WESCO International Inc. - Analyst/Investor Day

| About: WESCO International, (WCC)

WESCO International, Inc. (NYSE:WCC)

August 07, 2013 1:00 pm ET


Daniel A. Brailer - Vice President of Investor Relations & Corporate Affairs

John J. Engel - Chairman, Chief Executive Officer, President and Member of Executive Committee

Stephen A. Van Oss - Chief Operating Officer, Senior Vice President and Director

Kevin Kerby

Andrew J. Bergdoll - Former Vice President of Operations

David S. Bemoras - Former Vice President of Operations

Harald Henze

Les Kebler

Kenneth S. Parks - Chief Financial Officer and Vice President


Deane M. Dray - Citigroup Inc, Research Division

Joshua C. Pokrzywinski - MKM Partners LLC, Research Division

Sam Darkatsh - Raymond James & Associates, Inc., Research Division

Ryan Merkel - William Blair & Company L.L.C., Research Division

Martin A. Sankey - Neuberger Berman Group LLC

Matt Duncan - Stephens Inc., Research Division

John Anthony Baliotti - Janney Montgomery Scott LLC, Research Division

Matthew Schon McCall - BB&T Capital Markets, Research Division

Daniel A. Brailer

Good afternoon, and welcome to WESCO International's Investor Day. My name is Dan Brailer, and I'm the Vice President, Investor Relations and Corporate Affairs. On behalf of the entire WESCO management team, I'd like to thank you for taking time -- investing time to be with us today. We appreciate the time that you've taken to get here, particularly those of you who have traveled great distances. And also a special note of appreciation for those of you who have sacrificed by departing from your vacation to be with us here. I'd also like to have a special note of appreciation for those West Coast staff members, who have worked tirelessly to make this event such a success. Some of those members are here today and some are at headquarters. We'd like to thank you for your dedication and hard work and thank you for making today what it is.

Before we get started, I'd like to address a few housekeeping items. On the second page of your presentation, you'll find the required Safe Harbor statement pertaining to the presentation and discussion today. Many of the statements made today are forward-looking statements, which involve risks and uncertainties and actual results may differ materially from those -- may differ materially from the forward-looking statements. Secondly, we ask that you turn all BlackBerrys and cellphones to the silent mode. We thank you for that courtesy. And finally, safety is very important at WESCO. And in a very unlikely event of an emergency, you can exit the escalator by going directly out the doors to your back or to the doors to your right and make a left down the escalator.

Today, you'll hear from 8 senior leaders. Presenting today will be: John Engel, our Chairman, President and Chief Executive Officer; Steve Van Oss, our Senior Vice President and Chief Operating Officer; and Ken Parks, our Vice President and Chief Financial Officer. You'll also hear from 5 business leaders, who will discuss certain end markets and product categories and the strategies that we will deliver to drive above-market growth. And those business leaders are: Kevin Kerby, Global Accounts and Integrated Supply; Andy Bergdoll, Utility; David Bemoras, Datacom -- Communications and Security; Harald Henze, Canada; and Les Kebler, International. We're also pleased to have with us 2 senior WESCO leaders who are with us today. I will ask them to stand to be recognized when I call their name. Diane Lazzaris, our Vice President and General Counsel; and Kim Windrow, Vice President, Human Resources.

We ask that you hold your questions until the end of the program. And we look forward to receiving your questions and insights. Immediately following the Q&A session, we'll be hosting a cocktail reception in the rotunda behind us, where we have the inventory displays.

And finally, we'd like you to take away 3 key themes in today's -- from today's event. We are investing in our business to drive long-term above-market growth. We are consistently executing our strategy. And we are generating solid financial results.

With that, it's my pleasure to turn it over to John Engel.

John J. Engel

Well, thank you, Dan, and good morning, everyone -- good afternoon, everyone. I know we've started a few minutes late, which is not customary. But we'll make sure we get back on schedule.

Welcome to our 2013 Investor Day. It's a pleasure to be here and share the WESCO story. And I would like to thank you as well for all your support and for spending time with us today. I trust that you'll find the day to be well worthwhile and valuable. We've got some new material that we're very excited about sharing with you. And I very much look forward to hearing your questions and spending time with you throughout the day and the cocktail reception tonight.

Let me start out by introducing 3 members of our Board of Directors who are in attendance. I'd ask for them to stand, please, for moment. Bill Vareschi, in the back row, our Lead Director; Jamie Singleton, he's Chairman of our Compensation Committee; and John Morgan, he's also on our board. I'd like to recognize them and thank them as well as the entire WESCO board for their investments and supporting our investments in the company and our growth strategy.

We developed and launched a growth strategy 4 years ago. And we've strengthened our company and delivered very strong results. Some of you will recall back in 2010, we set out 3-year financial targets. How many of you joined us back in 2010? Raise your hands, please. We set out 3-year financial targets. We said in 2013, we will get the $6.2 billion in sales and $4 of EPS. You remember that? We laid out a new growth strategy and we began executing a more offensive-oriented strategy. I'm very pleased to say that we significantly exceeded those goals last year in 2012.

We remain focused on what we can control, and that is our execution, execution on our base business and our acquisitions. But I think what we feel pleased about is this performance over the last 4 years has been against a low-growth economic backdrop with some end markets that continue to be challenging, such as construction. So we have yet to benefit from the recovery in the nonresidential construction market, yet we feel like we've delivered very strong results over the last few years.

Today's WESCO is in excellent shape with our broader and stronger portfolio, with our improving global mix, with our strong management team and with our high-performance culture. We're establishing a track record of execution and we have excellent value-creation potential. With all that said, we think there's never been a better time to invest in WESCO.

Moving to the agenda. I'll give a quick overview. There won't be any new material in my overview, but I'll set the stage for today. But then you'll hear from Steve Van Oss, our Chief Operating Officer, and our various operating group leaders, and then Ken will wrap it up on financials. Ken will specifically address our financial expectations, how we're performing against those and also give you a first look into our 2014 financial targets.

Who is WESCO? Fortune 500 wholesale distributor, a leading provider of electrical, industrial and communication products and services. The top right of this page is our vision. Global leader of supply chain solutions. The operative words being global and supply chain solutions. Much more than a distributor, a supply chain management and solutions company. We'll bring that to life in the various success stories that you'll see in the individual presentations today. In fact, that is one of the key themes that we'll come across, it's our One WESCO strategy and how that's performing and building momentum across the company.

Our value proposition is shown on the bottom right. We're focused on 3 demand streams and servicing our customer with solutions for those demand streams. MRO indirect, product and services, OEM direct materials and value-added assemblies and construction projects or capital projects, both new construction and retrofit renovation and upgrades.

This is a look at our global footprint. As we sit here today, we have 9,000 associates in over 475 locations around the globe with physically with capabilities in 18 countries today. And we sell and service customers in 2x that number. We have a blue-chip customer base, where we serve a majority of Fortune 500 customers. We have a blue-chip supplier base as well. And we ship over 1 million different SKUs a year. We've been systematically and somewhat quietly investing in our international capability over the last 5 years. And that investment has taken the form of people, facilities and working capital in the form of inventory. Les will review our progress in international.

We've made terrific progress in terms of strengthening our capabilities, moving from 5 countries as where we were positioned literally 5-plus years ago to 18 countries today with assets. And our acquisitions are just further strengthening our international capabilities, most notably our most recent acquisition and largest to date, EECOL. And EECOL gave us a terrific position obviously in Canada but also in South America.

We see excellent opportunities to continue to invest in and grow and service our current blue-chip customer base in all their operations around the world. Where we serve them well in the U.S., Canada and Mexico, they're increasingly asking us to provide their solutions to all their locations around the world. And that represents incremental and attractive growth opportunities for us. With that said, and we've been consistent with this, we remain focused on our biggest opportunities in what we call our front and backyard, which is the Americas.

This is a look at our WESCO profile. Today's WESCO is a different WESCO. It was founded in 1922 as captive distribution of Westinghouse, spun out in 1994, $1.5 billion in sales and losing money. In the first 10 years after the LBO spinout, the company doubled in size. In the next 10 years, the second 10 years, we've more than doubled in size. The portfolio has been significantly strengthened and diversified over the 19 years, almost 20 years since we've spun out of Westinghouse. We've shifted the company from an electrical pure-play distributor that was participating in the construction markets almost exclusively to a diversified wholesale distribution and supply chain management company. That's today's WESCO.

Our addressable markets are large and they're fragmented and we've talked about this at length. We're very happy that we face into these fragmented markets. Quite frankly, we think opportunity is directly proportional to the fragmentation of the industry. It gives us many degrees of freedom with which we can operate. The way we like to think about it is if you look at the retail consumer distribution industry and value chain, there are big players, like Walmart, based on a brick-and-mortar model, and Amazon, with an e-commerce model, that have commanding share positions. You know we do not have a Walmart or Amazon equivalent in the wholesale distribution verticals that we are operating in and competing in today. We do not have that today. More importantly and maybe a better analogy is electronics distribution is more consolidated -- that verticals that is wholesale B2B distribution, is more consolidated than electrical. In electronics distribution, you have what's essentially close to a duopoly without Avnet and Arrow. Again, when you look at core electrical, which is where our deep roots are, we don't have any large player that has that kind of commanding share position.

So I think for us industry structure does matter because it speaks to the degrees of freedom a large company has to operate. And we see terrific opportunities in our industries. The fundamental growth rates are attractive. But even more importantly, the trends in our industries are very favorable to us and other large players like us. We're seeing consolidation and outsourcing occurring across the value chain, and it's accelerating. And what we're hearing from customers and suppliers is they would like to do business with a smaller number of larger players. That bodes very well for a company like WESCO. Price and availability is critical. But supply chain integrity, we're hearing increasingly, is paramount. And we're extremely well positioned to deliver on that capability or, let's say, that need.

We did launch our growth strategy, as I mentioned, back in 2009, when we went through a succession. Our growth strategy has a couple key elements to it. To strengthen and expand our base, our base operation, our base company, the core, we call it. To enrich the portfolio, and we've done that and are continuing to do that through organic investments and acquisitions. And then that sits on the top of an operational excellence foundation. It affects everything we do.

4 years ago, what did we specifically do? We established 8 growth engines. We established 6 operational excellence initiatives. We launched what we called One WESCO. And we'll bring that life for you further today. We increased the investments in the business. We increased our transparency. And we took what has been a differentiator for us, LEAN, which was launched in 2003. In the first 5 years, it was inside our company is where focused the application. Well, back in 2009, we began to extend it outside our 4 walls, up and down the value chain and focusing on our customers' operations. And increasingly that's proving to be a true competitive differentiator for us with customers in the marketplace. Our results, what they have been over the last 3, 4 years? They've been strong. Very strong top line growth, operating margin expansion, good free cash flow generation and solid shareholder value creation. We're playing offense, and that's going to continue.

These are our growth engines. We're going to drill down on 5 of these today. That's been how we've addressed this -- historically addressed that in this meeting. And I think you'll get a much better sense of the 5 we're going to talk about today in terms of what our current strategy is and what the growth prospects and our plans are.

These are 6 operational excellence initiatives. Again each of the presentations will touch on elements of these, particularly the first 5. Marketing, leadership, sales management, pricing effectiveness, sourcing effectiveness, those 2 in conjunction are really part of our margin improvement initiatives that Steve will give an update on. Service excellence, and then talent management. And I'll touch upon that and I've done that before in this forum.

We launched the talent management process back in 2005. The origins of it were GE's Session C or Allied Signal's process. We morphed it to what we thought would serve us appropriately. We're now in year 9 of that evolution. And in fact, in 2 weeks, we'll be going through our detailed reviews on our entire talent base and organization. And in the upcoming meeting with our board in September, we actually review the results of that. So it is absolutely critical to our ability to deliver increasing on our commitments. For us, we are a people business. We are, first and foremost. It's all about recruiting, retaining and developing the best and brightest talent. And we think we're making terrific progress.

This process has absolutely addressed and touched many in the company. Our top 100 leaders have been addressed or touched by it, impacted by it in a major way. And I should say that of the 10 to 11 executives that are here today, sitting here today from the WESCO team, in the last 4 years, they're either new to the company or have had a major expansion or change in their operating role. So this is an organic process that we manage and operate with every day. Our goal is to be the employer of choice in our served industries because again we're a people business.

Acquisitions have been a core element of our growth strategy since the LBO in 1994. We've done 40 acquisitions since WESCO spun out in 1994. The last 8 since the middle of 2010 have been larger and much more strategic. And they clearly have strengthened our company and have positioned us and are supportive of our One WESCO strategy. We get the question a lot, "Well, what type of target do we look for? How robust is the pipeline?" We have a pipeline that today is operating and contains targets at a record level. It's robust. We're actively managing it. And we see excellent opportunities to continue to do M&A transactions to strengthen our portfolio as we move through the second half of this year into next.

Again, the markets that we're addressing that we operate in are large and fragmented and we see a lot of opportunities. But we do focus on companies that are well-run and that can strategically add value, either expand our portfolio, so we can bring more products and services through our customers through our One WESCO strategy via our global accounts or integrated supply business model or to strengthen our geographic footprint in a particular area. We've been very clear with our priorities and our acquisition criteria, which are shown on the right-hand side of this chart. And I would tell you these last 8 have met the mark or exceeded the mark in all these areas, accretive in the first year, margin higher than WESCO, risk-adjusted weighted average cost of capital -- risk-adjusted return greater than our weighted average cost of capital and absolutely consistent with the One WESCO strategy.

So what does that all translate into? And let's take a look at our results. This is a graph that shows our total shareholder return since the IPO in May of 1999. So in the table that's in the top part of this chart, you'll see our performance, TSR performance for 1-year, 3-year, 5-year, 10-year basis versus 2 key indices, Russell 2000 and the Capital Goods Group. And you can see that we've outperformed both of those indices decisively over the 1-, 3-, 5- and 10-year point. WESCO has delivered a 10% annual shareholder return, compound annual growth rate since the IPO. And this year, we're up above 12%. So our focus remains and consistently will be to deliver consistent above-market returns.

So with that, I'd now like to hand it off and ask Steve Van Oss to join us at the podium.

Stephen A. Van Oss

Thank you, John. Since 2009, the launch of our One WESCO initiative has resulted in a workforce, utilizing LEAN techniques in every aspect of our business. Advance the slide now. From sales force productivity and streamlining operational tasks, such as warehouse velocity code slotting [ph] to administrative tasks, such as how we play -- apply cash to open accounts or obtain tax exemption certificates. These investments have resulted in productivity gains that have allowed us to grow our sales at a much greater rate than our headcount growth and establish a growth platform and culture that will serve us well over the next decade as we continue to take market share, integrate acquisitions and enter into new markets.

We operate in a very large global market, one that is highly fragmented, particularly in North America. The end markets we serve are substantial and diverse, and even in challenging economic times like today, offers substantial avenues for share growth through our growth engines and our successful acquisition program. Our business is performing well in this environment with sales up and profit margins expanding and we continue to build our backlog.

Let's now look at our operating priorities there, focused on delivering consistent, above-market profitable growth. Our operating priorities are unchanged and continue to direct our initiatives and activities. Sales programs focused on market share gains, deeper penetration with existing customers and end-market expansion, coupled with our acquisition activities, have driven compounded growth of approximately 13% since 2009.

We will continue to make investments to increase both the efficiency and effectiveness of our sales force through personnel additions and upgrades, training and expansion of our college recruiting program and selling tools. Our acquisition pipeline is very active. And as Ken will discuss, our balance sheet is back in the range that facilitates advancing that pipeline. These actions are expected to continue to drive profitable growth above the market in the years ahead.

