Wesco International Inc (WCC) 2014 Q1 法說會逐字稿

Good morning, and welcome to the WESCO International first-quarter 2014 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, Vice President, Investor Relations, Corporate Affairs. Please go ahead.

Thank you, and good morning, ladies and gentlemen. Thank you for joining us for WESCO International's conference call to review our first-quarter 2014 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.

To make the year-over-year comparisons more meaningful, we have adjusted first-quarter 2013 results to exclude the non-recurring impact of ArcelorMittal litigation insurance recovery, as shown on page 1 of the webcast presentation appendix. For today's call, John and Ken will reference year-over-year comparisons against 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 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, 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 call over to John Engel. John?

Thank you, Dan. Good morning, everyone. Our first-quarter results reflect an improving US economy, largely offset by the impact of the severe Winter weather conditions in both the US and Canada. We experienced growth in all of our end markets, except for construction, where sales declined primarily due to weather-related project delays. Sales in the US were up 3%. Sales in Canada were down 4% on a local-currency basis; and sales for the rest of the world were up over 10%.

After a challenging start to the year, with organic sales per workday down 1.5% in January, momentum improved, and organic sales per workday grew 3% across the balance of the quarter. Momentum further accelerated over the last several weeks, and our second quarter is off to a very good to start. April month-to-date sales per workday are up 6% versus prior year, driven by 9% sales growth in the US, and 4% sales growth in Canada on a local-currency basis.

Despite the slow start to the year and the challenging Winter weather conditions, we expect macroeconomic conditions to improve in 2014, with a strengthening recovery in non-resi construction. As a result, our full-year sales and EPS outlook remains intact.

We are making investments in our eight growth engines and six operational excellence initiatives, while maintaining good operating cost discipline. In the first quarter, we added over 40 personnel into the front end of our Business, primarily into sales and sales support functions. In addition, we opened a new 125,000-square-foot One WESCO facility in Los Angeles, which will house our third lighting and sustainability solution center. These continuing investments position the Company for stronger sales execution in 2014.

We also implemented a significant organization change in the first quarter to improve the execution of our One WESCO growth strategy and to accelerate the organic sales growth rate of our Business. These organization changes streamline the operations in the United States, and establish new global functional organizations for both the front and back ends of our Business.

Andy Bergdoll assumed responsibility for all US-based operations, which have been organized into three geographic regions and a series of nationally focused business platforms. You will recall that Andy previously ran our utility business for the last seven years. David Bemoras assumed responsibility for global sales and marketing across WESCO. David joined us in 2006 with the CSC acquisition, and was previously responsible for our data and broadbands communication business.

This new customer-facing front-end organization includes global accounts, marketing, supplier relations, sales operations, call centers, and newly established product line and customer sales groups. An expansion of our sales resources is underway, and new sales initiatives are being developed and launched to improve the productivity and effectiveness of our sales force. These sales productivity initiatives include improved marketing demand-creation programs, further expansion of our centralized lead-generation group, One WESCO sales force training, a new sales rep recognition program, and an improved CRM platform. Overall, these organization changes better position the Company to execute our One WESCO strategy and leverage the investments we have been making in the Business.

Moving to industrial: After being down 3% last year, we experienced a return to growth in industrial in the first quarter. Sales were up 2%, driven by growth with OEM and heavy manufacturing-oriented customers. Channel inventories appear to be in balance with current demand, with some customers beginning to build inventory; a promising sign for future demand growth. First-quarter bid and the RFP activity levels for global accounts were strong, and reached the highest level we have seen in over five years. Overall leading indicators in the industrial market remain positive, while notable customer trends of increased outsourcing and supplier consolidation remain in place.

Of particular note, and as we announced yesterday, we were pleased to renew a multi-year integrated supply agreement with United Technologies Corporation. The scope of this relationship includes providing industrial MRO materials and supply chain management services to this customer's facilities in over 10 countries around the world.

Moving to construction: Construction markets in the US and Canada were impacted by the severe Winter weather conditions in the first quarter, resulting in project delays. Our backlog remains strong, and provides a good setup for the upcoming construction season. Leading indicators in the non-residential construction market support an improvement in activity levels this year. We are seeing signs of accelerated construction momentum in the US.

In Canada, through a combination of WESCO and EECOL, we also remain very well positioned, as this market is expected to improve after the upcoming Spring thaw shifts into the start of the construction season. After a two-year design phase of engaging with a customer in Canada, we were awarded a large contract for a complete LED lighting solution for a government office building in the quarter.

Moving to utility on page 6, we are pleased with the strength of our utility business in continuing to deliver above-market sales growth. Organic sales to our utility customers grew 2% versus last year, following the 18% growth we experienced in the first quarter of 2013. Sales to utility customers in the US were up 7% in the quarter, as we continue to implement new wins from last year. The first quarter marks the 12th consecutive quarter of year-over-year organic sales growth, driven by new wins and an expanding scope of supply with our existing utility customers.

