WESCO International, Inc. (WCC) Q1 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to the WESCO Incorporated First Quarter 2013 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Dan Brailer. Please go ahead.

Thanks, Chad. Good morning, ladies and gentlemen. Thank you for joining us for WESCO International's conference call to review our first quarter 2013 financial results. Participating in the earnings conference call this morning are the following officers: Mr. John Engel, Chairman, President and Chief Executive Officer; and Mr. Ken Parks, Vice President and Chief Financial Officer. 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 7 days. Additionally, relating to this morning's release of earnings announcement, a supplemental financial presentation has been produced, which provides a summary of certain financial and end-market information to be reviewed in today's commentary by management. We have filed the supplemental 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 supplemental presentation to facilitate our review of the results. As John and Ken go through their prepared remarks, they will reference specific supplemental page numbers that relate to their comments. In order to accommodate as many investors and analysts as possible, we respectfully ask that your questions be limited to 1 per person. This conference call includes forward-looking statements, and therefore, actual results may differ materially from expectations. For additional information on WESCO International, please refer to the company's SEC filings, including the risk factors described therein. The following presentation may also include a discussion of certain non-GAAP financial measures. Information required by Regulation G with respect to such non-GAAP financial measures can be obtained via WESCO's website at www.wesco.com. The opening comments I will be making refer to Page 3 in the supplemental presentation. And before I hand it over to John and Ken to review the first quarter results, I'll take a minute to clarify the numbers they will be reviewing. As you know, we recorded a $36 million charge in the fourth quarter of 2012 results from the previously disclosed ArcelorMittal litigation. Following confirmation of insurance coverage by our carriers during the first quarter of 2013, we were able to record the insurance receivable, mitigating our financial exposure on the matter. We filed Form 8-Ks regarding these matters on February 19 and April 16. In addition, during last year's first quarter, we favorably resolved a long-standing tax appeal with the IRS resulting in a reduction of noncash interest expense of $3.2 million. This item was disclosed during our first quarter 2012 earnings call. To make year-over-year comparisons more meaningful, we have adjusted the non-recurring favorable items from both years and from the impacted financial statement categories as shown in this chart. For the remainder of today's call, John and Ken will reference the adjusted amounts shown on this page. I would now like to turn the call over to John Engel. John?

Thank you, Dan, and good morning, everyone. Our first quarter results reflect solid execution in a challenging environment. Consistent with the full year outlook that we provided in our last earnings call, we have yet to see a fundamental improvement in many of our served markets. In the meantime, we remain focused on what we can control, that is, our execution. This consistent focus on our One WESCO sales, productivity and lean initiatives is driving positive results in our business. In addition, we continue to make selective investments in our 8 growth engines and 6 operational excellence initiatives to support delivering our profitable growth objectives. Moving to our Q1 highlights on Page 4, we posted record sales and gross margins in the first quarter, and maintained our cost discipline while expanding operating margins 40 basis points to 5.6%. It is encouraging that our pricing and sourcing initiatives, in conjunction with our recent acquisitions, are having a positive effect on improving gross margins over the last 3 quarters. We are also pleased with the performance and effective integration of our recent acquisitions, including EECOL, where strong results were reflected in their sales growth of approximately 7% versus prior year. As a result, EPS grew double digits in the first quarter. Free cash flow generation was also strong at 121% (sic) [127%] of net income, up 38% over last year. We reduced our financial leverage to 3.6x on a pro forma basis to just above the upper end of our targeted range, and we continue to direct our cash usage to debt reduction. Our acquisition pipeline is robust and actively managed, and we see excellent opportunities to further expand and strengthen our portfolio in 2013. Our second quarter start so far in April is consistent with our first quarter, with overall sales being up 13% versus prior year. In addition, through this point in April, our book-to-bill ratio is tracking well above 1.0. Now moving to our industrial performance on Page 5. Sales to our industrial customers declined in the quarter, driven by industrial capital projects in the prior year and delays in customer spending, while industrial MRO and OEM sales were roughly flat. Channel inventories appear to be tightening with some customers reducing inventory. With that said, we continue to see strong bidding activities as the opportunity pipeline for new customers and expanding our scope of supply with current customers increased to a record of over $2.4 billion in the quarter. In addition, we had a nice One WESCO win with a global telecom provider in Q1, where we will be providing electrical MRO, Data Communications and OEM electronics across their North American locations. Now moving to our construction performance on Page 6. Nonresidential construction markets remain challenged in the U.S. but continue to grow in Canada and around most of the world. Weather has been a bit of a headwind in the first quarter as last year was marked by a warmer winter and an earlier start to the construction season. The growing strength of the residential construction recovery this year is a positive leading indicator for a non-resi construction market later in 2013 and into next year. Backlog was up approximately 7% versus year end 2012, driven by large increases in utility, Datacom and international. Bidding activity levels have increased as well, particularly for upgrades, retrofits and energy efficiency projects. In addition, in the first quarter, we were pleased to secure a large construction win in Western Canada from an oil sands extraction project, which also includes follow-on MRO materials. Page 7 outlines our Utility performance. As expected, our Utility business continues to perform well and our market position is improving. Organic sales to our Utility customers were up almost 17%, and that's compared to our first quarter last year, which grew 24%. We have now delivered 8 consecutive quarters of year-over-year organic sales growth, driven by new wins and an expanding scope of supply with our current Utility customers. Our Integrated Supply capabilities are in high demand where utilities want to improve the efficiency and effectiveness of their supply chains. We're in the process of implementing large wins that we secured over the last year, as well as expanding our business with several existing customers. Our pipeline of opportunities remain strong and we are well-positioned with our customers and prospects for additional growth. Now on to Page 8, which outlines our CIG performance. Sales in the first quarter were down for the second consecutive quarter primarily due to government budget constraints and the deferral of project awards. Bidding activity continues in the commercial and institutional markets. Government bidding also continues, and our opportunity pipeline is strong at over $500 million. In the first quarter, we were pleased to have signed a multi-year agreement with an organization that facilitates the purchasing activities of public agencies, eliminating the need for multiple bid solicitations. This agreement covers a broad range of products, including full-line electrical, Data Communication, security and lighting. This is another example of a One WESCO win combining multiple product lines across multiple locations. Now Ken Parks will provide the details on our first quarter results and our outlook for the second quarter. Ken?

