Wesco International Inc (WCC) 2013 Q4 法說會逐字稿

Good day, and welcome to the WESCO International fourth-quarter and full-year earnings conference call.

(Operator Instructions)

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

Good morning, ladies and gentlemen. Thank you for joining us for WESCO International's conference call to review our fourth-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, Senior Vice President and Chief Financial Officer.

In addition to this morning's release of our earnings announcement, an earnings 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.

To make year-over-year comparisons more meaningful, we have adjusted our results for certain nonrecurring items, as shown throughout the webcast presentation. The reconciliation of the adjustments are shown in the appendix of the presentation. For today's call, John and Ken will reference the adjusted results.

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 therein.

Finally, 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 via WESCO's website at www.wesco.com. Means to access this conference call via webcast was disclosed in the press release and was posted on our corporate website.

Replays of this conference call will be archived and available for seven days. I would now like to turn the conference call over to John.

Thank you, Dan. Good morning, everyone. Our fourth-quarter results were consistent with the third-quarter, reflecting continued execution in a low-growth economic environment. Sales growth was below our expectations, and we're disappointed in these results. Organic sales grew 1.5% versus prior year, driven by growth in Data Communications and lighting, and continued strength in utility and CIG.

Organic sales per workday varied across the quarter and were up 3.5% in October, were flat in November, and were up 1% in December. Adjusting for the impact of Hurricane Sandy in 2012, November organic sales per workday would have been up approximately 2%.

Sales remained stable in Canada in the fourth quarter, with sales being up 2% versus prior year for WESCO Canada. And on a positive note, up 8% versus prior year for EECOL, both on a local currency basis.

Operating margins expanded 40 basis points to 5.9%, and that was driven by tighter cost controls. And as a result, operating profit and EPS grew double digits in the fourth quarter. Gross margins were down 40 basis points versus prior year, driven by a reduction in supplier volume rebate rates and the business mix impact of large Utility and Data Com wins.

Free cash flow generation was a record in the quarter and continues to be directed to debt reduction, resulting in liquidity over $600 million. Financial leverage is now well within our targeted range.

On a full-year basis we posted record sales, profitability, and free cash flow. Our acquisitions are performing well, and we delivered on a our full-year EPS accretion expectations of $1 for EECOL.

EPS also reached a record level of $5.02 in 2013, marking the third year in a row of double-digit EPS growth. We are encouraged with the progress of our One WESCO initiative as we invest in our business and manage an active acquisition pipeline.

We are prioritizing our investments, into our eight growth engines and six operational excellence initiatives while maintaining good operating cost discipline. In the first half of last year we added over 100 personnel into our Global Accounts, Integrated Supply, Utility, and Safety businesses, as well as our pricing and supply chain management functions. In the second half we added another 100 personnel into these areas. These investments position our Company for stronger sales execution in 2014.

Our first quarter is off to a slow start, with overall month-to-date sales in January down approximately 4% versus prior year. December year-end backlog was at a record level, up 3% versus prior year, and our book-to-bill ratio is tracking above 1.0 at this point in January. Despite the slow start to the year and a challenging winter weather thus far, we expect macroeconomic conditions to show improvement over 2013, with a strengthening recovery in nonresidential construction this year.

Moving to our industrial results on page 4. Sales to our industrial customers were down in the quarter, driven by non-repeating industrial capital projects in the fourth quarter of 2012 and customers maintaining tight controls on their capital spending. Channel inventories appear to be in balance with current demand, and fourth-quarter bid activity levels remain strong. Leading indicators in the industrial market -- PMI, industrial production, capacity utilization -- are supportive for this year, while notable customer trends have increased outsourcing and supplier consolidation remain in place.

Our Global Accounts and Integrated Supply opportunity pipeline remain strong, at over $2.5 billion, and is being actively managed. We remain focused on providing a one-stop shop for our customers' supply chain management needs.

Shifting to our construction performance on page 5. Nonresidential construction markets were challenging again last year, but began to show some improving momentum in the US and Canada in the second half. Leading indicators in the nonresi construction market -- AVI and the continuing residential construction recovery -- provide a generally positive set-up for an improvement in activity levels this year. Sales to construction customers were flat in the fourth quarter and in the second half versus prior year, marking an improvement from being down 6% in the first half.

Solid growth in Lighting, driven by LED and retrofit applications, and continued growth in Data Communications were the catalyst for the second-half improvement. Entering 2014, backlog remains strong, and is up approximately 3% versus year-end 2012, and is up double digits in the US. Bidding activity levels have increased as well in the nonresi construction market, despite its challenges remains large with numerous opportunities for new construction and retrofit renovations and upgrades.

Now moving to our Utility performance on page 6. We are pleased with the strength of our Utility business in delivering ongoing 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 three quarters of 2013.

The fourth quarter marks the 11th consecutive quarter of year-over-year organic sales growth, driven by new wins and an expanding scope of supply with our existing Utility customers. Utilities are embracing the efficiencies offered by our Integrated Supply capabilities as they seek to find ways to improve their supply chains.

