventory in a slower growth environment, have had a larger than anticipated negative impact on supplier volume rebates this year.

Second, our data communications business grew 8% in the quarter, largely driven by strong direct ship large client enterprise network sales, double-digit growth in security products and the initial rollout of the large technology company win that we announced in Q2. Like utility, which grew approximately 11% this quarter, these data com growth drivers have lower gross margins than our average, contributing to the overall gross margin headwind. However, these new customer wins are providing incremental operating profit dollars. We continue to focus on delivering against our 22% gross margin target by executing on our pricing and sourcing initiatives while delivering solid sales growth.

SG&A for the quarter was $255 million, or 13. 2% of sales, compared to $226 million, or 13.6% of sales in the third quarter of last year. Core SG&A at $226 million was flat to the third quarter of last year and declined approximately $6 million from this year's second quarter, even while we continue to invest in the business to support our growth engines and operational excellence initiatives. Core employment was up approximately 1% from last year's third quarter and from the year end. In addition, this year's Company wide merit increases were affective on July 1.

In the second quarter conference call, we expected operating margin to expand to a least 6.2% in the third quarter. Operating profit for the third quarter grew 20% to $124 million, improving operating margin to 6.4% of sales versus 6.2% in Q3 of last year. Sequentially, operating margins expanded 40 basis points, demonstrating the strength of our operating model. With low organic sales growth and gross margin headwind, we were able to more than offset the impacts of headcount investments and merit increases to generate healthy, sequential operating margin expansion.

Interest expense in the third quarter increased to $21.3 million versus $12.7 million in the prior year. And that's as a result of the EECOL acquisition related to Janssen. Our overall weighted average borrowing rate for the quarter declined to 3.9% from 4.4% last year. The third-quarter effective tax rate was 27.2%, in line with our expected range of 26% to 27%. Net income increased by approximately 18% to $74.5 million compared to $63.4 million last year.

Now taking a look at the slide 9. Third-quarter earnings per diluted share grew 14% to $1.42 from $1.25 in the third quarter of last year. As shown in the chart, the core business was a $0.16 drag on EPS driven by the soft organic sales growth, gross margin headwind and growth in WESCO shares, which was partially mitigated by effective cost management and control. On the other hand, EECOL contributed approximately $0.33 of EPS accretion in the quarter and did step up from the contribution we saw in Q1 and Q2. Year to date, EECOL has contributed $0.74 of EPS accretion to our overall results and we maintain our outlook that EECOL will be accretive to WESCO earnings per share by approximately $1 in 2013.

Taking a look at cash. Over the last eight quarters, we've generated more than $0.5 billion of free cash flow, or approximately 110% of net income over that period. Free cash flow for the third quarter was $72 million and it's $180 million for the first three quarters of 2013. Third-quarter operating cash flow included a $20 million -- $21 million contribution to the EECOL pension plan which was agreed to and funded by the seller as a part of our acquisition of that business. While Generally Accepted Accounting Principles require the contribution to be classified as operating cash flow on the face of the cash flow statement, we've excluded it from the calculation of free cash flow because of its nonrecurring nature and its funding by the seller.

The acquisition of EECOL increased our leverage ratio above our targeted range of 2 to 3.5 times EBITDA. As we stated at the time of acquisition, we're committed to prioritizing near-term cash redeployment towards debt reduction until we're comfortably back within our target range. At the end of September, our reported leverage ratio was 3.6 times EBITDA, which is down from 4.7 times at year end 2012 immediately following the acquisition. More importantly, our pro forma leverage ratio improved to approximately 3.4 times EBITDA at the end of the quarter, bringing it back within our targeted range. Pro forma leverage net of cash was 3.2 times EBITDA at quarter end. We expect to continue to delever the Company as we move through the balance of the year.

In September, we executed an amendment to our accounts receivable securitization facility that increased the commitment to $500 million from $475 million and reset the maturity to another three-year term, lowering our borrowing spread and unused fee. At a full utilization level, the amended terms would reduce interest expense by approximately $700, 000 annually.

