WESCO International, Inc. (WCC) Q3 2014 Earnings Report, Transcript and Summary

Good morning, and welcome to the WESCO Third 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. Please go ahead.

Thank you. Good morning, ladies and gentlemen. Thank you for joining us for WESCO International's conference call to review our third 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. 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. To make the year-over-year comparisons more meaningful, we have adjusted third quarter 2013 results to exclude the nonrecurring impacts of the loss on sale of the Argentina business and the tax impact of the ArcelorMittal litigation insurance recovery, as shown on Page 14 of the webcast presentation appendix. For today's call, John and Ken will reference year-over-year comparisons against the adjusted results. Finally, the following presentation includes the 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. 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.

Thank you, Dan. Good morning, everyone. Our third quarter results reflect strong sales execution, along with continued improvement in our end markets. We delivered 7% organic sales growth, a further improvement from the second quarter organic growth of 6% and our best result since mid-2012. For the second consecutive quarter, we delivered sales growth in all 4 of our end markets and reached a record level overall. We continue to see favorable momentum in our customer base, including strengthening in nonresidential construction, which we expect will result in ongoing growth in our key markets. We are now 10 months into the previously announced organizational changes that were implemented to accelerate our One WESCO strategy. The new organization is focused on improving sales execution and enhancing our customer value proposition to consistently deliver above-market organic growth. As evidenced by our results, we are already beginning to see the benefits of our One WESCO organizational changes. We'll continue to build out this new organization and strengthen the business over the next several quarters. On to Industrial on Page 4. We've driven our return to growth in Industrial in 2014, a significant improvement over our results last year. Momentum accelerated in the third quarter with sales being up 7%, driven by growth of petrochemical and OEM customers and Data Communications products. It is the third quarter in a row of accelerating sales growth and the highest growth rate in Industrial since the first half of 2012. Channel inventories appear to be in balance with current demand due to customers maintaining tight inventory controls. Of particular note, third quarter bid in RFP activity levels for Global Accounts also remains strong and exceeded both the first and second quarter record levels. Overall leading indicators in the industrial market remain positive, while notable customer trends of increased outsourcing and supplier consolidation remain in place. In the quarter, we renewed a multiyear Integrated Supply contract with a global technology company, where our customer relationship dates back several decades. This noteworthy contract renewal demonstrates the strength of our customer relationships and the power of our WESCO value proposition to customers over the long term. On to Construction on Page 5. We are seeing clear signs of accelerating construction momentum, with overall sales of Construction customers being up 8% sequentially. Versus prior year, sales were up 4% overall, driven by 8% growth in the U.S. and 3% growth in Canada on a local currency basis. This is the second consecutive quarter of accelerating sales growth and the highest growth rate in Construction since the first half of 2012. The pace of bidding activity is high, and leading indicators in the nonresidential construction market support a continued improvement in activity levels in 2015. On to Utility on Page 6. Our Utility business continues to deliver above-market sales growth. Sales to our Utility customers grew 11% in the quarter on top of the double-digit growth we experienced in the third quarter of last year. This marks the 14th consecutive quarter of year-over-year sales growth, driven by new wins and an expanding scope of supply with existing utility customers. Notably in the quarter, we were awarded a multiyear contract to provide material management and logistics services for a large transmission line project, further demonstrating our capability to provide solutions across the entire utility power chain. Now on to CIG on Page 7. Our end user-focused One WESCO value proposition for customers continues to yield results. Sales to CIG customers were up 2% in the second quarter, marking the fifth consecutive quarter of year-over-year sales growth. In the quarter, we were awarded a contract with a large federal integrator for a government agency, which included offering electrical data communications, security and safety products for their facility upgrades around the world. On to acquisitions on Page 8. We completed 3 acquisitions in the first half of this year, and the integration of these businesses is going well. We are on track to deliver against our first year EPS accretion expectations. Our acquisition pipeline remains strong, and we see excellent ongoing opportunity to further strengthen our company. Our leverage is within our target range, and our free cash flow generation supports our ongoing acquisition strategy of strengthening our electrical core and adding new products and services to our portfolio. Finally, I would like to mention that we will be scheduling an investor conference call in mid-December to review our outlook for 2015. With that, Ken Parks will now provide the details on our third quarter results and our outlook for the fourth quarter and the full year.

