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Wesco Aircraft Holdings (NYSE:WAIR)

Q3 2013 Earnings Call

July 31, 2013 5:00 pm ET

Executives

Mark Davidson

Randy J. Snyder - Chairman of the Board, Chief Executive Officer, President and Member of Nominating & Corporate Governance Committee

Hal Weinstein - Executive Vice President of Sales and Marketing

Gregory A. Hann - Chief Financial Officer and Executive Vice President

Analysts

Carter Copeland - Barclays Capital, Research Division

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Jason M. Gursky - Citigroup Inc, Research Division

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Edward Marshall - Sidoti & Company, LLC

Kristine T. Liwag - BofA Merrill Lynch, Research Division

Myles A. Walton - Deutsche Bank AG, Research Division

David Mandell

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Wesco Aircraft's 2013 Third Quarter Earnings Conference Call and Webcast. At this time, I'll turn the call over to Mark Davidson, Head of Wesco Aircraft Investor Relations.

Mark Davidson

Thank you. Good afternoon, and welcome to the Wesco Aircraft's 2013 Third Quarter Earnings Call and Webcast. Presenting today will be Randy Snyder, Chairman and CEO; Hal Weinstein, Executive Vice President of Sales and Marketing; and Greg Hann, Executive Vice President and CFO.

Following our prepared remarks, we will open the line up for questions. As a reminder, today's conference call includes statements regarding the company's anticipated financial and operating results, as well as other forward-looking statements based on current expectations as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements may often be identified with words such as we expect, we anticipate, we believe, upcoming or similar indications of future expectations. Although Wesco Aircraft believes that such forward-looking statements are reasonable, we cannot assure you that any forward-looking statements will prove to be correct. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may be -- cause our actual results, performance or achievements to be materially different. Additional information relating to factors that may cause actual results to differ from our forward-looking statements can be found in the company's filing with the Securities and Exchange Commission, including the company's Annual Report on Form 10-K for the fiscal year-ended September 30, 2012, as supplemented by our quarterly reports on Form 10-Q for the periods ended December 31, 2012 and March 31, 2013. Wesco Aircraft undertakes no obligation to update or revise forward-looking statements except as required by law.

Now to begin the call, I would like to introduce Randy Snyder, who will deliver the opening remarks. Randy?

Randy J. Snyder

Thank you, Mark. Good afternoon. Please turn to Slide 4. I'm proud to announce Wesco Aircraft's third quarter results with record sales of $230 million and adjusted diluted EPS of $0.31. Our sales for the quarter were 22% greater than in the third quarter of 2012 with 14% of the growth being organic.

During the quarter, we continued our strategy of pursuing new customers, selling new product lines to existing customers and gaining long-term relationships with our customers while offering value-added services and a supply-chain solution that guarantees availability of products while improving the productivity of our customer's workforce. During the last quarter, contract signings and contract bid opportunities remain at a very high level, which will bode well for the future. Hal will go over the highlights later in the call.

Interfast is fully integrated. And we exceeded the synergies targeted by our board. We also expect to benefit from operating leverage since the integration is complete. And we are all operating from Wesco's global ERP system. Now that the integration is complete, I would like to formally thank all the legacy Interfast and Wesco employees who worked so diligently to integrate our companies.

As we continue to achieve sales growth in excess of market growth, it is important that we continuously improve our operational capacity, execute on orders and maintain control of our SG&A. A good example is in our main warehouse where we have achieved a 30% increase in shipping capacity with virtually no impact to our SG&A. Even with a 14% organic growth rate, Wesco's performance to our customers remain at a world-class level. In the past, I've stated that Wesco is in great position to take full advantage of this continually improving market. By signing new contracts, selling new commodities to existing customers and entering the MRO market, Wesco has the ability to leverage its inventory and expand its global customer base.

During the softer market conditions of the past several year, instead of shrinking our shipping capacity, we automated and improved processes, which resulted in having the capabilities to service our customers as demand grows. Throughout our history, Wesco has demonstrated time and again its ability to grow regardless of the cycle. I feel at this time, we are better prepared to support our customers. And we'll continue to grow our business at a greater rate than the market as we move forward.

Now I would like to turn the call over to Hal.

Hal Weinstein

Thanks, Randy. Good afternoon, everyone. As we've spoken about in past quarters, our comprehensive sales and marketing plan calls for a long-term multipronged approach. As you will see from our results for the quarter, our global sales team is performing very effectively against the plan. As Randy mentioned, we continue to see robust revenue growth globally in Q3 with another record quarter. As has been the case in past quarters, the growth is in multiple areas including new customers, additions of products within our existing contracts, expansion in emerging markets, consistent gains in the MRO market and growth in our newer product lines, most notably, electronics. All of this long-term business positions us perfectly for continued growth for many years.

As our military customers focus on ways to reduce overhead, manufacture products more efficiently and reduce inventory levels, it has become very clear that Wesco's service and supply-chain solutions are part of the answer. We're moving forward with a number of customers to secure opportunities to supply both parts and service, with a recent example being our new contract from Fokker on their F-35 program, as well as other military platforms.