We are providing products and services that extend across the entire utility power chain, from generation through transmission and then onto the distribution grid for power delivery. We are implementing our new customer wins and renewed a multi-year contract with a public power utility for an increased scope of supply in the quarter. We are well-positioned to deliver our strong Utility value proposition into what is expected to be a low single-digit growth end market this year.

Now moving to CIG on page 7. Sales to our CIG customers were up 5% in the fourth quarter and in the second half versus prior year, marking an improvement from being down 6% in the first half. Sales growth was driven by broadband communications and improvements in commercial and institutional, partially offset by declines in government due to budget constraints and sequestration.

Similar to Construction, and despite the challenges in the overall CIG market, we continued to secure some nice new wins in the fourth quarter, including a multi-year award to provide Data Com materials to a state in the United States. Approval of the 2014 Federal Omnibus Spending Bill provides government agencies with better visibility, and should be a positive catalyst for this year.

Now moving to a recap on our acquisitions, which are outlined on page 8. We completed four acquisitions during 2012 and eight since June of 2010, which 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, and our efforts last year focused on integrating these companies into WESCO. We recently announced our intent to acquire LaPrairie, a Canadian-based utility distributor with annual sales of approximately $30 million.

LaPrairie meets our four key acquisition criteria outlined on this page, and is expected to contribute approximately $0.03 of EPS accretion in its first full year of operation. We are on track to close LaPrairie shortly, and see excellent opportunities to further expand and strengthen our portfolio via acquisitions this year.

In closing, we enter 2014 a bigger, stronger, faster, and more global company. As a result of executing our growth strategy over the last five years, we have strengthened our business and enhanced our position in the global marketplace. Consolidation and outsourcing are continuing in our industry, and customers are looking for a one-stop shop to manage their global supply chains. Our One WESCO value proposition provides customers with the product and service solutions they need to meet their MRO, OEM, and capital project requirements.

We remain sharply focused on executing our One WESCO initiatives this year, while continuing to make investments in our people, our processes, and our business. Now Ken will provide details of our fourth-quarter results and our outlook for 2014. Ken?

Thanks, John, and good morning. I'm going to review the results in the context of the outlook we provided in October during our third-quarter earnings call. As Dan indicated, I'm going to be speaking to adjusted results.

At the third-quarter earnings call, we expected fourth-quarter consolidated sales growth of approximately 14% to 17% and organic sales growth between 2% and 4% year over year. The consolidated sales in the quarter were $1.9 billion, an increase of 14.3% year over year, and this includes 13.8 points of growth from acquisitions, 1.5 points of organic growth, and 1 point of unfavorable foreign exchange impact.

Pricing for the fourth quarter was flat. Sequentially, organic sales declined a little more than 1 point on a workday-adjusted basis, which is consistent with our typical seasonality. As John indicated, monthly organic sales per workday were varied during the quarter; however, December did end up, up 1%.

Backlog remains at a healthy level overall. Core backlog was up approximately 3% versus year-end 2012, while US backlog was actually up over 10% during the same time period. While sales growth continues to be weak overall, the indicators continue to point to an improving US economy.

In October we estimated that fourth-quarter gross margin would be approximately 20.5%. We were disappointed that gross margin came in at 20%. That is 50 basis points short of our outlook, and 40 basis points down from the fourth quarter of 2012. Gross margin for the quarter was impacted primarily by final supplier volume rebate adjustments on the lower-than-expected top-line growth.

SG&A expenses for the quarter were $249 million compared to $231 million in the prior year quarter -- and EECOL accounted for all of that growth -- while core SG&A expenses were down about $13 million over last year's quarter. Sequentially, Q4 SG&A decreased approximately $7 million.

SG&A expense reductions were due to continued effective cost control, along with variable compensation actions that were taken, reflecting weaker than planned financial performance in the second half. Core employment levels were up approximately 2% in 2013 compared to the prior year, as we continue to selectively invest in our growth engines and operational excellence initiatives. We've also continued to expand our sales capacity and capability, increasing our core sales personnel to over 3,300 at the end of the year.

In our October call, we estimated fourth-quarter operating margin would expand to approximately 6%. Operating profit for the fourth quarter was $110.6 million. That is 5.9% of sales and up 40 basis points from the prior year.

Interest expense in the fourth quarter was $20.6 million versus $11.7 million in the prior year (sic -- see Press Release "$14.7 million"), and that was driven by the EECOL acquisition financing.

Our weighted average borrowing rate for the quarter was 3.9%. We expect the weighted average borrowing rate to tick up slightly in the first quarter of 2014, due to the impact of the high-yield financing that we completed in mid-December.

Net income for the fourth quarter was $67 million. That's up about 23% over the prior year. For the fourth quarter, earnings per diluted share were $1.26 compared to $1.06 last year. That's an increase of 19%. EECOL contributed approximately $0.25 of EPS accretion, while the core business was a $0.05 drag on EPS, driven by lower gross margins and higher share count, which was partially offset by $13 million of lower SG&A.

