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Executives

John Engel – Chairman, President & CEO

Ken Parks – VP & CFO

Dan Brailer – VP, IR and Corporate Affairs

Analysts

David Manthey – Robert W. Baird

Deane Dray – Citi Research

John Baliotti – Janney Montgomery Scott

Adam Uhlman – Cleveland Research

Noelle Dilts – Stifel Nicolaus

Joshua Pokrzywinski – MKM Partners

Anthony Kure – KeyBanc Capital Markets

Matt Duncan – Stephens

WESCO International, Inc. (WCC) Q4 2012 Earnings Conference Call January 31, 2013 11:00 AM ET

Operator

Good morning ladies and gentlemen, and welcome to the WESCO Fourth Quarter and Year-End 2012 Earnings Conference Call. (Operator instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator instructions) Please note this event is being recorded.

I would now like to turn the conference over to Mr. Dan Brailer, Vice President of Investor Relations and Corporate Affairs. Please go ahead, sir.

Dan Brailer

Thank you. Good morning ladies and gentlemen. Thank you for joining us for WESCO International’s conference call to review our fourth quarter and full year 2012 financial results. Participating in the earnings conference call this morning are the following officers, Mr. John Engel, Chairman, President and Chief Executive Officer and Mr. Ken Parks, Vice President and Chief Financial Officer.

Means to access this conference call via webcast was disclosed in the press release and was posted on our corporate website. Replays of this conference call will be archived and available for seven days.

Additionally, relating to the morning’s release of our earnings announcement, a supplemental financial presentation has been produced which provides a summary of certain financial and end-market information to be reviewed in today’s commentary by management. We have filed the supplemental presentation with the Securities and Exchange Commission and posted it on our corporate website.

During today’s call, we will be webcasting selected slides from the supplemental presentation to facilitate our review of the results. We anticipate a large number of questions today following the December closing EECOL Electric. As a result, in order to accommodate as many investors and analysts as possible, we respectfully ask that questions are limited to one per person.

This conference call includes forward-looking statements, and therefore, actual results may differ materially from expectations. For additional information on WESCO International, please refer to the company’s SEC filings, including the risk factors described therein.

The following presentation may also include a discussion of certain non-GAAP financial measures. Information required by regulation G with respect to such non-GAAP financial measures can be obtained via WESCO’s website at www.wesco.com.

I would now like to turn the conference call over to John Engel.

John Engel

Thank you, Dan and good morning everyone. We issued an expanded supplemental presentation earlier this morning in conjunction with our earnings press release. We’ll be using this presentation today to provide additional insight in our fourth quarter and full year results including the impact of the EECOL acquisition which was completed in mid-December.

Our results reflect solid execution of our One Wesco growth strategy and a continued positive impact of our productivity and lean initiatives of our business. We’re pleased to complete the acquisition of EECOL Electric in mid-December, which strengthens our Canadian operations and establishes a solid foundation for WESCO in South America.

On a full year basis, we grew sales to a record $6.6 billion through EPS at a double-digit rate for the second year in a row and generated $265 million of free cash flow, all while completing four acquisitions. Last year included many noteworthy accomplishments and I’m very proud of the extra effort and results delivered by all our associates around the globe working together as the One Wesco team.

As a result of playing offense over the last several years, we have strengthened our business and enhanced our position in the global marketplace. In the fourth quarter, organic sales reflect the continuation of market trends experienced in the third quarter where strength in Canada and international were offset by weakness in the U.S.

Sales in Canada international were up by over 10% in the fourth quarter offset by the softness in the U.S. and this was driven by a low single digit decline in data communications. Organic sales per work-day varied across the quarter and we’re down 6% in October, we’re up 6% in November and we’re down 6% in December.

The market trends experienced in the second half of 2012 are expected to continue into the first half of this year. Our first quarter start is consistent with this expectation, with January organic sales being down approximately 2% month-to-date.

Overall, we expect to see the benefits of our investments, growth strategy and effective execution continue in 2013 with the second half being stronger than the first.

We acquired four strong businesses during 2012 and eight since June 2010 and have added product and service offerings to our portfolio, expanded our global footprint and improved our overall market position.

RS Electronics, Trydor Industries, Conney Safety and EECOL Electric were completed in 2012. These four acquisitions strengthen our global business and provide substantial growth opportunities in 2013 and beyond.

The WESCO and EECOL combination enhances our business mix and diversification. Close to one-third of our sales will now be outside the United States. In addition, we added new supplier relationship and strengthened our General Supplies and Lighting & Controls product categories.

Sales to our industrial customers continued to grow but a lower rate in the second half of 2012. We have had 12th consecutive quarters of year-over-year organic sales growth driven by new wins and an expanding scope of supply with our Global Accounts and Integrated Supply customers.

In the fourth quarter, we’re especially pleased to secure a major win with one of the world’s largest technology companies. This was for a multi-year global supply arrangement for data communications equipment and electrical products.

We’ve also secured Conney Safety wins with our current Global Accounts and Integrated Supply customers. As we enter 2013, the opportunity pipeline remains robust at over $2.3 billion excluding approximately $500 million in government opportunities.

Non-residential construction markets remain challenged in the U.S., but continue to grow in Canada and around most of the world. The growing strength of the residential construction recovery is a positive leading indicator for the non-residential construction markets later in 2013 and into 2014. WESCO is performing well against this market backdrop.