Thanks, John, and good morning to everyone. On Slide 9, I'm going to review the Q1 results in context of the outlook we provided in January during our fourth quarter call. As Dan indicated at the beginning of the call, I'm going to speak to Q1 2012 and Q1 2013 results adjusted to exclude the favorable impacts of non-recurring items. During our January teleconference, we estimated first quarter consolidated sales would grow between 12% and 14% year-over-year, with minus 1 to plus 1 growth excluding EECOL, and that would be minus 2% to flat organically. Overall, we performed in line with that January outlook. Consolidated sales in the quarter were $1.8 billion, an increase of 12.6% year-over-year. Acquisitions accounted for 16 percentage points of the growth, comprised of approximately 14 points from EECOL and 2 points from Trydor and Conney. Organically, sales declined 3.4% but -- and were softer than expected. Normalizing for the impact of 1 less workday in 2013, organic sales declined approximately 1.8%. Sequentially, organic sales declined 2.1%, which is in line with our typical seasonal trend, but that's different from 2012, where the year started out strong and organic sales increased from the fourth quarter of 2011. Normalized organic sales declined approximately 1.5 points in January and February, and 2% in March. As John said, our backlog remains at healthy levels as core backlog declined only 3% from last year's first quarter and expanded approximately 7% sequentially over year-end 2012. The estimated effective pricing in the quarter was approximately 1%. Now EECOL sales were $227 million, which was up approximately 7% over the first quarter of 2012, and based on our review of EECOL's historical seasonality trends, quarterly sales do typically increase throughout the year. In our January earnings call, we estimated that first quarter gross margin would be at or above 20.6% and we reached 21.1%, which is a WESCO record. While acquisitions were accretive to gross margins, we were especially pleased to see core gross margins expand approximately 30 basis points year-over-year. Importantly, this core expansion occurred even with the mix headwinds, stronger utility sales, which do tend to run at a lower gross margin level than our overall company average. We continue to focus on delivering against our 22% gross margin target and feel good about our progress to date. SG&A for the quarter was $264 million compared to $228 million in the first quarter of last year. All of the growth in SG&A year-over-year does come from our acquisitions of EECOL, Conney and Trydor. Core SG&A at $228 million was flat to the prior year and flat sequentially from the fourth quarter. Core employment levels were down slightly from last year's first quarter and unchanged from year-end 2012 as we continue to closely manage our overall costs while selectively investing to support the growth engines, as well as the operational excellence initiatives. Our operating profit pull-through, which is measured as year-over-year incremental operating profit dollars divided by year-over-year incremental gross profit dollars, is the metric we watch to drive operating margin expansion while still investing in the business for growth. Over time, our objective is to consistently generate a core operating profit pull-through rate of approximately 50%. Because we're expecting to see the benefit of market recovery in the second half, we made a decision to hold our operating costs as flat as possible through the first half of the year instead of making a significant pullback on cost. This decision will weigh on our short-term pull-through metric for the core, but we believe it's appropriate in light of the anticipated market improvements. That said, we're prepared as always to take more significant expense reduction actions if we don't see solid signs of recovery develop. Our January outlook on first quarter operating margin was for expansion to at least 5.5%. Operating profit in the first quarter grew to $101 million, taking operating margin to 5.6% of sales, which is solid expansion of 40 basis points over Q1 of 2012. Interest expense in the first quarter increased to $22 million versus $12 million in the prior year, and that's as a result of the acquisition-related financing at the end of 2012 for EECOL. As a part of that financing, we were able to obtain very attractive rates, and as a result, our overall weighted average borrowing rate for the quarter declined to 3.9% from 4.7% last year. Finally, the first quarter effective income tax rate was 25.7%, and net income grew 15.1% to $59 million compared to $51 million last year. Now, I'll move on to Slide 11, and what you see here is that earnings per diluted share for the quarter grew 13% to $1.12, and that's from $0.99 in the first quarter last year. As shown on the chart, the core business was a $0.12 drag on EPS, with the impact of 3% organic sales decline being only partially mitigated by gross margin expansion and SG&A control. On the other hand, acquisitions contributed approximately $0.25 of EPS accretion in the quarter. EECOL specifically contributed approximately $0.22 of EPS and is in line with our full year accretion expectations. We maintain our outlook that EECOL will be accretive to WESCO earnings per share by approximately $1 in 2013. We have a history of generating strong free cash flow throughout the portions of the business cycle, and as shown on Chart 11, free cash flow for the first quarter was very strong at $74 million, and that's 127% of net income, compared to free cash flow of $54 million or 106% of net income in last year's first quarter. Over the last 8 quarters, we've generated close to $0.5 billion of free cash flow, which essentially equals net income over that time period. Our redeployment strategy has been consistent. As a first priority, we invest in our business through organic growth initiatives and acquisitions, which will strengthen and profitably grow the business over the long term. That said, with the acquisition of EECOL, we entered into a financing that increased our leverage ratio above our target range of 2 to 3.5x total debt to EBITDA for the short term. As we stated at the time of the acquisition, we're committed to prioritizing near-term cash redeployment towards debt reduction until we're back within our target range. With our solid first quarter cash flow, we were able to exit March at a reported leverage ratio of 4.3x EBITDA, that's down from 4.7x at year end, but most importantly, our pro forma leverage ratio improved to approximately 3.6x EBITDA, which is just above the top end of our target range. Liquidity, defined as invested cash plus committed borrowing capacity, was healthy at approximately $374 million at the end of the first quarter and expanded nicely from $300 million at the end of 2012. ROIC at the end of March was 10.8%. And although the EECOL acquisition is expected to reduce our overall ROIC in the short term, we remain focused on our long-term target of 15%. Now to the 2Q outlook. In January, we indicated that the economic recovery was expected to be weighted to the second half of the year, and our expectations were for flattish organic top line in the first half. The current data trends have not altered our view. Consistent with those January comments, we continue to believe the second half of 2013 will be stronger than the first. In the second quarter, we expect consolidated year-over-year sales growth of approximately 13% to 16%, and excluding EECOL, we estimate sales will be down 1% to up 2%. Sequentially, organic sales tend to grow mid-single digits from the first quarter levels. We expect gross margin to be at or above 20.9% and operating margin to be at least 6%. Last year in the second quarter, we reported a $4 million increase in SG&A as a result of moving all employee merit increases to 1 date, which was April 1. As we keep a tight rein on costs, we have deferred 2013 annual merit increases to July 1. Finally, the second quarter's effective tax rate is expected to be in the range of 26% to 28%. With that, I would now like to open up the conference call for your questions.