For the full year, sales grew to a record of $7.5 billion, with acquisitions contributing 14.6% of that growth while organic sales were essentially flat. Foreign exchange was a 40-basis-point negative impact on sales, and pricing was up approximately 20 basis points for the full year.

Full-year gross margin reached 20.6%, expansion of 40 basis points over 2012, and gross profit grew to $1.55 billion. Both gross margin and gross profit reached a record level in 2013.

We continue to make progress towards our gross margin target at 22%. For the full year, SG&A expenses grew $117 million, but declined 30 basis points to 13.7% of sales. All the growth was the result of acquisitions, while core SG&A declined $16 million as we continued to tightly control costs in the current low-growth environment.

The additional sales, gross margin expansion, and cost control generated 20% year-over-year growth in operating profit to $445 million, or 5.9% of sales. For the full year, interest expense was approximately $86 million, up $41 million due primarily to the EECOL acquisition financing.

For the full-year 2013, net income reach $264 million, and that's up 15% over the prior year. Return on invested capital was 10% for the full-year, and while ROIC declined in 2013 due to the impact of the EECOL acquisition, we remain committed to our 15% ROIC target over the longer term.

Capital expenditures were $7 million in the fourth quarter and $28 million for the full year. We continue to invest in our people, our technology and facilities through both capital expenditures and operating expenses.

Full-year 2013 EPS reached a record level of $5.02 compared to $4.49, which is an increase of 12%. Consistent with our expectation, EECOL delivered approximately $1 of EPS accretion for the full year. However, the core business reduced EPS by $0.47 due to flat sales, 50 basis points of gross margin contraction, and 1.6 million incremental diluted shares; all this partially mitigated by $16 million of lower SG&A.

WESCO has historically generated strong free cash flow throughout the entire business cycle, and as a first priority we focus on redeploying cash through organic growth and acquisition initiatives to strengthen and profitably grow our business. Second, we work to maintain the financial leverage ratio of between 2 to 3.5 times EBITDA.

Following the acquisition of EECOL, we committed to prioritizing near-term free cash flow to debt reduction, and we've been able to reduce our leverage ratio from over 4 times EBITDA at the end of 2012 immediately following the acquisition to 3.2 times EBITDA at year end this year, 2013, comfortably inside our target range again. Debt, net of cash, was 2.7 times EBITDA, and liquidity -- defined as invested cash plus committed borrowing capacity -- reached $606 million at the end of the fourth quarter, and that is more than twice the level that we ended 2012 at.

Free cash flow for the fourth quarter was $128 million, 191% of net income, and for the full year we generated record free cash flow of $308 million or 117% of net income, compared to $265 million, which was 115% of net income in 2012. We had a strong year of working capital management, reducing average working capital intensity by four days from 2012.

In December, and as previously disclosed, we completed $500 million of high-yield financing, achieving a 5.375% fixed rate on an eight-year term. The proceeds were used to reduce the variable-rate US term loan that we closed last December as a part of the EECOL transaction.

We expect the favorable impacts of previously disclosed pricing amendments to both our accounts receivable revolver and the US term loan to largely offset the higher interest expense resulted from the high-yield financing. As a result of the new financing, our fixed-to-floating debt ratio is now approximately 50/50 versus 20/80 at the end of the prior year.

I will now turn my comments to the full-year and first-quarter 2014 outlook. For the full year, it is our expectation that the macro economy will show slow but steady improvements during the year, and we are confident that our value proposition and our investment in our growth engines favorably position us to take share and grow faster than the market.

At the same time, our M&A program continues to be an important growth engine that supplements our core growth. Given the lack of predictability around acquisition timing, our outlook will now include only announced acquisitions. For 2014, only LaPrairie falls into that category, and therefore our outlook.

We expect 2014 sales to grow between 3% and 6% for the full year. We expect gross margin to be approximately 20.9%, which will be approximately 30 basis points higher than 2013. Operating margin is expected to between 6.1% and 6.3%. That is 20 to 40 basis points of estimated operating expansion.

Currency translation is expected to have a negative impact on 2014 results based upon the weaker Canadian to US dollar conversion. The effective tax rate for the year is expected to be in the range of 26% to 28%. Putting all of this together, we expect our full-year diluted earnings per share to be in the range of $5.30 to $5.70.

I'll now turn to the first-quarter outlook. We expect first-quarter 2014 sales to be flat to up 3% over last year's first quarter, including LaPrairie for the months of February and March.

Assuming the current rate environment continues, foreign exchange is expected to negatively impact sales comparisons by approximately 2 points in the quarter. In the first quarter, we expect gross margin to be in the range of 20.8% and 21%, and operating margin to be approximately 5.3% to 5.5%.

Canadian currency translation is expected to have a slightly larger impact on profit comparisons, due to the relatively higher profitability of our Canadian business. Consistent with the full year, the first-quarter effective tax rate is expected to be in the range of 26% and 28%. With that, we will now open up the conference call for your questions.