Overall, backlog is down approximately 3% versus year-end 2011, but remains at a healthy level. Backlog outside the United States is up over 10% versus prior year end. Bidding activity levels have increased particularly for upgrades, retrofits and energy efficiency projects. Through this point in January, I’m pleased to say that our book-to-bill ratio is tracking above 1.0.

As expected, organic sales for utility customers continue to grow in the fourth quarter and we’re up approximately 7% including an estimated $12 million of sales associated with the power restoration efforts following Hurricane Sandy. We’ve had seven consecutive quarters of year-over-year organic sales growth driven by new wins and an expanding scope of supply with our utility customers.

Our integrated supply capabilities are in high demand and are increasingly being used by utilities to improve the efficiency and effectiveness of their supply chains. In the fourth quarter, we were very pleased to secure another major win the large investor on utility. In this case, we’ll be providing procurement, warehousing, vendor managed inventory and logistic services for their T&D operations.

Sales to our CIG customers include schools, hospitals, corporate management firms, retailers, financial institutions, cable companies and governmental agencies. Sales in the fourth quarter were down due to a large data com government project that shipped last year. Bidding activity remains active in the commercial and institutional market.

Government bidding activity also continues and our opportunity pipeline is strong at approximately $500 million despite government budget constraints.

Through our expanding international footprint, we’re gaining traction with global government contractors, which is helping offset other slower growth segments. In the quarter, we’re pleased to sign a master service agreement with the government prime contractor to provide electric products to U.S. government military basis that they are supporting around the world.

Now, Ken Parks will provide the details on our fourth quarter and full year 2012 results and our outlook for 2013. Ken?

Ken Parks

Thank you, John and good morning. I’ll review the results in the context of the outlook we provided in October during our third quarter earnings call. To do so, I’ll first address those items not included in that outlook.

As John mentioned, in December, we completed the EECOL acquisition and redeemed our $150 million 7.5% high yield notes. The impact of these two transactions along with two weeks of EECOL results had a net EPS drag of $0.11 in the quarter.

EECOL sales were $24 million during that last two week period of the year, a seasonally week time period against the operational earnings during this period we incurred interest expense on the acquisition financing. In addition, we incurred approximately $4 million of non-recurring SG&A acquisition related charges during the quarter.

The redemption of the high yield notes resulted in a one-time debt extinguishment charge totaling approximately $3.5 million. The charges comprised of two components, first, the prepayment premium of approximately $1.9 million and the second, the non-cash write-off of deferred financing cost totaling approximately $1.5 million. This charge is identified separately in the P&L. After factoring in these adjustments, our adjusted EPS was $1.06 in the quarter.

During the third quarter earnings call, we expected fourth quarter consolidated sales to grow between 2% and 4% year-over-year with acquisitions that have been completed at that time contributing 2 to 3 points of the growth.

Consolidated sales in the quarter were $1.64 billion, an increase of 3.5% year-over-year. This included 4.3 percentage points of growth from acquisitions and an estimated 50 basis point favorable foreign exchange impact.

Organic sales declined 1.3% versus last year’s fourth quarter. And sequentially, organic sales declined 2.4% which is in line with our typical seasonality. The net sales impact from Hurricane Sandy was approximately $12 million benefiting our utility business. We believe we’re well positioned to participate in the catch-up of deferred projects as well as the commercial and infrastructure rebuilding of the storm effected areas across the Northeast.

For the full year, sales reached a record level of $6.6 billion, a 7.4% increase over last year. Acquisitions contributed 3.3 points of that growth while FX was a drag of 25 basis points. Organic sales growth for the year was 4.4% including approximately 1 point of pricing.

Backlog remains at a healthy level with backlog outside the U.S. up over 10% versus the prior year-end. Core backlog declined approximately 3% from year-end 2011 and 4% sequentially from the end of Q3.

In the October earnings call, we estimated that fourth quarter gross margin would be at or above 20.2% and we came in at 20.4% excluding EECOL, a decrease of 20 basis points over the prior year, but 40 basis points higher than the first half of 2012. We continue to focus on our longer term gross margin target of 22% and feel good about our progress during the quarter. For the full year, gross margins were 20.2% and flat to last year.

Reported SG&A for the quarter was $240 million compared to $228 million in the fourth quarter of last year. Included in the quarter’s SG&A were approximately $4 million of non-recurring EECOL related acquisition charges as well as $11 million of SG&A from the 2012 acquisitions. Core SG&A for the quarter at $225 million was $3.2 million lower year-over-year and 14.3% of core sales. That’s the same as last year.

Core employment levels were up 1% year-over-year as we continue to selectively invest and support for our growth engines. But they remained unchanged overall from the end of the third quarter. Sequentially, core SG&A increased $5 million from Q3 and that’s primarily as a result of the non-recurring acquisition related charges.

For the full year, reported SG&A including the EECOL non-recurring charges of $4 million and acquired SG&A of approximately $30 million, was $925 million versus $872 million in 2011. Core SG&A excluding the charges and the acquisitions was $891 million or 14% of sales that’s 20 basis points better year-over-year.