As we've mentioned, based on our ability to help our customers reduce their costs and working capital and also improve operational productivity, Wesco is positioned to grow this portion of our business.

In the commercial market, build rates are on the rise, backlogs are at unprecedented levels and the need for new and more efficient aircraft is driving growth, thus continuing to provide exciting opportunities. The key to our plan to expand faster than market is to be positioned on virtually every commercial program throughout the world, which we are; demonstrate our value; and ultimately, grow by providing new products and services as we have throughout our history. Beyond that, our geographic expansion into regions such as China, Mexico and India continue to exceed expectations, which will lead to more opportunities and greater long-term growth.

When we look to gauge our progress in achieving sustainable long-term business, contract signings become a key indicator. We will always strongly focus on market share gains with new customers. But beyond that, our success is based on satisfied customers, increasing the scope of work with Wesco through line item additions, expansion of services and extension of existing agreements. The third quarter was exceptionally strong in terms of contracts signed. But as important, there was a good cross-section covering each of these areas. A few recent examples from our OEM business in North America and PacRim include the extension of our existing agreement with Northrop Grumman on the F-18 program, a new contract with Korean Airlines in support of their Boeing subcontract work, Triumph Group in Mexico with a new contract in support of Boeing and other programs, a significant addition to our existing contract with PCC Aerostructures to incorporate recently acquired new business units, Atlas Aerospace for all their programs, LMI for all their work, as well as a number of awards from Spirit for various programs.

Internationally, we've been awarded a new contract from Strata for Airbus and ATR work, significant addition to our current Alania [ph] 787-9 program, as well as new additions from Bombardier-Short Bros. division in Europe on the C series program. Keep in mind that these contracts cover a wide range of Wesco products, which again falls right in line with our long-term growth strategy.

Our MRO business continues to gain traction with ever-increasing activity levels across the world and new contract wins from such notable companies as Air France and AAR.

So to summarize, activity levels continue to be high in all areas of our business, contract signings remain strong and we're in a great position to grow our business for all commodities and services.

Now let me turn over the call to Greg for a detailed discussion of our financial results. Greg?

Gregory A. Hann

Thanks Hal, and good afternoon, everyone. If you'll please turn to Slide 5. As Randy and Hal have noted, our sales during the quarter were very strong as the company had record sales of $230.2 million. This is up 21.6% year-over-year for the quarter. Randy noted that our organic growth was approximately 14%. This growth rate was consistent with what we saw last quarter as well. We saw growth in all channels to market and in all regions.

Our Rest of World segment continue to perform very well and showed approximately 27% external sales growth year-over-year, primarily due to the growth of contract revenues across most of our largest customers, as well as new contract wins. Our objective has been to have sustained above-market growth. And we are clearly demonstrating that. Ad hoc sales made up 40% of our total sales, JIT sales were 27% and LTA sales were 33%. The mix has been relatively consistent between Ad hoc and contract business over the last 6 quarters.

The gross profit percentage for the quarter was 35.6%. This is slightly higher as compared to Q3 2012. As we said before, our gross profit percentage can fluctuate quarter-to-quarter due to our sales mix of the more than 525,000 SKUs we sell.

Next, I'd like to discuss our SG&A expenses. As a percentage of sales, consolidated SG&A expenses were 15.5% in the third quarter as compared to 15.5% in Q2, 16.4% in Q1 and 17.2% in Q4 2012, which was the first full quarter following our Interfast acquisition. Operating leverage should continue to improve now that the Interfast integration and systems transition is complete, and as new contracts mature.

For the second quarter, we reported a year-over-year increase in SG&A of $3.4 million. This increase was primarily due to the addition of Interfast-related SG&A cost, costs associated with Carlyle's secondary offering and payroll-related costs associated in part with headcount increases this year. Excluding the addition of Interfast SG&A and costs related to the secondary offering, SG&A cost increased only 1%, which compares favorably to the 14% organic sales increase in the quarter. Also, the headcount increases I referenced earlier have occurred mostly in our sales and sales support organizations in order to meet our growth, including new contracts and our customers' growing requirements. We continue to remain focused on increasing our productivity, which Randy touched on, in all areas of the business that will allow us to continue to get operating leverage as the business grows.

Now if you would please turn to Slide 6. Adjusted EBITDA as a percentage of sales was 21.6% as compared to 21.7% in the third quarter of 2012. Near term, our strategy is to focus on sales growth while maintaining our margins, which will continue to drive rapid EPS growth. Over time, we expect to be able to increase EBITDA margins as we drive operating efficiencies and leverage our SG&A infrastructure. Hal spoke about the number of new contract wins we had, and it is typical to build the infrastructure and hire the people necessary to service the business at the start of the contract with EBITDA margins improving over time as the revenue stream increases and we start benefiting from the operating leverage.

Adjusted net income for the second quarter was $29.5 million, resulting in adjusted diluted EPS of $0.31. This compares to adjusted net income of $22.6 million, an increase of 31%, and adjusted diluted EPS of $0.24 in Q3 2012. Our effective tax rate for the quarter was 33.9%, and we still expect the rate to be between approximately 33% to 34% for the year. The number of fully diluted shares in the quarter was 95.9 million.