Our overall cash redeployment strategy remains unchanged. Over the long term, the first priority for cash redeployment is to invest in our business through both organic growth initiatives and acquisitions. Liquidity, defined as invested cash plus committed borrowing capacity, was healthy at approximately $546 million at the end of the third quarter and has increased nicely from $300 million at year end 2012, and $429 million at the end of the second quarter. ROIC at the end of September was approximately 10%. Although the EECOL acquisition has reduced our overall ROIC in the short term, we remain focused on our long-term target of 15%.

Now to the Q4 and full-year outlook. We continue to experience an economy that is yet to show signs of a meaningful recovery in many of the end markets in which we operate. Our full-year outlook provided in July called for mid teens total sales growth with low single-digit organic growth reflecting second half sales improvement over the first half. In the fourth quarter, we expect organic sales to grow between 2% and 4% and total sales to grow 14% to 17% including EECOL. In light of the sales growth coming in at the low end of our range for the third quarter, full-year sales are now expected to grow between 14% and 15% including acquisitions, a 1 point reduction from the top end of the range provided in July. Organic sales are still expected to be essentially flat to last year.

We expect gross margins to be approximately 20.5% in Q4 and approximately 20.7% for the full year with operating margins approximately 6% in the fourth quarter and 5.9% to 6% for the full year. Our effective tax rate is expected to be between 26% and 28% for the fourth quarter and 26% and 27% for the full year. Putting all this together, we now expect full-year diluted earnings per share in the range of $5 to $5.20, adjusted for the nonrecurring items that we've discussed today. The reduction from our previous EPS outlook in July of at lease $5.15 to $5.35 is driven by the reduction in the top end of the sales range and the resulting impacts on gross and operating margins. As has been our practice, we'll update our full-year 2014 outlooks during our Q4 earnings call, which will be in January.

With that, I'd now like to open up the conference call for your questions.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

David Manthey, Robert W Baird.

First off, could you talk about the growth in the utility segment on a same customer basis, meaning if you exclude the implementation of customer wins that have happened in the last 12 months, I would assume that's growing at a slower rate than 11%. Could you talk about what that number might be?

David, good morning, welcome. I don't -- we don't have that number off the top of our head. I'll give you this sense. That the overall utility market has clearly slowed down. And I think we're hearing it across our supplier partner base. And as you know, there's some of that market they serve direct, and a piece of it they serve through distribution, of which we're one of their partners. And so we've seen a general slowdown clearly in the transmission portion of the power chain and distribution has been bumping along, no growth or very low single-digit growth. And so that's the backdrop we're facing.

We feel that we're doing very well with that tough set of end market conditions, taking share, holding our own, expanding our scope of supply with current customers. And then as we've talked about over the last number of quarters, we've added a number of new customers. So we don't have -- I don't have a real good number on that, that's something David we'll take offline and we'll make sure that you get a good number for that.

Okay, great. The second on EECOL, how does that 9% sequential growth compare to historical 2Q to 3Q growth rates for them?

It is a step up from the typical sequential growth rate that they've seen in Q2 -- from Q2 to Q3 historically. But as you remember, we talked about on the last call that the second quarter for EECOL was somewhat held back by the weather patterns that they experienced. So not only did we start to see a little bit of stabilization and recovery in Q3 in their business, but it's off of a number that was typically lower in Q2. And if it was lower in Q2 than it normally is.

And, David, since you brought it up, I want to give a little more color on this now because I'm sure there'll be a number of questions around EECOL. But when we were here a quarter ago, we clearly had some challenges in the second quarter in the Canadian market particularly in the Western Provinces due to the late and rainy spring. Alberta floods were the worst in history and a little more than a third of our sales are out in Alberta in those Western Provinces. So projects came to a halt and we had expected that that would start the recovery effort and rebuild efforts to start in Q3 into Q4 in the second half of the year.

We're encouraged by, first of all, our core performance in Canada. We've been taking share we believe consistently for every quarter for a number of years now. But on the WESCO core business, not EECOL in Canada, it grew 7% sequentially on a Canadian dollar basis, constant currency basis which is the right way to look at it. And so we feel good it's was real nice momentum and the backlog moved sequentially nicely. So that sets up nicely. But when you look at EECOL, we're right around essentially a double-digit sequential growth.