As our growth moderated in the second half, we tightly controlled or SG&A investments, maintaining overall cost discipline while investing in our growth engines and productivity initiatives.

Also in our October earnings call, we estimated fourth quarter operating margin would be at or above 5.6%. Operating profit in the fourth quarter excluding EECOL and the acquisition related charges was $89 million or 5.5% of sales, down 30 basis points from Q4 of last year. That was a tough comparison compared to the last year including the favorable impact of supplier volume rebates and projects.

Acquisitions other than EECOL added 10 basis points to the quarter’s operating margin. For the full year, operating profit reached $373 million excluding the non-recurring charges or 5.7% of sales that’s growth of 12% and 30 basis points compared to 2011.

At our Investor Day in August, we outlined our objective to expand operating margin by 40 basis points to 60 basis points annually through the combination of gross margin expansion and operating cost leverage. We continue to make progress towards that objective.

Operating profit pull-through measured as year-over-year incremental operating profit dollars divided by year-over-year incremental gross profit dollars is a metric WESCO uses to drive operating margin expansion while investing in the business for growth. Over time, our objective is to constituently generate core operating profit pull-through of approximately 50%.

Our reported operating profit pull-through was 42% for the year excluding the non-recurring charges and operating profit pull-through for the core was 51% for the full year.

Interest expense in the fourth quarter grew to $14.7 million versus $12 million in the prior year as a result of the acquisition financing. Our weighted average borrowing rate for the quarter was 4.5% and that’s flat to 2011. The fourth quarter effective income tax rate was 28.7% and was 29.5% on a full year basis.

Net income for the fourth quarter was $45.6 million which includes of the impact of the non-recurring acquisition and debt extinguishment charges. Excluding these items, net income was essentially flat to last year.

Reporting earnings per diluted share for the quarter were $0.95 and adjusted EPS was $1.06 excluding EECOL and the non-recurring charges. For the full year, net income was $224 million, up 14% from last year’s net income of $196 million. 2012 reported EPS was $4.38 per share and that’s up 10.6% over 2011. Excluding EECOL and the non-recurring charges, adjusted EPS was $4.49 or 13.4% growth year-over-year.

ROIC was 11.6% that’s down 30 basis points from 2011. Through the third quarter, ROIC had shown steady growth improving 70 basis points during the first nine months of the year. While the EECOL acquisition has a negative initial impact on ROIC, we remain committed to our long-term target of 15%.

Free cash flow for the fourth quarter was strong at $95 million or 195% of net income compared to free cash flow of $86 million or 157% of net income in the last year’s fourth quarter. For the full year, we generated $265 million of free cash flow that’s 118% of net income compared to $134 million or 68% of net income last year. We exceeded our 80% target of free cash flow to net income in every quarter of 2012.

Capital expenditures were $3.6 million in the fourth quarter and $23.1 million for the full year. We continued to invest in our people, our technology and our facilities through both CapEx and operating expenses.

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

The completion of the EECOL transaction and redemption of our $150 million 7.5% high yield notes, we’re financed by a combination of an $850 million term loan and $425 million drawn under our existing credit facilities. The weighted average cost of debt for this financing was approximately 3.8%. As a result of the acquisition financing, our leverage ratio at year-end stepped up to 4.7 times, but remains less than 4.0 on a pro forma basis.

Liquidity, defined as cash, invested cash plus committed borrowing capacity was healthy at approximately $300 million as of the end of December. We expect to reduce our debt to our targeted range over the next several quarters while we prioritize cash flow to debt reduction in the near-term. As a result, we expect to be back in our target range of 2 to 3.5 times before the end of 2013.

As previously communicated, we expect EECOL to be accretive to WESCO’s earnings per share by approximately $1 by 2013. The accretion from EECOL is coming from the addition of a well run profitable company finance with low cost debt and certain ongoing tax synergies. EECOL will be run as a dual brand go-to-market operation and therefore we haven’t assumed any sales or cost synergies. The synergies we have included relate to benefits that will be achieved relative to the ownership structured utilized in the transaction.

I’ll now turn to 2013 first quarter and full year outlook.

We believe the pace of economic recovery will continue to be slow particularly in the first half of 2013. We’re confident that our value proposition especially in low growth economic environments favorably positions us to take share and outpace economic activity.

We expect first quarter consolidated year-over-year sales growth of approximately 12% to 14%. Excluding EECOL, we anticipate sales to be relatively flat in the range of down 1% to up 1% in the first quarter. Sequentially, organic sales are expected to be flat to down 2% from the fourth quarter while different from last year this is consistent with our longer term seasonal pattern.

In the first quarter, we expect gross margin to be at or above 20.6% and operating margin to be at least 5.5%. The first quarter’s effective tax rate is expected to be in the range of 27% to 29%.

Now, taking a look at the full year, consistent with the first quarter, we expect first half sales growth to be flattish excluding EECOL and up mid single digit second half of the year. Including EECOL, we expect sales to grow between 16% and 18% for the full year. This includes no additional acquisitions beyond those already completed.

Gross margin is expected to be at least 20.7% and operating margin to be at or above 6.2%. As a result of the acquisition of EECOL, the full year effective tax rate is expected to be in the range of 27% to 29%. Putting all of this together, we expect full year diluted earnings per share to be at least $5.75.