Moving onto cash flow, we generated $24.3 million of free cash flow during the quarter. For the year, free cash flow is at $55.1 million. The company also paid down $23.5 million in debt during the quarter, and has paid down $47 million this year. We continue to feel very comfortable with the strength of our balance sheet to support our business growth.

Now if you'd please turn to Slide 7. Now let's discuss our outlook for fiscal 2013. As we've discussed, our performance in the third quarter was strong, both in terms of revenue and earnings. Based on our results and the activity levels we are seeing worldwide, we are confirming our guidance for the year. However, based on our strong third quarter, we do expect that our revenue for the year will be on the higher end of the range of $880 million to $900 million. Due to the success we've had in winning new business, we are gradually adding the infrastructure necessary to manage these new contracts in sight. As these contracts ramp up, we will see future benefit to the EPS. Consequently, we are comfortable with our current guidance of $1.17 to $1.21 for adjusted diluted EPS. We are certainly optimistic about how we are positioned in the market now and into the future.

For some closing comments, I'd like to hand the call back over to Randy. Randy?

Randy J. Snyder

Thank you, Greg. As you can tell, we are very pleased with our third quarter results and excited about where our business is headed. We have the processes and breadth of product to support our people as they lead us on the path of sustained strong performance and continuing growth for the company. We will now open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And their first question comes from Carter Copeland.

Carter Copeland - Barclays Capital, Research Division

Just a couple of quick ones. The first is on this margin topic and what's sort of implied by the guidance. I wondered if you could expand a little bit this -- on this for me, Greg. If I look at what's implied for the full year given the sort of consistency we've seen in the gross margin rates and the SG&A as a percentage of sales, it looks like the higher end of the EPS range would imply some improvement in one or both of those. Is that the right way to think about it? Does it take some incremental SG&A leverage or maybe better pricing or, I guess, even better revenues to reach the higher end of that range? Is that the right way to think about it? And is that something you're planning on? Or did your comments about operating leverage improvement apply more to next year?

Gregory A. Hann

Yes. I think for the remainder of the year, this next quarter, as I indicated on the revenue side, we feel like we will be on the upper end of the range. I think that from a margin perspective, it will be relatively consistent. I don't see a dramatic movement in the margin on either the gross margin or the EBITDA margin.

Carter Copeland - Barclays Capital, Research Division

Okay. And when you look into -- I realized you don't have '14 guidance out there yet. But consistent with your comment about trying to generate that leverage and doing the MRO build-out and getting past the Interfast integration, is it your expectation that we'll begin to see some of those benefits begin to hit the margin next year at any particular time?

Gregory A. Hann

Yes, absolutely, Carter. We would certainly expect to see that going into 2014.

Carter Copeland - Barclays Capital, Research Division

Okay, great. And one last one, just the point of clarification...

Gregory A. Hann

And I mean, obviously we'll -- I'm sorry, obviously we'll talk more about that when we talk about our full year guidance on the next call.

Carter Copeland - Barclays Capital, Research Division

Okay, okay. And at the revenue line, it looks like -- obviously, the organic growth has been running at pretty high rates for the last couple of quarters. The guidance obviously implies that, that slows down a little bit. Does that pertain to any particular contract or contracts that we should note? Or is it sort of regular course of business-type stuff and the 14% numbers we've been seeing have been just out-performance relative to what you think you would normally generate?

Hal Weinstein

Carter, it's Hal. I would say that, that's kind a spread over the general business. We're doing overall very well. Europe's been exceptionally well, great success on some of our new product lines. So overall, a lot of traction being gained.

Operator

And we have Joe Nadol on the line with a question.

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Guys, you've mentioned in the press release that you're very excited about 2014. It's July 31 here. I know you're not going to give guidance yet, but I know you mentioned in the call some of the things you're excited about. But can you maybe directionally give a sense on revenue growth? And how you're thinking about sustaining this kind of -- potentially sustaining this kind of revenue growth going into next year?

Randy J. Snyder

Joe, this is Randy. It's all about preparing. These contracts that we get today really don't start for 3 -- 6 months to 9 months out the road. So we're only giving you what we've -- actually, our growth is not what we've done today. It's what we've done 6 months or 9 months ago that are showing the growth for this particular. So the idea of having all these contracts and these bid opportunities that are coming up just bodes well for us to do well in the future. So as -- because it's just not likely you get a contract and then we ship the next day. We get the contract. We have to do the procurement. We have to clean up the customers, own inventory so you don't have any inventory any longer. And that takes time. So over the last year to last year or so, we've been actually seeing a lot of opportunities. We've been winning quite a bit of those opportunities. And now they'll start, one after another, will start going into place.

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Yes. It sounds like a lot of wins. I was wondering if there's a way to quantify at any better way than just listing off some of the customers, which it all sound like very good opportunities. Is there a better way to quantify exactly the way you think about it maybe...