Thanks, John, and good morning. I'm going to review the results against the outlook that we provided in July during our second quarter earnings call. At the second quarter earnings call, we expected third quarter consolidated sales to grow between 5% and 7% year-over-year. Sales in the quarter reached $2.1 billion. That's a record level and an increase of 7.6% year-over-year. This includes 6.7% organic growth and 1.8% growth from acquisitions, which was partially offset by 90 basis points of unfavorable foreign exchange impact. The U.S. business grew approximately 8% organically compared to last year's third quarter, while the Canadian business led by EECOL grew by approximately 5% on a constant currency basis. Pricing for the third quarter had a positive impact of approximately 50 basis points, and that's consistent with the first 2 quarters of the year. Monthly organic sales growth per workday accelerated as we moved through the quarter. July grew 5%, August grew 6% and September grew 9%. Sequentially, organic sales per workday increased 3%. That's at the higher end of the Q2-to-Q3 seasonal improvement that we typically see and was driven by improving markets and increasing traction from our One WESCO strategy. Core backlog was flat from yearend and was down approximately 3% from last year's third quarter. The U.S. backlog expanded 7% from year end and 8% year-over-year, reflecting a continuation of the improving U.S. economy as well as nonresidential construction market. Backlog in Canada declined 4% from the second quarter and approximately 9% from the end of 2013 on a local currency basis. October's off to a solid start, with month-to-date sales growth at a low single-digit rate, and book-to-bill ratio in October remains strong in the U.S. and Canada, where both are running above 1.0 month-to-date. In July, we estimated that third quarter gross margin would be approximately 20.6%, and gross margin came in at 20.3%, short of our outlook and down 20 basis points year-over-year and sequentially, both due to business mix. Large Datacom wins, growth in Construction and the ramp-up of Utility programs have put pressure on gross margins over the last several quarters. SG&A expenses for the third quarter were $272 million compared to $255 million in the prior year. Core SG&A for the third quarter increased $10 million, while acquisitions contributed the remainder of the growth. Core SG&A increased primarily due to higher employment and employment-related costs but declined 20 basis points as a percentage of sales from last year's third quarter. Sequentially, third quarter core SG&A decreased by approximately $8 million as a result of ongoing cost controls and additional cost-reduction actions that were implemented during the second and third quarters. As a result of the cost controls, core employment at the end of the third quarter was approximately 1% lower than yearend and is flat year-over-year. Core sales personnel increased approximately 1% versus last year's third quarter as we continue to selectively invest in our growth engines and operational excellence initiatives while maintaining operating cost discipline. In July, we estimated third quarter operating margin would be in the range of 6.3% to 6.5%. Operating profit for the third quarter grew to $133 million. That's a record level and was 6.4% of sales or up 60 basis points sequentially. Core operating profit pull-through was approximately 44% year-over-year and over 100% sequentially. Interest expense in the third quarter was $20.8 million versus $21.3 million in the prior year. The impact of overall lower borrowing levels was somewhat moderated by a slightly higher weighted average borrowing rate versus the third quarter of last year. Our borrowing rate remained unchanged from the first half of the year at 4.1%. Net income for the third quarter was $80.8 million, and earnings per diluted share were $1.52 on 53.2 million shares, and that compares to $1.42 on 52.5 million shares last year. Organic growth contributed approximately $0.15 to EPS and acquisitions added another $0.02 in the quarter, while foreign currency translation, primarily in Canada, reduced EPS by approximately $0.02. Growth in our diluted share count reduced EPS by approximately $0.02 as well, while the slightly higher tax rate reduced third quarter EPS by approximately $0.03 a share. WESCO has a record of consistently generating solid free cash flow in all business cycles. We redeploy that cash for organic growth and acquisition investments to strengthen and profitably grow our business. At the same time, we target to maintain a financial leverage ratio of between 2 to 3.5x EBITDA. At the end of the third quarter, our leverage ratio was 3.2x EBITDA, within our target range and down from 3.4x EBITDA at the end of the second quarter following the completion of the LaPrairie, Hazmasters and Hi-Line acquisitions, which were completed in the first half of the year. Leverage on a debt net of cash basis was 3x EBITDA, also sequentially lower. Liquidity, defined as invested cash plus committed borrowing capacity, was $539 million at the end of the third quarter, and that's essentially unchanged from last year. Free cash flow for the third quarter was $85 million or approximately 105% of net income. Our working capital metrics remain solid, and we expect free cash flow to accelerate as we move into the seasonally slower portion of the year. On a year-to-date basis, we've generated $124 million of free cash flow or 61% of net income. I'll now turn my comments to the fourth quarter and full year 2014 outlook. We expect fourth quarter sales to be up 5% to 8% over last year's fourth quarter, including the impact of the 3 acquisitions completed year-to-date. As a reminder, the fourth quarter does have 1 last workday than last year's fourth quarter. Assuming the current rate environment, foreign exchange is expected to negatively impact fourth quarter year-over-year sales comparisons by approximately 180 basis points. In the fourth quarter, we expect gross margin to be approximately 20.4% to 20.6% and operating margin to be in the range of 6.4% to 6.6%. The fourth quarter effective tax rate is expected to be approximately 28%. Based upon the third quarter results, we've narrowed our outlook for the full year. We now expect sales to be up approximately 5%, including the 3 completed acquisitions. This compares to our previous outlook of 4% to 5% growth provided in July. We now expect gross margin to be approximately 20.5%, down 10 basis points from our previous outlook and reflective of our year-to-date performance, including the continuing nonresidential construction recovery and the highly competitive pricing environment, especially on larger projects. Our outlook for operating margin is unchanged at approximately 6%. Operating margin is a key financial metric that we're focused on consistently improving through both gross margin expansion and operating cost leverage. As always, we will continue to exercise tight cost discipline as we move through the balance of the year to help mitigate any gross margin pressures. The full year effective tax rate is expected to be approximately 28%, and that's consistent with previous guidance. As a result of these revisions, we've narrowed our earnings per diluted share outlook to $5.25 to $5.35 compared to our prior range of $5.20 to $5.40 provided in July. We continue to expect free cash flow to be approximately 80% of net income for the full year. Now with that, I'll open up the conference call for your questions.