[Operator Instructions] Our first question comes from David Manthey with Robert W. Baird. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: First off, on the -- as you look through the year, I guess the $64,000 question for everyone is, the comments about the back half being stronger. I'm wondering beyond easier comps, you said that the backlog being up and a few other things, what gives you confidence in that outlook as we move through the year? Or is it just based on these near-term items and will adjust as the year goes on?

Well, what we see, a couple of things, as John pointed out as we went through, and a couple that I did as well. You highlighted the backlog expansion from year end. We do see, and we've talked about it with you before, a good solid resi recovery underneath that non-resi trend moving forward. So that makes us feel like there is some substance behind it. We always have to see when it starts to come to fruition, but the good sign is backlog is expanding. In addition to that, the other thing noted was that the Utility business continues to roll in the impact of the new wins that they saw as we move through 2012, and that will continue to ramp in 2013. In light of all of that, we are continuing to do exactly what I outlined, which is we held our cost very, very tight. So as this economy starts to develop and recover, and we still would say we think the second half has some underlying fundamentals of strength that are going to support it, we should see nice leverage as we move through that with our good cost position. So those are really the things that we look at. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: On Slide 9, relative to your guidance for the first quarter, it looked like sales were about the midpoint. Gross margin, I think, was 50 basis points better, but EBIT was only about 10% better than your baseline. You mentioned that all the growth in SG&A basically came from the acquisitions and the core was flat. Could you talk about what surprised you? Was it EECOL, SG&A? Was it different from what you had expected, why there was that variance there? And then just as a quick follow-up on that, what was the level of merit pay last year and how much do you think that'll be this year?

Okay. There were -- as far as the EECOL numbers, there were really no surprises in those. They were essentially where we modeled it. The weighting on the operating margin is due to the fact that we did hold the cost flat, but we saw the topline decline a bit. So that puts a little bit of basis point weight on the operating margin number. As far as merit increases last year, we had -- I think we talked about $3 million or $4 million of increase in the second quarter. We are planning for comparable kind of levels that will be around that number that would kick in, in July based upon our current look. But we will continue to watch this economy develop as we move through the second quarter.

The other thing I'd add, Dave, as we moved through the second half of last year, and we reported this, that we tightened up our cost controls, really drove hard our productivity initiatives and been working very hard with our pricing and sourcing programs on improving gross margins. And last year really was kind of a two-step year when you look at the first half versus second half in terms of sales growth organically, but also gross margins. We stepped up gross margins in the second half, coupled with, I would argue, very good cost controls. And then we extended that and that's been our same operating philosophy and approach for the first half of this year because as Ken mentioned, that was the construct of how we built our expectations for 2013. The natural tendency would be for our cost to grow in Q1. And if you look at us historically, even without adding headcount, they do, because there's not linearity to our cost through the year. Q1's typically a little higher weighted. So -- but yet, we were able to hold SG&A flat. If you kind of get underneath that, give you a little more color and insight into what we've been doing, there have been parts of the business where we've been taking substantial cost reductions, particularly in Datacom, our Datacom business. We've gotten some great efficiencies combining some locations and doing a few other things. We haven't talked much about that over the last 3 to 4 quarters. Simultaneously, we're still investing. And I'd use the term selectively investing, but in some cases, significantly investing in some of our growth engines that are offering promise. So we continue to invest in Global Accounts, we've made some investments in Utility and Integrated Supply, and we also -- and including in that is some of the marketing activities. We have a centralized lead-generation qualification group that we've referred to before. And in addition, we're investing in Conney, and seeing that was a very strategic acquisition for us. Conney grew in the quarter. It's not part of our core yet, it will be as we move into the third quarter, but it grew in the quarter and it's growing so far in April. Actually the growth rate has ticked up, and we really like what we see more and more with that business. And so we've been applying some incremental investments in terms of sales and applications specialists in that business. Hopefully, Dave, that gives you a little more insight in the SG&A strategy. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: It does.