As you can see on the chart, we are making excellent progress on our gross margin initiatives: 19.5% in 2009; 20% in the first half of 2012; 20.5% in the second half of 2012; and so far in 2013, we're at 20.9%. We are on track to achieve our target of 22% despite unfavorable mix due to accelerated growth in some of our lower gross margin businesses. Later on in the presentation, I will bring to life some of the procurement, pricing and selling initiatives that are responsible for the progress to date and set the platform for further margin expansion moving forward.

LEAN has been a driving force for operational efficiency for WESCO for the last 10 years. We adapted and adopted LEAN manufacturing techniques and have successfully applied them to logistics, service and distribution environment. The results have been impressive. The chart at the bottom of the page demonstrates the results of these activities. EBIT has expanded 5.2x on a sales increase of 2.1x, while headcount has only increased 1.5x. Our LEAN programs and actions have led this accomplishment.

Our global footprint has expanded nicely as a result of our ongoing acquisition program and organic investments. Since 2009, we've added 10 of to 18 countries in which we operate out of today. And sales to customers outside the U.S. and Canada have doubled as a percent of WESCO's total sales. Employee count has risen from approximately 3,200 at the time of our LBO at 1994 to over 9,000 employees today. And our locations have grown from over 200 to over 475 today. This dramatic expansion in physical and personnel capacity, coupled with our One WESCO investments, has positioned WESCO to win large orders with multinational companies that as few as 3 years ago, we were not even in a position to bid on. Kevin Kerby, who leads our Global Accounts and business development efforts; and David Bemoras, who leads our communication and security operations, will be highlighting a few of these wins.

40 acquisitions, adding $3.6 billion in sales, 300 locations, additional sales and administrative personnel, new end markets and new geographies. Individually, each has a positive impact on the company. But individually, each is limited in scope and lacking in transformational impact for our customers. But combined seamlessly across the entire enterprise, these companies and capabilities provide a tremendous amount of power to capture market share, strengthen our position in the supply chain with both suppliers and customers, provide a distinct competitive advantage and improve our operations and profitability.

One WESCO is our program to integrate our portfolio of products, services and supply relations into comprehensive supply chain management solutions for customers' global MRO, OEM and capital project needs. Marketing program leverage and One WESCO branding is one of the first key steps in the integration process of an acquired company. We then work on key customer support with the sales team, product specialist, technical support and local branch collaboration to bring the full array of products and services to the customer in a seamless experience. Incentive and commission plans are revised and aligned to encourage and facilitate cross-customer introductions across a broad set of product categories and/or service capabilities, depending on the specific customer needs. WESCO University is used to provide specialist training to increase the awareness of total company capabilities, to encourage a broader portfolio of offerings that are being introduced to the customer base than what the salesperson was previously experienced in and was offering to the customer base. Core capabilities are extended across the entire network as appropriate. And in select geographies, operations from all operating groups are being combined into large One WESCO facilities to further enforce the collaboration and cooperation needed to bring our customers the most comprehensive product and service capability in the industry today.

This chart provides an overview of the physical aspect of select One WESCO locations. Our first combined location was opened in Houston in 2008. 6 separate operations were consolidated into 1 centrally located facility. As separate entities averaging 20,000 square feet, housing from 10 to 40 employees and carrying a nominal amount of inventory, the individual operations did not make much of a statement in the marketplace to our customers, to our suppliers or even to current or prospective employees. These entities were combined into 1 modern 108,000 square foot facility, housing 140 employees, carrying over $12 million of inventory and controlling $0.25 billion in revenue.

The benefits were both significant and immediate. Proximity of the previously separate sales force more easily facilitated joint call planning, project identification and account assignment. Warehouse operations were consolidated and efficiencies were immediately gained with common supervision, elimination of multiple shipping and receiving operations and utilization of best shared practices. Back-office operations were combined, resulting in less overhead. The size of the facility itself, combined with the consolidated inventory position, made a powerful statement to current and prospective customers, employees and to the supplier and community that were -- that we were significantly invested in the geography and were going to be there in the long run.

Following Houston and applying best practices learned over a 2-year period, we opened our next major One WESCO operation in Charlotte, North Carolina. Similar to Houston, multiple smaller operations were combined into a centrally located, modern 113,000 square foot facility, employing 120 employees and stocking over $13 million of inventory, supporting both local as well as regional customers. Dallas followed in late 2011. And in 2012, our Chicago One WESCO location was opened.

In what will be a standard addition to most of our One WESCO locations going forward, we incorporated a lighting and sustainability solution center within the facility. This center is utilized as a showcase for state-of-the-art technology in LED lighting and control systems, as well as other product categories that support the green and sustainability initiatives of our customers and suppliers. Multiple vignettes, simulating a campus dorm room, an office setting, a hospital room and the like are utilized to visually display in real-life settings the products and services available today to facilitate our customers' needs in this area. The showroom is in constant use, bringing customers and lighting designers in for training and awareness seminars and positions WESCO as a technical expert with sales experience and inventory product availability to solve our customers' needs. Later this year, we will open our next One WESCO facility in Los Angeles. That facility will incorporate the lighting and sustainability center as well. All of our One WESCO locations support expanded offerings to our customers and result in more efficient operations that enable above-market profitable sales growth.

This slide provides an example of a large multisite oil and gas customer that is managed under our Global Accounts business model. For this customer, we currently service 12 locations globally and sell electrical and general industrial MRO items from 38 product categories with varying degrees of penetration at each of the 12 locations. Estimated sales for this customer in 2013 for WESCO approached $30 million on an annual basis. I don't know how you can read this. But the dark box denotes by location and by product category, where we estimate we have 80% or more of penetration the customer. Now we consider 80% or more penetration as achieving our entitlement or significant sustainable sales level for the category under the agreement that we have with the customer. The lightly shaded box depicts sales penetrations of 50% or less and represents that while we have a significant amount of the customer spend captured for that product category at the customer location, there's still a fair amount of more business to be obtained. Finally, the clear box shows those locations and product categories where we have no or less than 20% penetration.

As you can see, if you've got really good eyesight, location 7, 8 and 9, our Global Accounts team and the local WESCO servicing branch have done a good job of capturing the available spend across most of the 38 One WESCO product categories. We're deep in agreement with the customer. We're servicing the account well and keeping the competition at bay and are likely getting everything they can out of that account. Locations 5, 6 and 12, on the other hand, are not being successfully penetrated in most product categories and represent significant revenue upside with a customer that we know at the highest level in the procurement organization and have a significant commercial relationship at the overall account level.

So bringing this home on a dollars-and-cents basis, the run rate of sales revenue for location 12 is currently about $10,000. At the 50% penetration level, we would enjoy about $2 million in revenue at that location, and at the 80% penetration level, about $3.2 million. To put in perspective at the overall customer level, this customer spends over $60 million in MRO and capital expenditures in North America last year and over $150 million outside of North America. So this truly represents a One WESCO opportunity both with this account, as well as other global and non-Global Account customers that we serve today.

So working our LEAN sales for sales program, combined with 80-20 stratification techniques, has evolved into a powerful sales methodology for WESCO, which we could call precision-based selling. So what is precision-based selling? In its simplest form, precision-based selling efficient matches the appropriate sales resource to the customer, so they are treated as a key customer according to their value to WESCO, while dramatically increasing sales force productivity and maximizing margin rates. At the top of the pyramid are the highest-valued customers. Those 20% of our customers that represent 80% of total company revenue. The strategy for that group of customers is to overserve, protect and defend with a fully dedicated sales force and ensure retention while increasing penetration and garnering share gains with product expansion.

The next strata of customers represents 15% of company revenue and customer count. Those are significant untapped revenue potential. The strategy here is to aggressively grow revenues and requires a moderately high level of effort by both our inside and our outside sales force. The last segment of customers, while making up almost 70% of the customer base, represents only 5% of sales revenue. These customers require and deserve a low intensity of sales effort and will be served through our e-channel to the extent possible and practical. At the bottom, new customers will be added to the pipeline through our business development efforts and treated accordingly as they move up the pyramid and are identified as having high-value potential.

Let's review some statistics to put this in a better perspective and also to provide some guidance on how we are using this selling methodology to not only drive selling efficiency but also to aid in our margin expansion programs. So here's how a $100 million region breaks down in the pyramid. The high-value customers total 325 and generated $80 million of the $100 million in sales in 2012. For these customers, we are targeting nominal margin expansion. The aggressive growth customer segment of the pyramid represented $15 million in sales and sales from about 250 customers. For these customers, we're targeting a billing margin rate expansion of the 100 to 200 basis points. The transactional customers represented 1,200 or 68% of the total customers, yet generated only $5 million or 5% of the sales volume. The margin expansion target for this group is 5 to 10 points of margin expansion. So with this program, we're not only expecting to see significant share gains, improved sales efficiency and margin gains and it will help drive to do as far as driving more efficiency and productivity out of our sales force and ties back to that earlier slide, where you saw EBIT expansion, sales expansion with headcount lower than those rates.

Our highly successful program of accretive acquisitions has improved operating results and has been building momentum over the last 3 years. Our late -- our last 8 acquisitions have combined sales of $1.5 billion with $590 million of these sales occurring in our largest end market, industrial. $405 million in sales are associated with construction end markets, followed by CIG or commercial, institutional and governmental and utility. These acquisitions have been strategic in nature, focused on specific end markets to provide local market relevance and/or product expansion.

For example, Potelcom, a utility-related acquisition in Anchorage, provides significant market presence and product line expansion. Brews, Trydor and EECOL were all Canadian-based acquisitions and established WESCO as a leading distributing utility industry in Canada and a strong geographic presence in South America, neither of which we had prior to these acquisitions. Conney Safety provides us with a centralized national operating platform and a template for industrial MRO focused on safety products. We have a successful record of integrating acquired companies into the WESCO infrastructure, to harmonize back-office functions, achieve an internal control environment consistent with a public company and garner cost savings in multiple areas, such as freight, information technology, facilities and procurement.

We're on track on integrating these last 8 acquisitions. Notably, these latest acquisitions should add an estimated $1.53 of first year earnings per share accretion. And all were done with internal resources and funded by new and/or existing debt facilities. As Ken Parks will discuss later, we are back into the high end of our targeted leverage range ratio just 2 quarters after completing EECOL, our largest acquisition ever. Our pipeline of potential candidates is at a very high level and we continue to have discussions with interested parties.

Let's now talk about the initiatives and tools related to gross margin expansion that helped drive improved operating margins. Several years ago, we established a target for gross margin of 22%. As you can see, we made steady progress towards that goal over the last 3 years and are well on our ways towards 22% gross margins. The main drivers of this expansion are pricing, sourcing and purchasing initiatives, as well as acquisitions. We continue to see opportunities in each of these areas, and we'll need to make progress in each of these categories to continue to expand margins, while facing the headwinds of competitive pressures, customer pushback and internal business mix, such as experienced in the second quarter of this year.

Margin improvements in sourcing and pricing must be closely linked and be collaborative with our pricing initiatives. Gains made in procurement must be protected in pricing, where there's a probability than in a cost-plus pricing environment more than all of the procurement gains made can go to the customer. We made significant investments in our procurement organization, both in quantity, quality of personnel and capabilities of the personnel and our tools. Programs related to volume leveraging helped improve our margins by buying better, both in terms of what we buy, who we buy it from and how much we pay for what we buy.

Category management and use of customer-specific pricing agreements provide another lever for margin improvement. The use of customer-specific pricing agreements or SPAs have been an area of emphasis and have increased significantly over the last 2 years and cover an increasing dollar amount of spend.

On this chart, I've broken out the utilization of our preferred suppliers to demonstrate the benefits of their utilization versus a non-preferred supplier. We have over 225 preferred supplier agreements, covering approximately 35% to 45% of the company's purchases.

Cash discounts and extended dating helped improve gross margins, and reduce the working capital investment required to maintain an appropriate amount of inventory in the channel to drive high availability and high fuel rates.

Project registration. It provides price protection for certain projects and/or customers were WESCO has on done the heavy lifting to get our suppliers product specified and where WESCO has significant influence over the customer's buying decision.

Supplier-dedicated staff navigate the internal structures of both companies. And the funded of embedded marketing and sales personnel into our operations help drive increased sales at higher margins. And importantly, ensure we are getting the lions' share of our preferred suppliers resources and time. All combined, the enhance terms and conditions and investment by our preferred supplier translates in approximately 3 to 9 more percentage points of profit versus a standard supplier.

Similar to sourcing and purchasing, we are fully engaged in a series of programs to improve profitability, and have made significant investments in personnel, systems enhancements and new tools. Our priorities include optimization by pricing category, with price bumps trying to coincide with announced supplier price increases; working with suppliers to get additional advanced notice on price increases and effective date; and working to minimize customer rebates situation at contract renewal time.

The precision-based selling methodology, which was previously reviewed, will also aid in margin expansion through value pricing. We continue to add tools to facilitate better analytics and to drive margin improvement behavior. One such tool which we implemented over the last year is called dynamic floor pricing. This automated tool is now an integral part of our WESNET point-of-sale system, and is utilized by our inside sales and customer support group. Sales representative has the flexibility to price the product anywhere from the floor to the target price and above, but cannot go below the floor level without authorization. As history has developed at the customer and SKU level, analytics are provided to refine the target and floor price dynamically, and to maximize both our sales and profitability with that specific account.

The flexibility and feedback provided by the dynamic floor pricing module has proven to be a significant improvement over the previous application, which simply lock down pricing by customer class. We will continue to develop more tools and to provide further training to further establish a profit and value maximization culture inside of the company.

As John mentioned, our LEAN journey began in 2003, as a result of interactions with the customers LEAN program and continues to be a foundational element of our operational improvements today. We have a core centralized team in place that oversees all of our programs and coordinates with LEAN resources that are now applied in all of our operating groups. These resources coordinate and lead over 20 Kaizen events each week that focus on value creation for our customers and suppliers, and drive internal transaction improvement and operational excellence initiatives.

Our LEAN value creation process starts by identifying needs and requirements, and then aligns an appropriate, existing value-creation solution, or if need be, recreate a new solution. Next, we run a search for savings event and customize a tailored-implementation program for the customer. Today, we have over 53 packet value creation solutions focused on key areas, such as construction, energy, green and sustainability, safety, security and working capital. LEAN is viewed as a distinct competitive advantage, and we will continue to invest in and execute on this important cultural aspect of our company.

We're committed to making ongoing investments in our operations to drive profitable sales growth, expand our geographic reach, drive operational efficiencies and leverage our size and our scale. Our ongoing acquisition program has resulted in increased sales and earnings per share, additional capabilities in new product categories, local market relevance and extended physical presence internationally.

Organic and inorganic investments in personnel in the last year has increased our sales resources by over 25%, and our business development resources by approximately 15%. Investments in our supply chain organization has driven and will continue to drive operating margin expansion and improve the efficiency of our working capital utilization through better procurement and terms.

We recently launched a new e-commerce platform and have over 1,400 store rooms today being managed by our e-Stock program that provides bin management and stock replacement via customized electronic platform that is integrated into our point-of-sale system.

Investments in programs like LEAN and precision-based selling should continue to provide a significant return on investment, as we streamline internal warehouse and administrative operations and improve the effectiveness and efficiency of our sales force.

Investments in new distribution centers and branches helped [indiscernible] improve supplier support and to drive gains in local market relevance, which should, over time, help improve both the sales revenue and the profitability in the invested locale. These combined investments should all help to strengthen the WESCO enterprise.