And if you look underneath that David and look at the composition, it was really driven by the warehouse sales. Again, three quarters plus of our sales mix is warehouse based, but that was encouraging for us. And I did mention that for October start is strong both for the core and for EECOL and it's at the upper end of our Q4 outlook range. In particular for EECOL, it's that strength that we built through the third quarter has absolutely started so far in October.

Great, thanks a lot, John.

Deane Dray, Citi Research.

On the guidance to get some additional insight here, if you take the inputs on the bottom-up guidance that you give on each one of the metrics, we're getting somewhere around that [$1.26] to [$1.30] range, if we've got the math right. But if you do the other simple math as to how you've done year to date and back those out and adjust for the share count and so forth, there's some implied upside on the top end. And I just want to make sure that that's what you're suggesting, is that is additional upside and if that's the case, what has to go right to see that additional EPS?

Sure. I mean look you're reading it -- I think you can do the math with the inputs and you come out exactly where I would say my inputs take me. But the opportunity to the upside is truly driven by what happens with the top line. And as John indicated, we're currently running at the high end of our guidance range for the quarter. If that continues, that could deliver upside, but we're early enough in the quarter where we've really got to see how we move through.

Great, that's helpful. And then if we can highlight one end market that looks like there's some changes happening on the positive side, it's in construction. So some additional color in terms of your non-resi outlook, so much of what you do is on the retrofit side, so you might have to wait around for starts and value in place to change from the dodge numbers. But what are you seeing now in the combined both retrofits and then the starts and you highlighted bid activity, so additional color would be helpful.

Yes and I'll come back to Ken's point about the fourth quarter. We're encouraged by the start in October and I think what's going to be important is how the fourth quarter unfolds. And we have some sense of what the different parts of WESCO have done historically versus typical seasonality. Sometimes we match historical seasonality, [other times] we've broken it for a number of years as well. EECOL is the first time we will be the owner through the fourth quarter, Deane. The thing I would comment on that I think when the freeze comes, the hard freeze, really is a trigger point for as customers spend before the freeze.

And so we're encouraged by those initial results so far in October. It's an active pipeline, too. It's not just a warehouse, it's small and mid-size projects in both EECOL and WESCO in Canada which gets to your construction comment of [bits]. And typically if you look at EECOL, at least as they're sharing with us, and we'll see how this cold season unfolds. October and November are typically stronger and their normal seasonality would suggest there's a fall off in December, but again that's more weather driven, [the threes], et cetera. So I think it'll be interesting to see how that unfolds and I think that'll be a determinant really on how Q4 ends when the flash bulb goes off on December 31.

In terms of non-resi, we've had some backlog growth sequentially now for a few quarters. And we thought it was setting up that we begin to see some improvement in sales. We're encouraged that we've had a return to growth. I'll give a little more color on this. If you look at -- just break the WESCO into three major regions, US, Canada and everything outside US, Canada for construction only. We have sequential growth in all three pieces, so -- in terms of sales growth. So I think we've got this improving momentum, we're really seeing it more in the small and mid-size projects as opposed to the larger project by and large. That's not encouraging or discouraging us, it's just what we're seeing.

We do see increased bidding activity levels and particularly for retrofits, renovations, upgrades, both for energy efficiency and lighting, we're still seeing some very nice data center growth. We're very encouraged with our step up in data com growth. And now we're -- there is a -- we are seeing some of the competitive benchmarks that are out there, so that increases our encouragement a bit. And I'll tell you as we think as we set up and enter next year, non-resi has a very long runway from our perspective. And shale gas development we think is going to be an increasing opportunity and growth driver, particularly in the US, but to some degree in Canada, particularly in the US and we're well positioned to take advantage of that. We've not talked a lot about that, but I think that's a very nice growth trend we're facing into. And the opportunity for that are on-site, it's nearby and it's also upstream, downstream. So does that help?

That's real helpful. And any color regarding bid activity, how closely is that calibrated?