[Operator Instructions] The first question comes from Steve Gambuzza from JPMorgan.

Can you just talk about the -- I might have missed this, but did you guys talk about October at all?

Yes, we did. We said October month-to-date is up at a low single-digit sales growth rate and pointed out that our book-to-bill ratio month-to-date is running above 1.0, and that's both in Canada and the U.S.

And the color would be on the slowdown?

I would call it good, solid growth month-to-date. A little bit slower, but there's always a push towards the end of the quarter, which causes a little bit of step-up in the last month of the quarter.

Okay. So is there something to do -- is it something about the comps where last October was tougher? Or you're just saying that at the end of the quarter has a greater weighting so that low single digit is -- is it as meaningful?

Yes. It's just typically, we'll see the growth rates step up as we move through the quarter in an accelerating cycle.

Okay. Can you guys just also just talk about the gross margin a bit? I mean, it continues to kind of fade a little bit. Maybe you could talk about what's mix and what is -- what you're seeing from a price perspective out there?

Yes. We saw, overall, first of all, we saw about 0.5 point of favorable pricing in the quarter year-over-year, as we've seen for the first half of the year in both of those quarters. So to give you a little bit more color on the mix, we've pointed out that as we've really been pushing the One WESCO strategy and really solidifying that and seeing the reorganization take place, we've actually seen a lot of larger contracts. Some of the larger programs come into the portfolio. We pointed out large Datacom wins, some of our larger Integrated Supply businesses. Those will sometimes have a little bit lower gross margin overall than the rest of the business, as well as the step-up in the nonresi construction, which we pointed out before will tend to be lower overall gross margins. Also, a little bit lower cost to serve because a lot of that will be more of a direct ship-type of business. At the highest level, what I would tell you is that the mix of the business to those larger projects, as well as the nonresi business, is really what's weighing a little bit on margins. We're not seeing margin deterioration in the remainder of the business.

Okay. Got you. And then one last question just on the nonresi side of things. Can you talk about maybe the vertical there and what you're seeing? And how you expect that to play out for 2015 at this stage?

Yes. Steve, we were pleased with the improvement in nonresi in the third quarter. As I noted earlier, best growth rate we've seen since the first half of 2012. We had growth in both the U.S. and Canada from a geographic perspective, and we had very good, balanced growth in the U.S. across and by region. So as -- there were really no pockets of weakness. So we're seeing kind of a general broad-based growth in nonresi construction in the U.S. In Canada, it was a bit stronger in the West than the East. Not unexpected, given our strength in the market with EECOL and WESCO combined out West. In terms of 2 areas, I'd just spike out and I would characterize it as more of the same continued strong momentum in both Communications and Security, Datacom, Broadband plus Security, IP Security and in Lighting. Both were up in the very high single-digit growth range in the quarter organically. So -- and in terms of what setup is as we move in -- through the fourth quarter and to 2015, I think we've mentioned this last time, we clearly see ourselves in the nonresi construction recovery portion of the cycle with -- our bid activity levels are very high, seeing a lot of opportunities, and we're pleased with how we built some momentum this quarter.

The next question comes from John Baliotti from Janney Capital Markets.

So John, if you look at the Industrial and Construction, obviously, combine the biggest portion of your business. Nice improvement sequentially and growth, and you had a harder comps. So you look at the fourth quarter, comps get a little bit easier. Are you factoring in -- I just kind of taking a conservative look at this, given what's going on in the world, or is there -- I know the fourth quarter could be a little bit slower with weather. Is that just how you're factoring the fourth quarter?

I'd make 2 comments. Since you touched upon Industrial, I want to at least say we're very pleased with our step-up in Industrial performance in the third quarter. It's at 7%. We feel really good about that. That was up sequentially as well. And if the third quarter of growth was accelerating -- the third quarter with accelerating sales growth. And again, the highest growth rate we've seen in Industrial since the first half of 2012. Our Global Accounts and Integrated Supply are growing in a bit higher rate. So I think we feel very good about that. Bidding activity levels are very robust. We've had 3 successive quarters in a row of record RFP activity for Global Accounts. And I just mentioned in response to Steve's question our view of construction. With respect to the fourth quarter, I'd make 2 comments, and Ken may want to elaborate. One would be that fourth quarter is -- because of the construction exposure of our business is heavily weather-dependent, and we cannot predict that. And so depending on how winter sets in, where it sets in and to what degree it sets in can have an impact on our sales profile. That's the first point. The second point is you will recall that last year in the fourth quarter and particularly October for that matter, EECOL had its all-time record sales results in the month of October. We had a very, very strong fourth quarter by EECOL. And particularly, we spiked out October as being an all-time record month. And that was really the result of some catch-up as a result of what we had with the late spring, the soggy spring, the flooding. And so EECOL sales were kind of shifted out to the right of that in the second quarter and early third quarter. So there, I would say those are the factors that impact 2 things: one, kind of the measurement, Steve's question, October sales to date so far some challenging comparables. And it -- ultimately, Q4 will be a function of weather.