So in summary, our operating priorities are working and they haven't changed. Our acquisitions and our increased investments in One WESCO operations have resulted in good results. Precision-based selling process should help drive productivity, as well as gross margin expansion. And opportunities to deeper penetrate existing global accounts customer should help accelerate the top line growth. Increased gross margins should translate into higher EBIT, and LEAN will continue to drive all the activities inside of the company.

So with that, I'd like to turn it over to Kevin.

Kevin Kerby

Well, good afternoon, everyone. It's a pleasure to be here today. Global Accounts and Integrated Supply has been and will continue to be one of our most important growth engines. We're the leader in the space, but we're intent on extending that lead through continued investment in the organization, expansion of our business development and marketing activities and the execution of the winning strategies that we've had in place for several years now.

Now while we are the leader in this space, we still see a tremendous opportunity in both our existing customer base and adding to that customer base in driving growth for Global Accounts and Integrated Supply. We really believe that our supply chain solutions map really well with our customer challenges.

We're hearing our customers ask a lot of questions of us around core competencies. What are they focused on today and what should they be focused on tomorrow? A lot of questions around supply chain optimization. Why is my supply chain so big and complex? And how can I simplify it? And they're asking questions around risk mitigation. Where is the risk? The echoes of 2009 still ring loudly in their ears, and they want to work with a partner that can minimize that risk.

So we're going to do 3 things today. One, I want to talk to you about our view of the market and how that's driving our strategy. Two, I want to talk about some of the unique aspects of our organization that are driving that strategy. And then I'm going to walk you through a couple of success stories that I think will help illuminate that.

Okay. A little bit of background on Global Accounts and Integrated Supply. It's a $2 billion part of our business, a significant business for WESCO. Two, we focus on the Fortune 1000 and other multi-location companies. We view our customers through a lens that helps us drive focus into their 3 demand streams: their MRO or indirect spend, everything that goes into the plant to make the plant run; their direct material for our manufacturers; and their capital spend. Anytime they're going to build a plant or expand one. Our goal is to move rapidly from a transactional supplier to a strategic partner.

So how do we do this? How do we capitalize on this opportunity? How do we maximize the yield in this market? We believe strongly in a 5-stage selling process. It begins with demand generation and lead qualification. This is our process of making 30,000 outbound phone calls every year, the people that really don't know WESCO and we're not doing business with today. If we qualify that lead, it goes into our pipeline, where we begin to manage this and pass that off to our selling resources. These selling resources then marry the challenges that we're hearing with our 4 categories solutions. Once we formalized that relationship in a contract, it moves to my account management team, 600 people throng.

And there are really 2 major groups there. One, a vertical market focused group of global account managers. So I've got teams of global account managers that just do oil and gas customers, or just do food and beverage, or just do metals and mining. We believe that there are nuances within each of those vertical markets that adds credibility when we're having discussions with customers about the plant. Those global account managers are tasked with a couple of things. One, building a multiyear collaborative approach with our customers to drive results and success. Two, to develop a relationship at the sea level. We believe that our message resonates with chief procurement officers of the world, and we want them to work hard at that.

The second group is the implementation team. So this team is organized geographically. So when we signed a contract last year with Kraft [ph], it has about 40 plants around the United States. This team divides those plants up and then executes a consistent implementation across those plants.

The last part of the process, of course, is the thousands of interactions we're having everyday with our 475 branches. They're providing 2 really important feedback loops as well. One, they're providing feedback loop to my global account manager saying, "Hey, the plan that you developed with corporate procurement is not necessarily working the way we thought. We need to adjust it." They're also providing a feedback loop right into the demand generation team. So they might be witnessing some new trend at a food and beverage customer. We provide that to the demand generation group. We tweaked our marketing so that the next 30,000 phone calls we make are that much more compelling to new customers.

So we're back at demand generation. It's interesting to note, this capability and this approach came through our acquisition of CSC, and we do this for all of our acquisitions. We try to identify best practices and then deploy [indiscernible] across enterprise, and we use Global Accounts to do that.

And here are some of the results. So through this demand generation team and approach, we have generated over 40,000 actionable leads since 2011. What's an actionable lead? Well, it's pretty simple. We get a customer on the phone who says they have a problem that they'd like some help with, and that happens the vast majority of the time. Very rarely do we run into a customer who says, "I've got it all figured out. I've got my direct material figured out, my indirect and my CapEx spend fairly rarely." Two, we believe that our solutions map well into one of those, and we can help them. And three, that customer agrees to meet with us. To have a face-to-face meeting to begin that process of funding a solution for them. Out of that, we've resulted in $185 million worth of first time orders. There are certainly a second, third, fourth time orders, but I think that highlights the dramatic impact we can have through this effort.

Now it's also having an impact on my overall pipeline. So this stands now at a record of $2.4 billion. But in addition to this demand generation activity that's helping drive this record pipeline, there are other things that work. One, continued economic uncertainty that plays to WESCO. Our customers view us as a financially stable and globally capable company. They want to do more with us, not less. Two, our acquisitions. My team loves when we acquire new customer -- new companies because we can go right back to our existing customer base and say, "We've got a new capability, we've got a new geography and we'd like to talk to you about that." Three is our expanding global footprint. Now Les is going to go into more detail with that. But as we established credibility in the Americas, we like when we add to our footprint and we go to our customers and say, "We can deliver those same solutions all around the world." And then lastly, we have a message that resonates at the C level. I think we you can go back to 2006, and we were sort of focused myopically at the electrical buyer level [ph] and electrical MRO, we're much, much broader now, and we've got a message that's really working.

So what is that message? What do I say if I've got 30 seconds with a chief procurement officer? Well, this is the a slide that I showed them. This is the mission statement for my team. There's 4 things that we can do for you and do extraordinarily well. One, we can help you with your industrial and electrical distribution. This is where you have a need for access to millions of SKUs, tens of thousands of suppliers and a partner that can bring all that complexity under their umbrella and manage that for you.

Two, direct material solutions. So this is a CPO that sits atop billions of dollars of direct material spend. Now typically, 80% of that spend will be contained within 20% of their suppliers. That's where their commodity teams and their commodity strategies are focus and should be focused. But then there's the 80% of the suppliers that represent 20% of the spend. That's that long pay off, but just has much risk in it as your top suppliers. But that's where WESCO can bring a lot of value around managing that risk, looking for alternate sources of supply and really helping drive value for those direct material items.

Global capital project management. You're going to build a plant. This is as highly episodic and compressed spend, where you need a partner that really understands the electrical content because the last thing you're going to do is energize that plant. You need somebody with technical capabilities, with technology to manage these really complexed bills of materials and to assist you in bringing that project on time and under budget.

And lastly, Integrated Supply. So this is a CPO that works for an aircraft engine company, and that's what they want their core competency to be. That's what they want to be great at. The industrial MRO, they would like to outsource that to somebody that has best-in-class processes, technology and people that can do the job. That really resonates with the customers in our CPOs.

And we're seeing results of it. So our customer count has risen 30% since 2009. The number of sites we're serving is up 40% in that same time period. And what we don't show here and it's proxy for penetration is that our spent per site has risen about 40%. So we're seeing great results in this messaging.

Okay, I wanted to take a moment to talk about an end market construction, a product line lighting and then solution go a little bit deeper on Integrated Supply. So as John mentioned, construction remains a very large piece of our business, and we attack that piece of our business in 3 ways. One is the day-to-day local projects that are handled by our branches, where they're getting relationships with electrical contractors, pursuing for, competing and winning those bids.

Secondly, is Global Accounts. So this is where we're focused on, EPCs, end users, but also contractors. We saw a phenomenon occur in 2009 for about 100 top large contractors, and that was they got on planes to bid for jobs. So if you are traveling with them and you are developing relationships with these large contractors, you'd never know about the job. This is where the general contractor and EC that is headquartered in Southern California suddenly shows up in Pennsylvania to bid on a multimillion-dollar bid. The local branch would never know or have insight into that bid. So we've got a team that's focused just on that.

And then lastly, of course, are the megaprojects. This is our capital project groups that are focused on the multibillion-dollar projects that are happening around the world for oil and gas customers, bringing a lot of value to those efforts.

Lighting. The lighting is going -- undergoing a transformation that quite frankly is as big as the light bulb. You might have seen a TV commercial where a fairly new LED supplier is placing Thomas Edison's fluorescent bulb into a tiny coffin and burying it deep in the ground. Now they might be overstating it a little, but it is undergoing a transformation. We've got an industry that's going from $16 billion to $20 billion by 2017, but with a dramatic shift in the spend, where 50% of that spend will be solid state.

What does that mean for WESCO? Well, a couple of things to think about. One, we already know lighting very well. It's a major product segment for us. We have great relationships with the suppliers that are participating in this transformation. Two, we've got an existing global account customer base that is being dragged, pulled and pushed to look at lighting, whether by legislation, by sustainability goals or by their efforts to reduce their energy consumption, and they need a partner to help lead them through this transformation. And we've got a dedicated lighting team to do just that, with regional lighting managers, indoor and outdoor specialists, coding specialists, that can put those customers through a really robust audit process and then create that multiyear plan for them.

A couple of more comments on Integrated Supply. It's a big business, a big model for us. One, we've been in the business for over 50 years. This business process outsourcing business. We just celebrated our 51st year with the Fortune 100 company. Two, we operate in about 600 plants around the world today. And when I mean operating, I mean, WESCO personnel are walking into that plants and owning those store rooms. The backbone of this solution is a proprietary technology we have called e-Crib. e-Crib connects all the disparate ERP systems of our manufacturing customers. As you can imagine, they've grown through acquisition, so they've got SAP and BAAN and JD Edwards and probably a whole host of home-grown ERP systems, each would [ph] connects those and provides visibility into this rather murphy [ph] spend. But certainly, we drive cost savings for our customers through lower material prizes, but the bulk share is in that visibility that we provide. 85% of the costs we're driving out is through productivity improvements, eliminating waste and optimizing inventory.

Now all of these solutions that I talked about when we talk to Global Accounts and Integrate Supply customers, we want to have a global conversation. And while Les is going to talk about improving our footprint, which we're really excited about, I like the green area. The green area is where we don't have bricks and mortar, but remember what John said, we're a supply chain solutions company, and that's what we're talking to our customers about. We may work with a partner, we may work with the third-party logistics provider. We may, as we did just a couple of weeks ago, have a conversation with a European customer, use their own warehouse facilities to create a tailored and unique solution. We are not constrained on my team by our footprint, and our customers really like that.

So what happens when it all comes together, and when the business development activities and the marketing and the account management groups come together? Well, we get a great success story.

So a little bit of background. We look at the explosion that was happening in shale, Barnett, Utica, Marcellus, Eagle Ford, Cline. And we determine that there was a part of the market that we weren't as penetrated as we would like. So we put together a demand generation program. And one of the companies we hit was an $18 billion refining and pipeline company. We got connected to the CPO, as luck would have it, they didn't have an existing supplier supporting all of their sites. They're also going to spend about $1 billion in CapEx and wondered if we could help them and their EPC of choice in pursuing those projects, we could. So we took a sale cycle that can typically last 12 to 15 months, and we compressed it to about 6 months. We're going to be fully implemented by the end of this year and for the ongoing years, we'll be helping them with their CapEx. We believe this is about a $20 million annual sales potential for this customer. We didn't have to respond to an RFQ. We didn't have to go in competitors because we proactively reach out to the customer and created a unique solution for them.

So to sum it up, we've got a large addressable market. We've got great customers that we still have super opportunity to penetrate. We've got a great opportunity to acquire new customers, to leverage these synergies from our acquisitions and we really see continued growth for the future.

Thanks very much. Next up is Andy Bergdoll, our Vice President of Utility.

Andrew J. Bergdoll

Thank you. So I have the privilege today to share our utility story with you. But probably even more important, I have the privilege to release you for a break. But not right now until I'm done. So you're 40 into it, 12 more to go.

So utility, 1 of our 8 growth engine, but also a platform for us to leverage the other 7 growth engines in a One WESCO way. This is a platform that we've been investing in as one of our growth engines, and I'm happy to report that those investments are yielding results due to some very healthy internal growth, and as Steve mentioned, some really exciting external growth, particularly in Canada, that Harold will give you some cover on. It's now $1 billion platform, and we have a leading position in North America.

So if you step back for a minute and just look at the industry overall, we talk about a $15 billion addressable spend. That's really focused on our core products, and I'll get back to that in just a minute. We serviced that market really in a total One WESCO way, using all the infrastructure that's existing in WESCO. That means 150 WESCO branches across the enterprise are engaged in servicing utility customers.

We also take a One WESCO approach and looking across our whole product portfolio, and taking the products and services that our utility customers need the most and I'll get into some color about that. That leads to our value proposition. Our value proposition in utility is really around 2 areas. To sum it up, the first one is around consolidating, helping utilities consolidate their spend and helping them better manage that spend. The second is helping utilities drive productivity in their supply chains. I want to get into that a little bit, but to give you a framework about how that value proposition leads to growth opportunities for WESCO, let me give you a little bit of context or framework of how we do the industry. We look at the industry along 2 dimensions. The first dimension is the powertrain -- the utility value chain. The second dimension is by customer segment. So on the value chain, you start with generation, 2,000 generation sites across the U.S. About 500 of them are really big industrial plants. All of the things that Kevin just talked about from an industrial MRO perspective and construction applies. We leverage all those principles in generation.

Second is transmission. That's our interstate highway system for our power, as we move power around the country. There is a big project, and our participation is project-oriented. Then we move to substation. The substation is the nerve center of the utility system. It's where a lot of the smart grid investment is, it's a lot -- where a lot of the control and equipment upgrades are happening, and WESCO is right in the middle of it, 1.5 million substations out there. So interesting statistic is 60% to 70% of the equipment in those substations is more than 25 years old. So there's a huge pent-up demand for equipment replacement and upgrades.

And then finally, distribution. Distribution is the network and the grid that takes our power out to all our homes and businesses. Traditionally, spend in that area has been driven by new meter sized [ph]. As many of you know, we've had relatively flat meter growth, but our utility spending has held up. In that space, it's moved really more of a product-based spend, where we're talking about reliability upgrades, efficiency upgrades. And now we're starting to see some pick up in meter growth, but a lot of that project business is still holding on, and I'll give you some color on that.

Then finally, if you look to the customer segments, 6 customer segments we talked about. The big ones are the IOUs, roughly 100 big public companies. They control about 70% of the meters in this country. The other end of the sector is probably power. About 3,000 customers, about 25% of the meters. But when you look at how we service them, our addressable spend is split pretty evenly between the 2, and we've had good, healthy growth on both segments. In addition to that, servicing those 2 customers our utility contractors and generation contractors, and we've got strong position with both of those to lead us into those customers.

So if you take a look at how are Utility business, WESCO's platform now filters through those 2 lenses. In the upper left, that's our business profile looks today across the value chain. You could still see 70% of the business is downstream on the distribution grid slide. If you look at that slide, say, 5 or 6 years ago, that'd be more like 90%. Now that's not because we're not growing in distribution. That's actually been one of our real growth engines. It's been we've been diversifying the portfolio. Strong growth, very strong growth in generation that I'll talk about, driven primarily by Integrated Supply programs. Very strong growth in the high-voltage, which is a combination of transmission in substations, again, project-based, taking project services to the contractor community.

