WESCO International, Inc. (WCC) Q1 2014 Earnings Report, Transcript and Summary

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 nonrecurring 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 certain -- 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, 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 7 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 U.S. economy, largely offset by the impact of the severe winter weather conditions in both the U.S. and Canada. We experienced growth at all of our end markets except for construction, where sales declined primarily due to weather-related project delays. Sales in the U.S. 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 start. April month-to-date sales per workday are up 6% versus prior year, driven by 9% sales growth in the U.S. 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 nonresi construction. As a result, our full year sales and EPS outlook remains intact. We're making investments in our 8 growth engines and 6 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 solutions 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 U.S.-based operations, which have been organized into 3 geographic regions and a series of nationally focused business platforms. You will recall that Andy previously ran our Utility business for the last 7 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 broadband 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've 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 5 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 multiyear 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 U.S. 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 nonresidential construction market support an improvement in activity levels this year. We are seeing signs of accelerating construction momentum in the U.S. 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 2-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 were 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 U.S. 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 multiyear 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 third 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 U.S. 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 telecommunications 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 2 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's 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 U.S. 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's 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. U.S. backlog expanded over 6% during the quarter, while backlog in Canada was down double digits, and that's including the impact of foreign exchange. While sales growth was muted by the severe winter weather conditions, the expansion of the U.S. backlog signals to us an improving U.S. economy. In addition, our book-to-bill ratio in both the U.S. 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's 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 continue to selectively invest in our growth engines and in our operational excellence initiatives. Overall, first quarter's 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 reestablishment 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 U.S. 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 U.S. 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 2x to 3.5x 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 4.7x EBITDA to 3.2x EBITDA at the end of 2013, comfortably back inside our target range. At the end of the first quarter, our leverage ratio was 3.3x EBITDA, still within our target range following the completion of the LaPrairie and Hazmasters acquisitions. Leverage on a debt net of cash basis was 3.1x 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 2 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 U.S. macro economy to show slow but steady improvement throughout the year, and we're encouraged by broad growth in the U.S. 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're 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 2 acquisitions completed in the first quarter. With that, we'll now open up the conference call to your questions.

[Operator Instructions] Our first question is from David Manthey with Robert W. Baird. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: 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 segments, first off? And second, those lost sales are -- do you think they're just gone, sort of pushed forward, or there's some sort of a recapture possibility?

I think we saw the most effect in construction, Dave, clearly. And in terms of the construction impacts in the quarter, we had gotten reports throughout the quarter of work stoppage at various construction sites. And that -- we don't see that as being perishable demand. I mean, the good thing about a delay in the construction market is, typically, that doesn't result in any project cancellations. It just kind of defers or delays those. So we would see those sales as picking up or coming back. Hopefully, we recapture those as we move through the second quarter. We do -- 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 U.S. 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 and 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. And that was specifically due to a series of weather impacts where we're positioned with certain utilities. So -- and in Industrial, I think we've had some impact on Industrial customers. We -- since the time I've been at WESCO, I would say, and Steven 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 been -- it's notable that this was a pretty challenging winter. And 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. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: Okay. So to somewhat quantify that, you're thinking low single-digits impact anyway overall?

I think, overall, it's in the range of 1 to 2 workdays.

Yes, that's right. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: Okay. All right. And last question here. Ken, I think in your comments you mentioned, if I heard you right, that you're seeing some positive price realization. And maybe, if that is the case, could you talk about how that lays out across the segments? Are you seeing it in one area more than others?

Yes, I'll address that, Dave. It's -- when you look at the first quarter, I would say the -- going into the quarter, suppliers planned and had announced price increases that were very significant. And 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 we were to set the clock back one quarter, entering the first quarter, it was planned to be very active. And we then tracked what increases occurred in the quarter and what new increases were announced that we didn't know as we entered the quarter, and 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%. And it was more by product category as opposed to by end market. And the justification notices that they were referencing was the increase in raw material pricing, transportation cost, et cetera. So as we enter the second quarter, the price increases announced thus far are in a similar range in terms of price increase amount, but the volume is not near where it is in Q1, but that is somewhat typical.