Okay. Because it seems nonres construction was even better if you look at the comp of how much harder that -- the third quarter versus the second quarter last year, how much better, sequentially, it got. It's -- like it's an encouraging sign.

It's particularly encouraging. Again, we grew in Construction in both U.S. and Canada, but the U.S. strength is notable, and it's very broad-based and balanced. And Canada was more of West versus East, but that's not -- that was not anticipated. I will say that the Industrial -- our Industrial in rest of world and international, let me say now, industrial rest of world and international, it's not a large percentage of our sales. That was down a few points. We got terrific pipeline of activities, and good -- RFP activity is high. That business can be a bit lumpy, but that is also capital project-driven. Now the first half for international rest of world, that was we were growing double digits in both Q1 and Q2, down a little bit in Q3, but still real nice and strong. So your takeaway is our view that very positive set of conditions, at least that we experienced and we're able to deliver against so far in the third quarter in Construction, but we're particularly pleased in Industrial.

Maybe a quick one for Ken. Ken, I know you've worked a lot of the cost structure of the business, and I know there's a difference in gross margin and sort of an offset of gross margin on bigger projects being lower, and then yet they're less costly on an SG&A line. But your core growth has improved each quarter this year, and your SG&A as a percent of sales has dropped. How much of that would you say is the mix of business, big project versus small? Or just fundamentally, you've become more efficient so that as if core growth starts to pick up even further or stays where it is that we won't see that line necessarily pick up?

Yes. I would say it's primarily due to cost management and cost-reduction actions, and I'll describe those to be management of attrition, being able to utilize attrition to help us to refocus positions in the right areas that we needed to be. And then in the second and third quarter, we did reduce our headcount by a few positions across -- primarily in the U.S. That was allowed by the reorganization that we did at the beginning of the year. But simply put, it's more driven by improving the efficiency in our SG&A and not just driven by the mix of the business. So to your point about what should we see going forward, we think we're appropriately sized in the SG&A front to support healthy growth, at least in the near term. Shouldn't expect a significant investment to support a step-up in the business.

The next question comes from David Manthey from Robert W. Baird. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: Also a question on SG&A. When I look at your guidance, and I assume with cash flow, you're going to pay down some debt in the fourth quarter, but interest expense might be around $20 million again, let's say. If that's the case, working my way up the P&L, it looks like your SG&A would have to decline by about $10 million, something in that range, to get to sort of to the midpoint there. And I'm trying to justify that. Is there a glide path here from some of the changes you've made in the first couple of quarters? Is it -- there's 1 less day, I guess? There's a mix situation here. I'm trying to figure out how you feel comfortable with that SG&A coming down that much sequentially from the third quarter.

Well, the first thing I'd say is the analysis that you did kind of put you, as I would say, in the right ballpark. And why are we comfortable with it? I mentioned that we did some actions in not only the second quarter but the third quarter, and we have yet to see the full impact of those on a quarter SG&A performance level. So that will roll into the fourth quarter. Secondly, the fourth quarter volume's a little bit lower. That tends to drive along a little bit less in the commissions and incentive line. Those are the key variables as well as the fact that you mentioned, 1 less day. But that will be what glides us into that new SG&A number. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then in terms of the gross profit margin, the mix, I think you went into some detail here in terms of you're seeing larger projects and sort of where that mix shift is coming from even within segments. But if we're looking out 6 to 12 months and thinking about gross profit margin, if it happened to be up or down 20 or 30 basis points. What would be the key drivers, positive or negative, that would lead to that sort of variance from here?

David, we have talked about the initiatives that are going to grow us to the target of 22%. Those are smaller pieces. They're not going to be a big chunk that's going to hit us at any point in time. And what we'll see is that as we start to see other parts of the business step-up, including the Industrial business, which tends to run at a higher margin rate than the overall WESCO average, that, combined with our ongoing appetite for acquisitions, and we've mentioned that, as well as the initiatives and the mix improvement should step that up as we move forward. Those initiatives are all in -- all being worked right now, and we'll see them roll in small pieces at a time, but that's what will drive us up. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: Okay. So it sounds like you have more confidence that, that would be flat-to-higher than flat-to-lower going forward?

With improving mix across the base, including Industrial, yes.

The next question comes from Mike Sang from Morgan Stanley.

Quick question on pricing. Mostly looks stable from 2Q, but to the extent you have visibility from some of your suppliers, could you talk about where you see that number trending over the next couple of quarters?