Yes, it's ticking up. And so again though in terms of the mix, again for construction, I'm not on addressing industrial bidding activity, which is also very robust. But bid activity on non-resi construction has ticked up a bit, but again it's for the smaller and mid-size projects.

Great. Thank you.

Josh Pokrzywinski, MKM Partners.

So not to belabor Canada here, but I think some of the feedback from your peers in a few other laterals in this space, actually we saw a down tick in Canada intra quarter. Is there anything you can help us with from the timing of the way your business falls in the sales cycle versus maybe some other peers in distribution or otherwise? Do you guys feel like you're a leading indicator there and that you've already lived through the weakness and they're catching up for that? Or is there a potential that there's a little bit of a sign wave and we have a fresh round of correction coming in, in 4Q, 1Q?

Josh, I'm glad you asked this because I think we should parse our comments a bit, I want to be very specific. I -- we've stated before and I think we've really shined a spotlight on this and this is before we acquired EECOL, that we felt very strongly that our Canadian business has performed well to exceptionally well at times over the last week 3.5 to 4 years. We had much better market data in Canada than we do in the US. And so we can say definitively we were taking share over the last three to four years on the WESCO Canada side. Obviously we worked that EECOL acquisition for a long time and if we got inside their numbers and looked at it, and they shared them with us before we acquired them, their historical financials, it's very clear they were taking share, too. So we put two very strong Companies together.

I would say that's it. I think that's what we're seeing in Q3. I'm not -- it's hard to really determine and parse, which I understand your question of how much of it is our performance, out performance versus the core market. And -- but I do believe strongly that we're outperforming in the market. And we did see some improvement in the market, and again it was -- Q2 had set up such that there was because of the weather and the flooding, it was set up to have an improvement sequentially clearly. But I think we're particularly pleased with the level of sequential improvement. To be at 7% for WESCO Canada call it the core, and then to be literally that double-digit level on a Canadian dollar basis for EECOL. It -- if we -- I would say we're driving for, but we're very encouraged to see it.

Got you. So it sounds like some of the perhaps contingency or opportunity on the high end of your guidance, if I'm understanding some of the earlier comments correctly is, you had some project deferrals, to the extent that those come through in the fourth quarter here and maybe you'll know more in the next four or five weeks, that's the upside, if not you have good visibility otherwise that things are stable?

That is a factor, what you describe. And the other factors as I described earlier really weather. So I think -- and again, what we don't know and don't have a good feel for and to be very specific about it because EECOL is essentially three quarters plus base warehouse driven sales versus direct ship. What -- and what is the effect when the freeze comes and how does it impact that versus (inaudible) direct ship and projects. All that we know is what they tell us and we're engaged in the business and what we've seen historically. So it'll be -- we'll have a much better feel as we get through the quarter. But I think that represents a factor that could be a plus or minus.

Got you. And then if I could squeeze one more follow up for Ken. Does the comp -- and I appreciate the color on October, do the comps get easier or harder or about the same as we go through here? I know it's putting a fine point on it, anything to help us with the top line would be helpful.

I would say the comps are probably over all about the same in the mix business as you move through the quarter.

The one thing we should spike out and -- is that you'll recall we closed EECOL in the middle of December last year. So essentially when we get to December and then we close the quarter, EECOL becomes part of our core that's our custom halfway through December. It doesn't affect there were consolidated reported results, but I just -- as we get through and report our Q4 results and we parse core versus consolidated. One other continuity point year to year, and we did address it last year and it was not insignificant with Hurricane Sandy and the effects. And so I think you'll recall that Hurricane Sandy was as I recall in the $12 million to $14 million or $15 million range is what I recall we said in Q4 of last year as a positive benefit to our utility business. And we don't have -- to this point, there's been no significant storm that sets up. So that just becomes a more challenging comparable just for that quarter.

Got you, understood. Thanks, guys.

John Baliotti, Janney Capital Markets.

John, seemed like this was first quarter where all four of the end markets, the major end markets were positive, I mean I know to various degrees. But if I go back, it seems like the third quarter of last year was the first quarter -- was the last quarter where all four of them had positive growth. And I'm wondering collectively, I know you gave us some plus and minuses on utility and so on, but any change you're sensing whether internally or with customers in terms of their visibility or their feelings about let's say the next 6 to 12 months?