Our next question comes from Josh Pokrzywinski with MKM Partners.

I know you're still kind of feeling your way around on the whole topic of guidance and updating it, and I appreciate the color you give. I just want to know how we should think about the earlier year comments, the 5.75 plus in today's environment. It sounds like everything you're saying seems consistent with your outlook from 3 months ago. Should we interpret that as reiterating or look for an update later in the year? Or just trying to get some more color on that.

Yes, Josh, thanks for that question. Look, if we -- if we're -- we'll give you -- I'll share our view. If we objectively analyze the first quarter, we're disappointed with our organic sales growth. I mean we're at the low end of the range, but we really came in a little bit below the low end of the range. It's softer than expected. When we outlined what we thought the first quarter would be and the second quarter, but particularly the first quarter, we thought that we'd not come in at the bottom of the range or below the range on organic sales growth. And so that's disappointing to us. When we really analyze it by end market segment, it's clearly understandable, but we're not happy with that. The acquisitions came in a bit stronger than we anticipated, but we've been driving them hard and we're very encouraged with what we're seeing initially. I talked to -- in response to Dave's question, what we're doing with SG&A, and we feel really good about the gross margin traction we're getting, and the free cash flow generation was excellent and it's a good characteristic of our business. We've shown a good ability to drive that. We paid down debt, leverage ratio has come down. It's not quite inside our control band yet, but it's just above the top end. So we're ahead of schedule in that regard. So when we take an objective look at the whole quarter, we feel that in balance, it was a really solid quarter, the disappointment was organic sales growth. With that said, backlog grew nicely. And if you peel the onion and get underneath the backlog, and I'm really focused on the sequential backlog because that's what's most relevant in terms of what sets up for Q2 and as we move to the back half, and it grew 7% sequentially and there were large increases, very large, double-digit increases in Datacom, international and Utility. So the backlog gives us some confidence, and our book-to-bill is tracking well above 1.0 so far in April. And so that gives us a view of the second quarter. Our fundamental construct for the year has not changed, but organic growth is going to have to move in a positive direction, Josh, to be very direct, and it's going to have to move as we move through the year. So we're going to see how the second quarter unfolds, and as we move through the second quarter and get to the back end of the second quarter and have our earnings call and approach our Investor Day, we'll have a refreshed outlook on the year. That's our approach.

Yes, I'd like to -- just 1 comment or 2 to that, which is, fair question on the beginning about as we kind of feel our way through this, are we reaffirming, are we changing, are we getting -- you can understand that based upon the way that our outlook is constructed, it really counts on a step-up in the second half. We don't have enough indicators to say that, that's not happening. So we're going to continue to move through this quarter and watch those indicators. But as far as reaffirming, we just don't have enough information to say it's going to be different at this point. So it's important to go through this quarter and we'll watch it closely.

That's right. If I could just add a follow-on for industrial specifically, it seemed like the loss of momentum there over the past couple of quarters here has been surprising. If we just strip out comps, selling days, I know that weather has been, call it an irritant, how do you feel about the underlying business? Obviously, a lot of noise in the first quarter, but it seems like there's a lot of moving parts there between some of those irritation items and what sounds like behind that, some hopeful commentary on backlog, momentum and quotations and customer wins.

Thank you for the additional clarifying question because I can imagine from all of your perspective when you look at industrial and you look at the various other end-market segments of customers that we service, say wait a minute, industrial looks like the biggest delta. And it does from the outside looking in. If you peel the onion, MRO and OEM portions of industrial are essentially flat. And so now, you look at Q3 and Q4 of last year, we were roughly flat, okay? And so the MRO and OEM is kind of -- represents that industrial is still growing slowly but slowed down, let's call it. The first quarter of last year, we grew 12% in industrial. And that was driven by -- we had some large industrial capital projects, specifically in metals and mining and in some in petrochem. And they're non-repeating and they don't show up this year, and they really helped our results last year. So as we take a very objective look at industrial, the way it looks, the way it feels in terms of the results, because I think that's 1 part of your question, the results, if you adjust for the non-repeating industrial capital projects where we sell direct to industrial end users, the MRO and OEM is roughly flattish, and that's consistent with the second half of last year, which was our construct. That was our outlook and our construct coming into the year overall for us for organic results. Relative to the opportunity pipeline, I got to tell you, the activity is stepped up. Our bidding activity levels are up, our opportunity pipeline has 5 phase gates in it. We don't include in that $2.4 billion, which has grown by the way, our prior record was $2.3 billion, we're over $2.4 billion now, we don't include the first part of those 5 phase gates, which is we'll call it the discovery phase. So these are bona fide opportunities where we're in discussion, seeing if we can literally lock in a program or to create value or responding to an RFP. And so I'd tell you that those activity levels have not -- they're not flatlined, they're not degraded, they've stepped up. And part of it is, I think, our ability with our One WESCO value proposition. We're engaging more customers. We did add a few Global Accounts and Integrated Supply customers and new ones in the quarter, and what we've tried to do in this earnings release and the last 1 in the supplemental is give a little bit more color around some of the wins. We're not going to give you company names, but to give you a sense of what the composition of those wins are. And hopefully, that's given you some insight that if you were to set the clock back a few years ago, even, I'd say, 1.5 years, 2 years ago, the nature of some of these wins would be, okay, we just won the electrical MRO as part of Global Accounts, and we just won an Integrated Supply contract. Now, you're seeing other parts of WESCO being part of these awards and that's our One WESCO strategy starting to gain some traction, and we're relatively in the early days of that. We see that as a multi-year transition cultural shift, where we get our various parts of our organization to work together, focus on the customer. But we're very encouraged with the momentum we're seeing. Does that help?