Yes. I would characterize the pricing environment as continues to be a challenge. What we saw in Q2 through 3 was very consistent with what we saw in Q2. We do get -- as you know, we've discussed in prior quarters, we do get good insights into what our planned and preplanned supplier price increases. Typically, Q4 is not an active quarter when you look at the fourth quarters across the year for supplier pricing increases. So I'd characterize what we've got. Our visibility in the supplier price increases for the fourth quarter thus far, and it could change as we move through the quarter, and it's a small number. So a smaller -- a relatively small number of suppliers, and the price increases are all generally well below 5%. So -- but that's not atypical. So that's what -- from a supplier side of value creation, what they're trying to drive. I think as we move into the first quarter, and we'll give color on this in our Q4 earnings call, that's when we'll see a much larger number and a much wider variation in terms of price increases that get laid in for 2015 at the start of the year, or at least throughout the first quarter.

Okay. And on free cash. I know fourth quarter tends to be a lower volume quarter, but if I just run the math and implied 4Q, historically, 4Q is a pretty big cash quarter for you guys. It doesn't look that's going to be the case this year. Is there something going on there that you could sort of expound on?

It is typically a strong quarter. If -- we can maybe go through the math off-line if we talk after the call, but I would say the number that's going to be implied by at least an 80% cash flow to net income would be over 100% of estimated net income within the range of what we provided. So we fully anticipate the fourth quarter to be a strong free cash flow quarter again.

Okay, that's fair. And then lastly, within CIG, can you just talk about what you're seeing on the institutional markets? Seems like that's -- the market's loosening up a little?

What was the last part of that, Mike? That market is what?

It is loosening up a little.

Yes. I mentioned that we're very much -- we sell to C&I and even some G customers, commercial, institutional and governmental, either direct or through contractors, and we've got very active bidding activity levels there, I would say and a really strong opportunity pipeline. And we experienced, I would say, solid results in both commercial and in the institutional throughout the year. Where we've had -- we're at 5 quarters in a row now of growth. Where we've had the drag over those last 5 quarters is government. So our government sales were down. Our sales to government, the G and CIG, and it's either if it's direct end users in CIG, if it's through a contractor could be in construction. But we were down in 2013, all 4 quarters in government. And this year thus far, in the first half, we were up 1 in Q1, down 1 in Q2 and now we're flat in Q3. So it doesn't sound good relative than any absolute term, but relative to last year, government -- we're doing better and government has improved a bit. With that said, I would say that we're really getting traction with government prime contractors, state and local entities and some of the non-DoD agencies. And that's helping offset some of the reduced DoD spending-related opportunities. There are some budget concerns that remain for the Fed in the near term, but overall, I think we've seen a relative improvement in government. Commercial and institutional have been bumping along nicely, and government should -- I would expect we would see that continued relative improvement as we move through the fourth quarter into next year.

The next question comes from Matt Duncan from Stephens.

Just want to go back to the SG&A conversation for a minute to make sure we understand how this is going to trend going into next year. So the step-down of $10 million sequentially, some of that's just general seasonality, but some of that is underlying cost cuts. How sustainable are the cost cuts that you've put in place? Has there also been an edict out to control discretionary spend, for example, and maybe that doesn't continue? Just want to make sure we sort of understand how the bridge those into next year.

Yes, there has been. We talked about managing discretionary beginning in the April time frame. So we continue to do that. As we move through the second half of the year, we've continued that. We've done incremental opportunistic reductions in headcount as we've seen the ability to do it. But as you say, when we move into 2015, depending on the environment, there may be some desire to continue managing discretionary costs but make investments in the business to support organic growth, where it does step up. So a piece of it is sustainable, absolutely. A piece of it, we will continue to manage to sustain, as we see activity levels in certain parts of the business be stronger and/or weaker. And then by that, I'm referring to the discretionary piece. But we will begin to make some investments or release some of that discretionary spend control in areas where we need to make investments to support our organic growth initiatives and our growth engines.

Ken, is there a level of organic growth that you would want to see before you would be willing to make those investments? Or the 2 aren't even connected all that much?

They're absolutely connected. It's just very hard to see -- to kind of set a big, bright line as to where that would step up. We would obviously have to look at the intensity of the need from an SG&A support perspective in different areas, depending on how that growth steps up, for example, on the Construction side of the business versus on Industrial side. So I would be cautious about giving a growth rate that would trigger the investment, but tell you that we'll look at it, as we always do, in a very tight and disciplined way.

One thing we have said, Matt, was we target 50% pull-through and at 50% plus or minus of 5-plus point band is what we kind of notionally target. As our pull-through gets stronger, we'd like to take the incremental above the 50% notionally and plow that back in terms of increased investment. So I think our year-over-year pull-through was solid in the mid-40s. As Ken mentioned, sequentially, the pull-through is very strong as it should have been. But -- so that's another aspect that we look at when we started to begin to think about our investments. And this year, for the first time, as I mentioned, we will be having a conference call in December to give an initial -- our initial outlook and framework for 2015, which will begin to share kind of our viewpoint of what the investment thesis is that supports that framework for 2015.

Okay. That helps, John. And last thing for me guys is as you look at the growth in Industrial accelerating up to 7%, how much of that is large contract wins versus maybe an underlying pickup in growth just from day-to-day branch business? So I'm trying to understand what's driving that acceleration. If you could talk about how different the margins are, the gross margins are on branch sales versus your very successful large contract Integrated Supply business as I think that would be helpful, too.