Yes, I -- actually as we from our accounting, we were -- we had such a nice growth 2010 into 2011. And the first part of 2012 we had a very nice growth momentum and we last year became a two speed year. So we didn't grow at all four segments, end market segments since Q2 of last year. We grew a little bit in Q3, but we didn't have all four growing (inaudible). It has been extremely disappointing to us and we were ticked off about it quite frankly, and we've talked about that. So we've been pushing really hard through our execution and that's been a focus across the entire organization.

I don't sense any major change in customer sentiment or buying behavior in industrial. I still think that there's a significant opportunity for a step up in industrial if and when GDP picks up and there's confidence that the economic recovery portion of the cycle we're in is pretty stable and it's picking up. There's capital expenditures that can be released. We're not seeing that in a meaningful way. Now there's different segments there. Mining is down a bit, et cetera. But fundamentally, we are seeing a pick up or a release of CapEx. I think that represents a positive potential as we move into next year.

We are seeing -- we are stating this quarter, this is different than non-resi, is beginning to start the recovery. I think what's going to be important is honestly it's the long run way for the recovery, but what's going to be the shape of the recovery. And I think that's the -- really the key question. Once the recovery starts in -- because the resi recovery has been underway now for some time, it's been strong double digits. But if the -- you look at the nature of the resi recovery, it's not necessarily feeding a double-digit non-resi recovery. So I think the answer to that shape of that recovery is going to be important.

Utility is setting up to be a more -- still a challenging market. We're doing well because I think we're executing. But there is a depressed outlook for load growth. There's been a decline in power demand and -- which is surprising when you step back and think about it in 2013. And there's continued regulatory pressure, there's rate case battles, there's a lot of pressure by utilities that they're placing on cost reduction and productivity improvement.

Now that actually turns into opportunities for us because of what we can provide them. There is increasing investment in distribution automation and demand response along with gas plants. But our view for utility as we go through this quarter and set up for 2014, is distribution part of T&D is very low single-digit growth for the market, not speaking to WESCO's performance. But for the market, very low-single digit. And transmission we think is going to be down mid-single digits, and again for the market. And so a tougher backdrop, Again, we feel real good about our position and our capabilities.

CIG we still see a downdraft, or let's call it a headwind from government. Our government sales were down in the mid-single digits in the quarter, so -- CIG return to growth and it was driven by broadband communications, we had very nice growth there. Plus some nice wins and some uptick in some selectively in commercial and institutional. So that's the overall outlook. I don't -- we're not -- fundamental the short answer, and I gave a lot of color by segment, but the short answer is we are not seeing increasing tailwinds at this moment. If anything, I would say the headwinds have picked up a bit in utility, industrial is about the same and our outlook is. And hopefully a tailwind is going to start here in non-resi. Does that help?

Yes, that's great. How about if you strip out government from CIG, any idea or have a feeling how that grew if you strip that out? Because obviously that's been a headwind for a number of distributors and other companies?

Well our government was down in the actually low-single digits. So the decline we experienced in government, because it was double-digit declines in the Q1 and Q2, actually was not as bad -- it was only down low-single digits for government and that's embedded in that number. And so I -- it's -- we're still -- we're hopeful, but let's see if that's a real trend because that market is tough, right? It's tough. And so we had pretty good execution though in government, so I think that's part of it. But obviously you strip government out, I'm not going to give you an exact number, but we're above the 5% because the government was a downdraft.

A quick question for Ken. Ken, you guys did a nice job, you talked about the mix and how you got to the operating margin being above expectation. Did a nice job on the SG&A efficiency. And I'm wondering, you gave us some color on it, but was there anything more on a secular basis that you guys are working on that is pushing that efficiency let's say going forward?