And Dave, it was relatively broad across most categories as well.

Our next question is from Deane Dray with Citi Research.

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

Mix, the biggest -- the way I would characterize mix in the quarter is geographic mix. We've talked pretty clearly about the fact that Canada -- the Canadian business is relatively more profitable than the U.S. business overall and above the WESCO average. And that's 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 U.S. or within Canada. It's truly a geographic mix issue.

All right. Ken, since we're 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?

Deane, I'll address that. Yes, it was -- Canada was down, as we said, 4%. It was equally balanced across both WESCO Canada and EECOL. They were down roughly the same. And when you looked underneath, it was very interesting. All product categories declined, and all geographic regions declined. So it was not specific to any particular geography across the Canadian landscape. We definitely had an earlier freeze this winter, and I think there's been significant snow accumulation. It has impacted Construction, in particular. And with that said, I think as we moved into April, what we've seen so far is a very nice pickup. Our book-to-bill is running well above 1 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. And what is interesting to note is that underneath EECOL, so far in April, all regions are growing thus far. And in Canada -- for WESCO Canada, most regions are growing so far in April.

Great to hear. And then just the last question for 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.

So I guess the way -- and I -- we purposely put one sentence in the opening comments to kind of give some 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 5 years in any given quarter. So I -- that, to us, is an encouraging sign. We had -- we were really scrambling in the quarter to respond to all the efforts that we were working on relative to RFP responses. So I think that kind of sums it up. We are hopeful, Deane, and we do look -- we do try to get as much data as we can by customer that we serve. We are hopeful that the capital -- 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. So -- but I would tell you -- that's my comments. I think the trend is -- we see it, a real potentially rising demand curve, as evidenced by our RFP activity levels.

The next question is from Ryan Merkel with William Blair. Ryan Merkel - William Blair & Company L.L.C., Research Division: 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. I think I already gave color on Canada. Let me give color on the U.S. The 9% growth, it is obviously strong. It's very balanced. What do I mean by that? It's balanced geographically and it's balanced by end market. Ryan Merkel - William Blair & Company L.L.C., Research Division: 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. And 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. So maybe just flesh that out a little bit for us.

Yes, I think the way that we -- the margin steps down a tiny bit in the second quarter versus the first, and that's essentially based upon the way that we book and accrue our supplier volume rebates. They're 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 of 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. And 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.

The next question is from Robert Barry with Susquehanna.

I just wondered if you could unpack the sales growth acceleration that you're seeing and also the estimate for 2Q, the 5 to 8? I mean, 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?

So I'll address the first part. The -- well, 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 one -- for the holiday in Canada only, for the Canadian results but not for the U.S. results, okay? So 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 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 a construction spring-back or project spring-back. In terms of pricing outlook and assumptions, Ken?

Let me -- one thing to also consider as you're 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 2, they're $110 million, around, of annual sales. So part of the growth rate in the second quarter relates to the full inclusion of those 2 businesses. So you can back out 1.5 or 2 points for acquisitions on both ends of that range. So that's actually part of the step-up between Q1 and Q2, and that's 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. So you can pretty much assume that these numbers include kind of 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're assuming? Or...

Yes. I guess what I would say is we've kind of built it in at the rates that we're at today. And depending on who -- we look out externally and you do the same thing, it's kind of in that range. So we're not expecting a big improvement or deterioration from where we are today.

The next question is from Hamzah Mazari with Crédit Suisse. Flavio Silveira Campos - Crédit Suisse AG, Research Division: This is Flavio. I'm standing in for Hamzah today. Just -- most of my questions have been answered. But just within Industrial, if you could 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 those 2 -- how the segment is performing between those 2.