Yes. Well, I think we -- as evidenced by the bid activity levels and the Global Accounts RFP pipeline that I described, I think that's the best indicator to give you a sense of kind of the breadth and depth of the opportunities we're being exposed to. I do want to make a very fine point, though. I don't know that we're really seeing yet a broad pickup. Actually, I don't know. I'm saying we have not seen the broad pickup, sequential pickup, in the industrial markets. Okay? We feel really good about our execution. And by and large, we've not seen CapEx being released incrementally to the degree that it could and should once we're in a more robust industrial recovery cycle. So I think those represent some upside potential catalysts, which can -- it's all based upon kind of confidence in the economy, overall GDP, where is it going as we move into 2015. So we're not experiencing those tailwinds. I would really characterize our step-up in momentum as we move through the quarters as improved execution, and it's relatively broad-based. I mean, we -- as I mentioned, our Global Accounts and Integrated Supply, in total, grew at a higher rate than overall Industrial. And we're still growing in core industrial across the branches. And when we win an Integrated -- or Global Accounts contract, it is the branches that execute. So the branch margin is the Global Account margin. Integrated Supply is a different business model. And we're getting -- that growth rate's a little bit higher than the 7%, but -- for the Industrial side and then on the Utility, Utility has Integrated Supply-light programs, as well as additional alliance programs, which you can think of as Global Accounts in nature. And Ken, I think, already addressed the impact on margins. It is selective large Datacom wins that we went after consciously. I'd refer to those over the last 3 to 4 quarters. There was one I spiked out at EPG earlier this year, which is extremely notable. And we're applying a strategy to that space with those products that we did the Utility a few years ago. And then Utility continues to just rethink. And the market that we're facing perform exceptionally well.

And the next question comes from Ryan Merkel from William Blair. Ryan Merkel - William Blair & Company L.L.C., Research Division: Just want to ask about gross profit pull-through, first of all. You typically target that 50% level when I think organic sales growth is in that 6% range. But as you look out the next 6 to 12 months, should we be tempering that a little bit if the kind of negative mix in the gross margin continues? Or would you try to operate and still try to generate that level of incremental profitability?

Yes. I'll repeat the number for the quarter and answer your question, which is for the quarter itself, we stepped up to about a 44% pull-through rate on the core business as growth occurs. It obviously puts a little bit of pressure on that pull-through target, but we would tell you that 50% is notionally the target that we're always working towards. As John mentioned, we can be a few points above it. We can be a few points below it. In an expanding environment, it does put a little bit of pressure as we're making investment for growth initiatives. Ryan Merkel - William Blair & Company L.L.C., Research Division: Okay. So nothing's changed?

Nothing's changed. Ryan Merkel - William Blair & Company L.L.C., Research Division: Okay. Same question. Sonepar bought Industrial Distribution Group recently. I'm sure you guys got a look, but I'm wondering what you think it means for Bruckner and just the general competitive environment.

Yes. Well, I would say that you can only imagine, we've said this for a long time now that we do get an opportunity to look at everything that's marketed because we've been an active and consistent, and we think high-quality acquirer. And also, what has been a part of our staple or secret sauce, so to speak, is the majority of the acquisitions we've done since the middle of 2010 and turn the acquisition back on after the trough have been on marketed transactions. So that's a little backdrop. We know IDG well. Some of you on the call will recall that before it went -- we bought out by a private equity many, many years ago, we were in the mix for that. And that was -- Dan, what was that? Probably 7, 8 years ago? Yes, 6, 7 years ago. Man, how time flies. So we know the business well. We've tracked their progress. And I think it's a well-run business, and it'll be interesting to see how that works as far as Sonepar. I will say from our perspective, there's only a handful of Integrated Supply players, and we inside WESCO have a series, and I emphasize the word series, a series of well-developed Integrated Supply business model that we -- that was borne out of Industrial, and we don't even use the term Bruckner anymore. We call it WESCO Integrated Supply and have for a few years now. It was borne out of Industrial, but we've been applying it to other customers and other verticals and there are variations of that, be it utilities, be it selective CIG customers and even contractors. So we feel very, very good about the capability and quality of our Integrated Supply business models. And again, it's only a handful of competitors that really compete at a national or global basis. And Sonepar, quite frankly, already has that capability. So that's our view of it.

The next question comes from Winnie Clark from UBS.

On Canada, you mentioned in your comments that business is stronger in the West versus the East in Construction specifically, I think. Did you see something similar across your other end markets in the region? And then month by month, were trends in Canada similar to what you saw for the overall business?

I would say month-to-month in the quarter, Canada and U.S. are very similar. We saw accelerating sales momentum. So no difference in pattern of how the sales accelerated through the quarter, be it U.S. versus Canada. In terms of West versus East, just in general, we saw more strength in the West versus the East in Canada, but that should be expected. I mean, we strategically acquired EECOL. We have some -- have an outstanding market position. And you'll recall that in acquiring EECOL, we didn't just acquire this terrifically well-run business, but we also acquired some new supplier relationship and positions that we did not have in those regions in Canada, specifically on the core electrical side, because EECOL was a Schneider Electric Square D house, and WESCO was an Eaton Cutler-Hammer house. In Lightning, EECOL was an Osram-Sylvania house, and WESCO was a Philips house and a few other places as well. So I think this is all part of the strategy. So we've got -- we're in a better position to provide even a more complete solution for customers, Winnie.