Really the main thing that has driven the sequential decline is we talked about it early in the year, as we came into the year and we're looking at a flattish first half on the top line with a step up in the second, that as we moved into and through the second quarter, we were becoming more and more confident we weren't going to see that second half step up. We have a large amount of costs that I will not describe as discretionary because everything is ultimately discretionary to some degree, but more readily controllable. So we have actively gone out with all of our operating group leaders and finance leaders and worked to manage those controllable cost out of the business in the second half as much as possible, without harming the business. And there's a lot of those that can be managed and moved around in order to benefit the bottom line. So that is the biggest thing that we're doing because we are a people-oriented business. So when you talk about secular movement, it's really about managing what our people spend.

I will also tell you, not surprisingly, as we set our guidance for the year we're clearly coming in at a lesser amount than when we were when we started the year because of the second half outlook. So our compensation as a performance-based organization is tied to our performance against plan. So during the third quarter, we did take a bit of adjustment in our variable compensation in order to get it aligned to our performance versus plan. But the biggest chunk and positive performance was in managing the controllable cost, not just here in Pittsburgh, but across organization.

The only thing I'd add, John, is -- and we're -- this is hard work and hard to do and we're proud of it, is we are still invest -- stepping up our investment in our growth -- selected growth engines and also the pricing and sourcing function. So as I stated earlier, we added 100 people net, net sequentially from December 31 through the middle of the year through June, so averaging 50 per quarter. We added 75 in Q3. So I think it's incredibly important for us and the whole teams aligned that we want to continue to step up the investment and those areas are going to drive better growth, more profitable growth for us. And yet to do that and hold our overall headcount basically within 1% growth says we're really driving productivity in a number of other functions and that's lean. A lean still alive and well, we're driving and executing our lean productivity initiatives. And that's, as I've stated continuously, that will always be here, it continuous, will never stop.

Great, thank you very much.

Shawn Harrison, Longbow Research.

Want to touch on the rebates issue first. Want to make sure that it's not a secular issue as we would head into 2014 that you would see continued pressure, but more the dynamics you described in 2012 with opening the new sites.

Absolutely, it's not a secular issue, it's not a change necessary -- necessarily in how the programs are built. It's really about how the volumes coming out in the year.

Okay. And as my follow up, wanted to dig in a little bit deeper into the data com market, the strong performance side of this quarter. I think it was maybe alluded to earlier that you're taking share. But if you could just elaborate about the strength you're seeing, how much of that is maybe market coming back, because it seems a bit choppy versus share gains you're taking in the market?

Yes, the short answer is the markets not growing. Did not grow in Q3, it's been challenging Q1, Q2, Q3. We did not leave, we grew this quarter and we grew it nicely, it wasn't 1% or 2%, as we outlined it was 8% growth. And so we feel really good about that. We have not grown in data com since Q2 of last year. So -- and the pricing environment is very difficult.

It's very difficult (inaudible), it has not gotten better, it's gotten worse over the last couple quarters. I -- that doesn't mean I think it's going to continue to that degree, but we think if Q4 sets up as challenging from end market perspective, and we're hopeful as we get into next year that the market start to improve and heal and get a little bit better in data com. But our execution clearly has performed against that backdrop.

Okay, I guess from that comment it sounds if you don't see any green shoots yet of data com starting to turn for 2014.

I think it's -- we're going to have to really monitor that as we go through Q4 and -- but we did not see that in Q3.

Thank you very much.

The markets still tough.

Got you, thank you.

Ryan Merkel, William Blair.

So I think first off pretty good quarter in light of what I've seen from everybody else, so congratulations there. But I want to start with EECOL, I had a question on the guidance to make sure I have this right. So the guidance seems to imply EECOL sales of [$210 million], [$220 million] in the fourth quarter. And if I add back the stub period from last year, that would put it down about what 3% year over year, is that about right?

And you also got to consider the fact that we know that FX will be a bit of a headwind in the fourth quarter on that number.

Okay.

So that's a few percentage points as well. Effectively the takeaway is what we're -- what we've got in the fourth quarter outlook for EECOL is essentially the same kind of volume as you saw in the third.

But it looks like --

On a constant currency basis.

Okay. But it looks like sequentially the [$220 million] implied that the guidance is down sequentially and I thought the fourth quarter was a seasonally strong period because people are buttoning up for the winter. So what kind of reconcile is that?