Flavio, we saw growth on both with -- when you think about industrial, we serve industrial customers for 3 of their "demand streams." Those are as follows: MRO, indirect material supplies, services, not just electrical but industrial for those customers, products, that is; cap -- 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 fundamentally CapEx cycle-driven. My comments to Deane earlier were we're hopeful that we see the industrial capital cycle kind of 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. But at least that is their plan today, and we're hopeful. We've not seen that flow through our industrial numbers in any meaningful way in the first quarter. So our industrial sales growth of essentially 2% for our largest set of customer segment is balanced with both MRO and OEM. And we feel good about that we've had to spring back to growth. It was clearly a disappointment for us in 2013, where that -- our largest segment was down 3%. Flavio Silveira Campos - Crédit Suisse AG, Research Division: That's great. That's very helpful. And just as a quick follow-up, if you could give us some color on the Datacom business, how that's performed in Q1. And if you're comfortable with building that business organically or if you want to have some acquisitions in that sector as well.

Well, in terms of Datacom, we were very pleased with the results. In the first quarter, we grew 5%. And that's another strong quarter of growth. So now we've strung together several quarters of strong Datacom growth. Since you asked, I probably ought to -- let me touch upon that a little bit more. I -- we feel really good about our performance. I think there's 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's been growing double digits for us. It did -- it grew double digits in the last 2 years, 2012 and 2013. I'm happy to say it grew double digits again in the first quarter. We're 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 & Security that we've 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 large-scale cloud and service providers and colo facilities as opposed to enterprise-class data centers. And we're seeing a lot of enterprise data center customers kind of optimizing their existing infrastructure, consolidating facilities and focused on improving their performance. And we're going after them with a full data plus electrical offering, a One WESCO offering. And I mentioned 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. And we've taken our data and electrical businesses and integrated them essentially on a regional basis inside the U.S. And with Andy Bergdoll leading U.S., he's run Utility the last 7 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'd make on Datacom is the emerging technologies, such as in building wireless, seem to start to be gaining traction in the quarter. And that's another application set that we're focused on in the Datacom space.

The next question is from John Baliotti with Janney Capital Markets.

John, if you -- if I take your comments about customers building inventory, and it sounds like, if you look at the durables that we -- that just came out today, it was another strong month. That's almost a year's worth of strong results, that it seems like it's taken a while for the distributors to be more inelastically related to that. Do you feel, I mean, given the trends in the quarter, taking out weather and all the things that you've been seeing, that you guys are now a much more fixed relationship to the demand that's 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'll see as we move through the second quarter, but yes, that's our view.

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

Well, I think what's going to be important -- and again, I don't -- we're going to have to see really what happens as we move through Q2 and Q3, in particular. Do the -- I mean, Caterpillar came out with some very strong results this morning. Do you want to call them an industrial company? They are in and of themselves, but clearly an indicator for nonresi. But -- so I think, what does the -- is the end market demand kind of at this stable base, that now it's sequentially upticking as we move through the year. And if that's the case, I can tell you that a number of our customers in the industrial space have planned on stepping up CapEx. That's an indication of their plans that -- they're hopeful that it's a more stable and 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. We've not -- to your point, I think your description of 2013 was -- 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's kind of setting up to be. What we haven't 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 '10 and '11. And you'll recall, we were growing in our industrial end market double digit organically. And that's when -- when that happens, when we get both, that's kind of the -- kind of a double set of tailwinds. We -- with our particular geographic profile and value proposition, we really -- we benefit greatly.

Well, it seems that, now that capacity utilization is almost at 80%, which is a very high rate just for the U.S., and 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 re-signed 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 anymore.

Yes. And I -- we've clearly stated, and I'll reinforce it, that those conversations have been increasing in a relative sense after this last economic downturn. This is a part of the cycle since over the last 4 to 5 years versus prior to that. And because I think the way these industrial companies manage their supply chains, moving through that down part of the cycle and then coming out of the other end, I just -- 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's a continuing trend, and so I think that macro trend, we continue to see. The point that I would make specific to WESCO, that Global Accounts RFP activity is the highest we've seen in 5 years is a telling point.