Great. And then just on Utility. Can you talk about what trends have been like in the market? I mean, you reported another strong quarter, and it seems like continued success has been driven by scope expansion in the Integrated Supply. But how would you characterize the underlying end market demand currently?

I will tell you, our view when we entered the year has played out so far pretty consistent with that, which was that distribution of DFT&D [ph] would grow in the low single-digit range, that transmission would be a bit challenged through the better part of year. We've seen that. Although transition there has been some -- it's been bumpy so there's been some spurts of low growth here and there, and it's been improving a bit. But what we thought we'd see unfold throughout the year from a market perspective has, in fact, unfolded that way. In terms of our business, the drivers that were driving our growth above the market in 2012 and 2013 continue to be the same drivers in 2014. We're winning new customers, and we're expanding our value proposition, which is additional One WESCO strategy products and services to our existing customers. And that's working well. We were particularly pleased with the 10% growth in the third quarter, coming -- on top of a -- on a stack basis, double-digit growth last year in the third quarter.

The next question comes from Josh Pokrzywinski from Buckingham Research.

A lot of the questions have been answered. Not to get too far down the path of pricing, but just a follow-up on that, how has some of that project competition trended kind of over the past quarter? I understand the mix of business. To some of these nonresidential projects drives the headwind, but kind of on a job-for-job, apples-to-apples basis, has that gotten better or worse? And then is there a length of time into a nonresidential recovery, where that competition tends to die down? So is it 6 months in, 12 months in? I guess, that's the first question.

Well, your first question is it's the same, Josh. It's really tough pricing, and we have to maintain discipline on what projects that we choose to take and have confidence that we can execute and deliver the margins we're committing to. So I'm not signifying it's getting any worse, but it's not getting any better. In terms of the ability to deliver margins, improve as we get through the nonresi cycle, I will say this. I don't know that we know what's going to happen this cycle. The residential construction recovery cycle this time was totally different than what it has been the last 3 to 4 cycles. And nonresi is different as well, so I think it's going to be very difficult to predict kind of the shape of this cycle and then how it's going to manifest itself. From an internal operating perspective, we tell our teams, "Look, the pricing environment you see today, it really can't get much worse. You ought to just plan that this is how it's going to be for as far as we can see." At some point, if general inflation rates tick up, that will be a positive overall driver across the whole value chain, but we're not in that state yet. Not even close. So that's how I'd characterize it.

Okay, that's fair. I mean, I guess, versus prior cycles, though, presumably, this whole pricing competition early in the recovery is common. I've heard that from others. Is that something that is persistent for a year or persistent for months? Like how, if I look back at last cycle?

Yes. I think, Josh, the difference is, though, you have to look at what general inflation did in concert with those other recovery cycles. I think that's -- this is where I'd be. I'm not sure the past is prologue here, right? So I think that's -- and we get into these discussions all the time internally. I just -- I think it's going to be interesting to see how this cycle plays out, but the low inflation environment we think is going to continue for some period of time. And if we get any -- if inflation ticks up a bit, and great, we'd love to take advantage of that, but we're not planning for it.

Okay. And then just one additional question on the M&A pipeline and kind of how you guys are planning strategically in terms of end markets or product segments that you want to be in. Are you seeing -- as growth has been sluggish here in the past couple of years, are you seeing yourselves and some of the other large public distributors cross paths more often, as you kind of branch out from the core in this lower growth environment and as you will get M&A properties? Or is it still pretty well-defined niches between yourselves, Grainger, Fastenal, et cetera?

You know what, that's an excellent question. And it's actually -- if I think about this and you set the clock right, the market is as large and fragmented as it's ever been, even with the significant M&A activity that's occurred. Now that's a little different on the supplier side of our value chain because you've seen a handful of larger deals that have greater implications. But for us and our part of the value chain, and maybe it's just our whole M&A process and how we're working it, our pipeline, the quality, the breadth, the richness of it is as strong as it's ever been. And there's just so many opportunities out there. And the market's very, very large with many, many different verticals and niches, which just gives us a great opportunity set as we move forward. So we really haven't -- I don't see the space getting crowded for as far as I can see, quite frankly. It's something we're watching, but -- and I thought that -- I'll tell you, I'll be clear. I thought that with the acceleration M&A on the supplier side of the value chain that it may precipitate even a faster rate in the distributor value -- portion of value chain. And there's a number of us being very acquisitive. Yet, I still don't see it -- too many of us bumping into each other and being crowded.

The next question comes from Flavio Campos from Crédit Suisse. Flavio Silveira Campos - Crédit Suisse AG, Research Division: I have been -- most of mine have been answered already, but if you could just help me understand a little bit on gross margin. You guys are guiding to a slight sequential improvement 10 to 30 bps, and a pretty significant year-over-year improvement. How is the mix helping you in Q4? And how is that expansion going to come about in your forecast?