Well like I said, we've got the fourth quarter running at where we had the third. We, as John mentioned earlier, we're going through the fourth quarter for the first time with them. We know that it is typically a bit of a step up and we are going to see how that plays out. But right now we have the guidance set at consistent with third quarter.

Okay. Then for my follow up, October is running 4% organic growth, is that broad based or is that weighted to utility and data com?

It is broad based.

Okay, great. Thank you.

And again when I say broad based, US, Canada, international at that kind of level. I mean I'm not -- and so it's an extension of how we went through finished Q3 into Q4.

So is that -- you don't have the end market color there, you're just talking geographically or do you have the end market and --

We have the end market color, it's consistent, it's consistent on how we finish Q3, that momentum is continuing into Q4 so far, into October so far.

Okay, great. Thank you.

Matt Duncan, Stephens.

Back on SG&A, Ken, real quick to make sure we know how much was actual discretionary cost pull down versus an adjustment to the variable comp. Can you give us a little help there on the $10 million sequential drop in SG&A cost, how much of that it sustainable if you continue to keep a lid on the discretionary cost versus how much of it maybe comes back in the 4Q now that you're going to be running through again on the variable comp?

I would say what we've taken out on the discretionary controllable piece, you should anticipate we can manage that consistently at the forecasted sales level to carry through to the fourth quarter. I'll also tell you that the variable comp adjustment, if that helps you decide that was somewhere between $2 million and $3 million in the quarter.

Okay, that's helpful. So then if you get a little bit of a sequential drop in revenue, which is a seasonal norm, than net, net SG&A costs are up a little, but not a lot because that $2 million to $3 million comes back?

That's always what we target.

Okay. And then in terms of the industrial market, it seems like things have still been pretty flat out there in industrial world. You guys obviously have a pretty good view on what's going on more broadly especially through the old Bruckner integrated supply business. I'm curious, the better PMI data, the ISM has been a lot better for three months in a row. Are you seeing that show up at all in your industrial business, are you picking up on any kind of changing tone from customer conversations? Any there any reasons to believe that maybe things could turn there?

It's not showing up in our sales yet. But it is showing up in increased bid activity levels. And our pipeline actually grew a bit this quarter and we start that out through every quarter. And so -- and our -- I think as we've shared in the past, we've got roughly 16 different verticals under industrial that we measure our performance against. And I'll give you a sense that 10 of the 16 were up in the third quarter.

Okay, John, that's very helpful color. And then last thing --

And six of them grew double digits. So I would tell you that the PMI perception index says that things are going to get better. It's not showing up in sales yet. Clearly in the bid activity levels and in our opportunity pipeline it is. We're seeing a continuing trend of this outsourcing supply chain consolidation boding well for us. There's still this CapEx that's locked up, it could be released quite frankly. If there was confidence on the behalf of the CFOs of these industrial companies that we are truly in the recovery and there isn't -- and some of this uncertainty could be lifted, of which some of it's self-imposed with the Government and other drivers, if you could say it that way. So we're hopeful that as we move into 2014, that CapEx release starts and there's a general pickup in industrial production levels.

Okay, that helps. And then last thing, Ken, as we look out to next year, should we still view the $5.70 to $6.10 EPS guide as valid today?

I think the way you got to look at that is what we always do which in this part of the year, we don't with the update anything on the next year until we get into January.

Okay. All right, thank you.

And Matt, I think by the way I was blank for the economic recovery, but John and I will talk about that later as CFOs of industrial business. (laughter). All right. Thank you, Matt.

We did the same thing, Ken. (Inaudible) expenses and cost controls, right? So we understand the motivations.

Sam Darkatsh, Raymond James.

It seems like Matt and Ryan had exactly all of my questions, they just went right off the list here.

Sam, good morning to you too, as well.

Good morning, John. What do you attribute the Conney sequential strength to and might that be an additional tale or is that something that is just being helped by the improved integration and everybody rowing in the right direction?

We are, and I'm going to use the word, we're thrilled with Conney. That was a step out for us, Sam, as you know, right, the type of distributor it is. We grew 4% to 5% mid-single digits in the first half. We're double digit, we're above 10% in Q3. And they had their best month ever in history in September. I'll give you little more color.