If you look at on the other side, how the business divides up by customer segment, about half of our business now is in the IOU space. Again, that's up as a mix over a couple of years ago, and that's a reflection of the success we've had with a number of major integrative supply programs. But to balance that, we've also had a good healthy growth in the public power sector, slugging it out, account by account, product category by product category, just as important. And again, utility contractors space.

So if you look at some of the trends across both sides. One, we expect the trend of slow meter growth and slow load growth to continue. We're not betting just on adding new meters to support our growth plans. What we're betting on is that plus a continuation of the project investment in both reliability and efficiency programs, and there's been good support from regulators and good rate support that [indiscernible] invest in reliability to grid. And certainly, I'll give some examples on some storm response, we see that trend continuing.

In addition to that, there's a buildout in communication infrastructure to support the automation of the grid. David will give you some additional color on that. But we have a good collaboration -- One WESCO collaboration there.

Some of the alternative energy drivers and some of the win business that we've enjoyed the last few years had certainly slowdown, as many of you know. But we're optimistic and we see a lot of that actually being replaced, and then some by support that's going into gas infrastructure, both from a grid support of gas infrastructure, but also a new plant build as we start to convert the fleet from a coal fleet to a natural gas fleet.

If you move over on the customer side, tremendous pressure on utilities, particularly the investor-owned utilities on cost reduction productivity improvement that's right in WESCO's warehouse. So customers that might not have viewed that as an issue 3 or 4 years ago, and we were working hard banging on the door, showing them how much money we could save to them; too busy, not interested. Right now, there is not a utility in the country that does not want to talk about how they can drive productivity improvement in their supply chains.

In addition to that, there's a real drive in site utilities today to focus on their core competencies. And what's the core competency? Their core competency is running the electric grid, running and maintaining the electric grid. The core competency is not being a distribution company where, in fact, many or most of utilities are a distribution company today, and I'll talk a little bit about how we're helping with that. In addition to that, the utilities are facing tremendous changes in their workforce demographics, but that also brings the new people the new ideas into the industry.

So if you translate then our value proposition of helping to consolidate spend and better manage that spend, and helping to drive productivity improvements in the supply chain, the first one leads to product category expansion. And our menu for product category expansion is in front of you right now, 17 product categories, which you'll see down the middle, that really spread across all the whole utility value chain. So we've got a very robust and deep product offering in generation. Equally, we had a deep, robust product offering and distribution.

You can see that the product offering on the transmission and substations side is a little bit lighter. You're going to see where we fill in some of that whitespace when I show you our services chart later. If you look over on the left-hand side, if we take our product portfolio, we break it down into 3 main buckets. The first is what we call core products. Core products are products were WESCO or one of our operating groups is a core competent distributor. What does that mean? Deep domain knowledge and technical expertise in that product that we can take to a customer. We've got a strong inventory and a local service position where we have very deep supplier relationships. So the first 9 there, that represents our core.

If you look down to the second part, when they get to the services slide and I'll tie some of this together, there's another set of product categories that we call second tier. There's a product category that we are not a core competent distributor on, or we're not to the utilities space. However, because the utilities want to leverage our service capabilities and drive supply chain productivity, the utilities are asking us to help them manage that portion of the spend. We do that by bringing in a second-tier partner. And you'll see the that, that really applies to the generation portion of this program.

The cargo [ph] to that or [ph] on the distributor grid is manufacturer direct spend. We have utilities that are asking us to provide those same services for manufacturer direct spend, so that's how we round out to our total 17. But focusing just on the core product cat growth drivers or the 4 [ph] product categories. Here, if you look in the upper left, T&D materials, that's been our historical wheelhouse, still represents a huge part of our business and a tremendous part of our growth strategy. And here, this is driven by system expansion, system maintenance, storm recovery. But also, as we look at expanding, if you're expanding for -- whether it's a shale energy because you're adding new meters, that's all happening here. The play here for the utilities is how can we help them distribute and get those materials onto their trucks just in time, more efficiently.

If you look down to the lower right-hand side of this table, you'll see safety and MRO. A lot of similar attributes in safety and MRO in terms of driving productivity. But there, we've got a spend profile that actually looks quite different. Lots of SKUs, a lot of complexity and diversity. Lots of high transaction, relatively low dollar volume, relatively low. So there, the play really is about supply chain productivity. A lot of our Integrated Supply programs really start in this category, where we'll consolidate spend and we can drive tremendous savings to utility in those categories.

If you're all roll [ph] up to the upper right, in outdoor lighting, Kevin just talked about the lighting opportunity overall. A subset of that is outdoor lighting, which is absolutely exploding in utility today. There's roughly 30 million streetlights in the U.S. today. Less than 2% of them have been converted to solid-state or LED. Estimates are, in the next 10 years, about 50% of that is going to be LED. So it is a compelling driver, it's a compelling issue in every single utility and it just so happens to be a category where WESCO has very, very deep knowledge. And in fact, one of the investments we've made is to build out outdoor lighting specialist in each one of our regions to help our utility sales professionals deal with this category with the customers.

How about parallel to that. If you think about smart grid, there's 2 categories here that I'm going to tie together for you in a minute. One is communications and -- the communication products and the other is T&D equipment. T&D equipment both in terms of replacing aging and infrastructure, but also to upgrade equipment to make it a controllable so you can communicate is a real trend and an underlying trend in the driver behind the smart grid movement. Well, controlling that is the infrastructure, the communications infrastructure that I managed, and we have a whole host of communication products to support that.

So if you look at how you bundle this together in smart grid, this is a slide that shows you last year within -- and I made a point last year, smart grid did not begin with stimulus. It will not end with stimulus. And I made that point again now that the stimulus is winding down. Stimulus actually was really good for 1 of the 7 categories of the smart grid, which is the advanced metering infrastructure. They're really only about 100 grants. Even almost every utility put a smart grid plant together, they're really only about 100 of them. They were focused on this AMI side, an area that WESCO is very, very strong. That continues and we're still very active in smart grid deployment and we really only got a fraction of what the penetration could be. That's going to be a many year transition as we go through.

But a lot of the activity right now is really focused if you go up a little bit on grid optimization. It's a different names for that. You kind of bundle it up and do a category called really distribution automation, substation automation. It all plays back to that equipment upgrades tying in communications infrastructure. So this is a long-term theme. And like lighting, we have invested in putting sales engineers out into the field to help our salespeople be proficient and to be a technical resource to our customers.

Now if you flip over to the other side, you look at what our services portfolio is. This is a similar menu for our services portfolio. And here, again, if you look, there's 14 categories of services. We're driving the discipline to manage these service categories with the same kind of rigor and precision that we manage product categories. It's a product, really, which means package up the tools to make it easy for utility to understand what the value proposition is. Package up the tools to make it easy for our branches to implement them on behalf of the utilities. A lot of investments has been happening in that area.

And why this is so important? If you look at across the top, our services apply broadly across the whole value chain. And look at transmission and substation, where we've really had great success over the last few years. That success has been driven by services. And the products really are a pull-on [ph] after you sell the services. And we're finding more and more that it's really our services that are driving our product sales as opposed to the other way around.

So we break our services up into 2 categories. One, supply chain services. Things like procurement and expediting, sourcing and category management. These are the things that WESCO does every single day as a national distributor, a global distributor. And there are things that utilities do everyday. What we're seeing though is utilities are less and less interested in investing in these areas. So we can come in and either supplement their organization with resources and services. Or in some cases, we move to Integrated Supply, we actually take over certain portions of these functions.

So one of the areas here that's particularly interesting, we talked about cross dock and logistics, point-of-use systems, that's where these second tier and manufacture direct relationships come in. If we're running the logistics out to the utility service centers who are rolling the truck to every single one of the utilities generation stations every day, it becomes very economical for the utility to use our branch or distribution centers across dock, and we'll leverage the same transportation system, the same service model, and by the way, the same point-of-use technician that might be either replenishing a vending machine, managing a bin stock program or managing truck stock, very, very powerful cost savings for utility.

If you take all of those things then and apply them to a project, because more and more the utility spend is bundled around these projects, then you term the project services. In addition to that, we layer on a number of other things around building material development, project material sourcing, packaging, kitting value-added services, we can save a utility a lot of money. But more importantly, we can really help them manage risk on their capital projects.

So if you look at how you knit this altogether, the services and products, that's only we talk about an alliance program. And certainly, our objective with every utility is to have a -- that manage all their spend in evergreen relationships. So that's our strategy in a nutshell. If you're to say, hey, how does the value proposition play out? Over on the left, the top part, and this is similar to a chart that you just saw from Kevin, the top part is that first value proposition. I talked about consolidation of the spend, better management of their material, we can drive significant savings there. We show 15% when you're rolling standardization and substitution. But what the utilities are seeing and we're demonstrating more and more that that's a fraction of the total value proposition.

The balance below that is what we think of structural cost. That's the productivity equation. And it plays from improved material availability, even material usage and wastage reduction, labor availability, labor productivity. There's a whole host of things here. And more and more, this is what the utility industry wants to talk about. It's what they need to talk about in a rate case-challenged environment.

So how you knit that together? If you look over on the right, generally it starts with supply chain services, and it starts with one of those. Might be a big bang, and we love those. We're doing a couple of big bangs right now, where we're doing it all at once. But more often than not, it's going to start with one of those supply chain services. We sell on the supply chain service, we demonstrate value, you bolt-on that second-tier spend. You're getting more of that, we'll use our business process improvement and LEAN value creation to start generating some additional productivity improvements, and all of a sudden now, we're rolling this up into a program. We can then apply that again to the projects with the project services and to sustainability programs. Well, when the day -- when it's all said and done, we really, really earned our keep and we really, really prove ourselves to the bottom, which is outage and storm management. Because in the utility world, every day is a Super Bowl, every day. So when a storm rolls in and, I'm going to give you an example right here, that's all near and dear to everybody's heart. When the storm rolls in, that's when we prove our mettle. That's when we really, really add value to the utility. So take Hurricane Sandy, for example. You guys all know the statistics pretty well, I'm sure. From our perspective, a 17 states impacted, 8 million outages, the largest outage in history, let's say non-blackout outage, 14 IOUs impacted, 14 IOUs, we've never seen anything like that. Half of those IOUs were WESCO Alliance customers. We're committed. We're embedded, some cases operating in the warehouse. We provided assistance -- well, assistance crews came in from over 50 utilities outside, flying utility trucks in on C130s. It's about a three-week restoration effort. Certainly, I'm sure that hits some to everybody here. WESCO provided 24/7 support to our Alliance customers. It was our commitment. But in addition to that, we also provided support to a lot of our non-alliance customers, actually, all 14 of those IOUs, we provided some level of support to. We had over 40 WESCO branches engaged in the restoration program. There were 9 of those branches that were actually in the impacted area, but there were 40 overall WESCO branches. 20 of them were utility branches outside the area. We have the ability because of our national footprint. We moved the command of control outside of the affected area. We were able to manage the inbound materials from suppliers to the utilities, either through our branches or through utility distribution centers. And rotated over 30 of WESCO employees into the affected area, with 4 of the 7 IOU alliances, we were actually embedded inside the utilities' command post. And we leveraged our national inventory of course, but we also leveraged the inventory across our customers and alliances, and we're a big, big part of the restoration effort.

So if you go to some others recent success stories, one, on the left. This is a really exciting win that I think John alluded to in our earnings release. We're in the process right now of ramping up an exciting new integrated supply program. This is the utility that we've been working with in the generation side for many, many years, and had been really pitching the idea of integrated supply and productivity improvements for a number of years. Well, the message hit. They went through a major benchmarking exercise, brought in a number of consultants, had a large bid event and WESCO was successful. So this full scope of supply is really our entire product portfolio across generation, transmission, distribution. And we're currently in the implementation phase and planning to go live later on here in the year. So that one is going according to plan.

Next one, which is interesting, and I put this in here to show that although, alternative energy is nowhere near where it was 2 years ago, it's still a very, very important part of our business. We had a great win this year. IOUs developing a solar project, went through a utility contractor, a utility-scale solar. We can come in to the utility contractor, here's a contractor that had not done a lot of utility work and could offer them a lot of assistance. Assistance in the collection system, substation, transmission lines and some overhead to tie that system into the grid. So again, a lot of core competence honing from our entire service portfolio and that project is just ramping up, going live right now.

So to kind of -- to wrap things up. Utility market, large, under growing, dramatic change. And that change is creating opportunities for WESCO. We're the leader in integrated supply programs, both in utility supply chain and also in projects. We will continue to lead the industry and play offense. Customer service, storm response, scope expansion, service integration, alliance models. And when WESCO has really expanded our scope of supply, it's increased our service capabilities and it's really enabled us to very quickly react and deal with our customers' changing needs and we'll continue to do so. So with that, the magic occurs.

Unknown Executive

Ladies and gentlemen, we will now take a short break. Please return to the room at 3:00 o'clock for the next presentation. Thank you.


Unknown Executive

All right, thank you. It's now my pleasure to introduce David Bemoras, who is our Vice President of our Communications & Security Group. David?

David S. Bemoras

Good afternoon. I'm pleased to have the opportunity today to present to you and update on our WESCO Communications & Security business. As you will see from today's presentation, our Communications & Security business is building momentum and we have made excellent progress creating a stronger foundation for growth in the important segment of the WESCO portfolio. While we expect the general economy to continue to present ongoing challenges, we believe we have put ourselves in a great position to continue growing a highly profitable business in its very dynamic space. As we all know, the digital world is going to continue to accelerate and security concerns, as we see everyday on the news, are top of mind issue for all industries and governments. The need for a globally enabled distributor to supply high-quality products that are bundled with value-added services to address the evolving technology and security requirements of a diverse set of end markets has never been more apparent, and WESCO is in the best position it's ever been in, to capitalize on the opportunities and be the distributor of choice.

First and foremost, it's important to note that since 2006, WESCO has emerged as a leading distributor of Communications & Security products, generating over $1 billion in revenue annually, and firmly establishing us as the #2 player on a global scale. We have developed a strong set of capabilities to support the product requirements for a wide range of applications, such as voice and data communications, security, data centers, intelligent buildings, broadband networks, wireless communications, digital, audio, video systems and, as Andy mentioned earlier, smart grid. It's important to note that our product and service portfolio supporting these applications has never been more robust and supplier advocacy is in an all-time high. The global addressable markets are large and technology trends and complex supply chain needs of our customers support a long-term growth opportunity for WESCO. Our unique value proposition, as you've heard today, is resonating with customers when they evaluate the integrity and true capabilities of their supply chain to help them improve their profitability. Our financial strength, our consultative selling approach, our ability to develop and deliver customized solutions that address the real true needs of our customers, the way Andy described, our international supply chain capabilities, which Les is going to talk to you about today, our highly experienced in technical sales force, a best-in-class supplier ecosystem, and one of the broadest product offerings in the industry, WESCO is uniquely positioned to help customers collapse their supply chains by providing data communications, security, electrical and general supplies on a global scale.

Now let me spend a few minutes to talk about some key trends that are evolving in the marketplace, that I believe, put us in an even better position to foster long-term growth. First and foremost, is data centers. Cloud computing, excessive data usage by mobile users, video-on-demand applications, data storage requirements and social networking are just a few trends that will continue to drive the retrofit and expansion of data centers, and I'll talk about more data centers later on in my presentation, in much more detail. The pervasive use of surveillance systems, combined with the shift from analog to IP, continues to fuel our double-digit growth rates in the Security segment of our business, and we certainly expect that to continue as we move forward. In-building wireless deployments are becoming more common place as cost of this technology has come down and the technology has actually improved and easier for customers to install and maintain. We all know that end-user clients are requiring much higher levels of service to support consistent, reliable mobile connectivity for their employees. And we've put ourselves in an excellent position with key suppliers of these technologies to bring these solutions our customers. Next-generation LAN enterprise connectivity infrastructure, such as optical LAN, are creating new evidence for growth, and we position ourselves very well with the suppliers of this technology and believe that it can be a key contributor to our success in driving growth with our end-user clients in the years ahead. And then finally, intelligent building architecture is starting to become more pervasive as end-users look to manage, monitor and control their office environments more efficiently.