With that, I would now like to open up the conference call to your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question will come from David Manthey of Robert W Baird. Please go ahead sir.

David Manthey – Robert W. Baird

Hi, good morning. Thank you. First off, the overall baseline guidance, looks like it implies 50 basis points of gross margin improvement and 50 basis points of EBIT margin improvement in 2013. Should we assume negative SG&A leverage early in the year like you’re guiding for the first quarter and then turning positive in the back half? Is that generally what we should be thinking about?

Ken Parks

Yeah Dave, this is Ken. That’s exactly the way that you should think about it. Clearly in a lower growth environment, we’re going to get not much leverage out of the SG&A line, it will happen in the second half.

David Manthey – Robert W. Baird

Okay. And then just quickly, the assumption of minus 1 to plus 1 in the first quarter, but yeah you’re minus 2% so far. Was the first week significantly worse than what you seen in subsequent weeks in January?

John Engel

Dave, good morning. Yes. As we moved through the months, we’ve had a nice improvement trajectory in terms of lessening the decline versus prior January. We have maintained a very healthy book-to-bill ratio throughout the entire month with a nice margin above 1.0. So that says that we’re booking more orders than we’re shipping sales out the back door. So the number that we gave approximately 2%, certainly little under 2% is through a couple of days ago, a little less couple of days can be somewhat non-linear at times but I think you got the sense of the momentum.

David Manthey – Robert W. Baird

All right. Thanks very much.

John Engel

Thanks David.

Ken Parks

Thanks Dave.

Operator

And our next question will come from Deane Dray of Citi Research. Please go ahead.

Deane Dray – Citi Research

Thanks, good morning everyone.

John Engel

Good morning Deane.

Ken Parks

Good morning Deane.

Deane Dray – Citi Research

Just to stay within the question line on guidance, just kind of big picture, very ambitiously you said guidance for the year back in August. And that’s $5.40. EECOL gives you $1, that would have implied $6.40, but obviously the world has changed. And maybe if you can address the ways the end markets have changed for you, expectations on volume, expectations on price. And maybe more color regarding the end markets. So bridge for us, the revised guidance from on a base level volume price and then color around end market.

John Engel

Deane, let me first to kind of set the context for the answer, let’s think about 2012 and for us it ended up being, which is not what we expected as we entered the year and moved through the year, kind of a too speed year, I call it. The first half we had very high single digit organic growth at the 9% plus level as you recall. We had our Investor Day in early August at that point we had some look into the July results which we shared at the Investor Day. As we move through the third quarter into the fourth, we experienced, really just a completely different set of results.

We felt the end markets slowed down in a meaningful way and it was really all end markets with the exception of utility, which we continue to post strong results as we move through the year which is what we had expected. And so we close out the year with the second half, if you look at the entire second half, roughly flattish organic growth, I mean a little bit above flat, but roughly flattish. So we go from close to 10% in the first half to flat and so our view, Deane, at the first half of this year will be similar to the second half of last year, so kind of flattish organic growth. Obviously we’re doing everything we can with our sales initiatives, our demand creation and try to do better than that, but that’s our current view that’s our planning construct.

And our planning construct for the second half is returning to a more, what we would expect to deliver throughout this recovery kind of a mid single digit organic growth. And when you put the first half second half together that would suggest that organic growth for the year will be low single digits, whether its 2, 3, 3% plus, 4%, be in that kind of range. And in layered on top is obviously the EECOL acquisition.

Final comment I make, with respect to the end markets our view is that industrial continues to grow, the growth rate has slowed down. We’re very encouraged with our pipeline. We’re very encouraged with our new wins in Global Accounts and Integrated Supply and we have seen some customer destocking effort. So we haven’t seen indications that they start to restock as of yet, but we’re hopeful that they’ll return that effect will occur at some point in the first quarter hopefully or second quarter of this year.

In terms of utility, we’d expect that to continue to perform nicely through the year. We still view the end market, the end market for where we play which is more distribution clearly than transmission to be low single digits this year. We feel very good about our share capture initiatives. We’ve been winning, we have one very large win in Q3 as we mentioned in last earnings call, now another large one in Q4. So it’s our view that we’ll be mid to high single digits is what we’ll deliver in utility organically this year.

I wish some upside potential on that. I think that’ll determine what we can do really in the second half as the new customers come online and we’re ramping because we’re in implementation phase.

Now with respect to construction, again we’re encouraged with the residential recovery, its meaningful, it’s underway; it’s actually in some degrees kind of strengthening as we move to the right which is encouraging. ABI has been above 50 for few months, there is a little bit noise and moves around month to month. What we’re hearing from contractors and even where we work with design and architect firms is that there is working to be – that activity level is increasing, our bidding activity level is starting to increase, our book-to-bill is above 1 so far in January. But I think when we look at how we think its going to manifest itself in the year. We really see it is more back half loaded.

We’ve evolved in hoping and watching and waiting for the fundamental non-residential recovery for construction, resi the pre-curves. So we’re finally seeing that. So I think hopefully now we’re at a point where we see that in a meaningful way second half into 2014. And CIG, interestingly enough, we’ve got some healthy bidding activity levels. Government actually grew a few percent in the quarter. So we did actually a very good job relative to the backdrop. It’s the same story we’ve talked about quite frankly for a few years now. We still represent a low share in a large market.