And John, we've talked about it in the 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's a timing of willingness to invest. And so large industrials, we analyze it the same way you are, and we talk to them because they're our customers, which is it's a matter of when is the demand stream strong enough to say that we truly are -- I mean, I think overall capacity utilization is sitting at 76%, 77% right now in the U.S. 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, then, being caught in the queue, so we agree with you.

Our next question is from Sam Darkatsh with Raymond James. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Most of my questions have been asked and answered. Just 3 really quick ones. First off, just double checking this, so the 6% growth that you're 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. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: So that is an all-in number, so it would include FX and everything else too. It's an all-in, not necessarily an organic.

It's an all-in with FX because that's -- again, the U.S. growth organic is 9%, yes. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Got it. Okay. Now 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. And I'm curious as to that because I know you keep a tight rein 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, and 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. So that's really the wider band on the operating margin in the second quarter. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: 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. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Okay. Last question if I could. What are you assuming for your Canadian growth in Q2 and for the year that's inherent within your guidance?

We haven't broken down guidance between geographies or even end markets. And 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 U.S. and Canadian breakout, and that's about as much as we would break it out at this point. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Are you assuming that the 4% Canadian growth that you saw in April was sustainable, or do you think that a lot of that might just be weather impacted and what have you?

I'd leave it at what I said before.

The next question is from Holden Lewis with BB&T. Holden Lewis - BB&T Capital Markets, Research Division: I'm struggling a little bit with the perspective around the 6% number in April as well. And 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 sort of suggested maybe 1.5 points. I think I also sort of heard you suggest that projects that are delayed due to weather obviously aren't canceled. And so I would think that as the weather gets better, you might have a surge of catch-up activity that might be benefiting April and maybe May but may not be entirely sustainable through the year. And so I want to get some perspective on that. And then on top of that, I kind of look at your Global Accounts pipeline number that you gave out. It's been $2.5 billion plus, I think, for the past 4 quarters, so it really hasn't moved a lot, at least in terms of the number you give. I look at the backlog growth number you gave, which was 0, I think, for Q4 -- or for Q1. I would have thought that backlog would be up if you're seeing deferrals. And I guess I'm hearing a really positive tone, but I'm seeing some numbers that might belie that a bit. So I wanted to get a little bit more perspective.

Maybe -- okay, so help us out a little bit, a little more specificity on the question. I'll answer one part first, which is the backlog. And 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 U.S. backlog expanded nicely, 6% in the quarter. So that is the answer to that point. Kind of getting a little...

So I guess, Holden, look, I mean, when you look at the first quarter, 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 is -- it's very strongly led by the U.S. at 9% growth, okay, organically, versus 3% growth in the first quarter overall. And Canada is 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. And April is not done, but we have more than 1 or 2 weeks of April under our belts. Holden Lewis - BB&T Capital Markets, Research Division: But do you feel that April is benefiting from sort of a return of volume that you'd lost through Q1 just because of the weather? And therefore, you take that 6% total, and I guess if you were...

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's very balanced, and it's balanced by geography. So that, there's no -- is there some projects that could have been in March that spilled into -- fine. But -- and then the headwind is the Easter holiday being in April this year versus last. So 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. Now obviously, we want to do everything we can with our execution to build off this base, but we're very encouraged with the start in April thus far to the second quarter.

The next question is from Christopher Glynn with Oppenheimer. Christopher Glynn - Oppenheimer & Co. Inc., Research Division: So 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 have changed the comps. Christopher Glynn - Oppenheimer & Co. Inc., Research Division: Okay. And then the full year margin ramp from 1Q to 2Q and 1Q to the full year, it's a steeper slope than the historical linearity, so I'm just wondering what drives the confidence and how we should think about that?

Yes, it's really driven by the -- it's the -- compare it to last year, where we saw really no step-up in volumes as we moved throughout the year other than seasonality. In other words, the growth rate, we anticipate, with the step-up in growth, we'll see more leverage fall through on the bottom line from our cost base.