There's no doubt that businesses and consumers will continue consuming bandwidth at a very rapid pace as our digital world accelerates. The deployment of IP-based security systems will continue to increase as end-users continue to recognize just how critical it is to have this infrastructure in their facilities. And we see them in news every night. All too often terrible events remind us of just how important it is to have a strong physical security platform in your infrastructure.

While CapEx continues to be constrained, there is no doubt that pent-up demand is building and investment levels will need to increase. WESCO is uniquely positioned to capitalize on these markets and these trends, as we are one of only 2, 1 of only 2 globally enabled communications and security distributors. Our One WESCO value proposition and value creation capabilities create tangible economic benefits to our customers that really differentiate us from the competition. We have outstanding supplier advocacy and preferential support as the supplier community sees WESCO playing offense and becoming a true extension of their sales and marketing organizations at an international scale.

We have a highly diversified customer base that's really being monetized more effectively than ever to One WESCO engagements. And it's across many different industry segments, which continued to enable us to create high levels of sales productivity in a very diversified manner. And finally, as Steve mentioned, our newly developed e-Commerce capabilities will enable us to cost-effectively serve many more customers on a global scale. The combination of these growth trends and our position in the marketplace creates a solid foundation to deliver better than market growth for the foreseeable future.

The WESCO Communications business is made up of 3 primary segments: Enterprise, Security and Broadband. Our revenue is generated across a broad range of large end-markets, such as government, commercial enterprise, service providers, healthcare, utility and education. We often work through and with a diversified group of channels on behalf of the ultimate end-user client. It's very important to note that we work hard to establish very strategic relationships and collaborate with construction contractors, consultants, systems integrators, engineering firms, and together, we provide comprehensive solutions to our mutual customers. Let me spend a few more minutes to get a deeper dive in each of these 3 core segments. Our Enterprise business currently represents approximately 60% of our Communications & Security portfolio. Today, it is largely a North American-based business that we are in the process of expanding internationally. In the Enterprise segment, we focus on providing products and services that support the technology infrastructure requirement in commercial, institutional and government buildings, carpeted spaces. Our broad product offering supports the construction and maintenance of local area networks, data centers, wireless connectivity, audio, video systems, building control systems and campus-wide networks. This segment of our business has experienced some headwinds the past few years, primarily due to the commercial construction slowdown and most recently, the government sequester. However, however, we continue to capitalize on the growth opportunities in the data center area and are starting to benefit from the deployment of new technologies supporting next-generation LAN connectivity and wireless communications. We are bullish, we are bullish on the future of this segment, as the evolution of the intelligent connected building becomes more pervasive. Data center investment continues to grow and commercial construction ultimately improves.

The next segment is the Security segment, and we started pursuing this segment about 6 years ago, as we saw the opportunity for growth with the move from analog to IP video surveillance systems. Since that time, the IP security market has been in a hyper-growth mode. Recent research, as the slide shows, suggests that the overall global market of video surveillance is going to grow about 14% over the next 5 years. The IP portion of that market -- the IP video surveillance area is going to grow at a rate of approximately 24% and the overall market will be about a $10 billion market in 2016. One of the more favorable dynamics of this market, is that the leading manufacturers in this space have adopted very pro-distribution channel strategies. In fact, the 2 largest manufacturers of IP cameras, Sony and Access Communications have 100% through channel strategies. Other companies like Samsung, recently have adopted a similar approach. So the combination of a high-growth industry dynamics, combined with the pro-distribution philosophy of the key suppliers in the IP sector, which is really what we're focused, create an excellent opportunity for long-term growth for WESCO. As a result, we continue to accelerate our investment in this space. We have built a large field support organization with the technical expertise to assist our sales force and bring value creation solutions to our customers. We have increased the training investments supporting our sales force. We have built an outstanding ecosystem of suppliers and system integrators that we work with to deliver complete end-to-end solutions to our customers, and we're utilizing our demand creation resources, which Kevin spoke about, to target new opportunities and create more awareness of our robust capabilities in the Security segment of the marketplace.

Our Security business today is approximately 10% of our total portfolio in the Communications & Security area. We have plans on expanding to Canada and other parts of the world over the next several years. It's primarily a US-based business today.

Finally, I am pleased to report that our Security business, which grew over 20% last year, is on track to deliver an even higher level of growth in 2013. We are very confident that our momentum will continue in the years ahead as we continue to play aggressive offense in this very important segment of our business.

The third segment is Broadband. And the Broadband segment became a key strategic business for us, with the acquisition of TVC in 2010. There is no doubt that we have established ourselves as the leading distributor of infrastructure material supporting applications, such as cellular backhaul, high-speed voice, data and video services for residential and commercial end-users, IPTV, over-the-top video and broadcast systems. We have a very diversified customer base that consist of cable-TV operators, such as Comcast and Time Warner, telecom companies like AT&T and Verizon, satellite companies, television networks and broadcast studios, as well as many of the contractors and integrators that serve these customers. Our product offering supports the delivery of a complete end-to-end solution starting with the head end electronics from the data center, all the way to the customer premise. Our supplier ecosystem in this space is very strong with companies such as Cisco, Motorola, Corning, Belden, Tyco and CommScope supporting us with very high degrees of advocacy. Our broadband business represents approximately 30% of our Communications portfolio and supports customers all throughout the Americas and Europe. I am pleased to report that this business had been growing at better-than-market rates as far this year, and we just finished the month of July with a very strong book-to-bill ratio.

Overall, we have built world-class capabilities and have established a very strong market position in each of our 3 core segments. We firmly believe we have built a solid foundation to continue growing a profitable, diversified business that can capitalize on the growth trends in each segment and leverage the power of One WESCO.

The management team in the Communications & Securities of the business has 4 key initiatives that we are focused on executing, all designed to facilitate profitable market share gains. The first one is our end-user engagement strategy. We have been investing in a specialized, dedicated sales force that is focused on executing a consultative, customer engagement strategy directly with the end-user client. This initiative has 3 primary objectives: one, to proactively and produce new product technologies to our customers that address their infrastructure needs, that demonstrate tangible economic benefits to their business; two, to influence product specifications to get the project registrations that Steve spoke about, in collaboration with our core strategic suppliers, and gearing up to them as an extension of their sales organization and really monopolizing more of their mind share; and then three, establishing preference with the end-user, as a trusted advisor to their organization. This approach, when executed properly, almost always makes price less relevant, differentiates us from the competitors and creates long-term annuity-type relationships with our customers.

The second initiative supports our effort to monetize the opportunities that emerging technologies present to our company. We are in a time of change, no doubt. And I'm a firm believer, as I think the entire management team is, that change always creates opportunity. As mentioned earlier, next-generation LAN infrastructure, Passive Optical LAN, in-building wireless solutions, data center intelligent management software, IP lighting control systems and power quality solutions, all offer great opportunities to generate new revenue growth. We've been building a technical sales engineering organization that will work side-by-side with our end-user focused account managers to position these next-generation building technology solutions to the end-user client. We have developed key strategic relationship with world-class suppliers of all these products and received terrific support as we proactively bring their solutions to market. We have already experienced a number of outstanding success stories to position these new technologies and expect significant revenue contributions in the future.

The third initiative, which you've heard a lot about today is our global account focus. We have a dedicated team that is focused on developing communications and security engagements for global accounts. They fit inside of Kevin's global accounts organization. This team has made terrific progress during the past year. Our value proposition clearly demonstrates to U.S. companies deploying infrastructure globally how well equipped we have really become to manage their supply chain across a diverse set of product categories at an international scale. We have had some excellent wins this past year, one of which I will elaborate in a moment. But more importantly, our pipeline is growing exponentially as suppliers provide more support and end-users gain more intimate exposure to our robust and unique capabilities. This is key. We have finally reached a point where suppliers and end-users see WESCO as a true viable alternative to other channels. As a result, we are confident that large global account relationships will continue to make bigger contributions towards the achievement of our organic sales growth objectives.

The fourth initiative is customer value creation. Value creation is the center of every strategic customer engagement. We are passionately focused on seeing a higher and higher percentage of our sales connected to a value-added engagement with the customer. We continue to add to our already expansive offering of WESCO Value Creation solutions. We have dedicated people that support the implementation of these solutions, and also training them on how to work with our sales force to discover the real true needs of our customers and design a customized solution, if appropriate. That's where we're seeking to do. Find the pain, find the real challenges and then leverage the entire portfolio we have to bring a remedy that creates real economic benefits in the eyes of the customer. We are having much success with this approach in the market and are realizing the benefits of higher profit margins and closer relationships with our customers. Our management team is committed to a higher level of execution in these 4 areas. We are confident that these efforts will continue to fuel better-than-market growth rates and more importantly, better levels of profitability.

Let me now spend a few minutes discussing our approach to the very important Data Center segment of the market. Monetizing this market opportunity continues to be a key strategic priority for the management team. Market research confirms that data center construction will continue to be on an upward trend of a significant nature through 2020. Our business development strategy is designed to pursue opportunities in 4 distinct subsegments of the data center market. The first segment is the data center collocation providers. Companies like Equinix, Rackspace, DuPont Fabros are all high-value targets in this segment. They leave space enterprise customers looking to deploy some or all of their data center operations in a highly secure and cost-effective space. Colocation companies have a high degree of churn in their data centers requiring them to efficiently manage their communications and the electrical infrastructure materials needed to support the build out an ongoing maintenance for their clients. And it's important to note that the electrical category is actually a larger category WESCO use from the communications category. WESCO is well-positioned to support these customers with a complete solution of products and services.

The next segment is the cloud and content providers, Microsoft, Amazon, Google, and Salesforce.com are great examples of companies that are currently investing billions of dollars expanding their data center footprint that support the high-growth shift to cloud computing. These customers are expanding rapidly on a global scale and require an organization like WESCO to manage their complex mission-critical supply chain. We have developed a value proposition for customers in this segment that clearly demonstrates our ability to collapse a supply chain internationally across multiple product categories, required to build and maintain their massive data centers.

The third segment is service providers. Verizon, Comcast, Time Warner, DISH and AT&T are just some of the many service providers building and maintaining a large footprint of data centers support the high-speed delivery of content to billions of people across the globe. Our value proposition resonates with these customers in a very similar fashion the way it does with the customers in the cloud and content segment.

The last segment we target is the enterprise data center. This segment is really built by the enterprise to support the business computing and data storage functions required by the enterprise. Our consultative sales force and technical sales engineers are focused on engaging customers in the Fortune 1000, healthcare, education and government end markets. Our product offering supporting the data center market is seen as a true one-stop shape capability that is really second to none. To all customers in all 4 segments, our supplier ecosystem serving this market is world-class and the value creation services we provide, which is on flight managed inventory, clearly sets WESCO apart from the competition.

As a leading distributor in the data center space, we are constantly developing new tools to help our customers select and purchase products they need to support their facilities. Our recently released WESCO Data Center iPad application is a great example of this. This resource provides customers with white papers, product demonstrations, videos, specifications and ordering information. The app is updated on a regular basis and clearly communicates the One WESCO offering product and services we bring to market. Overall, we believe we have built a very strong position for ourselves to be able to continue monetizing the high-growth data center market opportunity.

Let me now share with you a success story that is a terrific example of how we are winning in the data center space. Last year, we were invited to participate in a global RFP to support the data center construction and maintenance requirements of a Fortune 100 technology firm. WESCO had no relevant supply-chain relationship with this company and was up against strong, very strong incumbent competition. The customer was looking for a company that can manage their communications product requirements on a global scale, with local presence in key markets that they were planning to expand in throughout the globe. Our proposal included on-site inventory management in all data centers globally, 24-hour support, dedicated inventory commitments, kitting and our ability to manage multiple product categories, and this is key, outside of the communications category.

After careful consideration, this Fortune 100 company made it single award -- a single global award to WESCO. This is a landmark win for the Communications & Security platform at WESCO -- very similar nature to the Duke win in the Utility business several years back. It provides us the ability to provide products from every product category in the WESCO portfolio. We are just 8 months into this multiyear agreement and we are already providing electrical products and general supplies in addition to a wide range of communications and power quality products that this customer requires for their data centers. This win is a great example of the power of the global supply chain value proposition and how it's resonating with large corporate clients building and managing data centers on a global scale. We currently have a very strong pipeline of opportunities we are pursuing that are very similar in nature, and we feel confident we have put ourselves in a great position to win more than our fair share.

In summary, as you've seen from today's presentation, WESCO is well-positioned as one of the few organizations capable of supporting communications, security, electrical and general supply requirements on a global scale. And our value proposition is resonating with customers in a manner that is inspiring them to include us as a strategic participant in their supply chain. Market trends continue to be favorable for long-term growth and we positioned the business to capitalize on the emerging technologies that support the evolving technology needs of our customers. Our One WESCO business development strategies are proven to be very effective in helping to facilitate wins across the entire business. Our data center offering, as we just discussed, is the broadest in the industry and puts us in a great position to continue monetizing the great growth opportunity in this segment. Our security platform has put us in an excellent position to continue capitalize on the double-digit growth markets -- the double digit growth rates in this market and the migration to IP solutions. And finally, our value creation solutions are facilitating the development of intimate relationships with our customers leading to more long-term annuity relationships. There is no doubt that we've made great progress in our Communications & Security business during the past 6 years and become a leading global distributor of enterprise, security and broadband solutions. As we look ahead, we should continue to see opportunity for sustainable, profitable growth. We feel very good about our market position, the momentum we are currently experiencing, our management team, the support we are receiving from our suppliers and our ability to continue leveraging the power of One WESCO to drive market share gains. Thank you for your time today.

I will now turn it over to Harald Hanze to talk about our Canadian business. Harald?

Harald Henze

Good afternoon, everyone. Thanks, David. I always get excited when I hear Dave talk about datacom and low-voltage business and the opportunities that are there, and the global aspects of it. My world is a little more mundane or north of the 49th parallel, but getting a fair bit of attention these days as well. Last year, I talked about our growth strategy in Canada. It's really around 2 main areas: one, growth through the investment in the distribution centers and new branch openings, with the market share position that we have, which is weaker on the shelf goods and the warehouse side of the product than we have on the project side. Don't want to lose that focus momentum on the project business, but we see a terrific opportunity of growth share on the shelf goods side. So I'll give you an update on that. And then the other one, obviously, we spent a lot of time in Canada on the acquisition side, and that continues to be a focus area. We've got some updates on that. So what I also talked about last year was LEAN and how important that's been in Canada in terms of managing the way we get our people engaged and we keep working on process improvement and productivity gains. And I won't be talking about it today, but I want to bring it up just because I think it's important for everybody here to realize that there are commitment in the gains we've made, and adapting to a LEAN culture inside the organization in Canada has been phenomenal over the last 12 months and I'm very proud of that. And the other reason I want to bring it up is because I think it's the single biggest gift that we can give to EECOL, it's the latest acquisition into the organization. And when I look at 2014 and the opportunity start introducing EECOL with LEAN into their organization and LEAN has that opportunity for fantastic process improvement inside our organization, without changing or damaging or influencing the unique culture and position that we have in the marketplace. A year ago, we had 3 years in a row of having wind at our backs and that's over. I mean, that's it. It almost felt like I feel the wind shift back to where it came back from last year's meeting and start to get some headwinds. And that's kind of where we find ourselves today and that's really where I want to start the conversation with and just to give you a position about where we are today and kind of where it's going, what we see over the next 12 to 18 months. So last year, I had this almost the same slide, a few things different. The biggest one from my perspective was on that top left hand corner. Today, we're saying WESCO is the largest distributor with a strong presence in all provinces. Last year, we said we're the third largest distributor in Canada on the electrical space. So from our perspective, that's a pretty significant change and a very powerful one. So we really came with, to get that $1.8 billion if you annualize all the acquisitions in the core business last year. We are neck-and-neck with Rexel. We're in the #1 spot. And all the data suggest that we've seen through the first half is that we've taken that share to be in the #1 position. So that EECOL acquisition has changed the distribution landscape in Canada significantly and I think forever. And from my perspective, and I think from John's and Steve's, Ken's, we love where we're sitting today in Canada. We think we're in a fantastic position. We're the #1 player and we still see tremendous opportunities for growth.