(Operator Instructions)

Deane Dray, Citigroup.

Hello. I was hoping you could expand on the comment about the conditions you are seeing so far in January, the down 4%, because your guidance for the quarter is flat to up 3%.

So how significant is this slow start? How much would you attribute to the weather, and maybe size the FX hit that you are assuming as well?

Well, Deane, good morning. I'll start out with the weather, with the January start weather impact, et cetera. Ken, maybe you can talk about the FX.

Yes, we are down approximately 4%. We are seeing a broad-based impact on our business due to weather.

It is showing up in our stock business as opposed to DS. When you think about it, in winter conditions, if the ground is freezing, DS orders are lined up to ship from a supplier, they pretty much ship.

The balance of that construction project, if it is delayed due to weather, that ultimately is service on, via stock or special order-type materials that are not DS get impacted. We are not through the whole month yet.

We have a couple days left; but this is with two, three days left. We will see where we end up. We are down approximately 4%.

If you look underneath that, Utility is still growing in the month. Data Com's growing in the month.

Our OEM electronic business is growing in the month. The old Carlton base, AA Electric, RS Electronics, those combined together, the electronics-based distribution, which is an indication that that part of the business is performing okay. And EECOL Canada on a Canadian dollar basis is up a bit as well so far.

We are definitely seeing the weather impact. And I would say that they are more substantial in January than we had expected, and they are more substantial in January than we saw in the latter part of Q4, although we did see a little bit of weather impact as we moved through the fourth quarter, particularly in Canada.

I know it is a long answer. Maybe I will put a spotlight on that. EECOL had a record sales month in October.

November softened quite a bit and finished flat. It was very cold. This is Western Canadian provinces, and day-to-day business kind of slowed down and ground to a halt.

December was up a bit versus prior year. But the backlog heading into 2014, for EECOL this is, was stronger than it was heading into 2013. I think we've seen this weather impact.

It is our belief that that is not perishable demand as it impacts construction. It is just a timing factor in that -- that there will be some recovery as the weather improves as we move through the first quarter and enter the spring season.

So on FX, I'd size it for you this way. It's obviously hard to predict what will happen to rates in the next couple of months.

But you have certainly seen over the last year, as we have, the Canadian currency consistently weaken each quarter by quarter against the US dollar.

So if you think about our relative share of Canadian revenue, it's about 25%, as we disclosed, of our total WESCO revenues. And the first quarter of 2013, the rate was pretty much at parity, moved down through the year.

When you look at it in the first quarter, it is down, depending on how you average, 8% to 10% year over year. If you apply that 25% of revenue rate against it, you can see how I size it at a couple of points on the top line.

It is important to note, and I highlight in the first-quarter outlook, we consistently have talked about the fact that our Canadian business is relatively more profitable than the WESCO average overall. Therefore, the FX impact on the bottom line would be slightly bigger than the impact on the top line.

Ken, just so we are clear, what is the exchange rate that you're assuming in the first quarter for the Canadian dollar?

We are pretty much assuming it's a couple of pennies above where it's ending today because of the way it's averaged down so far. We don't really forecast rates, like I said, through the end of the quarter. ¶ But what we do is say, it's trended down this much this month; and we will just carry that kind of to size the outlook.

Okay. And just the second question, on the bridge for the guidance, the lower guidance, and this is the guidance that you said back in August.

One of the changes right towards the end is that I heard you cite was the fact you are not including any assumed unannounced acquisitions. I checked that from the Investor Day.

There was two or three percentage points of your sales growth that was assumed. Just flow -- and that is fine. Most companies don't assume unannounced deals either.

Flow that through to the EPS side, and that'll help bridge for us the change.

Sure, sure. If you think about -- what we said in August was an outlook range for 2014 of $5.70 a share to $6.10 a share. And what we just told you was essentially $0.40 lower on either end of that range.

At the time we were with you in August, our outlook for 2013 was $5.15 to $5.35 for 2013 full year. Pick a midpoint, $5.25. We ended up close to $5.

You can say that is the first level of anticipated reduction between what we told you in August and what we look at in 2014. The second, I would say, would be the FX impact, which has certainly changed even more to the negative since August.

And what I would say is again, go through the math there. Look at where the rate was in August versus where we are sitting today.

Again, not necessary projecting four quarters, but looking at a relative change since August, you can easily get to $0.10 from that itself. And then the remainder of it, I would say, is the absence of the acquisition in the outlook.

We have announced, and intend to close quickly, on the LaPrairie acquisition. We've told you that is about $0.03 a share to the current year.

But we had a larger kind of placeholder in our guidance as we started in August, and I would say pulling that out is the remainder of the variance. Hopefully that gives you the three pieces of the bridge.

Deane, let me follow on. We have been doing annual Investor Days in the August timeframe since we started them -- what -- four or five years ago. And we've gotten feedback on the timing of that and such.