We renewed a multi-year agreement to provide T&D supplies and services to an investor-owned utility in the quarter. The scope of this relationship has expanded over the last several years due to our One WESCO solutions-oriented sales offering.

Now moving to CIG on page 7: Sales to CIG customers were up 3% in the first quarter, marking the 3rd consecutive quarter of year-over-year organic sales growth. This was driven by solid momentum in commercial and institutional, and improvement in government. Government sales in the US grew slightly in the quarter, reflecting an improvement in activity levels since the 2014 federal omnibus spending bill was passed. Our end-user-focused One WESCO value proposition for CIG customers is yielding results. We were pleased to be awarded a broadband communications agreement with a large South American mobile telecommunication provider in the quarter.

Moving to acquisitions: With the closing of LaPrairie and Hazmasters in the first quarter, we have now completed 10 acquisitions since June 2010. These acquisitions have strengthened our electrical core, added product and service offerings to our portfolio, expanded our global footprint, and improved our overall market position. LaPrairie, along with Brews Supply and Trydor Industries strengthens our capabilities for serving the transmission, distribution and substation needs of our utility customers in Canada. Hazmasters, our second safety-related acquisition within the last two years, strengthens the Company's portfolio of MRO products and services, and further expands our footprint in Canada. Our acquisition pipeline is at a record level, and we see excellent opportunities to further strengthen our Company via acquisitions throughout this year.

Now, Ken Parks will provide the details of our first-quarter results and our outlook for the second quarter. Ken?

Thank you, John, and good morning. I'm going to review the results in the context of the outlook that we provided in January during our fourth-quarter 2013 earnings call; and as Dan indicated, year-over-year comparisons will reference adjusted Q1 2013 results.

At the fourth-quarter earnings call, we expected first-quarter consolidated sales to be flat to up 3% year over year, including the acquisition of LaPrairie that was completed on February 1 and had been announced at that time. Consolidated sales in the quarter were $1.81 billion. That is an increase of 20 basis points year over year, and included 160 basis points of organic growth, 190 basis points of unfavorable foreign-exchange impact, and 50 basis points of growth from acquisitions.

The US business grew approximately 3% organically, while the Canadian business was down a little more than 4% on a constant-currency basis. Including the impact of foreign currency, Canada negatively impacted consolidated revenues by slightly more than 3% year over year. Pricing for the first quarter had a positive impact of approximately 50 basis points on sales, after being flat through most of 2013.

As John mentioned, monthly organic sales per workday improved in February and March from the weak start that we saw in January. Sequentially, organic sales decreased 3.1%. That is at the higher end of the typical Q4 to Q1 seasonal decline that we see, and that was due primarily to the severe Winter weather conditions that we experienced in the first quarter.

Core backlog was essentially flat to year-end 2013. US backlog expanded over 6% during the quarter, while backlog in Canada was down double digits, and that is including the impact of foreign exchange. While sales growth was muted by the severe Winter weather conditions, the expansion of the US backlog signals to us an improving US economy. In addition, our book-to-bill ratio in both the US and Canada remains above 1 through the month of April to date.

In January, we estimated that first-quarter gross margin would be in the range of 20.8% to 21%, and gross margin came in at 20.7%. That is 10 basis points short of our outlook, and up 70 basis points sequentially from the fourth quarter of 2013. Gross margin was slightly below our outlook, primarily due to the lower-than-expected sales in Canada, which run at a rate higher than the overall WESCO average.

SG&A expenses for the first quarter were $265 million compared to $264 million in the prior year. Core employment was up approximately 2% in the first quarter, as we continued to selectively invest in our growth engines and in our operational excellence initiatives. Overall first-quarter core sales personnel increased by 5% versus last year's first quarter, and continued tight cost management controls essentially offset the impact of personnel investments. Sequentially, first-quarter SG&A increased by approximately $17 million, and that's primarily due to the re-establishment of variable compensation accruals, along with the impact of the acquisitions of LaPrairie and Hazmasters.

In our January call, we estimated first-quarter operating margin would be in the range of 5.3% to 5.5%. As a result of the year-over-year declines in Canada, operating profit for the first quarter was $93 million, or 5.1% of sales.

Interest expense in the first quarter was $20.7 million versus $21.9 million in the prior year. The weighted average borrowing rate of 4.1% was unchanged from the fourth quarter, but increased approximately 20 basis points over the first quarter of 2013 due to the impact of the high-yield financing completed in December of last year. The impact of the increased rate was more than offset by the lower level of borrowings.

The tax rate of 28.2% came in at the high end of our outlook range, due to the lower relative mix of Canadian profit, which is taxed at a rate lower than in the US.

Net income for the first quarter was $51.9 million, and earnings per diluted share were $0.97 on 53.4 million shares. That compares to $1.12 on 52.4 million shares last year. The impact of the lower sales volumes in Canada, along with the negative impacts of Canadian currency translation, reduced first-quarter EPS by approximately $0.16. Growth in the diluted share count of approximately 1 million shares negatively impacted EPS by $0.02. The impact of sales growth in the US and international businesses, along with the acquisitions, contributed approximately $0.03 to EPS year over year.