EECOL is the market leader in Western Canada, with a -- and is an extremely well-respected company with their customers, with their vendors and even with competition. They have strength that are very, very complementary to what we do, and I think terrific learning opportunities for us as we look at focusing this activity by shelf goods' growth because that is really their strong suit.

We talked about this one. When we did the deal, that there's a dual channel strategy with EECOL and WESCO competing head to head in the markets with a different vendor base. And I want to just report that so far, I mean, that has worked seamlessly as we expected it to go. And this is not unique to the Canadian market. That strategy, that dual channel strategy, has been in place for over 25 years with Rexel and we've got Sonepar playing parts of those things. So the strength of it is that we can compete vigorously against each other with different vendors where we overlap in the markets and really get 2 bites at every apple.

So the Canadian market -- this is very similar to the slide. I mean, we all understand it's very clear that we're driven by the natural resource sector and the short-term impact of that, with commodity pricing and slowing demand in Asia, has been negative on us. But the long-term growth prospects for oil and gas, mining continue to remain attractive. Construction continues to be a significant part of what Canada is all about in all aspects of construction.

I talked last year about the increased investment in the utility space, and that continues. And green sustainability, while we've taken a step backwards in Canada in terms of how much focus there has been on solar and even on wind, I mean there's still tremendous investment opportunity going there. And others have alluded to it on the lighting side with the LED and lighting and control technology.

I think the other thing I wanted to point out to you, what sometimes people forget about, as a first world country, we have another blessing that many other countries don't have. We have a very aggressive immigration policy into Canada and we have a positive birthrate. The annual population growth in Canada between the 2, roughly 1/3 more births than deaths and 2/3 being immigration. And to the Canada, it's about 360,000 people a year. And about 100,000 of those end up in Toronto every year.

And if you think about that long term, today, we have 36 million people in Canada. By 2050, at that rate, we'll have 50 million [ph] people in Canada. And that population growth is something that has its own driver for -- in terms of economic growth, housing and infrastructure, and I think it's an important thing for people to understand from a prospective standpoint.

This is a slide I really want to focus on for you the most. And I want to kind of paint the picture a little bit. So we've got pluses kind of things, at fairly neutral and we have negatives. And I've broken it down geographically, not particularly any order to the geography on it, just the way that came into my head at the time. And I want talk about the pluses and the minuses are both from the standpoint of there's an economic situation out there, which creates a positive or a negative. But also, I've put in positives where things might be neutral or even negative inside the market. But from our perspective, we see a growth opportunity because of the things that we're doing.

And so if we look at Alberta, and Alberta has been the place I think that has struggled the most over the last while or been close to that. We end up in 2013, I think, with a GDP forecast of 2% in Alberta. It's probably the lowest it's been in a long, long time. And we're looking at a GDP forecast for Alberta in 2014. That's about 3.3%. So that in itself is already a significant turnaround in terms of what the expectations are there.

We also see through the last quarter, in particular, a strong, strong bookings environment. And today, we're sitting there with a backlog. And I look at my backlog for Alberta and Saskatchewan more together than I do independently, a very, very strong double-digit growth on our backlog in Alberta and in [ph].

So on positives for us, we've got a big investment in the Utility business with the Brews acquisition, the Trydor acquisition and with EECOL. And so we see that as being a very positive for us in Alberta. Oil and gas will be much more positive going forward, not strong the way it has been historically, but still much stronger than it has been over the last 12 months. And we see recovery going on, on that front and more investment. We see a rebound on commercial construction and a very significant impact from the Alberta flooding. I mean, we've got $3 billion to $5 billion worth of damage that has happened to Calgary, and the communities that have gone down the river through the flooding process. A lot of rebuilding that has to happen. And you all understand how much the electrical side gets infected by floods and the Utility business as well, right? So these are big positives for us.

I left residential flat. I think that's essentially what happens in that market, and it's a strong market for EECOL, a relatively smaller market for us. And government spending will be down, I think partially because everybody is trying to balance their books but partially because $1 billion of investment is committed to the Alberta flood recovery by the provincial government. So that's a factor as well.

Move over to Saskatchewan, and we see the same thing. We see the GDP growth in Saskatchewan and Manitoba that, that's going to be about 40 or 50 basis points over what's -- what the track area is for this year. Again, here, we actually see a positive over the next while for the mining side, utility as well. You've got the shale developments and the frac-ing that's going on south of Saskatchewan. That same activity is going on in Saskatchewan. That's new business, new activities for us, and we see that. And there's actually is -- it's one of the places where the solar investment's going on and wind generation.

I left residential the way it is. Government spending, it's one of the provinces that have a balanced budget right now, but they will be managing this.

And I think one of the storm clouds that we've got our eyes on trying to understand is just what's happening here with Uralkali making this announcement that they're getting out of the cartel in Europe on pricing potash. Maybe its customers will have a 25% drop in the shares because of that, so there's been strong market reactions. And so we want to see just how that shakes out. I think it's something we've got to watch for. My biggest concern is not on the 12- to 18-month horizon on that. It's much further out than that. I think my concern would be that there is -- there would be concern about new development, new mines opening up and greenfield operations, if there's a tremendous drop in the prices of potash.

For -- yes, the only thing I want us to be clear and I took up, that also has the backlog improvement and the booking improvement that's going on. Ontario is the largest improvement and -- or the largest province. We see, on the bright side for us, we're very strong on water, wastewater treatment plants. We see good activity there and growth opportunities for ourselves. Manufacturing has made a rebound. Automotive plants in Ontario are all pounding out product. Transportation investment in the Toronto area and Ottawa all on front. We've just rewon the tender for all the work with the Toronto Transit. Wind generation is -- I'm on the wrong side. Utility is the other one where we've been focusing with Brews and others and helping Brews with leveraging. We've got an interesting example where with the crossarms, where they were selling through a small sub distributor, they were making 5% billing margin, the rest went to the sub distributor. Today, all that business is growing at a 20% rate. Brews now has a 35% billing margin. So that kind of opportunity is significant for us.

We see continued investment in hospitals. And by multifamily residential, we're really talking about condos. And if ever you've been to Toronto in the last few years, I mean, the condo development there is phenomenal and there's lots of concerns and expressions about, is this something that's slowing down? It isn't. I mean, there's many, many cranes up. There's over 100 towers being built in Toronto. And that will be something that slows down, it will not be over the next 12 to 18 months. So we see that as continuing as it is. And that's important for us because we don't play in it, but we have a lot of competitors that do. And if that slows down, then I'm concerned about them trying to come after our sweet spot, so that's why I bring it up.

On the downside, we see commercial structure, residential, solar and wind, all mining, all slowing down in that province.

On the positive side, we've made this large investment in the distribution center. We're starting to leverage it with TVC moving in there. Brews has moved in there, and we're starting to look at now, through the next 12 to 18 months, how we can leverage this to look in the biggest markets in Canada for shelf goods, share good side.

I would say over the last 12 months, our strongest performing region has been British Columbia. We've had strong double-digit growth in the first half of this year through the last half of last year. And that, again, is an area where the GDP is going to be improving and actually improving nicely, but we had just an unfair share of project success in that region. And I think that's the one place where I don't see growth in -- over the next 12 to 18 months. We're going to hang on to and try to maintain the levels that we've had. The economy is growing nicely. And we see forestry, oil and gas, significant investments because of the liquid natural gas up in northern B.C. with Kitimat and those larger projects that are going on out there. Commercial construction, again, in Vancouver, the condo market is still going strong. So the utility market is flattening out and residential, mining, government spending going down as well.

And then in Québec, we see, again, improvement from 1.1 to 1.9. We've been taking share in Québec consistently over the last 3 or 4 years, but we are a small player. We still have plenty of room to grow. So -- and we'll focus on the soft side.

So let me go and give you a visual of the impact of the EECOL acquisition. So today -- and I've combined the other acquisitions under the blue WESCO dot. But visualize, take a minute and just take an exercise and drop those red dots out and take a look at what we were like before. Take the blue dots out and take a look at what EECOL is like. I mean, footprint that we have in Canada today is phenomenal, second to none, and very strong in Western Canada.

And if you think about the growth opportunity for us, if we think about organic growth and acquisition growth in the context of certain acquisitions will make more sense for us as bolt-ons on the WESCO side. Others as bolt-ons to the EECOL side. And so, my goal would be over the next 2 years, 5 years, 10 years, that we'll see more red dots going out through the Eastern part of Canada. That's a significant growth opportunity for us, with a dual channel strategy that goes from coast-to-coast

So we continue to invest for growth organically through the distribution centers, and I've talked about the other ones, the Montréal one, which is the last one out of the -- we'll have 4 of them from coast to coast. And we call -- they're hybrid distribution centers because they're not stand-alone distribution centers. They're in the middle of the largest CDP [ph] centers in Canada. They have tremendous access for customers and vendors coming into them, and they have our branch as part of it. So they're a very compelling element of the large markets, where we have inventory and resources that are tied up to service those big population centers. We also opened up 6 branches, 4 in 2012 and 2 of them are actually going to open up this quarter, one in Prince Albert, Saskatchewan; and the other in Peace River, Alberta.

And so the Brews -- or the acquisitions, we did TVC. I think I mentioned they've just moved into the distribution center in Toronto. We've been able to leverage their infrastructure across the country, so the other facilities. Now we've got to help them grow their business. Brews has been delivering to us from day 1. And they have taken a complete lead and control of the Trydor acquisition, and it is a great business with great employees and great leadership. And EECOL has delivered well against strong headwinds, came out of the first quarter very strong, stumbled a little bit in the second quarter with the weather issues that they had in Alberta. But this is a great business that has a very bright future.

So this is a little bit of the dual channel strategy. Just so you understand kind of the power of the brands that we have. And this list could go on for a lot bigger than what it is, but we're eating and have been probably eating for years. And Schneider is the #2 player in Canada, and they're solidly locked in with EECOL. The other players that I know would be -- Siemens, obviously, is in that mix; and then GE, a distant fourth.

But as you go through these lines, on all the major lines, we have little or no overlap. The only really significant overlap that we have is Thomas & Betts, who's the market leader in Canada and the products that they have -- and they really have shelf space and probably 80% of the distributors in Canada. So we're all used to having that scenario. But what it does do, it makes us the largest T&B distributor in Canada, and there's never any harm in having that. So I wanted to give you that perspective. And the overlaps really have been fairly easy to manage so far.

Talk quickly about 2 success stories, and this is the classic project. I mean, there's really customer engagement and strong project management capabilities at the roots of where we are in Canada. The first one is a large mining company in Western Canada. We received orders for -- between $10 million and $15 million worth for our power transformers and distribution equipment that will be shipped mostly in the first half of 2014.

On the other side of the country, we've got a large food processing -- processor that did a big plant expansion, very, very rushed time frame. And that's the one that won -- the general won the award. Really sat down with the electrical contractor, and they got us involved. They didn't say -- they just had a high comfort level to do the job with us because of our project manage capability, and we've got 99% of that build. There's only [ph] what's left to sort out on that.

So in summary, I think I want to talk about the long-term economic growth and success are still very much around this issue of being a commodity-based country. But I don't want us to ignore the situation about the population net growth that we have. And generally we have -- I think we have about half a dozen cities in Canada that have over 1 million people. And if you think about this 1% population growth, every 3 years, we have enough population growth for another city with 1 million people. And it doesn't happen that way. I mean, the growth happens in Toronto. It happens in Montréal. It happens in Vancouver. That's where we have our investments. So we're very confident over the next 12 to 18 months about the business in Canada. We love the comps. I mean, that's a terrible place to start from, but we have a much easier row to hoe with the comps that we have over the last 12 months. The backlog has improved significantly and the bookings activity is very, very strong, and the economic forecast for 2014 are significantly better than they are today.

So I'm feeling good about where we are, where we're positioned and where we're heading.

And with that, I'll finish up and I'll introduce and turn it over to Les Kebler. Thank you very much.

Les Kebler

Good afternoon. It's great to be here. My name is Les Kebler. I have a responsibility for all activity outside the U.S. and Canada. And really, what I want to focus on today is our expansion of our global footprint, our investment in international and really our operating model, which is unique in the industry. So if you look at where we are today, operating in 16 countries. That's 3x as many countries just 5 years ago. In 2013, we plan on entering 4 additional countries, all in support of the strategy to become a global supply-chain solutions leader.

Unique to us, and what I believe is a competitive differentiator, is our ability to have global platforms along the locally managed businesses, and that's executed through an integrated operating model. And why that's important is because it drives speed in our organization, as well as communication across a very large geography. So as it stands today, we have the capability to support our customers on a local, regional and global basis.

Our strategy is straightforward. We target large growing markets. Once those markets are identified, we look for a triggering event to move in-country, that could be a customer engagement, a supplier engagement. And then once we get into the country, we look to hire locally. We want to naturalize the sales team, local management. These are folks that know the market, build out the infrastructure, kind of develop full distribution capabilities. Once that's established, we then bring in, as appropriate, a set of globally enabled product and service platforms. This is really key because this allows us to scale the business and accelerate our growth in those markets.

Our growth drivers, very straightforward also. Geographic expansion, we have a set of criteria we use, and we evaluate countries and determine if it's an appropriate fit for the WESCO value proposition. There's a constant stream of those countries under evaluation. And then once they meet the certain criteria, then they become candidates for entry.

Increased sales capacity. This is standard blocking and tackling around outside sales, inside sales, customer service, technical support, all the things you need to support customers on a local basis.

Finally, we want to have a good balance between local operations and requirements from our local markets, as well as driving productivity and efficiency across the platform. This is a global consistency we look for, and it really helps us drive the operational excellence we're looking to achieve. We have a flexible business model. We have partnerships today. We will continue to have partnerships. And basically, that can be driven by a business need, a market condition or a government requirement.

Finally, our acquisition pipeline is very robust. Part of the corporate acquisition pipeline is we have a constant review of candidates that is then bubbled up to the corporate acquisition process and under our constant review process.

Taking kind of a step back and looking at the general market and how we feel about it, we're very positive about the current trends and the outlook in the international market. Although there is some global uncertainty and markets moving up and down, we feel that there are certain countries, specifically emerging markets, as well as a number of end markets. You heard of some of them today that are growing very rapidly. So we feel very good about that long-term trends: The population growth, the increasing wealth of that population, the infrastructure required to support that, demand for oil and gas, as well as other commodities. All those long-term trends remain in place today, which, again, supports our thesis for investing in international markets.