The only thing -- the only comment I would make, and I would -- 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 be April, step-up in momentum sequentially into May, into June. So that is typical. That's what we see in most years unless we're in a downward part of the cycle and we're facing recessionary-type contraction. So we'll need to do that, clearly, but that's typical as weather improves and you move forward. Christopher Glynn - Oppenheimer & Co. Inc., Research Division: Okay. 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'm just wondering why that's different from the 1.6%.

Hold on.

On the webcast, Chris, is that where you're referencing? Christopher Glynn - Oppenheimer & Co. Inc., Research Division: Yes, on Slide 18. Maybe it's a typo. It says total core gross sales are minus 0.3%, and everywhere else we've referenced 1.6%.

Okay. That is core without acquisitions...

But it's not organic.

But not organic.

The core has FX in it. Organic has FX removed. Okay? Christopher Glynn - Oppenheimer & Co. Inc., Research Division: Okay. I could have figured that out, probably.

That's okay, but that's the one point. And we, on the earlier chart [indiscernible]...

That is the 1.9 -- there's the 1.9% of FX.

So you add that back and you get to organic of 1.6%. Christopher Glynn - Oppenheimer & Co. Inc., Research Division: Okay. And is that the same for the subsegments, Industrial, Construction, et cetera?

Yes, they would all have FX in them, and we have not broken FX out by segment. Okay?

The next question is from Matt Duncan with Stephens Inc.

First thing I've got, just real quickly on the modeling for the 2Q, looking at SG&A costs. 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 are -- 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 U.S. 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?

Yes. Well, we're 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 terrific leader doing a very nice job with that business. And I think we're starting to see the synergies between Conney and our Global Accounts and Integrated Supply-driven business model with customers. And so when you look at kind of the U.S., it's kind of 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 a margin basis for WESCO. And we've been putting investment into Conney. I mean, we got a centralized sales and application specialist group when we bought 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. So I think you'd see that as kind of a -- and that will flow through our kind of supplies category from a product category standpoint. We didn't have any safety presence in Canada whatsoever. And Hazmasters is -- think of it as kind of a similar strategy to what we did with Conney in the U.S., where we think the industrial MRO lagged to our business. It's 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. And that's what Conney does, and that's what Hazmasters do. But with Hazmasters in particular, they've 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 a playbook where, again, taking their capabilities, their supplier relationships, to solution sell safety into our current customers, get the 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, et cetera.

John, how big is that safety business now in terms of revenues?

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

Well, the -- Conney, when we -- we publicized it as $85 million, and Hazmasters is a comparable size.

It's $80 million. But we've not -- that's something -- 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. So I think that's something we could do a better job kind of putting a little spotlight on in the future. And Dan, let's take that -- a note that we can do that.

Will do.

The next question is from Winnie Clark with 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 lamps versus fixtures, controls, et cetera?

Yes, great question, Winnie. Thank you. Overall, lighting for us in the quarter was flattish. So when you dig underneath of it, we have been growing lighting nicely for a series of quarters. When you look at it, and it is about all that I'll 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's 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've done in the past, and it was your question of lamps versus fixtures, ballast, controls and the balance of the lighting package, our lamp business was down double-digits in the quarter. Now remember, WESCO has probably got a -- may have a little different mix than some supplier manufacturers 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. So that gives you a sense of mix between kind of replacement lamp business and the rest of the lighting solution. It's something we've not talked about in the past. And I thought that kind of since you raised the question, I'll at least put a spotlight on it. And I've made a comment previously about LED or solid-state mix, and I said we're very consistent with our suppliers, and we are. When you kind of look supplier by supplier, on a supplier basis, we're very consistent with our LED mix. But for WESCO overall, it's becoming a much more meaningful part of our portfolio. So I'll tell you that the LED mix, from our perspective, is running roughly 1/3 of our lighting business now, which, again -- and that's inclusive of lamps in the replacement lamp business. If you pull the replacement lamps up -- out, that number would even go higher. So that's a -- it's a good indicator of kind of the new product introduction solution sell for solid-state lighting to our customers. 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 we've got a schedule of calls set up. But thank you for your time today and your continued support. Have a great day.

The conference is now concluded. Thank you for attending today's presentation. Please disconnect your lines.