WESCO has consistently generated solid free cash flow throughout the entire business cycle. We redeploy that cash through investments in organic growth and acquisition initiatives to strengthen and profitably grow our Business. At the same time, we also work to maintain a financial leverage ratio of between 2 to 3.5 times EBITDA.

Following the EECOL acquisition at the end of 2012, we committed to prioritizing near-term free cash flow to debt reduction, and were able to reduce our leverage ratio from 4.7 times EBITDA to 3.2 times EBITDA at the end of 2013, comfortably back inside our target range. At the end of the first quarter, our leverage ratio was 3.3 times EBITDA, still within our target range, following the completion of the LaPrairie and Hazmasters acquisitions. Leverage on a debt-net-of-cash basis was 3.1 times EBITDA.

Liquidity, defined as invested cash plus committed borrowing capacity, was a healthy $524 million at the end of the first quarter, and that's after funding the 2014 acquisitions referred to earlier. Free cash flow for the first quarter was $41.7 million, or 80% of net income. We continue to maintain strong working capital management, reducing average working capital intensity by two days versus last year's first quarter, while increasing our inventory position to maintain service levels to support rising demand in our end markets.

I'll now turn my comments to the second-quarter and full-year outlook. Our expectation continues to be for the US macroeconomy to show slow but steady improvement throughout the year, and we're encouraged by broad growth in the US backlog and accelerating daily sales. We continue to remain positive on our Canadian business, although the rate of economic growth through the year remains somewhat uncertain. We are confident that our value proposition and ongoing investment in our growth engines favorably position us to take share and grow faster than the market.

We expect second-quarter 2014 sales to be up 5% to 8% over last year's second quarter, including the impact of the acquisitions of LaPrairie and Hazmasters. Assuming the current rate environment, foreign exchange is expected to negatively impact year-over-year sales comparisons by approximately the same amount as in the first quarter. In the second quarter, we expect gross margin to be in the range of 20.6% to 20.8%, and operating margin to be approximately 5.7% to 6.1%. The second-quarter effective tax rate is expected to be approximately 28%.

For the full year, our outlook is unchanged. We continue to expect sales growth in the range of 3% to 6%, earnings per diluted share in the range of $5.30 to $5.70, and free cash flow at approximately 80% of net income. This includes the two acquisitions completed in the first quarter.

With that, we will now open up the conference call to your questions.

(Operator Instructions)

David Manthey, Robert W Baird.

First off, with the weather impact, it sounds like you think it was mainly in the construction segment. Was there any impact on any other segment, first off?

And second, those lost sales, you think you're just gone, sort of pushed forward? Or is there some sort of a recapture possibility?

I think we saw the most effect in construction, Dave, clearly. In terms of the construction impact in the quarter, we had gotten reports throughout the quarter of work stoppage at various construction sites. We don't see that as being perishable demand.

The good thing about a delay in the construction market is, typically, that doesn't result in any project cancellations. It just defers or delays those. We would see those sales as picking up or coming back. Hopefully, we recapture those as we move through the second quarter.

We absolutely had impacts in some of the other end market segments as well. In utility, we had 2% overall growth, really driven by the challenges in Canada. 7% growth in the US. If you were to parse that, we had double-digit growth in investor-owned utilities with those customers. And again, we've had some new wins there in expanding scope of supply.

In the public power market, which is broader and more diverse and geographically oriented, our public power sales were down in the quarter. That was specifically due to a series of weather impacts where we are positioned with certain utilities.

In industrial, I think we've have had some impact on industrial customers. Since the time I have been at WESCO, I would say -- and Stephen Van Oss and I were discussing this -- the amount of branches that were impacted this quarter, supplier facilities, manufacturing operations that were impacted, customer operations throughout the quarter, it's notable that this was a pretty challenging winter.

I think we expected, as the weather started to improve, as we moved into the second quarter, sales momentum would pick up. With that said, I think we've been very pleased with the rate at which it has picked up.

Okay. To somewhat quantify that, you're thinking low single-digits impact anyway overall?

I think overall, it's in the range of one to two workdays.

Yes, that's right.

Last question here. Ken, I think in your comments you mentioned, if I heard you right, that you are seeing some positive price realization. And maybe if that is the case, could you talk about how that lays out across the segments? You're seeing it in one area more than others?

Yes, I will address that, Dave.

When you look at the first quarter, I would say going into the quarter, suppliers planned and had announced priced increases that were very significant. Obviously, we work with them; and we try to get as much advance warning as possible; and we typically get 30 to 60 to 90 days in terms of advance warning on price increases.

So I would characterize the first quarter as very active. And if you were to set the clock back one quarter, entering the first quarter, it was planned to be very active. And we then track what increases occurred in the quarter and what new increases were announced that we didn't know as we entered the quarter.