That does, John.

Our next question comes from Deane Dray with Citi Research.

Just for starters, I really like the use of these slides. We've all kind of gone through a migration where it started off as supplemental and didn't really get referenced, then started to get reference and now, it's part of the whole prepared remarks. But it's very helpful for us so thank you for that. And first question is the -- just talk more about how the quarter progressed, and in particular, what impact from pricing. I know you're baking in a positive 1% for the year, but just what's going on with pricing? As some of the raw materials are coming off there's a little less pressure to the upside, is it going to be harder to get price?

Yes. So let me address the first part and maybe, Ken, you can give a little color on the pricing. If you look at our sales per workday, organic sales per workday, we were roughly flattish across the quarter. What do I mean by that? Down 1-plus percent for January, February, around 2% in March. So I don't -- we don't like to kind of look back and say, well, where Easter fell, this is a little soft. I mean that's all kind of in the margin there [ph]. We were roughly flattish across the quarter. We didn't see the bigger drop in March versus January, February. And so far as we start out in April, as I mentioned, Deane, our overall sales are up 13%. Overall sales results in Q1 were 12.x, call it, 13%. And so we're roughly tracking with the same momentum, I'd call it, versus prior year. Ken, you want to talk a little bit about pricing?

Sure. We show in 1 of the charts that we didn't speak to but that is in the appendix to the supplemental, the pricing impact in the quarter, which we estimated was about 1 point. That's consistent with what we've seen through the second half of 2012. We saw a step-down a little bit in the middle of the year and then a step back up. We don't officially forecast pricing as we look out into our future quarters. So what -- the approach that we take is we say we think it's going to essentially continue the way it is right now. So what we'd say is that we believe the environment doesn't change significantly even based on some of the movements and some of the commodities. The good news out of all that, and we're not there, is that some of the margin step-up that we talked about in the quarter is based upon the good outcome of some of our pricing and supply chain initiatives. We haven't really had to take a look closely at our pricing outlook because we had not seen that start to come to fruition yet. I think you'll see us over the next few quarters start to really take a look at forward-looking on pricing because we're starting to see some of that benefit come through our numbers. So that's probably a little bit of flavor around it, but the highest level takeaway from my perspective is, we're anticipating the environment to kind of be the same as we...

Well, the only thing I'd add, maybe 1 clarification or adjustment to that, would be with respect to copper, but -- and I'll tend to that. But relative to supplier-price increases, Deane, let me give you a little insight into that. Our supplier base, roughly -- not every product category, but I'll give you the band. They were looking to push 2% to 6% price increases through in Q1. We've got a very clear view of what they're planning for Q2 and in early part of Q3, and they're still within that range. And the ability to do that is going to be a function of that particular product and the end market and the customer they're trying to serve. Now copper has stepped down and even stepped down in the last 48 hours. And so that doesn't give us any pause, however, because I think we've shown the ability to do a very good job at managing our margins, gross margin level, in the face of very volatile copper markets. And it still doesn't affect a large portion of our portfolio anyway. But even with that said, I think we've shown that ability. And so copper's nudging down closer to $3, it hasn't been there in some time. That's just something we know how to deal with and we've dealt with in the past, and I don't see that -- that doesn't give us any particular concern.

That's helpful. And then a lot of focus on backlog and you're at record backlog levels now, but maybe you can address just sequentially that increase, what the mix of going into the backlog. You said Datacom, international and Utility, but within that, is there an implied margin, the types of products going in that gives you further confidence?

Yes, great question. As I'd say, with Utility growing at the rate that it did in Q1 versus the rest of the business, Utility gross margins are at a lower level than our overall WESCO corporate reported results. They have been historically, they still are. So that creates a little bit of gross margin mix challenge, but we did a very good job of combating that with our pricing and sourcing initiatives in the first quarter. So utility is off to a very strong start in April as that momentum continues. The backlog did grow nicely, sequentially, it grew very strongly in Datacom. While it's very strong double-digit number, and international as well, Canada was down a little bit sequentially. Very low single digits, but it was up 4% versus Q1 of last year, whereas overall WESCO backlog was down 3% versus Q1 last year. So the takeaway on Canada should be that the backlog is very strong, and it's up around and bouncing around near -- right at record levels, a little bit of variation month-to-month, but holding up very nicely. And then the rest of the business is just across all the other segments, Deane. And so that's where, I think, it's more of and some of that shorter cycle. And so it's going to -- what's important is the bid activity levels, which we have seen step up. I think the 1 thing that is clear now is the residential recovery's clearly underway. And so it's not a matter of if, it's "when", when non-resi recovers. So we're hopeful now that at least we can begin to see the beginning of that as we move to the latter half of this year and into next.

Our next question comes from John Baliotti with Janney Montgomery Scott.