We have discussed this as a team, and we are going to make a change in 2014, because I think in retrospect the August Investor Day had good attendance. It has been a terrific meeting the last four plus years, but we're out of bed early versus everyone else.

So we are going to go to a more traditional schedule in 2014, where we have a conference call with the entire investor community, analyst community, in the December timeframe to give the outlook for 2015. We will do that in December of this year for 2015.

And then we will follow that with a full-blown Investor Day, similar to what we have done in the past, in the first quarter, probably the latter part of the first quarter of 2015. We've not locked down the scheduling on that yet.

So I did want to relay that we have looked that as part of this process too, and that is a change we are going to make going forward.

Great. Thank you.

John Baliotti, Janney Capital Markets.

John, I was wondering. Any call you're getting from your customers in terms of whether it is the shorter cycle demand or the longer cycle demand as you went through the quarter?

But as you're talking to them about 2014, is there a different behavior that you expect now that we've started the year?

No. Clearly, we're disappointed with the fourth quarter, John. We came in below our sales outlook guidance.

When you deconstruct the pieces, industrial is the one that kind of jumps out I know to all of you, and to us as well. Some tighter spending on CapEx and MRO spending as we move through the first quarter.

As we looked at 2012, we had some real nice Petro Chem projects; and that was true in the earlier part of 2012 as well. It's a little tougher comp.

When you look at it sequentially for Industrial, it was down 0.9%, Q4 versus Q3. That gives you a little sense of the momentum vector on Industrial.

As I said, I think as we moved into this first part of this quarter, our backlog held up. We burned a little bit of backlog in Q4 -- typical in every fourth quarter.

But it was still at a record level when we ended. We were at 3% up overall year-end 2013 versus 2012, and US portion of the backlog was up double digits.

And our book-to-bill ratio consistently through January thus far has been nicely above 1.0%. So our bookings rate is higher than our sales rate.

I'm not seeing a real shift in customer behavior in the industrial market, per se. And we are not seeing a fundamental shift in customer-driven behavior that is impacting our sales in construction or utility, or even the parts of CIG for that matter.

I think it is just a slow start, and we are working hard to drive the execution.

Do you feel, to follow on that, when we had your Investor Day and we visited one of your utility customers, there was a lot of, seems like, points and catalysts for why they have used you more extensively than the past. Is it fair to assume that the longer cycle, the more project-related business, you have more of an immediate ability to consolidate the competition there, whether it is between construction, utility, and maybe even to a degree the CIG area?

Yes. I mean, the project-oriented business is more episodic.

But when you are looking at building a bigger, stronger, relationship, whether it is a Global Accounts relationship, an Integrated Supply relationship, or one, what we call these big Utility alliance agreements, which in essence is like a Global Accounts model, that's a longer sales cycle, right?

Right.

So that is where it's real important to work the pipeline and work it consistently over time. I think we feel really, really good about our results in the Utility business, particularly when you calibrate it against the economic backdrop and the end market of utility, and look at what power demand did in 2013 and what utility spending was in aggregate.

I think it's really a great example of our One WESCO approach, where we really knitted together branches. We're providing a complete services value proposition of these utilities.

And I think as we move into 2014, our view of the utility market is similar to what it was a quarter ago: the distribution portion of the power chain will be up very low single-digit growth, 2% plus or minus.

Transmission is down probably a little bit; but we're more biased to both ends of the power chain, generation and distribution.

But I think that our value proposition is really resonating well with customers. And we do see some potential for increasing investment with utilities and distribution automation and demand response, along with gas plants.

I think that has upside as we move forward, when you look at just the impact of shale gas development as a growth driver over the mid to long term, I think, in the US and Canada, for that matter.

Thanks, John.

Steve Tusa, JPMorgan.

So I guess to dig into the industrial business a little bit, one of your suppliers put up pretty good US results on the automation side. They were up double digit. I know you guys include Canada in there.

Can you maybe talk about what you saw geographically on the automation side? I'm trying to reconcile those two things.

Yes. Steve, thanks. I think you are probably referring to the Rockwell.

Rockwell has an interesting model on how they go to market through distribution. It is called a limited distribution model, and they have territories that they outline in North America, US and North America.

They call those ATRs. So they are authorized territories. And in the United States, there's only a single distributor for every territory in the US, other than Chicago and Minneapolis.

Parts of Chicago, parts of Minneapolis have two distributors in a particular ATR or geographic region.

We don't have a meaningful relationship with Rockwell in Canada. Our relationship is predominately in the US.

And so when you look at the relationship of Rockwell through us as a distributor in our approved ATRs, our geographies, which range --they include Minneapolis, Chicago, and the Upper Midwest and then we have some territories down in the Southeast of the United States -- our results are consistent with their's.

They are by definition, because all Rockwell sales go through distribution in those geographies.

Right. Okay, that's really helpful. Your view on US automation is still reasonably positive, and the growth there is consistent with what you talked about heading into the first quarter here, with the distribution (multiple speakers)?

Yes, our views are unchanged on automation. I think that's a nice upside; it's a growth driver. So yes, concur.