Randy J. Snyder

We do as we win a bid that we got from procurement. So we go actually into the facilities and see the assets they have, what we have to buy now versus what we can wait to buy. So we're actually doing an analysis on what the company's assets are and what we need to do to make sure that they have continued supply chain. So it's very hard to analyze it until we get into it because -- and actually, most of the time when we do take a contract, we're actually saving them money because they actually buy more than they use. And that's what they have had in the stock for these years. So until we can get in there see what is really going on, it's very difficult to tell you exactly what we're going to be doing 9 months from now, 6 months from now.

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

On the MRO side, you guys have been giving a little bit more information over time. And you mentioned again in your remarks a couple of new customers and strong momentum in that business. Are you getting close to the point where you might start breaking out exactly what you're doing in revenue in that business?

Gregory A. Hann

No. Really, for this year, what we've been saying all along still holds true right now. I mean, the growth that we're seeing is not significant. As we look forward next year though, we will try to give some more information about the MRO piece of it because we know it's a significant piece of our growth going forward.

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Okay. And then just finally, Greg, a small one. The unusual item that you backed out of your adjusted EBITDA and earnings, is that in SG&A?

Gregory A. Hann

Yes, it is. There's 2 pieces. It has to do with the last piece of our Interfast integration, as well as the costs associated with Carlyle's secondary offering that we did in May.

Operator

And we have Jason Gursky on line with a question.

Jason M. Gursky - Citigroup Inc, Research Division

Two quick questions to start here. On the international growth, can you talk a little bit about how long you think you can maintain the types of growth rates that you've seen here of late? And so what's the pipeline look like for new business as we move out over the next several quarters or years? And then you also made some emphasis that SG&A growth was 1% relative to the organic sales growth of 14%. Is that the right way for us all to be thinking about the relationship between sales growth and SG&A growth from hereon out?

Gregory A. Hann

I'll take the SG&A first, and then Hal will talk about the international. It really was just the kind of point in time, right, the last quarter or this quarter. I think from an SG&A standpoint, really the starting point really needs to be at the point in time that we bought Interfast, which was Q4 of last year because their cost structure was so different. Like here, we were just trying to give a reference of fact that the growth on the SG&A side from a dollar perspective, really if you pulled out these last 2 unusual items, it wasn't that significant. I think going forward, SG&A will grow. It will not grow at the rate that sales will. Will it grow 1%? No, I'm not sure I would say that going forward. But it will grow at a rate much slower than sales.

Jason M. Gursky - Citigroup Inc, Research Division

Okay. And then on the international growth?

Hal Weinstein

Yes. On international, Jason, a lot of runway there. Build rates are going obviously the right direction, Airbus 787-9, a new Laney [ph] program and other customers as well. We are, I've said it before, I'll say it again. We are in the right place at the right time with the right customers. And also, I kind of look back on our business in U.S. like 10 years ago, and I liken to where our European business is today, gaining incredible amount of customer loyalty, if you will. They're understanding what we do. It's picking up steam big time. And as it didn't stop here, I can't see it stopping there.

Jason M. Gursky - Citigroup Inc, Research Division

Okay. And then last for me on the inventory side of things, obviously a pretty significant growth in inventory year-on-year. Can you talk a little bit about your approach towards inventory at this point? And whether there's an increased focus now on inventory turns, and that potentially being a source of cash flow as we move forward? Or is that still going to be an investment?

Gregory A. Hann

Yes. I mean, no. Obviously, inventory is our strategic asset, right? So I mean, we're going to continue to invest to support our new contracts, the outgoing opportunities we have, as well as just to support our customer's growth. So if you're talking about inventory movement quarter-to-quarter over time, I think our turns will be relatively consistent. But the amount of inventory growing quarter-to-quarter could shift depending on what we need to do, once again, to meet our new contracts, to meet new opportunities, things like that. But once again, I would envision that the inventory turns, in general, will be relatively flat.

Randy J. Snyder

Yes. And, Jason, this is Randy again. When you sign a lot of contracts, inventory goes along with it because we have to build our inventory so we have inventory to support them when their inventory's gone. So as we get more and more contracts, you'll see a build-out. As it levels off, then you'll see more of a downturn of the -- our inventory will stay same, still stay stable. Or what's going to happen is that it'll actually go down a little bit.

Operator

And we have Michael Ciarmoli on line with a question.

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Maybe just to follow up on Joe's line of questioning around '14, to ask it another way and maybe play devil's advocate. Are there any programmatic challenges that you see either on the defense side or contracts that have rolled off or recompetes that you didn't win? I mean, obviously, we look at the OE cycle. It's very strong. You do have some headwinds on the 47-8, maybe to 380. But is there anything getting in the way of '14 right now as you guys see it?

Hal Weinstein

I can honestly -- yes, I can honestly say no. From the commercial side, obviously, as we talked about, very strong, no contract losses on either current or on the horizon. So we don't see anything but wins, frankly, and that's kind of what we're indicating in the call, which is all leading to good future growth. The defense side of the business, we -- I think you guys saw. We got some good news about the F-35 yesterday, or today I guess, it was that they got Block 6 and 7, I believe. So that obviously bodes well for us because we are all over that program. And then our other programs, again, stable certainly. And as we mentioned earlier, we are having some great movement with our customers to do more different better things. So it's kind of playing right into our wheelhouse, if you know what I mean. So it's a long way of saying, we feel really good about '14.