I just wanted to know that your stock, I think in sympathy, has been a little more volatile given the commentary we're hearing out of other natural resources end markets, and I guess there's an assumption about EECOL. And I was just -- it's nice to see, on a relative and absolute basis, the performance of EECOL in the quarter. And I was just wondering if you could give us just some color on how that business was trending in the quarter and just maybe how you expect to roll that out in terms of integrating it, and so your expectations as the rest of the year unfolds.

Yes, John, I will tell you we really like that business as we went after it for over 5 years. We were thrilled to land it in the fourth quarter of last year, and now, we have essentially 4 months under our belt and we couldn't be more pleased with the quality of the business, the management team, the employees, how it's run, both the Canadian operations and the South American operations. I thank you for your question, I'd like to give you a little -- I'll give you a little color. Overall sales in the first quarter, and again, it's not part of our core last year, but overall sales -- and by the way, traditionally, we would -- we've not done this with acquisitions where we gave what the effective growth rate was, but we started doing that, I think, now in this quarter. I think it's important for your understanding and particularly, with a large acquisition like this. Overall sales grew 7%. Canada grew 5%. All 4 provinces that EECOL has operations in, in Canada grew, all 4. And 2 of them were double-digits, but all 4 grew. So we're -- when you look at the quality of the EECOL sales results in Canada and the composition, excellent. So far -- let me hit South America and then come to EECOL overall. South America was up very strongly double digits, obviously, to get the overall to 7%. And we grew in all 4 countries where EECOL has operations: Chile, Peru, Ecuador and Argentina. And again, feel terrific about that business. So -- and I will tell you that April, EECOL's start is very strong. Now, look, it's not many days yet. But it's growing at a higher rate than was delivered in the first quarter.

Okay, that's great to hear. I was just wondering, is it -- I think sometimes people look at any business going into those -- into a market, if it's a strong market or soft market as being parallel to that, and just rising and falling, and maybe there should be a distinction between maintenance type of business versus large capital investment. And is it -- are you -- do you think the market in general is steadier for what you sell into it or is it -- and I guess, hopefully, there's also the percentage of market share gains that are going on, but how would you characterize that versus maybe, the large capital investments that people are concerned about?

Excellent question. Look, when you look at EECOL's mix, and we've given some insight in the charts that we used in the last earnings call, some were in the investor presentations and now, with our 10-K and 8-K filings it gives some deeper insight, but they've got a broad business. Construction, broad-based construction market, not just non-resi, but including kind of high-end, multi-family resi. Industrial, real nice set of industrial support businesses, as well as utility. And I'll tell you that Trydor and Brews performed very well in the quarter, exceptionally well. And so our utility execution and strategy in Canada is off to an excellent start. The only other comment I'd make about Canada, it's clear that the Canadian economy has slowed down a bit, but it's still growing. And it's really driven by, I'd say, weaker housing market fundamentally. But also, there's no doubt that there's been a lot of press around kind of the larger, longer cycle extraction industries and what's going to happen. From our perspective, there appears to be very strong demand still for Canada's heavy crude, the U.S. Gulf Coast refiners prize that. One of the issues is, and a number of experts are saying this, we share this view because our view of the Canadian market is very bullish over the mid to long term as we've articulated when we did the acquisitions of Brews, Trydor and then EECOL, is that we would expect that once additional pipelines are built through the U.S. and the Canadian, sure, that would continue to help support oil pricing. And so again, there has clearly been some slowdown, but everything is relative. So you look at WESCO's position, we have this terrific position in the Canadian market, it's attractive to us. We have a position in the U.S. market. There's some challenges, but we like our business. We have this position we've now acquired in the Latin -- Central and South America, which we like very much. We have very little exposure, virtually none to Europe, and we have some to some of the other continents and that's through our Global Accounts and Integrated Supply. So we like how we're positioned in our mix of markets. That's our view.

One other thing I'll add to that, because you asked about integration and John spoke about the integration of the business, the teams coming together. It's important to point out that as we told you about the full year accretion being $1, really, the only synergy that we built into that was tax synergies. And that has been successfully put into place, and you can see that in our tax rate. I make the point because you see the tax rate moving last year to this year.

And let me reinforce that. I think it's really important, and I'll state it again, that with the position that EECOL had in the market, and particular is a number of their supplier relationships that they were lined up with that we did not have on the WESCO side, that we see tremendous power in their operating model and their brand, and so we're going to customers with both the WESCO Canadian brand and the EECOL brand. EECOL was founded in 1919, WESCO Canada in 1922. We were high-quality competitors that respected each other for 90-plus years. And so we think that together, now we combined, we have this broader set of supplier relationships that we can serve customers even better. So we've not -- and I have been very clear that the first couple of years, we're going to focus on that strategy and not work on a whole series of other synergies. It's a little different than the other acquisitions we've done. But so far, we're off to a good start, consistent with our expectations.

Our next question comes from Christopher Glynn with Oppenheimer. Christopher Glynn - Oppenheimer & Co. Inc., Research Division: Just to get a little perspective on some of the book-to-bill comments and the backlog growth. Would you characterize those within the normal seasonality of your businesses?

We should have a tick up, yes. I think the mix may be a little bit different but yes, we should have a tick up. I wouldn't say it's at a significantly higher rate than what we would expect. I mean the good news is we're seeing it though. Christopher Glynn - Oppenheimer & Co. Inc., Research Division: Great. And then on the SG&A comment, there's the D&A line there, too. I think that was a little higher than most people modeled, but is the first quarter a good run rate for that now?