So even though spending constraints are increasing, we’re doing a disproportionally better job in what still a large market with a lot of addressable spent. Does that help?

Deane Dray – Citi Research

It is. It’s a fabulous landscape coverage there of end markets. And if I can just sneak one more in the idea of the increase in bidding activity and still a softer first half outlook. And one of the dynamics I know that’s important within WESCO is your willingness not to chase low quality business. So maybe, are you seeing low quality business or are you passing on this? You’re willing to take some lower organic revenue growth, but just, it is just hearing those dynamics and that’s it from me.

John Engel

I’ve been with the company since middle of 2004 and I know Steve was here many years before me and it’s been our priority and now we’ve got Ken helping out. Clearly, it’s been our priority to get fundamental product and gross margin expansion. We worked hard on it for a long, long time. The last two years in Investor Days we’ve giving greater insight to all the various pricing outsourcing levers that we’re working.

As we reflect upon and objectively analyze 2012, I think we can say that in what is a relatively tough set of end market, tougher in the second half because we really pushed hard and still got kind of flattish organic growth. We think we’ve done a very nice job in terms of gross margin expansion, Deane, and I think we’re beginning to really see meaningful sustainable traction in our gross margin improvement initiatives.

And that is to me, from our perspective is absolutely a testament and an indication of our discipline around customer profitability and types of orders we’re willing to take. We’ve always had that discipline. What we haven’t had for years is getting the fundamental margin expansion in a though environment. I think we’re starting to get it now. And you can see with our outlook for 2013, we have another step up in fundamental gross margin expansion.

Ken Parks

I think you can really see it when you look at the first half versus the second half of 2012 I commented on it in the earlier remarks, but we talked about this along the way that it’s not going to come from huge incremental chunks, it’s going to come from just all of the work that’s being done and has been done over the last three years of investment in the supply chain as well as pricing. And we felt good in the third quarter that we saw a step up in margin and the fact that we saw it hold at those levels in the fourth quarter tells us those initiatives are really taking hold.

Deane Dray – Citi Research

Great, thank you.

Operator

Our next question will come from John Baliotti of Janney Montgomery Scott. Please go ahead.

John Baliotti – Janney Montgomery Scott

Good morning. John or Ken, I was just wondering you are able to add inventory given your balance sheet and just given your size of company. I’m wondering to the extent that your long-term focus on improving gross margin. Is that helping your relationship long-term with your suppliers that you can add to your – and even though end markets are sluggish and lack of visibility, are you still able to add inventory?

John Engel

Yeah, that’s a great question John. Maybe I’ll give you a multiyear view of this. And we talked about this at lengths (ph) Steve and I as we managed through the global recession we’re facing the precipitous declines. We took about $100 million of inventory out when we lost 25% of our top line several years ago at the trough of that recession. So we didn’t take out as much inventory and we’re very thoughtful about what we took out relative to what some competitors were doing and we particularly were focused on high availability of the fast-moving skews that we thought our customers would want.

And as we come out of the recovery, we’ve done eight acquisitions now. We’ve been applying lean to our working capital processes. I think we’re more efficient, more effective, but we’re positioned where we’ve diversified the portfolio and we’ve added new supply relationships and we’ve been able to selectively add inventory in both our distribution centers and selected branches in support of our suppliers’ new product development and introduction, new product introduction planned efforts. And we are increasingly hearing back from suppliers that they value in their relationship with us.

And we view the term playing offense. For them what that means is twofold, adding inventory versus everything is relative, versus maybe some of their other channel partners and also adding sales force in local and regional markets where particularly we felt we had joined opportunities we can go after. So our description of playing offense from a supplier lens is those two levers you asked about inventory. So I think yes, we are clearly hearing that back from them.

And I’d tell you the overall we trend we talked about I think consolidation occurring across the value chain, we’re absolutely hearing from customers as we have been, they’d like to do business with a smaller number of larger suppliers that bodes well for us. But we’re hearing it from suppliers now increasingly. They’d like to business with a smaller number of larger well capitalized more disciplined channel partners. And with the consolidation that’s occurring in the supply base, major moves last year ABB buys T&B, Eaton buys Cooper that just makes that relationship even more and more important from both our perspectives.

John Baliotti – Janney Montgomery Scott

So that helps their cost structure and therefore you guys are able to share on that benefit.

Ken Parks

Yes.

John Engel

Yeah.

John Baliotti – Janney Montgomery Scott

And then on the other side of the chain with your customers as a number of distributors have talked about some of their customers especially in the back end of December destocking and just basically shutting until they used up everything on the shelves. Are you anticipating them coming to you more frequently or do you think that they’re going to build more of that back to a more steady level on the shelves. How do you see that interaction with you going?

John Engel

So the first part of your question or your comment, we did see that we saw similar effects that the other distributors you’ve referenced and there is a host of them. We just don’t – we’re not going to hang our fourth quarter on that. I mean I think there is volatility I’ve been – I’m in at the company eight years now, every December there is always some special cause reasons why I was better or worse than what the priority was.

So but I think that is the state of affairs. I wanted to make that comment. Right now what we’re seeing is more of a real time support we’ve not seen a meaningful or sustained restocking cycle start. Do we think one could and will start, I think it’s completely a function of and this is our belief of the end market demand our customers are seeing and to the extent they see that. And they feel, and they’re confident that’s going to continue I think the restocking cycle would happen in a more meaningful way.