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Okay, okay. And then what about your Ad hoc revenues? I know they ticked higher last quarter from a revenue run rate seem to be sustaining at this sort of level. I mean, do you see that inflection or a new trend beginning where we might start to see the pickup in Ad hoc? Or even maybe just build on this kind of recent momentum?

Hal Weinstein

When Ad hoc does come, we'll be as surprised as you are. It will show up in our numbers.

Gregory A. Hann

Yes. I guess, yes, we have no way of knowing. It's been -- the Ad hoc percentage of our business has been relatively flat for the last year, right in that 39%, 40% range of our total revenues every quarter. So even though the lead times are, once again, like we've talked about the last couple of quarters, are slowly inching out, it's certainly not enough to generate any additional Ad hoc opportunities for us.

Randy J. Snyder

And I think obvious is everything we're -- when you ask about 2014, how we're feeling about it, this is all in spite of, if you will, potential growth opportunity on the Ad hoc. Everything we're planning has nothing to do with that. If it happens, great upside. If it doesn't, still a great business going forward.

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Okay. And then last one for me, and I'll jump off here. Just on the cash flow, really solid free cash flow conversion. What can we expect? I mean, I'm assuming given the investment in inventory, that type of conversion rate can't be sustained. Or what are you guys thinking? What's the metric we should be thinking of for net income to free cash flow conversion?

Hal Weinstein

Yes. The way we look at it is that over the cycle, we're in that 60% to 65% of net income is what we have in cash. Obviously, quarter-to-quarter, the one big driver, and we touched on it already, at the inventory levels where they can spike a little bit. And that will drive a little bit of the cash flow up or down depending on what happens there. But once again, I mean we're in a pretty much of a growth position right now. We're able to generate this kind of cash. So I don't see too much changing unless, once again, it's due to inventory shift quarter-to-quarter.

Operator

And we have Edward Marshall on line with a question.

Edward Marshall - Sidoti & Company, LLC

So the question, my first question is on pricing. So we've seen nickel, titanium, aluminum, some of the metals that you guys will have in your products start to fall off. I'm wondering, have you seen or do you anticipate seeing? And understandably you pass a lot of those material costs off to your customers. But depending upon timing of purchase on your supply versus sale, are you seeing or do you anticipate to see any kind of movement on the margin because of the price squeeze or something like that?

Randy J. Snyder

In regards to metal and the parts that we do buy, this only represents probably a maximum of 18%, 16%, probably average is under -- in single digits. So it's not a high concentration of where the cost is. So even though metals, if they do become -- go up and they become scarce, then it really affects us in lead time. So that's what we've kind of looked for when we look at metals.

Edward Marshall - Sidoti & Company, LLC

Okay. And on the Ad hoc, Greg, the questions that were asked earlier, just to kind of extrapolate it a little bit further. I'm curious, as we kind of look at the way Interfast was laid into kind of the revenue rate, did any of that Interfast acquisition come into the Ad hoc? Is that the initial spike that we saw earlier this year? And kind of how I look at Interfast, and maybe to go further, on the aftermarket side, are those generally contract or will they be more on the Ad hoc as well? I guess there's 2 questions there.

Hal Weinstein

Yes. From an Ad hoc perspective, yes. I mean, clearly, when we rolled it in, there's an Ad hoc component to the Interfast side, probably not too -- it's not too dissimilar to the split that we had on the legacy Wesco. So there was probably a little bit of a blip. I can't remember exactly, but it wouldn't have been significant. I'm sorry, I forgot what your second question was.

Randy J. Snyder

Relative to MRO, the kind of the short answer is it was a combination of contract and Ad hoc for their aftermarket business, as frankly ours is as well. We, as we do with all of our business, we try to get as much on contract as we can, Edward.

Operator

And we have Sheila Kegel [ph] on line with a question.

Unknown Analyst

So my first question is can you maybe talk about what's going on in your end markets, what you're seeing on the commercial and military side of the business? And on the commercial side, could you break down the organic growth, and maybe what you attribute to penetration on existing platforms, production ramps versus new contract wins?

Hal Weinstein

I'm going to have to write that down. Okay. So the commercial and the military market, you're kind of asking what we're seeing out there?

Unknown Analyst

They both -- I think, Greg, you mentioned they both grew in the quarter. Could you quantify that? Or maybe could you give us some more color on that?

Gregory A. Hann

Yes. I mean, we kind of don't talk about the military and the commercial split of the business. It's difficult to do so. We kind of -- we do that once a year where we talk about actual growth rates in the percentage of business. It's very, very, very hard for us to do. Yes, so I can't tell you what the organic growth rate was on military or where it was on commercial. We can just say from an overall perspective, we know what the organic growth rate was.

Unknown Analyst

Okay. And maybe could you give us some idea on what you saw from penetration on your existing platforms or the incremental dollar amount from new contracts?