Yes, the first quarter is a good run rate for that. Christopher Glynn - Oppenheimer & Co. Inc., Research Division: Okay. And then gross margin, looking at the guide, I know it's sort of trivial, but any reason that should be down sequentially or you're just kind of measuring for the normal fluctuation potential?

There's a little bit of normal fluctuation potential because that -- and it runs to how we book things like supplier volume rebates versus the volume coming in through the year. It's just to account for the normal small amount of fluctuation.

In addition, if we -- depending on how the spring going into summer construction season goes and to the extent Utility continues to perform strongly and Construction does pick up, that runs with it, particularly the Direct Ship portion of our business runs with lower gross margin. So if you look at us over the long run, you see that, just call it variation, typically as we move from Q1 to Q2.

Our next question comes from Sam Darkatsh with Raymond James. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Two questions, if I might. First, with respect to Utility, the 17.5% growth in the quarter, generally speaking, how much of that came from the new wins and how much of that from the base business? And then you also mentioned that you expect those wins to ramp as the year progresses, but your comparisons also get considerably easier. So should we expect growth out of the Utility segment to be considerably higher than that 17.5% as the year goes on?

Yes. So, Sam, I think it's -- on the second question, I think as you know, we don't typically provide guidance or forecast by segment. And so I think can't -- the comment around Utility is we've had a series of wins, and I mentioned this in the last several earnings conference calls that -- was we got questions around what was the phasing of the implementation. And I mentioned that the phasing was 6 to 9 to 12 months depending on what win we were talking about. So that's -- we're in that phase and we're seeing that now. That was your second question. What was your first question again? Sam Darkatsh - Raymond James & Associates, Inc., Research Division: With respect to -- of the 17.5%, how much of that was...

Breakout, right, right. Here's how I think about it. If you take a look, and I think now, you see Hubbell's report and you're going to get some other interesting data points that represent a good reference, again, we're more biased to generation, substation to distribution versus transmission. Our view's been consistent that the distribution portion of the utility market was going to grow very low single-digits this year. So it's not the market driving us. It really is the combination of new wins plus, and I want to emphasize, this is really important, expanding our business with current customers. And so we had as much contribution from that as we do from the new wins. And that's something we've been working on for the better part of 1.5 years, 2 years. You think of it as kind of a complete One WESCO utility approach with current customers and trying to expand to make sure we sell our complete basket. So we've been increasing this scope of supply with the current customers, and that's contributing nicely along with the new customers. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Second question would be a bit of a broad question, I apologize for it. We're a bit hamstrung here in the investor community in that we can only really look at your public peers. But could you address your market share trends over the last, call it, 6 to 9 months? Because if you look at the overall organic sales growth rate versus, let's say, what Eaton has been saying, that the electrical industry has been growing, your growth rates are a little bit below that. And then if you look at your Industrial business versus the MRO peers, at least for the last couple of quarters, your growth rate has been below that. I know they're not really great compare -- comparables all the time, but could you -- and you have talked about the customer wins, but can you at least address, broadly speaking, what you believe your market share trends have been?

Yes. We think that we have been -- we're maintaining/increasing our market position depending on what particular vertical you're looking on. In Canada, we've got a good set of data from an organization called Electro-Fed. You don't have as good a set of data or anything anywhere near that in the United States. The 1 important point that I would raise, and I'm glad you raised this question, Sam, is that you really need to calibrate for the resi construction exposure and mix of other competitors that are pure-play electrical distribution -- electrical distributors versus WESCO. And so when you look at any -- when you look at different survey data that comes out or NAD [ph] data, a very large part of that market is resi construction. Many -- virtually, all of our local and regional competitors have a resi business that's meaningful. Some, it's very substantial. And it's wrapped around the -- a calendar business. If you were to go into the WESCO branches, a small percentage of our operations have meaningful counter business. It's not how we grew up. And so that calibration for the residential construction mix is significant, we believe. And so again, when we look at our particular mix, the customers we're serving in our end markets, we feel we're doing a very good job of holding our own/increasing share, depending on what segment or customer basket we're looking at.

Our next question comes from Hamzah Mazari with Credit Suisse. Hamzah Mazari - Crédit Suisse AG, Research Division: My question is just on gross margin. You talked about better pricing and sourcing helping gross margins and offsetting the negative mix you saw. Maybe you could talk about EECOL's impact on gross margins. And then longer term, where do you feel you have the lowest hanging fruit on the gross margin side? Is it pricing? Is it sourcing? Are there any other levers that you can pull to get to above 22%?

Thank you for that question. Yes, if you take a look at the last several investor days, we've given some deeper insight into our series of pricing and sourcing initiatives that we're driving. And so there isn't 1 or 2 that represents kind of -- going to give us 50 basis points. We're grinding away on a whole series of these initiatives. What we're really pleased about is the second half of last year, we got nice expansion on the core business and then acquisitions contributed on top of that. And in Q1, we had 30 basis points core gross margin expansion, core being without the acquisitions. And then the acquisitions contributed on top. I should mention, it's not just EECOL. It's EECOL plus Conney plus Trydor. Because Conney and Trydor were acquired in July of last year and EECOL in December. But that's consistent with our strategy. The work on improving the base business and then to acquire companies that are strong, well run and then have accretive -- are accretive to our operating margins, but also accretive to our gross margins. So our target is set to get to the 22. We're still a long ways off from 22. We got to grind our way up to the 22, consistent with our prior practices. We get close to 22 and we're at that level, we'll set the next target and communicate the timing.

Our next question comes from Matt Duncan with Stephens Inc.