We’re not betting on it, which is what’s reflected in our first half outlook, but if it happens I will tell you clearly that’s an incremental upside.

John Baliotti – Janney Montgomery Scott

And just finally, could you argue that if they didn’t restock but they did more real time interaction with you that that would actually be better for you in terms of your competitive advantage.

John Engel

I think it’s better for us absolutely in the mid and long-term and could even argue in the short-term because it’s going to the fact that where we have sticky relationships and we can leverage our large supply base, our large inventory, the first question you had it makes us ever more. There is a greater interdependence that’s occurring on both ends of the value chain. We’re in the middle. We have customers at one end, suppliers on the other. So yes, to the extent the restocking occurs I mean that would be incremental sales off of what our outlook is for the first half, so.

John Baliotti – Janney Montgomery Scott

Okay, thank you.

Ken Parks

Thanks John.

Operator

Our next question will come from Adam Uhlman of Cleveland Research. Please go ahead.

Adam Uhlman – Cleveland Research

Hi guys, good morning.

Ken Parks

Good morning.

John Engel

Good morning Adam.

Adam Uhlman – Cleveland Research

Yeah I was wondering if we could dig into the data com business and maybe a little bit more color on the trends you’re seeing, but more importantly how you see 2013 unfolding? Thanks.

John Engel

Q4 I mentioned we were let down low single digits and we did, and Ken has been helpful with this. In retrospect as the new CFO, he has taken the objective look hard at last year, this year, I mean I think our level have kind of, I’ll call it a financial analysis around the quarter, the composition of the quarter versus prior year and sequentially has stepped up the level. So I compliment Ken on that.

But I’ll tell you when you look at Q4 of 2011, there was one very large data com project that benefited our quarter. We also had as we have benefited that quarter. And it was north of $20 million. So I can tell you if you adjust for that. And you’re always are going to have big puts and takes but this was a unique one time non-recurring project that had some unique aspects around it.

Data com would have grown in the quarter. It would have grown kind of low to mid single digit. So we worked very hard on data com. I can tell you the markets challenged and remains challenged. Our feedback from suppliers and other sources confirm weaker than expected demand in the fourth quarter. And the outlook is that’s going to continue here, at least in the first couple of quarters.

Data center growth is continuing. I think there are fewer green fields though, there is more retrofits, more co lows. As we’ve spoken over in the past, we can offer both electrical and data as a combined offering so we think we’re in a unique position and have an advantaged offering versus some competitors.

But I would tell you that I think the first half is somewhat challenged. Our view of the second half is, with hopeful and we begin to see some recovery. I think that’ll be tying more to the non-residential construction recovery, which is the way we’re looking at it.

For the internet protocol, I’d be kind of physical and physical security markets, as a percentage of our overall data com business, it’s not as large as some of our competitors. David Bemoras at Investor Day spiked that out. I do want to site that because I didn’t mention it on our comments yet. We had double-digit sales growth in the fourth quarter and for the full year 2012. We would expect that to continue in 2013. So we’re getting very nice results.

Our broadband communications business had a very solid fourth quarter. It was up right around a double-digit range versus prior year. And that was encouraging. So I think, but all in all I will tell you that the challenges I think data com market is experiencing and I think we’re seeing that from other major supplier partners and competitors that are talking about that as well. It’s our expectation that would continue at least the first couple of quarters of this year.

Adam Uhlman – Cleveland Research

Great, thank you.

Operator

Our next question will come from Noelle Dilts of Stifel Nicolaus. Please go ahead.

Noelle Dilts – Stifel Nicolaus

Hi, guys. Good morning.

Ken Parks

Good morning.

John Engel

Good morning.

Noelle Dilts – Stifel Nicolaus

First I was wondering, when we look at these on the utility side, when we look at the Sandy related sales. Should we view that as incremental? I’ve heard some other folks mentioned that there was so much Sandy work that court distribution market was actually down a bit. And then excluding Sandy, we’re looking at kind of flattish year-over-year growth in that market. So can you just comment on the trends you’re seeing in distribution versus transmission excluding Sandy?

John Engel

Yeah. First I’ll let the last part first Noelle. I think the core distribution market is at best the very low single digit growth. I made those comments. We’ve been having some nice new wins. We feel very good about utility business, with without Sandy in the quarter. So we’re optimistic and bullish about value proposition and our ability to deliver results there.

Your comment about incremental, the utility sales we experienced in the fourth quarter related to Sandy are absolutely incremental and you consider there is one-time in nature because its in support of immediate real time store restoration. Outside of what we experienced in utility, we didn’t say it any other net sales impact. In other years, depending on, and you can think back five or six years where we had major hurricanes ripped through the Gulf region. We’ve had broader base impacts on other parts of the business.

For this, net-net, it was kind of a push that you could even argue somewhat and may have been a slight drag but let’s say net-net it’s a push. So that’s – the way to look at though for utilities again purely incremental not non-recurring. Now what’s interesting is some of those sales were with existing utility customers. Some of the $12 million was with utilities that we don’t have the equivalent of global accounts agreement; we call it alliance agreement or a integrated supply relationship.