What was notable about the first quarter was a significant number of additional suppliers ended up pushing and announcing increases in the first quarter. So I would characterize the first quarter as active in terms of suppliers trying to push their price increases through the ranges, typically ranged from 2% to 5%. It was more by product category as opposed to by end market.

The justification notices that they were referencing was the increase in raw material pricings, transportation costs, etc.

As we enter the second quarter, the price increases announced thus far are in a similar range in terms of price increase amounts. But the volume is not near where it is in Q1. But that is somewhat typical.

It was relatively broad across most categories as well.

Deane Dray, Citi Research.

I was hoping you could comment on how mix was a factor in the quarter, just broadly. And then, anything you would call out within the segments.

The way I would characterize mix in the quarter is geographic mix. We've talked pretty clearly about the fact that the Canadian business is relatively more profitable than the US business overall and above the WESCO average. And that is where we saw the most pressure in the quarter. And that, combined with the Canadian currency translation, was really where I would point you to in mix.

I wouldn't point you within the segments, within the US or within Canada. It's truly a geographic mix issue.

All right.

Ken, since we are talking about Canada, maybe this is going to be more precision than you all have at this moment. But within Canada, can you maybe directionally tell us the pressure on EECOL versus WESCO legacy Canada?

Dean, I'll address that. And good morning, by the way. ¶

Canada was down, as we said, 4%. It was equally balanced across both WESCO Canada and EECOL. They are down roughly the same.

When you looked underneath, it was very interesting. All product categories declined, and all geographic regions declined. It was not specific to any particular geography across the Canadian landscape.

We definitely had an earlier freeze this winter, and I think there has been significant snow accumulation. It has impacted construction in particular. With that said, I think as we've moved into April, what we've seen so far is a very nice pickup.

Our book-to-bill is running well above one in Canada thus far. And both WESCO and EECOL are growing on a sales-per-workday basis if you adjust for the Canadian holiday this year, which is in April so far, but not in last year's April. So if you adjust for that Canadian holiday, thus far in April, both EECOL and WESCO in Canada are growing on a sales-per-workday basis.

What is interesting to note is that underneath EECOL so far in April, all regions are growing thus far. And for Western Canada, most regions are growing so far in April.

Great to hear.

Just a last question from me, and I know you all choose your words very carefully. But when you talk in Industrial that the bidding activity is robust, maybe you can characterize for a little bit more what you're seeing. And maybe also comment on your win rates.

We purposely put a sentence in the opening comments to give more color on this, so let me expand upon it. For our global accounts, RFP and bidding activity levels, it is the highest we've seen in over five years in any given quarter. So that, to us, is an encouraging sign.

We were really scrambling in the quarter to respond to all the efforts that we were working on relative to RFP responses. I think that sums it up.

We are hopeful, Deane -- and we do try to get as much data as we can by customer that we serve. We are hopeful that the increases in capital expenditures that our various customers are planning this year in fact do occur as we move through 2014. I can say that we clearly have not seen that roll through our business in Q1 yet.

That's my comment. I think the trend is, we see a potentially-rising demand curve as evidenced by our RFP activity levels.

That counts as robust for us too. Thank you.

Ryan Merkel, William Blair.

I wanted to dig into April, the up 6% just a little bit more.

Is the recovery there broad based? Or is construction really standing out, maybe because of the pent up demand due to weather?

Good question, Ryan. Good morning.

I think I already gave color on Canada. Let me give color on the US. The 9% growth, it is obviously strong. It is very balanced.

What do I mean by that? It is balanced geographically, and it is balanced by end market.

Perfect.

Then the second question I had is, it looks to me like the GP pull through is a little soft in the second-quarter guide. I'm just wondering if there's anything there because the guidance implies that that will step up in the third quarter and the fourth quarter. Maybe just flesh that out a little bit for us.

The margin steps down a tiny bit in the second quarter versus the first. That is essentially based upon the way that we book and accrue our supplier volume rebates. They are accrued flat throughout the year; so as volume increases, the margin rate gets slightly negatively impacted. Or I should say, it doesn't have as much as a positive impact in each of the quarters.

I think the pull through question would run a little bit more to the SG&A rate. As we've talked about, we've added some heads, including sales heads. And with the organization, we'll be continuing to build out a couple of categories within the groups; and that will have a little bit more of a weight on the pull through.

Okay, great. Thanks a lot.

Robert Berry, Susquehanna.

Good morning, Robert.

I just wondered if you could unpack the sales growth acceleration that you are seeing and also the estimate for 2Q -- the 5% to 8%? How much of that acceleration do you think is business that got pushed from first quarter into second quarter? How much is Easter timing?

And then I'm curious also, just in 2Q outlook and for the rest of the year, what the assumptions are for pricing and currency?

I will address the first part. Good morning, Robert.

The Easter timing is a headwind, right? Because Easter occurred in April this year but occurred in March last year. So our 6% growth rate so far in April was on a sales-per-workday basis.