There's one thing that WESCO can take advantage of that some of the other folks can't, and that's lack of legacy costs. Because we don't have a long legacy in the international business, we don't have a cost structure that we need to manage to. Therefore, we can kind of select where we want to go in these markets, which is very important because they tend to be very dynamic and things happening on a very quick basis.

One customer trend right now that we experience and we're well positioned for: customers have the ability to take technology logistics, as well as communication, and structure their organizations around the ability to expand and leverage their spend across multiple geographies. Our combination of Global Accounts and our global reach allow us to step in the middle of that and capitalize on some of those unmet trend.

So in summary, we feel good about the international markets, but you really need to pick where you want to play.

Here's a look at our footprint. As you can see, we've got good mix across 3 polls: Americas, EMEA, Asia Pacific. We feel good about our global reach in existing -- in addition to the 16 locations we have today, which, as I mentioned earlier, 3x more than we had just 5 years ago. We can service a broad set of customers much beyond this footprint. Today, in 25-plus countries, we either have a commercial relationship with a customer or some type of commercial activity in those countries. So we truly are able to provide global reach.

Now I will be the first to mention that we do not have the most dots on the map. There are people out there with more dots. But we really think our structure, our strategy, our ability to react quickly to market conditions, as well as customer needs put us in a competitively strong position in the global market.

Finally, Latin America. If you look back a year ago to compare it to today, we now have a significant footprint in South America. If you combine that with Mexico, where we've been for over 12 years, have 150-plus people, 14 locations, we now have a significant footprint in Latin America and are well positioned for growth in that market.

So in summary, expanding footprint, investing in international, global reach, able to support customers on a global basis today.

A little deeper dive in the EECOL South America. As Harald mentioned, he has EECOL in Canada. I have responsibility for EECOL in South America. The interesting thing about EECOL covering 4 countries, 20 locations, full distribution capabilities, similar to what you'd see in North America. They cover similar end markets, as we do today, heavy on the industrial side. They also have a unique value proposition, which is an OEM manufacturing capability. I put a couple pictures in here for reference. But basically, what this is and what we call a power and controller e-house and really what it is, is a manufactured structure stuffed with electrical equipment, it could be switchgear, motor control, UPS systems. The key here is our ability to do this from the design, fabrication and post-order service perspective. We do not have a distribution competitor in this marketplace, so this is a unique opportunity for us to expand that platform, provide us a value proposition that, frankly, none of our competitors have today, and we're very excited about having it.

I've talked about our geography. I've talked about our strategy. Now I want to talk a little bit more about our operating model, which I think is unique to our industry. And I think it's a value proposition that can create long-term value for WESCO. Basically, it's made up of 3 points. We've got a centralized leadership, we've got a localized business management and then we have global platforms.

So within the centralized leadership, this is where you're going to find -- you're going to develop your long-term global strategy, your geographic expansion, your customer and supplier engagement on a global basis, talent management, tools for opportunity identification and qualification. Those things are handled in a centralized manner.

The localized business management, this is similar to what you'd seen in North America, full distribution capability, salespeople, warehouse inventory, all the things to service the local market. And now where we differentiate ourselves from the local traders and distributors in many of the markets we serve is, of course, we have the full financial backing of WESCO behind it, as well as a portfolio of world-class suppliers. So we think we -- when the -- in the local markets we operate, we clearly differentiate ourselves from the local players.

And finally, the third piece of it is the global platforms, which I'll go into more detail on this slide. And here, you've heard about a couple of these already today. But I'd like -- the way they're applied in international, again, is once we're established in a country, we bring these platforms in. They act as a way to scale our business or accelerate our growth. So it's a very powerful combination and unique to WESCO.

So communication and security, you heard David talk extensively about that. Customers and suppliers now are asking us to come and move that into the global footprint. That's happening today. So as we move into Europe and Asia and South America, what you'll find is we will become a globally viable alternative to existing supply channels that have existed for 25 years, opens up a whole new world for us, as far as opportunities.

Global Accounts. Kevin talked about that extensively. From my operation, it's key because we get a single point of contact within his team with a customer that can now take it across a much larger footprint.

Integrated Supply. We operate in 10-plus countries today already, and we're seeing an increasing demand from customers because they see the opportunity to leverage nonstrategic spend across a greater geography. So if you take their technology, which is the wrapper and look at the nonstrategic spend, their ability to get the transparency and visibility they want across the globe is a very, very powerful value proposition.

And finally, capital projects. We've got decades of experience on this. We've got extensive domain expertise and we got resources dedicated to users EPCs and contractors specifically addressing large capital projects. In addition to that, we have a material management system called RPM, which stands for remote project management. What RPM does is basically provide visibility into a large capital project, the material spend, which may involve thousands of items. This system basically takes it from design through procurement, all the way to construction. The value to the customer is that they can find cost savings through productivity and surplus savings. It is a very powerful tool. It's a proprietary web-based technology for us and it's something that puts us in a position to service the large EPs on complex capital projects. It's run through our COEs, which are global locations for capital projects. These global locations allow us to scale that business and also award share between offices or among offices depending on market demand.

So in summary, these global platforms are the third leg of the operating model that allow us to go in and scale and accelerate the growth in our international markets.

A couple of success stories. The first one is a diversified technology company in the U.S. If you put yourself in their position, they were -- they had a U.S. market. They were -- they're manufacturing everything. Their supply chain was centered around U.S., but their end market demand was in Asia. So what do they need to do? They needed to start up manufacturing in Asia, which required a complete transfer of the supply chain. The challenge for them that they've got to find someone to manage that, to source that, to provide a global sourcing, handle the duties, taxes and freight to get the products into Asia, as required.

What WESCO was able to do through our Global Accounts program was provide a single point of contact and provide a seamless transfer from the U.S. to Asia. And then of course, once they get in Asia, what do they want to do? They want to localize the supply chain because that's going to have the biggest impact on their cost and schedule. So again, WESCO steps in, offers that service, as well as all the in-country services of inventory management, distribution, et cetera. So a very, very good example of country moving from -- company moving from one country to another country and WESCO being able to facilitate that.

The second one is, as I've talked about, the e-houses earlier. In this case, the value proposition, again, we do not compete with our normal distribution partners and competitors in this market. But really, our value is if you look at a customer, they've got a roomful of equipment. They may have different manufacturers. They prefer for switchgear versus drive versus motor control. Our value proposition, we can bundle that altogether and kind of put a complete package solution, sell together independent of the manufacture presence.

The second piece of the value proposition, this is usually, because it's such a critical piece of equipment, it's first out. Meaning, we get immediate contact when the project gets launched. So we're much higher in the organization, much earlier in the organization. So as the project continues, our ability to introduce the full portfolio of WESCO products and services is greatly enhanced in this. So we're literally months ahead of the competition just from an engagement standpoint because of this type of equipment.

So in summary, we operate in obviously a very large and fragmented market. Our integrated operating model, which combines the global platforms with a locally managed operation into an integrated operating model is a competitive differentiator and a value proposition we think has long-term legs for us. We're expanding our global footprint. We're investing, and we will continue to do that at an appropriate pace based on our value proposition. And finally, we continue to see customers and suppliers looking to folks like ourselves, well capitalized, large companies to be their global supply chain partners.

So with that, I appreciate your time today, and I'm going to turn it over to Ken Parks.

Kenneth S. Parks

So I have to tell you before I get started, I'm a little bit destabilized as I began this because more than a handful of you have told me throughout the day that this is all about understanding the businesses and the operations and I'm supposed to be boring at this point. While I find a lot of numbers in presentations, I don't know how it couldn't be exciting in my typical bubbly personality, I'm going to have to hold back up here.

So anyway, let's get started. I'm going to be a little bit boring. I'm going to tell you about how we're performing against our long-term financial objectives. I'm mostly going to talk about the second half of the year a little bit. And then I will give you something a little bit new, which is a first and early look at 2014.

These long-term financial objectives are the same. They are the same as we showed you in the last couple of years, and we're performing well against them. You can just look down the page. We're growing sales faster than the market through both acquisitions and organic. We're maintaining and actually even improving our industry-leading cost structure. We continue to expand our operating profit and margins, generating strong cash flow throughout good cycles and bad economic cycles. And finally, don't lose fact to the point 5 on the page, which is providing superior investor returns across the periods shown, more than 3x the key market metrics and at the top of our peer group.

You can see this when you look back over time, you look back at the last 10 or 11 years, and what you can see is that while keeping our headcount relatively flat, and if I took out the acquisitions, you would see that it's essentially flat. You can see that our sales have doubled and our EBIT, our operating profit has grown by more than 5x.

Just looking at the last 3 years and the trailing 12 months going into June of 2013, what you see is that even through the slow and protracted economic recovery, each one of our key metrics continue to perform. Sales growing at about a 14% compound annual growth rate, both operating profit and earnings per share growing at about a 30% CAGR and free cash flow over that period running at slightly more than 100% of net income on average.

Just a couple of weeks ago, we released to you our second quarter earnings. At that point in time, we talked about what the year was going to look like. We updated our outlook for 2013. How was it different and what does this chart mean? It was different in the sense that as we came in to 2013, what we expected and we called it was kind of a 2-speed gear: a flattish first half with some mid single-digit top line growth on the organic side in the second half. And as we moved through the first half, we've seen the first half kind of just like what we thought. What's different about the year is we saw the second half of the year looking more like a flattish organic environment with the growth for the top line truly coming from the acquisitions.

We expect gross margins to stay about where they are in the first half of the year and operating margins to expand to about 6%; tax rate running around where we thought we would be and going into the year, and consistent with our latest outlook of 26% to 27%; and then finally, an EPS outlook of $5.15 to $5.35. We said that a couple of weeks ago, and that's what we continue to feel is our true outlook for 2013.

A couple of quick updates, so things that are not on the chart. We just finished July. Won't take you through too much complicated math, but let me kind of give you the picture of how July organic sales looked. We had one extra sales day this year versus last. And when I adjust that out just for the extra sales day, organic sales were flat year-over-year. We also saw an impact from the timing of the holiday early in the month, the July 4th holiday, and we estimate that to be about a 1/2 a day negative impact on sales year-over-year. When I adjust for that, I would say that organic sales for the month of July were up a couple of points in the month year-over-year.

In the second quarter call, we told you that we saw some increasing momentum as we move from April to May to June. June ended at about 1.5 points up year-over-year organically. So July is in line with that and maybe even slightly better. We're only 4 days into August, so it's kind of hard to draw a trend. But what I will tell you is that, that positive momentum vector continues on an organic basis.

The other point is backlog. At the end of June, our backlog was up 5% from the end of December, and that continued to expand through July, up another couple of points. So 5% up from year end through June and at the end of July, up about 7%.

Talk just a second about cost leverage. We show this chart every year. Sales per employee continued to run at about 50% higher than the NAED industry average, at about $850,000 per employee. Even more importantly, I believe, is on the operating profit side of the chart. You can see that operating profit per employee jumped up and continues to run at about $50,000 per employee, again, comparing very favorably to the industry benchmark at about 3x the average.

Cash generation is solid in the business. I already quoted that over the last few years, we've run at about 100% of net income. What I want to focus you on is the right-hand side of the chart. Harald talked about the EECOL acquisition that we did at the end of 2012. And when we did that, our financial leverage ratio moved up to 4.7x EBITDA. We told you that we were going to work to bring that leverage ratio back down into our target range. That's not a different range than we've always talked about. It's the same range, 2x to 3.5x EBITDA.

What you can see on the right-hand side is we have worked that down fairly consistently throughout the first half of the year on a reported basis at 3.9x EBITDA. But on a pro forma basis at the end of June, we had actually reached the top end of our target range again. We continue to expect to drive that number down to be comfortably within the 2x to 3.5x EBITDA range as we move through 2013.

Our cash flow redeployment strategy is the same. We have 3 primary uses of cash. The first is to support organic growth. The second is acquisitions that are accretive. The third use, and the reason it's shaded is because of what we just talked about on the leverage ratio, in the immediate term, we're utilizing more of our cash to redeploy towards bringing our financial leverage ratio until we get down into that target range. However, all 3 of those strategy points continue to be in our long-term strategy for cash flow redeployment.

A quick update on the financial side of our acquisitions. You see on the bottom left of this chart the acquisition priorities. We continue to put those out and tell you how we're performing against those, which is essentially a strategic fit and accretive to the business overall and accretive to EPS in year 1. What you see on the right-hand side of the chart towards the bottom is the $1.53 of first year EPS accretion from the last 8 acquisitions, and we delivered against every one of those metrics. And I'll reconfirm that we still feel confident about the $1 of EPS accretion coming from our latest acquisition, which will run through the full year of 2013, EECOL.

A quick look at where the momentum is within the business and the markets, and then I'll give you a look at 2014. You watched the indicators as well as I do. If you kind of take away the 4 key end markets that we've talked about today and that we talk about in each one of our earnings calls and meetings that we have with you throughout the year, what we see on the Industrial and Construction side is kind of a balance to positive outlook. I just quoted you backlog numbers. That's a positive indicator for our Construction business.

The Utility business, kind of a low single-digit growth kind of environment overall for the industry, but what Andy has talked about is some dynamics within that business that will drive top line growth that we're participating in fully and I would say benefiting more than our fair share based upon our work in those markets in the last couple of years. Finally, the really red number on the page is government spending. You heard it in Canada. Nobody's surprised by it in the U.S., and that's kind of the environment that we see today and kind of leading through the balance of 2013.

So what does that mean for 2014? If I just draw a perspective, if I showed you this chart for last year, it would've looked a little bit more balanced. What we see here is that there's a little bit more on the positive side of the equation, neutral to positive, less on the negative. Again, government deficits, part of the utility spending and we talked about the mining industry.

But on the left-hand side of the chart, you can see solid residential construction. We see that up 30% year-over-year in the first half of the year, and that's a leading indicator for nonresidential business as well as our growth in backlog. Some of the other variables as you look down the page. But what we see as we move into 2014 is a slightly more positive environment than what we've seen in 2013.

So how do we see this playing out at this point? What we see is for 2014 on the sales side, we believe our organic growth should be somewhere between 4% and 6% overall. As usual, and John spoke about a pipeline of acquisitions and bringing our leverage ratio back down within the range where we will continue to work that pipeline of acquisitions, we would anticipate 2 to 3 points of top line growth in 2014 coming from the acquisition part of the strategy for WESCO. So overall, 6% to 9% top line growth in that environment.

You look at the center part of the chart, and what we see is EPS in the range of $5.70 to $6.10. You see the range on this year, and if you do the math, that's effectively low double-digit EPS growth in 2014 on the top line growth that we just laid out.

Finally, we never forget about free cash flow bottom line. And as we always do, we're starting the year saying that our cash flow target is at least 80% of net income. And I'll remind you that in good times and bad, we have performed well against that in the last few years, and we would expect that to be north of 80%.

Finally, you've heard a lot about the business. We talk a lot about shareholder return. What do we do on a daily basis? What we do on a daily basis is to drive good quality operating profit improvement because we know as we do that as a team, we continue to drive the share price up and that's actually good for all of us. Okay.

So with that, I will turn it over to John for the final session of the day.

John J. Engel

Well, thank you, Ken, and great job. I want to recognize the entire WESCO team. You did a terrific job this afternoon.

We have a clear vision. We have a winning strategy. We have a proven business model, and I think as you could see today, a passionate and committed management team. We remain focused, singularly focused on strengthening our business through organic growth initiatives and accretive acquisitions. We're in the best shape we've ever been as a company. And for investors, we think we provide excellent opportunities for continued and consistent shareholder value creation.