First question I've got, sorry, Ken, I missed the month-to-month progression that you gave through the quarter. Can you give that again real quickly? Did you normalize that for the impact of Easter or no?

Well, we've normalized it for the impact of workdays, and that would be January and February, we set down about 1.5 organically. Normalized in April -- March, down about 2%.

But that wasn't take -- that wasn't normalized, and Ken, for taking additional Easter impact out. That was just on a pure workday basis.

Right.

So the Friday at the end of the quarter...

So we did not -- that's sort of what I commented earlier, Matt. We did not say, well, okay, because of where Easter fell, it counts as an extra half day event. I know some other companies do that, we don't do that.

Okay. And then so, I guess, that begs the question a little bit here. In April, it sounds like you're seeing similar trends to what you did in March, but Easter actually was in April last year, so you get a bit of a tailwind from that. I'm curious sort of what you see happening in the business and really all of the pieces so far in the month of April. And do you see -- is there any way maybe, and I think this could be the answer to the question, is there any way to quantify the impact on your business from sequester?

Not really. I did not share the number, but our government sales were down, and I'll share it now, over 20% in the first quarter. Now but in terms of really determining how much was sequestered, the reality is, the true sequester impact, if you -- any company trying to trace that, is extraordinarily difficult. The issue is more around the uncertainty around the sequester, okay? And also the overall budget challenges and looming budget cuts. So I think that's been more of the issue and that's a broad-based driver. But our government sales were down significantly in Q1, as I said, over 20% down.

Okay. And then the last thing for me then on Conney. You mentioned earlier that, that business is growing. It sounds like it's performing well for you. What changes have been -- are you making to that business? And have you taken that safety products portfolio that, as I recall, is a bit broader than what you had before that deal? And if you put that in all of your branches at this point, just talk about...

Excellent question. We're doing a whole series of things, but I'd summarize it this way. Three things: One, we absolutely working our Global Accounts and Integrated Supply relationships, and they are bringing the Conney portfolio and capabilities, bringing that to those customer sets. And we've got some nice new wins. Two, we've taken Conney's inventory and supply base, and it's available to every WESCO branch. So we've made that available through our centralized IT system, okay? Three, we are adding sales and applications specialists, and the number is substantial. I'm not going to get into the specific number, but let's just say they had a small group of a dozen plus and we've already almost tripled that group since we closed Conney. And so we see tremendous opportunity with that business. We like what we see. In the first quarter, it grew, I said, single digits. It was 4%. Again, it wasn't part of our core. So far in April, sales have strengthened further and it's at a much higher rate than 4%. So we love the business, we like the characteristics and it represents really just a nice category that we couldn't attack in a meaningful way. And it -- this is consistent with our strategy when we said we acquired them, that we were going to invest in the business and bring it to bear on all our customers.

Our next question comes from Ryan Merkel with William Blair. Ryan Merkel - William Blair & Company L.L.C., Research Division: Just want to ask about Datacom in the quarter. Can you just give us the growth rate? And then are you seeing some of the delayed projects starting to come back at this point or is that still to pushing to the right?

Overall, Datacom was down 3% in the quarter. And I will tell you that as we move through the quarter, sales and bookings improved. So with January to February to March, so the momentum was building and the backlog's up very strongly as we exited the first quarter sequentially and entered April. The project activities clearly improved. But I would say the day-to-day business, the day-to-day flow goods for Datacom still remains soft. Overall, I think the Datacom market will have some continued challenges in the first half, and that's consistent with our prior view for the full year. So the year's unfolding as we expected for Datacom. But we did have a nice improving sequential momentum in the first quarter. The other thing I'd mention is, and we spiked this out in last year's Investor Day, the IP physical security markets, they grew double digits for us last year, that part of our business. It's still small as a percent of our whole portfolio, but David Bemoras spiked that out and showed what we're doing in that area, and we had very nice growth rates in Q1, very strong double-digit growth continued in the first quarter. The final comment, our broadband communications, which is TVC, acquisition plus, that was up low single digits, 3% approximately, in the first quarter versus prior year. So that business is holding up nicely. Ryan Merkel - William Blair & Company L.L.C., Research Division: Great. And then for my follow-up, as it relates to the backlog that you talked about, what percent of your total sales does that impact? Because I was always under the impression that backlog was more about your large project business. So I'm just trying to gauge how good of an indicator the backlog growth is for a second half pickup.

Yes, I don't think we've ever really given the backlog number. Here's how I'd have you think about it. And I wouldn't use the term large. I would say we think of backlog, the way we measure it, and we're very consistent, it's our project is [ph] our construction business essentially. But it's small, mid-sized, large. It could be projects that get loaded in and shipped out in a week, or it could be projects that ship out 3, 4 months from now or a little longer. So it's our construction project business. And what's most relevant there, I think, is really the trending, and that's how we look at it. We do not take an Integrated Supply contract or an MRO supplies agreement and load that into the backlog, we do not. Other companies may, we do not do that. It is projects that we've got a booking for that we're going to ship against.

This concludes our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

Well, thank you, all, today for your time and your continued support. We're continuing to -- our One WESCO strategy of investing in our people and our business to deliver above-market organic growth plus accretive acquisitions. We remain focused on driving our margins higher and controlling expenses as we execute our 8 growth engines and 6 operational excellence initiatives. Have a great day. And I know there's a few remaining in the queue. Dan and Ken will be available throughout the balance of today and tomorrow to address any follow-up questions. Thanks, again, for your time and support. Have a good day.

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