Gregory A. Hann

Again, yes, I mean as Randy mentioned before, it's really, really difficult for us. We know we've got contracts. We know we have extensions, renewals. But what that has potentially worked over the next 12 months, for instance, is very difficult until we get inside of some of these businesses that can see what kind of inventory they have.

Kristine T. Liwag - BofA Merrill Lynch, Research Division

Okay, that's understandable. And then just switching over to market share a little bit. You guys have both, the 2 big competitors in the space that's talked about additional contract wins. Can you maybe give us an idea of what percentage of your contracts that you announced in the quarter were from new customers versus existing customers and scope additions?

Hal Weinstein

Yes. Again, we don't -- we haven't provided that data at this point in time. I don't even know if it's something we...

Gregory A. Hann

Yes. It's not something that we talk about as announced. So there's really not a whole lot more we can say about the split of how much the dollar amounts that go to new contracts, the dollar amounts that go to renewals and extensions.

Randy J. Snyder

And also, a large number of our additions to our contract wins are the addition to the contract we already won are getting more items on those particular items. We get items, add ons all the time. And we don't know if it's going to the military. We don't know if it's going to the commercial. So it's something that's very difficult to measure.

Operator

And we have Myles Walton on line with a question.

Myles A. Walton - Deutsche Bank AG, Research Division

Greg, so on the SG&A comment you made about 1% on the 4% organic growth. I just want to make sure I have the numbers right. So you're applying 1% to what was there last year, first -- second quarter -- excuse me, last year's third quarter versus your organic underlying sales or your total sales?

Hal Weinstein

Yes. All we were trying to do is say that if you took a look at just the bottom line SG&A cost, I mean, Q3 of last year versus Q3 of this year, and if you look at this year and took out primarily the Interfast SG&A costs that have been added, plus just this one -- the costs associated with this secondary offering, it's really about a 1% growth in SG&A, which compares to a 14% growth organically. Since I'm pulling the SG&A cost I'm in essence pulling out the SG&A sales -- or excuse me, the Interfast sales since I bought [ph] the Interfast SG&A cost. So I'm trying to kind of normalize it a little bit and just associates the organic SG&A, I guess, with the organic sales.

Myles A. Walton - Deutsche Bank AG, Research Division

So maybe that's to save me getting the math wrong. So is it -- does it work out to be like a 50 basis point improvement in SG&A as a percent of sales?

Gregory A. Hann

No. I mean, an improvement. Oh, are you asking a percentage? You mean using as a percentage in a [indiscernible]?

Myles A. Walton - Deutsche Bank AG, Research Division

Yes. So I was just trying to understand what's that leverage you're talking about.

Gregory A. Hann

Yes, that sounds about right.

Myles A. Walton - Deutsche Bank AG, Research Division

Okay, great, that helps. That helps me anyway. So on the one question I had was on the Airbus contracts that was announced back in May. I think also on the Aerospace call, they talked about still being the #1 or the largest supplier of consumables to Airbus. And so kind of 2 questions here. One is can you talk about the Airbus contracts in general to yourself? And second, can you give us some idea of the competitive landscape? And if there's more opportunity to -- or what the spread is between you and, I guess, B/E as the #1 player?

Hal Weinstein

Yes. We heard, obviously, B/E's comments. All I can tell you is that quantitatively, the information we have received has been absolutely indicated that we got the majority of that contract. So I -- that was from Airbus. So our press release was approved by Airbus. So that's all I can say. Yes, from kind of going forward, Airbus isn't done. There's more stuff coming from them, more opportunities. So we still see -- the good news for us is because, again, from what we have been told, we've kind of put in the predominant position. We will get more and more opportunities going forward. We're going to be a pretty big player in that end of the market.

Myles A. Walton - Deutsche Bank AG, Research Division

Okay, great. The other question I had was on PCP reported their core fastener sales year-on-year were up about 12%. Is that kind of what you saw as the underlying market versus your 14% run rate? And is this effectively a period of time where the manufacturers and the distributors are more matching time with the growth rates?

Gregory A. Hann

I don't think it has any -- is not in really in correlation between the 2, so...

Myles A. Walton - Deutsche Bank AG, Research Division

Not a correlation between the manufacturers...

Randy J. Snyder

Other manufacturers that we're talking to seems to be in the high-single digits. So PCP is broader than the high-single digits, yes.

Myles A. Walton - Deutsche Bank AG, Research Division

Okay. So the market you thought was more in the high-single digit?

Gregory A. Hann

That's what we believe the market is as we have heard that from other suppliers, yes.

Operator

And we have David Mandell on line with a question.

David Mandell

How would you characterize the product lead times from manufacturers right now?

Hal Weinstein

Pretty stable.

Randy J. Snyder

Yes, relatively flat right at the moment. We're not seeing [indiscernible] in this [indiscernible] yet.

David Mandell

And then as far as your sales force additions go, are you going to continue to add people? Are you mostly done with that? What should we expect going forward?