The only other comment I'd make is another one of our suppliers has reported as well, since you raised it -- I think you are only referring to Rockwell, but I will at least mention. Hubbell has their results out.

Look, you know we look at this in a detailed fashion. Remember, a supplier sales are essentially, we compare that to our purchases because our purchases are their sales.

Hubbell's organic sales growth, I think, was roughly 3%, 3.5%, in that range, for the fourth quarter versus prior year. We've got a very nice, long-standing broad and diverse relationship with Hubbell, as we do with Rockwell -- both terrific companies, terrific supplier partners of WESCO.

Our purchases year over year for Hubble are very much in line with their sales. And I won't give exact numbers, but very, very (multiple speakers). That is what we do with every supplier, and they give us -- we share data as well.

We triangulate, obviously, consistently to make sure that we're supporting our suppliers appropriately. A measure for us is we would like to be growing with that supplier at a faster rate than the rest of their channel partners.

If we are, we think we're -- it means we are doing a better job for them, and we are creating more differential value for them in terms of demand creation and fulfillment.

Right. Just trying to understand the channel dynamics there. Very helpful. Thanks a lot.

Sam Darkatsh, Raymond James.

A couple questions. First, Ken, regarding the backlog. I'm trying to reconcile it. Overall backlog up 3%, US up double digits.

I think you mentioned, or John might have mentioned, the EECOL backlog was up. How do you get to the plus 3%?

Does that suggest that the core Canadian business backlog was down dramatically? How do I get to that 3% number?

What is left, Sam, is Canada and other international, which is project-driven episodic. So, yes.

So their core Canadian business?

Let me just say this. EECOL's backlog is -- their effective backlog number, as a percentage of their sales, is relatively small because (technical difficulties) driven model. US is up.

Canada, core Canada is down. Even in the US, Data Com in particular is up very strongly.

That is how we get the number. Year to year, WESCO Canada year end to year end had a drop in backlog, yes.

If your remember the way it built up last year, Canadian backlog really built up. We talked about record levels of backlog in Canada.

We ended last year very strong with WESCO legacy Canada solid, and it has burned down backlog this year on the softer booking rate. So you read it exactly right.

Okay. So then in your guidance, when you did the walk, Ken, which was very helpful by the way, from the prior guidance to today, I guess the suggestion is that you haven't really changed any of your incremental growth expectations for 2014 from August until today.

You are just using the different baseline and the FX. Might the fact that the Canadian backlog is weakening, why wouldn't you be a little bit more conservative and assume some additional deterioration in the Canadian markets, then, for 2014?

I guess I would answer it this way, and it is good point. It gives me the opportunity to highlight. On the top line in August, excluding acquisition, we talked about 4 to 6 points of overall growth.

With this guidance, we have held the top end of that, because we believe that is still in the range. We did take the low end down to 3%. We did soften it up the low end a little bit, based upon a little bit softer potential outlook for 2014.

And to be clear, Sam, our backlog in Canada was down on a Canadian dollar basis year end to year end. And then you add the FX impact, it caused a little bigger impact obviously.

My final question. Ken, what is your nonresi construction for domestic assumption inherent within your expectations for 2014?

I mean, we are probably all looking at the same indicators; and it depends on which verticals we play in. But we are in the nonresi buildings as well as the non-buildings. It's low to mid-single digits.

Very helpful, gentlemen. Thank you much.

Noelle Dilts, Stifel.

I just wanted to started off first [ticking] into EECOL a little bit more. It looked like in the third quarter you got about $0.33 of accretion of $243 million in revenue. This quarter, $0.25 off of $251 million.

It looks like there was maybe some sequential margin compression. Could you discuss what you are seeing there; and if that is the case, with the drivers were?

Sure. It's really less operational.

In the sense of if you're thinking about margins on the sales going to through the business, it's really tied to them closing out the year on, while a very good volume and very good performance of softer sales performance in 2013, then effectively they had been anticipating on an SVR basis.

So the SVR number get adjusted at the end of the year in their case, and that was really the margin pressure from Q3 to Q4.

So it was the SVR impact a little disproportionally weighted to EECOL.

Correct.

Okay. I think this is stretching it a little bit, but you hit your $1 of accretion target for 2013.

Any thoughts on, are you going to set a new target for 2014; or could you just talk about specifically your expectations for EECOL as you move into this year?

Well, first let me say we are thrilled with EECOL. The cultural integration, the president of the business when he we acquired it has retired.

That was all part of the plan. And the chief operating officer assumed the overall leadership role for EECOL Canada. He reports into Harold Henze, our overall Canadian leader. The leader of EECOL South America, terrific leader, reports as well, reports into Les Kebler.

I think it's gone very, very well; and we are thrilled with the first year under the -- as part of the WESCO family.

The way I think about it, Noelle, is this way. When we closed that acquisition a year ago December in December 2012, we had a certain outlook for the Canadian market. And that was the basis upon which we articulated $1 of EPS accretion for EECOL in the first year of operation.