What does that mean? We adjusted for the holiday in Canada only -- for the Canadian results, but not for the US results. Okay? We've not done any other adjustment for Easter in April this year. So that gives a sense of the momentum.

And as I kind of addressed already, the momentum was balanced so that the Easter timing is a bit of a headwind. And as a response to Ryan's question, he said -- What end markets? I said we're seeing growth in all our end market segments thus far in April. So it's not like it's just the construction spring back -- or project spring back.

In terms of pricing outlook and assumptions, Ken --

One thing to also consider as you are looking at the second quarter is consider the acquisition impact, right?

We told you we acquired LaPrairie and Hazmasters in the first quarter. They were not in the full quarter of the first quarter. We disclosed in the webcast, between the two there are $110 million around of annual sales.

So part of the growth rate in the second quarter relates to the full inclusion of those two businesses. So you can back out a point and a half or two for acquisitions on both ends of that range. That is actually part of the step-up between Q1 and Q2, and that is on top of what John has talked about so far monthly.

Yes, but the 6% sales-per-workday, thus far, obviously, is the entire business. And it includes Hazmasters and LaPrairie.

And then on the pricing, we tend to not build in pricing changes as we go forward in our outlook. You can pretty much assume that these numbers include the steady state of where we are right now.

And the currency, you think, will be with us for the year? Is that what you are assuming?

Yes. I guess what I would say is, we've build it in at the rates that we are at today.

Depending on who we look at externally, and you do the same thing, it's kind of in that range. We are not expecting a big improvement or deterioration from where we are today.

Hamzah Mazari, Credit Suisse.

Hi there. This is Flavio. I'm standing in for Hamzah today.

Most of my questions have been answered. But within industrial, if could you give us a sense of the breakdown between OEM and MRO.

You guys did highlight OEM as one of the growth areas in the sector this quarter -- just how the segment is performing between those two?

Yes. Flavio, good morning.

We saw growth on both. When you think about industrial, we serve industrial customers for three of their, "demand streams." Those are as follows.

MRO, indirect material supply services, not just electoral but industrial for those customers, products that is; OEM, piece parts, modules, subassemblies, assemblies; and the third demand stream is capital projects that are industrial capital projects where we sell directly to that industrial customer and not through a contractor.

That last demand stream is a fundamentally CapEx cycle-driven. My comments to Deane earlier, where we are hopeful that we see the industrial capital ex cycle tick up this year and that spending occurs as many of our customers are planning. However, they can choose to spend that or defer that at any given point in time. At least, that is their plan today and we're hopeful.

We have not seen that flow through our industrial numbers in any meaningful way in the first quarter. Our industrial sales growth of essentially 2% for our largest set of -- in customer segment is balanced. It's both MRO and OEM.

We feel good about that we've had a spring back to growth. That was clearly a disappointment for us in 2013, where our largest segment was down 3%.

That's great. That's very helpful.

Just as a quick follow up, if you could give us some color on the Datacom business. How that has performed in Q1, and if you are comfortable with building that business organically, if you want to have some acquisitions in that sector as well.

At Datacom, we were pleased with the results in the first quarter. We grew 5%, and that's another strong quarter of growth. Now we have strung together several quarters of strong Datacom growth.

Since you asked, let me touch upon that a little bit more. We feel really good about our performance. I think there are still some challenges in the datacom and broadband communication markets.

But in terms of our execution, similar to utility, we feel really good about those results and particularly the momentum we built throughout the second half of last year, which has now clearly extended into this quarter.

In terms of a piece of that business, is the security, the IP security business. At our last Investor Day, David Bemoras highlighted that part of our business.

It has been growing double digits for us. It grew double digits in the last two years, 2012 and 2013. I'm happy to say, it grew double digits again the first quarter.

We are still somewhat underrepresented in that business as a percent of our portfolio compared to some competitors. But it's been a particular subcategory under communications and security that we have been focused on. And we're happy to say that in the first quarter, we had double-digit growth.

I think the data center growth does continue. But we still see the shift in the market towards a large scale cloud in service providers and Colo facilities as opposed to enterprise-class data centers.

We are seeing a lot of enterprise data center customers kind of optimizing their existing infrastructure, consolidating facilities and focused on improving their performance. We're going after them with a full data plus electrical offering, a One WESCO offering.

I mention these organization changes that we put in place the beginning of this year. It's very significant, with one integrated front end, one overall sales and marketing leader for WESCO. We have never had that in WESCO's history, period.

We've taken our data and electrical business and integrated them essentially on a regional basis inside the US. With Andy Bergdoll leading US, he's run utility the last seven years. We've had very strong growth there. And David Bemoras, who came out of datacom and broadband communications, running our front end now. I think we feel really good about those changes in terms of focusing on accelerating our One WESCO strategy.

The only other comment I would make is on datacom is the emerging technologies, such as in-building wireless, seem to be gaining traction in the quarter. And that's another application set that we are focused on in the datacom space.

Very helpful picture. Thank you very much. That's very helpful.

John Baliotti, Janney Capital Markets.