So there's a couple of things that naturally happen in the fourth quarter versus where we are right now. One is we will tend to have less Direct Ship business, which is tied to the construction cycle because of the weather and the seasonality. The lower relative Direct Ship business actually is -- has a positive impact on margins -- the gross margins. In addition, the way that we record our anticipated supplier volume rebates through the year is relatively ratable as we move through the year. So quarters that have lesser overall volume get a slight gross margin benefit based on the booking methodology, and those are 2 of the biggest things that drive the step-up that's anticipated between Q3 and Q4 from a mix perspective. Flavio Silveira Campos - Crédit Suisse AG, Research Division: Perfect, perfect. That's very helpful. And just a quick follow-up. We see your headcount reduction helping your SG&A line and core personnel growing very slowly. So this higher gain or growth is clearly not a sales force-driven growth. Can you talk a little bit about when do you start hiring more salespeople? And what are the -- just a brush-up on what are the key growth initiatives and how does your pecking order of growth initiatives go right now?

Yes. One thing specifically is even in this quarter, where we talked about holding back on overall headcount and actually taking some reduction actions into the quarter, we actually did grow our sales force. So we haven't talked too much on this call, but we consistently talk throughout the quarters and when we're meeting with you about LEAN and the LEAN process being embedded in WESCO over the last decade. What's nice about that is as we have some of the more back office and administrative positions and the processes that we look at and improve, we're able to kind of reallocate some of the back-end part of headcount to more customer-facing headcount by utilizing LEAN tools. So we are investing in sales force. We're constantly focused on investing in sales force. And for lack of a better term, we're essentially funding it with our LEAN initiatives that are becoming more and more mature in the organization over time.

And the next question comes from Shawn Harrison from Longbow Research.

Hopefully, 2 brief questions. What do you estimate the Canadian market grew overall during the third quarter? Just trying to triangulate your market share gains, potentially, your fast growth in market. And then to an extent of the same question for the Datacom business, you've been outgrowing the market. What do you think market growth rate is there right now? And is some of the increase you're seeing in RFQs tied to the Datacom business overall getting better in the marketplace?

Yes. In terms of Canada, we don't -- I don't have a good view of the market per se yet, and -- but we will have a view, but it ends up being -- we end up getting a report from a firm called Electro-Fed, a group called Electro-Fed. But we don't get that -- we haven't gotten it yet, but that's something that we track over time. We're pretty confident, though, that the sales growth rate in Canada is above the market, and we've been consistently taking share in the Canadian market for a few years running now overall. In terms of Datacom, we also think that we're outperforming that market. You can look at certain large supplier companies, and then you can look at other distributor competitors that'll -- some of which have reported, some of which have not yet that we'll cite and spike out how their respective data center-oriented and Datacom businesses are doing. But we feel very good about our growth in the high single-digit range and just right around double digits in Q1, 2, 3 of this year versus the market. The market's still challenging there, and there's some shifts in the market that we've talked about. I know in the last 2 calls, I think specifically around data center, let's say, large-scale cloud and colo facilities and growth in that space versus enterprise-class data centers. And so these are larger, but they're also challenging. And so, but overall, I feel very good about our momentum in the communication and security portion of our portfolio. The security portion, IP security, was very small for us. We spiked this out at an Investor Day a few years ago. David Bemoras gave a presentation that profiled that. And we've been growing double digit consistently in 2012, 2013 and every quarter this year in our security -- IP Security business, which is a portion of our Communications and Security.

Okay. And just as a follow-up, just the RFQ topic. I mean, the underlying market itself in data center. Are you seeing the uptick in RFQs that suggests you could better in '15?

Well, let me say this. Our -- I didn't cite -- I didn't speak about this. In our backlog in Datacom has grown very nicely across the year thus far, including in the third quarter. And so part of the RFP activity that we're seeing in Global Accounts is not -- as we continue -- we're continually more successful with the One WESCO strategy. It's bringing in product's other content that, maybe, not was part of -- was not part of the way we used to do it 3, 4 years ago. So the short answer to your question is we've got a strong level of RFP activity in the Datacom space, and the backlog is helping and has been growing as we move through the year.

Our last question for today comes from Robert Barry.

Just 2 questions. One quick housekeeping item. I think so just to clarify the 5% to 8% for Q4, that's a quarterly growth rate, not a daily sales. So should we think of that kind of on an apples-to-apples basis adjusted up by 1.5 points?

It is a quarterly growth rate. We called out -- I called out in the commentary that we do have 1 less day of sales, and we do have some FX headwinds. So that will roll into the calc, for sure.

Got you. Okay. And then just on the construction end market, that 3.8% growth, is it possible to break out what the growth was in Construction in the U.S. versus Canada?

Yes. We -- I think I made -- I did address that in my commentary for overall Construction sales, and maybe you missed it. We were up 4% overall, and we had about 8% growth in the U.S. and 3% in Canada. The 3% in Canada was on a local currency basis. Well, thank you, everyone, and we do appreciate your time today and your continued support. Have a great day.

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