And at the end of the day, the Canadian market in 2013 was much more challenging and softer than our outlook a year ago. We started out okay.

You will recall in the first quarter of last year, WESCO Canada grew 4%. EECOL grew 5% in Q1.

But, in Q2, going forward in Q2, we had that late and rainy spring with record flooding in Alberta.

In Q3 we started seeing CapEx delays clearly, and stuff moving out of it. In Q4, CapEx management, tight management delays, and then the beginning of the weather impacts. So we are very pleased overall to deliver that, given that backdrop.

Our outlook for the Canadian market is still bullish mid to long term, given it's a natural resource-based economy. I think there's an ongoing debate on railroads versus pipelines to transport oil from the oil sands.

That will get ultimately get resolved. But clearly demand continues for Canada's heavy crude, US Gold Coast refiners. Our view of Canada mid to long term has not changed, even given the little bit tougher market in 2013.

Our expectation is that 2014 is no worse than 2013 in terms of end market. And we are hopeful as we move through the year that it gets a bit better, but that's our basis for 2014.

And consistent with what we've done with every acquisition, when we get into year two, it becomes part of our core operations. We don't break out and shine a spotlight on it.

Okay. Second quick question. John, you referenced the Data Com backlog data being up strong. If you could talk about how much that is up, touch up on the trends in that market, if you're seeing some acceleration in the base market, or whether you think you're getting some share?

Well, we grew. I don't think I mentioned the growth number yet.

Let me start there. Our sales were up 5% in the fourth quarter versus prior year for Data Com.

You will recall in the third quarter, they were up 8%. So we basically grew nicely in the second half, and we had not grown since Q2 of 2012 in Data Com.

And the Data Com sales growth was balanced. It was in the US, it was in Canada, and rest of the world. We won some international business as well.

Backlog for Data Com finished up very strong double digits. I'll just say approaching and in the 20% kind of range.

We entered the year very nicely. And I mentioned, in response to Deane's question earlier, that Data Com is out of the gates in January and growing still. So I think we like what we are seeing.

Part of the Data Com business is our IT physical security business, and that was up very strong double digits for full year 2013 after being up very strong double digits in 2012. David Bemoras put a spotlight on our capability there in the Investor Day, you'll recall.

I will tell you, I think the quarter was better not just for WESCO. We feel good about our results. But even for the market in Q4.

Our suppliers said it was up, that they experienced an uptick in year-end project purchases. Certain categories, however, remain under pressure, I think particularly copper cable as it comes under pressure versus other competing products.

So hopefully that gives you a little color. Maybe one other data point is that I still think the overall Data Com market will be a bit challenging. It'll be tied to IT spending, and it is very price-competitive. But I think we've got a really winning One WESCO solution, and we're starting to see the results in Data Com.

I alluded to that, from an analogy standpoint, in our Investor Day of what we've done in Utility over the past four plus years. And it is translating into very strong results. And that One WESCO approach to Data Com, we're taking that same approach.

We have had a few recent very nice wins. So hopefully that helps, Noelle.

That is great. Thanks very much.

Ryan Merkel, William Blair.

Question on gross margin historic. Your guidance assumes a pick-up in the first quarter and also for the year from where we ended in the fourth quarter. Could you just walk through some of the factors there that are driving that?

Yes, there's really just -- there's one major factor, and that is SVR. As we finished out this year, we obviously had a flat organic sales growth rate or essentially no sales.

As we move into 2014, as you know we are looking at 3% to 6% growth. We estimate SVR for the year, and we accrue it ratably; and that really accounts for the step up.

Okay, I figured. I guess a follow-up question to that. What does your guidance assume about price inflation? And then maybe you could talk about the competitive dynamics, if anything's changed there.

As far as the guidance specifically, we assume really no change in pricing.

Okay. And then competitive dynamics? Has anything changed in this quarter versus --

Fourth quarter was tough. I mean, look at our pricing versus -- and look at some of our investor peers, other distributors, their pricing impacts.

It is tough, Ryan. This quarter, no change. We are seeing basically an extension of the conditions that existed in the fourth quarter relative to pricing occurring so far in Q1.

Great. Thanks, John.

Josh Pokrzywinski, MKM Partners.

Just taking a look at the full-year outlook, and I appreciate some of the drivers that are allowing you to keep the underlying assumptions the same, the lower base [year] notwithstanding. But comps seem like they're as easy as they are going to get in the first quarter.

Okay, I get that there is weather impact right now that's holding down January, but you still have a bit of a hole to dig out of just to get to the guidance range. Where is the visibility coming from that we get this pick-up 2Q to 4Q? And maybe beyond that, that there's good marginal leverage on it, particularly in this zero-price environment?

I think the setup of your question is very good because we don't quite have January done; but once January is done, we've got one-third of the quarter done. So I think now you see the basis for what Ken articulated, our 0% to 3% growth in Q1.

We do understand how our business traditionally performs. January to February to March inside Q1, and there's typically a very significant step up in sales as we move through the first quarter.