Gregory A. Hann

Well, I mean we will continue to add people when it makes sense to add people. I mean, we're very aware of our cost -- 50% of our SG&A costs is related to people. So we're very aware of the people that we're adding. But we have a lot of growth opportunities around the world. And when we feel like those growth opportunities require us to hire additions of sales support, salespeople. And once again, anywhere in the world, we're going to do it. We're going to make sure that we not only satisfy our customers so that we can satisfy and be able to meet the demand for future growth.

Randy J. Snyder

Yes. We're very continuously improvement-orientated. And right now, we probably have 80% of our staff. that's either yellow belt, green belt or black belt-trained. So we are always looking at process improvements first before hiring. And we're doing a lot of major process improvements in warehouse operations, sales operations, procurement operations. And so -- but when it comes from hiring, when we get these new contracts depending on the expertise we need, a lot of it does go into logistics. And as we get on these new lines or add on new lines and see the business growing, then there is a possibility that there will be more people who either will come up from administrative job to a sales job or we'll be hiring salespeople as our business grows, and as a need to support our customers.

Operator

And we have Jon Gardin [ph] on line with a question.

Unknown Analyst

We've heard a lot about market share wins. I'm just curious, could you just help us understand how that competitive dynamic plays out and the extent to which price is a lever versus the extent to which maybe you guys have a better value proposition, or so you think, versus the competitors.

Hal Weinstein

Yes. To me, frankly, it's a bit of both. There have been a number of contracts that we have been awarded where actually we've been told we haven't been low bid. But the value proposition we offered offers the customers some significant internal cost savings. And they get that. So it's kind of a combination of both. You have to be competitive, no question about it. But by the same token, if you offer a better mousetrap, then the customer sometimes is willing to pay for that.

Unknown Analyst

That's helpful. And certainly, you have a pretty robust outlook at least qualitatively for 2014. I was hoping that you could just talk a little bit about how much of that if any is based on the positive or an accelerating outlook for the market growth rate versus how much is an accelerating outlook for your market share or new wins kind of opportunities?

Gregory A. Hann

Yes. It's hard to quantify it.

Randy J. Snyder

We're trying to quantify, but it's both.

Hal Weinstein

But it is both, exactly.

Randy J. Snyder

When we talk about stable lead times, we're talking about lead times that are between 30 and 40 weeks. That's still a long time to wait for a nut or a bolt or a screw. So a lot of it is because of our performance. And they feel much more comfortable with us. So a lot of items that we gather from troubled suppliers that they're having that they know that we can take care of and get them parts on time. So as build rates go up, capacity gets restricted, they really want a supplier that has a history of being a great supplier. And that's what Wesco is. And that's, I think, we owe most of our growth to, is performance.

Unknown Analyst

Got it, that's very helpful. And just at the end market level, do you think commercial or defense is more likely to surprise in 2014 as a revenue opportunity?

Hal Weinstein

I wouldn't be surprised by anything on the commercial side based on the robust build rates and the amount of share we're taking. I think the surprise portion, not necessarily for the market, but I think for us is going to be -- it could be pretty significant, to be honest, on the military side. I think that will be the surprise for everybody this section.

Unknown Analyst

Okay, that's helpful. And I could just ask one more. I certainly appreciate the reluctance to kind of offer any commentary about Ad hoc mix going forward. But if -- but I'm sure it's on your mind. If you could just maybe give us a bigger picture framework for how you think about Ad hoc rebounding in the years to come, that will be helpful.

Randy J. Snyder

Okay. Well, I've been saying that the train is coming, but we have -- it's coming. We can hear the train coming, but it hasn't arrived at the station yet. I'm getting tired of saying that because I've been waiting at the station for it seems like forever. But when it happens, it happens. I mean, it's great from a sales point, but then it's not so good when I have to do all these follow-ups with customers, with vendors because they can't deliver. So we look at it as a blip on our radar screen. If it happens, it happens. And we've prepared to meet our customers requirements, yes, we are prepared. But at the same time, it's something that we really don't think about. It just happens. So when it does, you'll see it on the Ad hoc. And Ad hoc, by the way, is just not because we're getting great margins because there's a shortage of inventory. We do Ad hoc all the time because people -- some people don't have contracts. They just buy as needed. And that's what Ad hoc is, unplanned demand or buy as needed. So the difference is when the market changes from a buyer's market to a seller's market, that change is where the margins are getting affected for the high side.

Operator

And we have David Manthey on line with a question.

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

Just to square up the military comment. Last quarter, I believe you said that defense customers were preparing for sequestration. And now you're saying there's potential for upside. I guess, I'm just looking for an anecdotal kind of update on conversations you had. And what gives you that increased confidence as you look to the next year?