John, if I take your comments about customers building inventory, and it sounds like if you look at the durables that just came out today, it was another strong month. That's almost a year's worth of a strong results. It seems like it's taken a while for the distributors to be more inelastically related to that.

Do you feel, given the trend in the quarter and taking out weather and all the things you have been seeing, that you guys are now a much more fixed relationship to the demand that is out there? In other words, they're not really working down safety stock anymore?

I think that relationship, let's just call it the -- whatever term you want to use, John, the slack or the mismatch up and down the value chain. I think that a majority of that has been taken out. That's our view.

I think we will see as we move through the second quarter; but yes, that's our view.

Obviously, you can't control currency; nor can anyone else. But underlying, it seems like relative to what happened in 2013 for a lot of companies. What we're seeing macro-wise is coming through a lot better in terms of what you're seeing.

I think what's going to be important -- and again, we're going to have see, really, what happens as we move through Q2 and Q3 in particular.

Caterpillar came out with some very strong results this morning. Do you want call then an industrial company? They are in of themselves, but clearly an indicator for non-resi. Is the end market demand at this stable base that now is sequentially upticking as we move through the year?

And if that is the case, I can tell you that a number of our customers in the industrial space had planned on stepping up CapEx. That is an indication of their plans. They are hopeful that it's more stable than growing macroeconomic environment.

If that is the case, I think that, coupled with a stable demand stream, as you said, that starts sequentially ticking up and there's less slack up and down the value chain, that can be a double positive.

To your point, I think your description of 2013 at least matched our view in what we've seen in our business. And we agree with the summary you've made in terms of what this year is setting up to be.

What we have not had the benefit of, which is particularly a strength of WESCO, is the industrial capital expenditures ticking up. And we clearly benefited back in 2009 moving into 2010 and 2011.

And you will recall, we are growing in our industrial end market double digit organically. When that happens, when we get both, that's kind of a double set of tailwinds. With our particular geographic profile and value proposition, we really, we benefit greatly.

It seems that capitalization is almost at 80%, which is a very high rate just for the US. That obviously would help you from a project standpoint. But if customers really have worked down that slack or that safety stock, I would imagine that you're having more discussions, like you just resigned with UTX in terms of having to rely on the bigger guys like you more because they just don't have that safety built into their system any more.

Yes, and we've clearly stated, and I will reinforce it, that those conversations have been increasing in a relative sense after this last economic downturn. This is a part of the cycle over the last four to five years versus prior than that.

I think the way these industrial companies manage their supply chains, moving through that down part of the cycle and then coming out the other end, supply chain integrity is more important. Their supply chain is tighter. There's not as much buffer stock, and they've consolidated their supply base and that is a continuing trend.

So I think that macro trend we continue to see. The point that I would make specific to WESCO, that global accounts RFP activity as the highest we've seen in five years, is a telling point.

John, we talked about it these last few quarters. In fact, I think we've had specific conversations about the fact that this is not an ability-to-invest question. It is a timing of willingness to invest.

So large industrials, we analyze it the same way you are. We talk to them, because they are our customers. Which is, it's a matter of when is the demand stream strong enough to say that we truly are -- I think overall capacity utilization is sitting at 76%, 77% right now in the US.

It doesn't take that long to tick up when everything starts to move positive. And people want to be on the front end of that investment decision for capital than being caught in the queue. So we agree with you.

Sure. Thanks, Ken.

Sam Darkatsh, Raymond James.

Most of my questions have been asked and answered. Just three really quick ones.

First off, just double-checking this. The 6% growth you are seeing on a daily basis in April, that does include Hazmasters and LaPrairie? Or it does not include Hazmasters and LaPrairie?

It does include Hazmasters and LaPrairie. It does. And it also adjusts all of Canada's sales for the one workday, the holiday that was on Good Friday essentially.

That is an all-in number, so it would include FX and everything else, too. It's an all-in, not necessarily --

It an all-in with FX. Again, the US growth organic is 9%, yes.

Got it. Thank you for that.

Second question. I've noticed that this quarter, at least, your operating margin guidance has a range of 40 basis points, which historically is real wide. I'm curious as to that.

I know you keep a tight reign on operating expenses depending on the variability of demand. Why might it be so wide? And does that suggest perhaps going forward a little bit of a more fixed OpEx planning going forward?

The widening of the range, specifically on the operating margin in the second quarter, really runs to the fact that as we started the year -- as you know, we've shown the numbers -- we started out softer than we thought.

So the anticipation in the second quarter with the improving outlook is that there will be more SG&A cost in the SG&A bucket related to some of the variable and incentive compensation schemes. That's really the wider band on the operating margin in the second quarter.

So going forward, then, in Q3 -- I don't want to have you issue guidance before you're ready, but you would imagine that that range tightens up going forward? It's just that it happens to be a Q2 thing?

I think it's probably more of a Q2, and then it tightens as it goes forward.

Okay. Last question if I could. What are you assuming for your Canadian growth in Q2 and for the year that is inherent within your guidance?