And it is our expectation that, barring unforeseen weather conditions that continue to extend through the quarter, that we should start to see that pick-up. We understand what the seasonality of our business is, Josh, as we move through -- from a Q1 by month, through a Q2, through a Q3, et cetera.

That is the basis of it. We've got good traction in our Utility business, in our Data Com business.

I didn't mention Lighting. I probably should have mentioned Lighting. Lighting grew 5% in the quarter, and it had grown in the third quarter as well. And we've had very nice momentum in Lighting.

What I think is important to understand with our Lighting business is, we have a full lighting solution capability. It includes traditional lamps, replacement lamps for existing sockets; but then it also includes fixtures, ballast controls for new applications, whether it is our LED retrofit or tied with some new construction or an upgrade project.

If you look inside the fourth quarter, our fixed -- everything other than lamps was up double digits.

So back to the comment I made earlier, we look at suppliers, Acuity, one of our supplier partners, terrific company, had terrific results in terms of lighting growth in the fourth quarter, nice double-digit growth.

We had nice double-digit growth, lamps aside. With lamps, it was 5% growth. It gives you a little sense on that.

For the full year, we grew nicely at 6% for Lighting on the fixtures side. We are seeing a nice pick-up in momentum in Lighting.

It's a long answer to your question, Josh, but I think we've got a very clear view of how Q1 should behave, barring a typical return to normal weather as we move through the quarter, or let's say assuming, not barring, assuming a return to typical weather.

And then we know what the kind of linearity of our business is.

We do have a better sense now for EECOL seasonality, now that there has been one year under our belt. And as we talk to our EECOL leaders, they've given us a good sense of what was traditional versus not traditional, given how last year unfolded. So we factored that in.

I would just add one thing to it. You talked about the comps are probably the easiest or best with Q1. But also keep in mind as you watch what happened with the margin rates in 2013.

It's actually the reverse of that. That is the hardest comp. As we move through the year with the sales softening, that actually had pressure on the margins as we move through.

That is not the easiest comp. Just factor that into how you look at Q1 as well.

Okay. I guess the follow-up on that, though, it does seems like if you look over the past few years, the gap between the 1Q margin and where you ended up for the full year seemed like it was sub 50 basis points in what was arguably a better pricing environment than where we're at today.

Now we are looking closer to 80 basis points. So I guess I'm wondering, again in this low-price environment, if there's something holding back the mix in 1Q to where it is a much bigger leap than we were normally able to see?

I don't think that plays into it at all. I don't see a mix differential. Maybe we can even take it offline and work through the mechanics a little bit.

Okay. That would be helpful.

I know we're running a bit out of time. We still have a few in the queue. I think we will take one more. And then Dan, Ken, and I -- we're obviously -- I think, Dan, you've got a full set of calls scheduled and will be available to follow up.

Kwame Webb, MorningStar.

At the August Investor Day, you talked about a 22% long-term gross margin goal.

If you could maybe comment on how much of that goal is going to be accomplished through further scale, such as EECOL -- that clearly added about 100 basis points -- versus further improvements and procurement and leaning out that process?

Sure, and thanks for the question. We look at two major drivers to our gross margin improvement. I'll put it two categories.

One is our base business; two is the acquisitions that we are doing. If you look at the eight acquisitions that we've done since June of 2010, they were accretive and helped our operating margins. And many of them, in fact, helped gross margin -- not all, but many of them helped gross margins as well.

So acquisitions is a leverage. We buy other categories or strengthen an existing category.

If we strengthen an existing product category, it gives us a (technical difficulty) benefit. It translates into better pricing power and margins.

If we are adding new categories, by and large we are looking at attractive categories that provide attractive margins, like our Conney Safety business that we added back 1.5 years ago, which is a terrific industrial MRO supplies business.

On the base business, Kwame, Steve Van Oss, you'll recall, at the Investor Day laid out all the various initiatives that we're aggressively trying to execute to improve core margins -- core being that the base business without acquisitions.

There's a series of pricing actions and initiatives, there's a series of (technical difficulties) and supply chain and purchasing actions and initiatives. And all of those are being executed with teams driving that execution, and we work very hard at that.

That's into a backdrop of what's the dynamic pricing environment. The dynamic pricing environment is a challenging environment.

But, hopefully I've given you a little bit of a framework in terms of how we are going after fundamental margin expansion for gross margins -- the two contributors.

The other lever for up margin expansions is our operating cost leverage. And when we get nice growth at the 6%, 7%, 8% kind of organic growth range, we have tremendous operating profit pull-through because of our very cost-efficient SG&A structure and the way that we manage that over time.

So those two combined are what form the recipe of our operating margin expansion.

Great. Thank you so much, gentlemen.

Okay. Thank you. Le me make a few wrap-up comments. Thank you for your time today and your continued support.

I will end on this note. We remain sharply focused on executing our One WESCO initiative this year while continuing to make investments in our people, our processes, and our business. Thanks. Have a great day.

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