Hal Weinstein

Sure. And yes -- I mean, the customers are certainly -- sequestration is certainly out there and it's hit. But from our perspective, certainly in the short term, as I mentioned, the GSF is going to continue at a pretty good rate. F-18 is moving along good. V-22 is going to take a small hit on the domestic build rate, but the foreign military sales look like they're going to make up the difference. So overall, when you look at the major programs we're on, we're feeling pretty good about it. But it's kind of beyond that. And the beyond that goes into -- and I can't give you names, but let's just say that our major defense customers are in discussion with us to do more things because they do have the necessity. They have the need to become much more efficient. You probably heard that some of these guys have had to lay off employees. So that work still needs to be done, but now they're looking to us to do that work for them. So that's a combination of services and potentially, new products as well. So that's why we're feeling pretty comfortable and looks are confident relative to our ability to grow in that end of the market. So a very nice compliment because they know they have to keep their core business because eventually military will come back. So what they want to make sure is that they have the infrastructure to be able to allow them to get that quickly instead of having to rebuild it. And they have very -- a lot of confidence in our ability to fill that infrastructure for them.

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then last question on MRO, which I know is small. But have any of these test runs that you've been doing turned into anything broader in terms of relationship to this point?

Randy J. Snyder

You have to realize that we're really quite new with the MRO business. And more and more people are getting to know us. Our name is getting out there. And we're really pleased about our progress. We're winning partials of contracts that we never have won or had the opportunity to bid. And it continues. I think our bids on the MRO side is probably larger than our bids on the commercial side. So we're really excited about that opportunity to bid. And we feel we'll win our fair share of it. And once we do, win the ones we do, then they'll see how our performance can be. And that's where our growth has always been, is showing our customers the great performance that we do.

Operator

[Operator Instructions] And we have Scott [ph] on line with a question.

Unknown Analyst

Randy, could you -- you gave us a very impressive list of contract wins during the quarter, like the previous questioner I had alluded to. Can you talk about maybe your closure rate and those contracts based upon the number of contracts that you've bid, compare them to maybe the number of contracts that you're winning? And then I've got a follow-up question or 2 after that.

Hal Weinstein

It's -- talk about something difficult to quantify. We had a tremendous amount of contracts, no question about it. Our success rate on contracts to quantify exactly what we win, what we don't, what comes back later, very, very difficult. Some they don't place immediately. It will come back in 6 more months. Negotiations take a year sometimes. It's just very, very difficult to determine exactly as quantifiable. And right, and summer, we get 10,000 items to bid and we win 3,000 items. So we get a partial of the contracts. So it's a very difficult thing to actually state a number. Obviously, when we talk about the contracts we win, it's always exciting for us. And they, for the most part, are 3- to 5-year deals that tend to grow over time. So -- and that's what we focus on, and with the right customers and the right mix of product.

Unknown Analyst

Got it. And maybe I can approach the contract wins from another perspective. Like I said, very impressive list. And you talked about needing to do a period of an investigation and maybe some cleanup there in the inventory at the customers' sites. Do you end up procuring, buying much of the inventory that the customers are currently holding? Are you required to do that based upon the contracts? And then just maybe sort of ones that you mentioned here on the call, can you talk about how much of a working capital investment you're going to need for those contracts and over what period at a time?

Gregory A. Hann

Yes. Okay, go ahead.

Randy J. Snyder

In most cases, in the vast majority of the cases, we actually take the material back onto consignment, okay. And then we count it. And then we take their inventory and actually deliver their inventory to this site where it's being used until their inventory becomes diminished. And then we replace it with the inventory that we're selling to them directly. And with that, we usually actually get the sales commission -- not a commission, but a charge per delivery for each time they do it to cover our cost, and maybe a little bit of wiggle room there. But the ideas that -- usually, it's very rarely that we ever buy back inventory. And if we do, it's mainly we're bartering to get more business outside of the contract.

Gregory A. Hann

But there is a working capital impact clearly because what happens is, to Randy's point, as we, in essence, deliver their inventory or burn their inventory down or replace it with ours, we're having to make the commitment to buy that product before we can actually turn it into a sale. So there is a -- and it varies depending on the contract certainly in lead times and everything else. But there is a lag between the investment and the working capital of the inventory and actually realizing the sale.

Unknown Analyst

Sure. And I understand that, that has to do with how quickly you were able to turn the inventory, how quickly the customer uses it and all of that. Just trying to get a gauge on what that impact is and whether this is a particularly large number of contract wins in the quarter and what that's going to do working capital and cash flows like next 6 to 12 months.

Gregory A. Hann

Yes. I wouldn't suspect there would be anything significant. Clearly, it's something that we're very good at managing through this. Obviously, we have to get inside of the customer and understand how much inventory they have on hand, et cetera, et cetera. But we're very good at what we do. And we're very good at managing the purchasing of this inventory. So I wouldn't expect that it would show any kind of significant movement of working capital.

Unknown Analyst

Did the contract wins in the current quarter include any new suppliers in addition to new customers?

Randy J. Snyder

Every contract we take, it seems that we end up with new supply base, which is a good thing. So how many and which ones that we determine as we get into the contract itself and start buying the material. But that does happen virtually on every contract.

Operator

And we have no further questions at this time.

Mark Davidson

Great. Well, I really -- we really do appreciate everybody being on the call today. And we really look forward to speaking with you in a few months when we talk about our full year, and also begin to talk about 2014. So thanks again.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating, and you may now disconnect.

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