So what’s interesting is come back to John Baliotti’s question, because of our inventory position we’re a national utility distributor to really us and HD supply, we’re able to move inventory around the country and we had a team that worked 24.7, we moved people, product and transportation assets into the Northeast region to support Sandy restoration.

We had a number of customers that were not our customers that we were able to support with real times sales and so we hope to build that into potentially future business.

Noelle Dilts – Stifel Nicolaus

Okay, great. That helps a lot. Thanks much.

John Engel

Yeah.

Operator

Our next question will come from Joshua Pokrzywinski of MKM Partners. Please go ahead.

Joshua Pokrzywinski – MKM Partners

Hi, good morning guys.

Ken Parks

Good morning.

John Engel

Good morning Josh.

Joshua Pokrzywinski – MKM Partners

Just wanted to walk through EECOL a little bit here if we could. So the dollar that you guys have reiterated, are there any assumptions that had puts and takes underneath that dollar? I guess that’s my first question and will kind of follow-up from there.

John Engel

Nothing of any size whatsoever. Clearly as we go through all of the finalization of the deal. We’re estimating intangibles and doing all those things that you do on the accounting side. But I can tell you that the model that was built behind it is spot on where we are today.

Joshua Pokrzywinski – MKM Partners

Okay. So that includes the financing because it looks like you guys got a pretty decent rate at close on that.

John Engel

Yeah, it’s very, very close to what we anticipated. You remember as we started the financing, the summer was strong and we ended up exactly where the financing was at the time we started.

Joshua Pokrzywinski – MKM Partners

Okay. And then just on the sales basis, could you guys give us a sense what really is forecasted in for EECOL? Was it – are you modeling it flat with 2012, up, down, I guess just given not a lot of experience with the seasonality there or the recent trajectory other than kind of the generic response that its been solid and up. Can you just kind of help us with what’s assumed in EECOL and maybe some help on the seasonality?

John Engel

The seasonality it’s probably not significantly different than the seasonality that we see. We will certainly go through the year and look at seasonalities they began to report to us on a quarterly basis. But as far as growth, we are certainly anticipating growth to continue in that business. It is a growing business and what we’re looking at for 2013 is growth in the mid to high single digit range on EECOL and that’s what’s built into the outlook.

Joshua Pokrzywinski – MKM Partners

Got you. That’s helpful. And then just going back to the base forecast, the $5.75. It seems like underneath EECOL then you guys are kind of low singles organic. I would imagine that with construction in general with resi kind of catching a bit here that maybe some of the pricing pressure you guys have seen over the past couple of quarters starts to abate not as much as competition project pricing. And I would think within electrical distributor typically outpacing GDP anyway. Should I think of the backdrop behind that is kind of flat GDP?

John Engel

Again our planning construct Josh is the first half is flattish organic for WESCO overall. Construction remains – non-resi construction remains challenged. And we don’t anticipate and we have not seen it yet, now again January is not even over yet, but we have not seen any pricing pressure abate at all. And our planning construct, it suggests that we would not see those in the first half and it is our view that non-resi and hopefully starts to begin to build and grow in latter part of 2013 into 2014, which supports our overall construct of for mid single digit to organic for WESCO overall. That is 2% to 3%, 4% organic for the year for WESCO.

Joshua Pokrzywinski – MKM Partners

Got you. That’s helpful. And then just one last one. I know particularly in the third quarter, you guys were able to reign in investment and keep a little bit more that margin and if I’m interpreting you guys are kind of looking more to go on offense here with the expectation to things pickup in the first half. So should we see kind of typical operating leverage here going through as opposed to the outsized claw back in the third quarter?

John Engel

Yeah. If you and Ken in his talking points and we can follow up later too, Josh, if you want to go to through it in some detail. You take a look at fourth quarter and you look at sequentially and then you take out the one-time non-recurring costs, the conclusion we would suggest you should reach is that this tight cost control of productivity initiatives remained in place. And they are remaining in place and we’re putting the guest pedal down on those that we move through the first quarter.

We have the ability to play offense. We’re playing offense selectively in different parts of the business and some areas, and I kind of disclose where but there is some areas where we have authorized significant headcount additions that are occurring as we speak, but net-net, we’re keeping a lid on the overall headcount growth. So our headcount only grew 1% in fourth quarter.

Let me put it in context, the first two quarters were 2% to 3% headcount growth. Last year we were a point or so higher than that. We’d like to get back to the 3% headcount growth on the core. But we’re not going to do that until we’re confident that we’re generating the core organic top line growth. So we’re going to keep the cost controls and productivity initiatives in place. And with that kind of top line growth, i.e. no top line organic growth, the pull-through remains very challenged, very challenged. And we’ve gone through that before, right and we have a general cost inflation base. People cost is our number one item in our cost structure, transportation is too and just even with flat headcount.

Our merit increases and base comp increases and that whole set of changes to medical etc. that’s going to go up to 2 plus percentage points. So we have that as headwind so I think what we’ve done in the second half of last year is our current posture as we move through Q1. We’re doing everything we can to drive the organic growth higher through all our domain creation and sales initiatives.