We haven't broken down guidance between geographies or even end markets. I would say that we wouldn't start it here, but you kind of got an indication of where we are month-to-date. And you know the US and Canadian breakout.

That's about as much as we would break it out at this point.

Are you assuming that the 4% Canadian growth that you saw in April is sustainable? Or do you think that a lot of that might just be weather impacted and what have you?

I would leave it at what I said before.

Okay, very good. Thank you very much, gentlemen.

Holden Lewis, BB&T.

I'm struggling a little bit with the perspective around the 6% number in April as well.

I guess the way that I'm looking at this is obviously 6% is a little bit high from an organic standpoint. I think you've sort of suggested maybe a point and a half. I think I also heard you suggest that projects that are delayed due to weather obviously aren't canceled.

So I would think as the weather gets better, you might have a surge of catch-up activity that might be benefiting April, maybe May, but may not be entirely sustainable through the year. I wanted to get some perspective on that.

And then on top of that, I kind of look at your global account pipeline number that you give out. It's been $2.5 billion-plus, I think, for the past four quarters. It really hasn't moved a lot, at least in terms of the number you give. I looked at the backlog growth number you gave, which was zero, I think, for Q1. I would have thought that backlog would be up if you're seeing deferrals.

I guess I'm hearing a really positive tone, but I'm seeing some numbers that might belie that, I guess. So I wanted to get a little bit more perspective.

Help us out a little bit. A little more specificity on the question.

I will answer one part first, which is the backlog. While we said backlog overall was flat from December to March 31, we did break out -- and the indication and the positive news there is that the US backlog expanded nicely. 6% in the quarter. So, that is the answer to that point.

I guess, Holden, look. When you look at the first quarter, and I think I broke it out, daily sales per workday, what happened in January versus the balance of the quarter, April represents a very good start to the second quarter. And it's a material step-up in momentum.

And if you go underneath the momentum, it is not driven by one geography or one end market. It's very strongly led by the US at 9% growth organically, versus 3% growth in the first quarter overall.

And Canada's growing. When you adjust for the one workday, which was a complete holiday across the Canadian market, which is a markedly better result, a step-up versus minus 4% on a local currency basis in Q1.

I mean that's where we stand at this point. Aprils not done, but we have more than a week or two of April under our belts.

But do you feel that April is benefiting from a return of volume that you lost through Q1 just because of the weather and therefore, you take that 6% total --

I'm sure there's some benefit there. But I already answered the question that we're seeing growth. Ryan Merkel asked it earlier -- What end markets? And I said it's in industrial, utility, CIG, and construction. It is very balanced, and it is balanced by geography.

So are there some projects that could have been in March that spilled into April -- yes, fine. And then the headwind is the Easter holiday, being in April this year versus last --

I guess we're parsing things a bit too tightly. I think when you step way back from this, this is a significant step-up in momentum fundamentally when you look at April versus Q1 overall, and when you look at the progress through Q1.

Obviously, we want to do everything we can with our execution to build off this base. But we are very encouraged with the start in April thus far, to the second quarter.

Okay. Thank you.

Christopher Glynn, Oppenheimer.

Just was wondering if there's any material difference in the May and June comps as compared to April?

No. Actually, I think if I think back to June of last year, I think there's no significant drivers year over year that would change the comps.

Okay.

And then the full-year margin ramp from Q1 to Q2 and Q1 to the full year, it's a steeper slope than the historical in the area. I'm just wondering what drives the confidence and how we should think about that?

It's really driven by -- compared to last year, where we saw really no step-up in volume as we moved throughout the year, other than the seasonality. In other words, the growth rate. We anticipate, with the step up in growth, we will see more leverage follow through on the bottom-line from our cost based.

The only comment I would make, and I agree and support what Ken said relative to no unique or special comparables in the second quarter. But typical linearity through the quarter would to be, April step-up in momentum sequentially into May into June.

That is typical. That's what we see in most years, unless we are in a downward part of the cycle and we're facing recessionary-type contraction. We will need to do that, clearly, but that's typical as weather improves and you move forward.

Okay. Thank you for that.

And just a bookkeeping question. On slide 18, where you have the organic sales, it says core sales for the Company down 0.3%. I was just wondering why that's different from the 1.6%?

Hold on.

On the webcast, Chris? Is that where you are referencing?

Yes, on slide 18. Maybe it is a typo. Is says total core growth sales, minus 0.3%. Everywhere else it referenced 1.6%.

Okay. That is core without acquisitions, but not organic.

Core has FX in it; organic has FX removed.

Okay. Could have figured that out, probably. Thank you.

That's okay, but that's the 1 point. On the earlier chart -- (Multiple speakers) there is a 1.9% of FX.

So you add that back any get to organic of 1.6%.

Okay. And is that the same for the for the subsegments -- industrial, construction, et cetera?

Yes, they would all have FX in them. We have not broken FX out by segment.

Great. Thank you.

Matt Duncan, Stephens Inc.