This is a result of we're getting synergies, it's really hard to get sales synergies, we're getting sales synergies which are the most difficult thing to do with acquisitions. In addition, they have a centralized model of sales and application specialist resources, and we have built that out from less than a dozen folks in the fourth quarter of last year and it's now at 50. 50 people as we entered the fourth quarter in October. This was part of our strategic plan for Conney. This was not like some of the other acquisitions where we said we have all this cost synergy, we're going to wring that out in year one and year two. We're going to invest into the growth platform for the Company as part of our MRO leg along with OEM and capital projects, the three legs of growth for the Company on our platform. And we are absolutely thrilled with the execution there and the growth we're seeing.

Do you anticipate that double-digit growth continues, John, into Q4? And since it's safety equipment that implies manufacturing, which again getting back to Matt's question, might that also suggest better things broadly industrially?

I wouldn't make that leap yet because the growth quite frankly, as we have invested we're getting real good ROI on that investment and it's working what we outlined, which is opening up our global account and integrated supply customer relationships where we were not able to bring the safety category to them previously in a meaningful way. And now we are. So think of that as really one WESCO sales synergy that Conney has enabling. So I wouldn't deduce from that it's the end markets stepping up.

Got you. Very helpful, thank you much.

Hamzah Mazari, Credit Suisse.

It's a two-part question. First one, do you guys feel comfortable getting back into the M&A market? I know the leverage is within target but close to the high end. And then second part for John, maybe how do you think about getting bigger on the non-electrical side post EECOL? That business seems to be higher gross margin than the electrical side. You do have a pretty good network and DC network and branches, how do you think about that? Thank you.

Hamzah, good morning and thanks, great questions. Still have a very active pipeline on M&A, we never turned it off, right? So it's a continuous process. And I think as EECOL is very indicative of, we worked that deal for over five years. So we're constantly working relationships with different targets that are in our pipeline and we want to be positioned when there's a governance event. And if we then position and built the relationship, we need to be able to execute at that point.

So we continue to actively manage this pipeline. At any given time, we have a dozen to two dozen nondisclosure agreements, confidentiality agreements in place while we're evaluating companies and running them on models and such. And I've said that before. That has not stopped, it is one of the two value creation legs for the Company. First being and -- first and foremost organic, organic growth of our pull through and getting the value creation there. And secondly, acquisitions.

We see excellent opportunities, Hamzah, to continue to further expand and strengthen the portfolio as we close out this year and enter next. And we really feel good about our leverage ratio to cash generation of the Company and that whole model continues to work well. So it remains a great value creation lever and very high priority for us. Your second part of your question?

Yes, I was saying do you wait for leverage to come down a little more before you get more aggressive on M&A, or this is fine?

Yes, that's what I thought. So I think on that point is we are not going to -- EECOL takes us above 3.5, but it was temporary, right? We said we're going to get back inside 3.5 as soon as we could. And we've done -- I think we've done a very nice job, we closed EECOL, our biggest acquisition in history over 40 acquisitions we've done, we closed that in December of last year, look at where we are three quarters later, right? We were north of 4 and now we're inside the 3.5. So we're not going to allow where we sit to be a deterrent to doing the right deal, and we are constantly working these. Does that help now?

On the portfolio? On the portfolio, you will see more of what these last eight deals look like. If you look at these, they include a Conney Safety, they include a Brews and Trydor. They included a RECO, a Potelcom. They included a TVC Communication and they include the major strategic acquisition that gave us actually South American exposure as well, an EECOL. These are not just lulling up little electrical distributors and adding to our core, core of the electrical category, that category for us. So I think as a Company, and we've been clear about this, we got three legs, industrial MRO, not electrical, industrial inclusive of electrical, OEM and direct materials and value-added assemblies and services and capital projects. And increasingly, I think these acquisitions will support all three legs, but in particular MRO.

Great, very helpful. Thank you.

Thank you, that was our last question. We really thank you for your time today and your continued support. And I'll close with just a brief comment. We're encouraged with the accelerating momentum of our one WESCO initiative and we're continuing to make investments in our people, our processes and our business. Have a great day.

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