To the extent we see it that gives us the ability to begin to earn the right to invest a little more organically. We made substantial investments on the acquisitions in 2012 and that we have to keep our eye on that ball and make absolutely sure that we work on the integration and leverage the opportunities with a One Wesco strategy as priority one in 2013.

Joshua Pokrzywinski – MKM Partners

Understood, that’s helpful. And then just one more modeling question, sorry to squeeze this in. interest expense on the year it sounds like you guys are running kind of low 20 million range for the quarter on a quarterly basis. Is that about right?

John Engel

Yeah. That’s about right. All of the debt instruments are publically filed out there now. I think if you take a look at it you would comment exactly what you’re indicating.

Joshua Pokrzywinski – MKM Partners

Okay. Thank you much guys.

John Engel

Thanks Josh.

Operator

Our next question will come from Tony Kure of KeyBanc. Please go ahead.

Anthony Kure – KeyBanc Capital Markets

Hey good morning guys. Thanks for taking my question.

John Engel

Good morning Tony.

Anthony Kure – KeyBanc Capital Markets

So I want to talk about given that the second half organic demand in the fourth quarter, I’m sorry the second half of 2012 being a little bit more sluggish. Is it fair to assume that the true-ups there were no true-ups in the fourth quarter as it relates to volume rebates from your vendors or was that actually a head win on the gross margin side?

John Engel

As you know, we saw the volume changes as we move through the second half of the year, so we came in exactly where we projected.

Ken Parks

Yeah, so the positive effect that we saw in Q4 of 2011 because we substantially outperformed our outlook that we gave in the third quarter earnings call of 2011. As you’ll recall, we bucked normal seasonality where you kind of actually grew slightly sequentially organically in 2011, drove significant supplier volume rebates in the fourth quarter of that year. We did not have that effect in 2012. And no negative effect either because we ran sensitive second half with flattish organic growth and that’s how we have been running through the third quarter into the fourth Tony.

Anthony Kure – KeyBanc Capital Markets

Okay, great. Thanks. And then just looking at the line item on the EECOL EPS accretion paid to your synergies, $0.30 or so, on the EPS line, could you just remind us or maybe walk through a little bit more color, a little bit more detail? What is all involved in the synergies line?

John Engel

Right. As we referred to kind of generically, it’s all about ownership structure. So what it is as we’re using some more commonly used tax transactions or tax structuring for cross-border arrangements between the U.S. and Canada that’s the biggest piece. And then it’s the duct ability of the interest in the U.S. at the higher tax rate. And those are really it.

Anthony Kure – KeyBanc Capital Markets

Okay, great. Thank you so much.

John Engel

And to be clear, Tony, just because we want to make sure that you understand and I think that everyone understands this. Those are the synergies built into the dollar. We do not have any operational or cost synergies otherwise built in top line or bottom line.

Anthony Kure – KeyBanc Capital Markets

Right, got it. Thank you.

Dan Brailer

We have time for one more quick question.

Operator

Thank you. Our final question then will come from Matt Duncan of Stephens. Please go ahead.

Matt Duncan – Stephens

Good morning guys.

Ken Parks

Good morning.

John Engel

Good morning.

Matt Duncan – Stephens

I just want to dig in a little bit more on the EECOL to make sure we understand the seasonality. If I’m doing the math right and the guidance that you got in here for the quarter on, so total sales and the excluding EECOL, looks like you’ve EECOL doing about $210 million in the first quarter. First of all, it’s my math right there. And I assume to recall that business was doing just under $1 billion in an annual run rate when you announced it back in October. So just kind of help us think to maybe kind of the shape of the year in that business?

John Engel

Well, as far as this, for 2012, EECOL would have on an annual basis come in at about $900 million, $925 million.

Matt Duncan – Stephens

Okay.

John Engel

Seasonality wise, we’re estimating that it’s fairly ratable throughout the year, little bit heavier in the second and third quarter.

Matt Duncan – Stephens

Okay. That’s helpful. And then last thing on the EPS guide, the $5.75 number just to make sure I’m kind of hearing all the line items right. So the interest expense is going to run in the low 20s but I guess if I take at that level whether operating income at 6.2% even at the high end of your revenue guidance? I’m still maybe a shade below the $5.75. So is it really that the $5.75 is would be kind of more at the midpoint of the revenue guidance or just sort of help me think through that.

Ken Parks

The $5.75, the way that we model it out is the floor as we’ve said, it’s $5.75 plus that if you look at the range, it is close to the midpoint.

Matt Duncan – Stephens

Okay. All right. Thanks guys.

Operator

And ladies and gentlemen that will conclude our question-and-answer session for today. I would like to turn the conference back over to John Engel for his closing comments.

John Engel

Well thank you for your time today and you’re continuing to support. We’re continuing to execute our strategy of investing in our business in our people and we’re focused on delivering above market organic growth plus the accretive acquisitions. We enter this yea with a much stronger and more diverse business. I know we didn’t get to all of your questions today, I can tell you that Dan and Ken are available throughout this afternoon, this evening and we’ll make sure that we follow-up with everyone of you. We do have a list on who was in the queue. We apologize that we weren’t able to get to all of you, but we did figure that this would be a robust call given the major EECOL acquisition. Thanks again, have a great day.

Operator

Ladies and gentlemen, the conference has now concluded. We thank you for attending today’s presentation. You may now disconnect your lines.

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