First thing I've got, just real quickly on the modeling for the 2Q, looking at SG&A cost.

Ken, it looks like they're going to be up at the midpoint of both sales and op margin guidance and gross margin. That implies a sequential SG&A cost increase of -- call it $15 million to $16 million. How much of that is from the acquisitions versus the organic business?

There's a few million dollars from acquisitions. It will be more heavily weighted to the core business. And it would run, to my comment earlier, which is a step up in the variable cost related to incentive compensation and accruals related to that as the volume continues to increase.

Okay. That helps.

And then the other question I've got, I just want to talk a little bit more about your safety business for a minute. After you bought Hazmasters, you've got a decent-sized safety business in both the US and Canada.

I'm just curious if you can talk some about how that fits in and sort of what the plan is for growing the safety business from here?

Well, we are pleased with Conney -- the acquisition we did a few years ago -- and everything that we liked about it, we like even more today. And we've got a traffic leader doing a very nice job with that business. And I think were starting to see the synergies between Conney and our global accounts and integrated supply-driven business model with customers.

When you look at the US, the Conney platform was a major entry point for us into one of the subverticals under industrial MRO, which was safety. And they were obviously a well-run company -- very good margins, accretive both on a gross margin and op margin basis to WESCO.

We have been putting investment into Conney. We got a centralized sales and application specialist group when we brought them. It was 12 folks. We've grown that to 48, and we're beginning to funnel more and more of safety opportunities across the broader WESCO branch network in and through Conney to manage and execute and deliver.

I think you'd see that as kind of a -- that will flow through our supplies category from a product category standpoint. We didn't have any safety presence in Canada whatsoever. And Hazmasters is -- think of it as a similar strategy to what we did with Conney in the US.

We think the industrial MRO leg to our business is very attractive. And we've highlighted that for a number of years as being an important portion of the portfolio that we want to strengthen, the organic growth and acquisitions. That is what Conney does, and that's what Hazmasters do.

With Hazmasters in particular, they've have got 14 locations across Canada. It's a terrific business -- again, well-run. Accretive at the gross margin and operating margin line to WESCO.

And it's a business we're going to run of play book where, again, taking their capabilities, their supplier relationships to solution sell safety into our current customers. It's a customer synergy.

And then where they have specific safety customers, then pull in the other parts of the WESCO portfolio in terms of electrical, data, lighting, etc.

Okay. Very helpful. John, how big is that safety business now in terms of revenues?

You know what, I don't have -- that's a good point --

Conney, when we publicized it, it was $85 million. And Hazmasters is comparable. (multiple speakers).

It's $80 million. Let me not address that question with a number that -- on a combined basis, what we acquired is $170 million, approximately, but we've also grown. That something we could do a better job kind of putting a little spotlight on in the future. Dan, let's take that as a note that we could do that.

Will do.

Okay. Thank you.

We have time for one more quick question.

Winnie Clark, UBS.

You talked a little bit about an LED win in your remarks. Can you talk about growth trends that you saw in lighting in the quarter and potentially give us a bit of a breakdown between what you're seeing in lamp versus fixtures, controls, et cetera?

Great question, Winnie. Thank you and good morning. ¶

Overall, lighting for us in the quarter was flattish. When you dig underneath of it, we have been growing lighting nicely for a series of quarters.

When you look at it -- and this is about all that I will say in terms of mix -- there are a number of our suppliers where we grew in the quarter and, in fact, a number that we grew very strongly with in the double-digit range. There are other lighting supplier partners we have where we did not grow. So, net-net overall, we were flattish in terms of lighting.

When you look at the composition and break it down, which I have done in the past. And with your question of lamps versus fixtures, ballasts, controls and the balance of the lighting package, our lamp business was down double digits in the quarter.

Now, remember, WESCO may have a little different mix than some supplier manufactures you look at because we do have a legacy lamp business with a number of our current customers. The fixture ballast controls, the balance of the lighting solution, that grew mid-single-digit range in the quarter. That gives you a sense of mix between replacement lamp business and the rest of the lighting solution.

Something we have not talked about the past, and I thought that since you raised the question, I will at least put a spotlight on it. I made the comment previously about LED or solid state mix. I said we are very consistent with our suppliers, and we are.

When you look supplier by supplier, on a supplier basis, we are very consistent with our LED mix. But for WESCO overall, it's becoming a much more meaningful part of our portfolio.

I'll tell you the LED mix from our perspective is running roughly one-third of our lighting business now. And that's inclusive of lamps in the replacement lamp business. If you pull the replacement lamps out, that number would even go higher.

So it's a good indicator of the new product introduction solution sell for solid-state lighting to our customers.

Okay, thanks. I said one quick one, and I'll leave it at that.

Let me wrap it.

Thanks again. I know there are a few additional folks in the queue. And Dan is available all day and night, and Ken as well. And I am as well if you would like to talk. I know he's got a schedule of calls set up.

Thank you for your time today and your continued support. Have a great day.

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