So with that, we're going to open it up for Q&A. Dan has the mic. He'll go around. And if you could please, this is being webcast and recorded, so if you can state your name and who you're with, I would appreciate it.

Question-and-Answer Session

Deane M. Dray - Citigroup Inc, Research Division

It's Deane Dray with Citi Research. A couple questions for John. A couple of years ago, you talked about a path for operating margins to 8%. Maybe post this, what are the milestones, how much of that is mix, how much of that is expanding product areas, the One WESCO and take us to the path and maybe some color on the timing? And then a couple questions for Ken.

John J. Engel

So we remain committed to the 8% operating margin goal, Deane. What we've said consistently is we needed to first climb our way back to 6%. I think that's clearly within our sight at this point. If you look at what's driven that, we've outperformed our top line growth goals, right, and what we laid out 3 years ago on our first Investor Day. And we're making good progress on our gross margin expansion. And we, as part of our core strategy that we launched our growth strategy 4 years ago, we said explicitly that we are going to look at increasing the investments in the business. So we're still getting good operating cost leverage, but we have stepped up that investment in the form of salespeople. And before that point, we have not opened a single new branch. So opening new branches, new distribution centers, and we've obviously been much more aggressive with acquisitions. So if you look at -- put the last 4 years into context, better on the top line than we had laid out as our financial targets, good progress on gross margins, still getting operating cost leverage, but we use the opportunity to increase the investment in the business. We think that equation works. We've significantly strengthened the enterprise, and we've never felt better about the company. Going forward, our long-term strategic framework and how we think about our financial targets remains unchanged. We shared so [ph] getting to 8% operating margin as the next big target. We'd like to have a nice balanced contribution between gross margin expansion and operating cost leverage. We're at 20.9% gross margin now, getting to 22%. That's 110 basis points. That takes us into the 7-plus percent up margin range alone without operating cost leverage. So we want to continue to maintain that balanced equation. We'd like to continue to plow investments in the business. We still have as our notional target 50% operating profit pull-through on the core business. That remains unchanged. And I think we've got greater confidence than ever when we look backwards at the last 4 years. When you look at the market backdrop, and I made these comments in the opening, we didn't have the benefit of a lot of tailwinds. In Industrial, we had a -- we clearly had an inventory rebuild cycle, and this has been an industrial-led recovery. So that clearly helped us and a few others. But when you look at the AIM market growth in Utility, we've not benefited from that. We're doing exceptionally well by executing our strategy, but it's not driven by end market tailwinds. And we have yet to see the non-resi recovery kick in. We're encouraged by resi. It's a good leading indicator, but we've yet to see non-resi. So I think we've got to step back, look at the last 4 years, feel good about that the strategy is working. That context remains in place going forward, and it's our hope that we begin to see some tailwinds from the non-resi recovery and that would represent, hopefully, a nice accelerant.

Deane M. Dray - Citigroup Inc, Research Division

And then just a quick question for Ken. One of the metrics you introduced last year was return on invested capital. If you could post us on progress to date and where you expect to be in the next couple of years?

Kenneth S. Parks

Right. Progress to date is that we've been impacted...

John J. Engel

Can we turn on the mics on the tables now? I know you had them off.

Kenneth S. Parks

I think I'm on. So last year, we put out a target that said 15% ROIC by the end of 2015. That was prior to the EECOL acquisition. We did the EECOL acquisition at the end of last year. And for obvious reasons, that's the weight on the ROIC map in the short term. We'll continue to see that weight in the current year as it rolls through the full year impact. What I would tell you is that the 15% ROIC is still our target. It is obviously a little bit further out in 2015, but we will continue to be -- we will begin to track positively against that metric as we finish out 2013.

Joshua C. Pokrzywinski - MKM Partners LLC, Research Division

It's Joshua Pokrzywinski from MKM Partners. Just to follow up to Deane's question on the margin trajectory mix a couple of years. You didn't really touch on it in your response, but I have to think that pricing is a big part of that, that earnings hydraulic. And obviously, that's tapered off for you -- from you recently. Can you maybe walk us through how much of that is, is weak inbound pricing from suppliers from weak commodity prices versus weak outbound pricing just from competitive pressures and having to bid to win jobs and kind of what are the pressure points that will alleviate those into 2014?

John J. Engel

Yes. We're in the middle of that vise quite frankly. And so suppliers are consistently trying to push pricing increases through and through us. And the challenge we have, as any other distributor has and particularly one that does sell 1 million different SKUs, is figuring out how to strategically work and leverage and bundle those price increases in a way that we can manage them through the customers. So that's the world we live in. It's challenging. I will tell you that we still see capacity being greater than demand throughout the value chain overall. So the competitive pricing dynamic is still very challenging, Josh, and we're not seeing broad-based inflation on the input side of the equation. So our pricing has been less than 2%, 1% or less, and this last quarter was somewhat flattish. So that's the current market we're in. I would expect at some point, inflation will kick back in, right. It's a question of when it kicks back in, and that will move -- obviously, it has to be managed and moved through the whole value chain. I know it's well understood and acknowledged that inflation's good for distribution. But once that statement's made, it's really tough to manage it through and push it through the customers. But overall, inflation is good for distribution. So I mean, our view is that inflation is going to begin to tick up, but we don't see it being a major tick-up in the short-term planning horizon through the balance of this year. We'll give more commentary in our views for 2014 as we get closer to 2014.

Joshua C. Pokrzywinski - MKM Partners LLC, Research Division

And then just a follow-up question. You talked a little bit, a week ago, that [indiscernible] private label is an opportunity for a handful of years now. Is there leaning [ph] closer to seeing WESCO private labeling, where are you at in the process and I guess what have been the chokepoint so far?

John J. Engel

So we do private label today. We've never really disclosed the numbers. I think we may have ballpark-ed it over the years. It's not something that we've chosen to fully expose yet, Josh, to be honest with you. But we -- and via a number of our acquisitions that we've done, particularly over the ones we've done since the middle of 2010, a few of those have brought nice private label products as part of their portfolio. Two I'll cite specifically are TVC Communications and Conney. And so we got higher gross margin characteristics associated with those products. We really like what we see. And so it is still part of the how, it's one of the levers that Steve kind of outlined in the margin expansion plan. I would say we're still in the early days though, to be fair and objective about it, and so that represents significant future upside as we move out and into coming years. I think we've got -- we feel a lot better about understanding the dynamics there and how to manage that type of business. And so we'll be increasingly becoming more aggressive as we move forward in the future, but we've not put any specific targets down.

Sam Darkatsh - Raymond James & Associates, Inc., Research Division

Sam Darkatsh, Raymond James. Two questions. First off, specific to your industrial and nonresidential construction businesses, I think your largest supplier, Eaton, mentioned that their electrical market growth expectations for those particular verticals are up low single digits. And for your business, I believe, it's down mid single digits. Can you reconcile that specifically, understanding that with the Cooper acquisition for them, I thought it was supposed to bring you closer to Eaton and Cooper combined, if you could.

John J. Engel

So Sam, your comment is with respect to performance in the first half so far?

Sam Darkatsh - Raymond James & Associates, Inc., Research Division


John J. Engel

Not outlook, correct?

Sam Darkatsh - Raymond James & Associates, Inc., Research Division

Well, I believe Eaton's outlook was for the year. Your performance was below that for the first half. You are suggesting that the performance gets better in the second half, but it suggests a pretty significant ramp to get to those levels. And I would've thought that with the Cooper deal with them, you would've perhaps done a little better according to what...

John J. Engel

We've been very clear about what our Industrial -- what's driven our Industrial results for both the first and second quarter. And for us, if you remember, when we talk about Industrial, we're talking about 3 demand streams. We have MRO solutions that have a certain rhythm and cadence, we have OEM and then we have capital projects. So if we're serving an industrial customer direct and it's not through a contract or layer intermediary, we will treat that sales part of our Industrial end market and not Construction. And for us, we had some very large insignificant industrial capital projects in the first half of last year that we're not repeating. So think of that as a special cost driver for our first half results. We did cite, and maybe I'd ask Ken to comment, we're kind of building momentum in Industrial sequentially as we move from Q1 to Q2 in what still, I think, represents not a very robust industrial market overall. Capacity utilization flat, industrial production's growing, but it's a very small number, right? 1% plus or minus, 0.5 points or so. And so it's not a very robust industrial market. But we saw some nice momentum sequentially improve as we move through Q2, and we did cite our results on Conney in the second quarter being up 6-plus percent. So that's a good indication of more broad-based industrial. And relative to the Eaton-Cooper integration, there's been no significant positive nor negative. What do I mean by that? There hasn't been significant sales synergies that have resulted in our relationship since the acquisition closed, but there hasn't -- also has not been significant business lost or business being shifted. That's a very large acquisition that they did. There's a lot of integration, and we are joined at the hip in terms of strategically planning in how to jointly execute for our customers. So some terrific work we're doing with them. We -- they are our largest supplier, and we are their largest channel partner. So I feel really good about the partnership, Sam. But in terms of impact due to the acquisition positive or negative, I know that was some question that all of you have had, right, since this -- over the last year or so, it really hasn't moved the needle in either direction yet.

Sam Darkatsh - Raymond James & Associates, Inc., Research Division

And then real quick housekeeping if I could. With respect to the guidance for next year, the EPS guidance of $5.70 to $6.10, does that include prospective acquisitions or exclude prospective acquisitions, the 2% to 3% sales growth?

Kenneth S. Parks

That includes, includes. So it's based upon the organic and the acquisition top line combined.

Ryan Merkel - William Blair & Company L.L.C., Research Division

Ryan Merkel, William Blair. So I wanted to start with a question on the guidance, and I don't know who wants to take it. But it looks to me like the fall-through, the incremental margin looks a bit lower than I think all of us would've want it. So is that just conservatism? Or is there something on the margin side or something in the expense side that we need to be aware of?

John J. Engel

Ken, I'll let you handle it.

Kenneth S. Parks

There's nothing inherently going on in the expense side or the margin side that would tell you that it would be light. I will tell you that as we put guidance out, especially in this very early kind of time frame in August, we certainly want to be a little bit more conservative than we -- than airing on the other side to be too aggressive. I think that's probably the biggest variable.

John J. Engel

And the only thing I'd add, Ryan, is we're very early, right, in the Q in terms of stating formally and publicly what our outlook is for 2014. It has been our practice to do it in this meeting. We continue to do it, and we will continue to do it. But I think given what we saw in the first half and now what we're seeing in the second half, which has been reflected clearly in our full year outlook, that's the basis by which we're establishing this first set of financial targets or outlook for 2014. Hopefully, that helps...

Ryan Merkel - William Blair & Company L.L.C., Research Division

Understood. I appreciate the conservatism, of course. I think we all do in this room. But I want to ask a question on Canada. It's actually a 2-part question. So you updated us on July in terms of the total company performance, but I was also curious if we could give an update on Canada because I think with the flooding and the weather, it had started off pretty slow and just was wondering if there's any change in trend, now that you're fully through the month. And then the second part of my question is the $3 billion to $5 billion in damage. It's a big numbers there. Do I need to be changing my outlook for Canada next year? Is this a game changer? How should we think about how this could impact things?

John J. Engel

One of my objectives this year and I have -- I'm missing my objectives so far in the Q&A, was to help hand off some of these, and I'm going to actually start delivering on that. Get ready, Harald, okay. So in terms of the first part of your question, Ryan, I'll handle that and then ask Harald to comment on just the opportunities and the outlook relative to the flood restoration. We did state in the earnings call that the challenges we saw in the latter part of the quarter in Canada extended into July at that point. And that's continued through the better part of July. So the results that Ken articulated for July, which you could take as equal to or better than June versus prior year, if you peel the covers or get underneath the covers on that, so to speak, it is -- the Canadian performance is very similar to June. Okay. And the U.S. performance and everything else rest of the world, incrementally better. So I think you've heard the comment used several times, the momentum's improving. It's not improving in a step function fashion. But I think as we're moving forward each day, each week, we're seeing some -- an improving momentum vector. And that's the answer on Canada, thus far, okay.

Kenneth S. Parks

Harald, in terms of opportunities, I think we outlined kind of what you saw on the market, but Ryan's question relative to flood restoration and how we will participate and maybe the time phasing of that, if you could color?

Harald Henze

Yes, I think -- I mean, there is the immediate things, and we've geared up significantly, both on the EECOL side and on the WESCO side. We're putting a lot of the inventory that we expect to happen -- that's going to be used short-term and make sure we're not missing those opportunities and if you look at -- think back to the map and all the blue dots and red dots that we have in Alberta, in Southern Alberta, we're very well positioned to service wherever the damages have been. To put a dollar amount on, today, I think, would be difficult. It's also difficult trying to give sense of the timing, just how far out it is. There is a -- and when we look at the $3.5 billion, how much of that is damage to infrastructure and residential and commercial buildings and all of those and others that tends to be less of electrical bridges and rail systems and washouts, and the entire river systems has washed out parks and golf courses, all kinds of things. So we -- I think we're very confident about a significant uplift in our position to take advantage of it. But to quantify it, I'm not comfortable going there at this stage yet.

John J. Engel

I think the one thing that you should take away is we have now with EECOL. So WESCO and EECOL together, an excellent market position in Alberta.

Kenneth S. Parks


John J. Engel


Martin A. Sankey - Neuberger Berman Group LLC

Martin Sankey, Neuberger Berman. If we -- if you could go back over the last couple of years in the construction channel, while WESCO sharply outperformed the industry in 2009, 2010, 2011, 2012. It seems like the company in the construction channel seems to have stopped outperforming the underlying markets in 2013. So could you sort of go through what you saw happening in the 2000s, the last couple of years and then if anything, what seems to be changing for WESCO?

John J. Engel

Let me ask Steve to take that one.

Stephen A. Van Oss

Sure, Martin. I think you kind of answered it -- is this thing working -- you kind of answered that as you asked the question. If you look at 2010, we were up high-single digits. The market itself was down 13% to 15%. We outperformed it in a meaningful way. We did that again in the subsequent year when we were up high-single digits, again, with the market being down. So we got 3 years where we significantly outperformed the market, and these are all projects-based opportunities, they're not annual contracts that repeat. And so you got yourself in a position to where if we are now more at the market level or slightly below we're still well above it when you look at it on a multi-year standpoint. And we also have a position in this area where our book-to-bill ratio has been positive all throughout 2013, and we are now starting to see our backlog improve along with that. So I would expect to see some improvement in the second half of the year on a total overall basis. But I would tell you if you look at the aggregate dollar amount of our construction sales and you compare that with the trend line and what the total market would do, has been done, we are up on a 3-year or on a 4-year basis.

John J. Engel

The only other comment Martin to add on to that, after acquiring CSC and doing some other organic investments, when you look at our total -- at a company level, our total construction mix, and I'm going to round it for 1/3 of our sales, upwards of close to almost 10%, but its high single-digit percentage point of that mix on a total company basis is communications and security. And if you look at that performance over the last couple of years, we went through an internal IT conversion, which that was a self-imposed issue, right, which ended up pulling down our sales a bit. And then the Datacom market, has been challenged a bit for I'd say, 4 quarters plus in a row. Now it's beginning, we're seeing a nice positive momentum now, but I think that, that was part of it that helped pull it down.

Martin A. Sankey - Neuberger Berman Group LLC

Okay, so what you are -- if I'm interpreting this correctly, what you're saying is that you see the current lack of market outgrowth as a pause due to project timing? And that you would expect as the backlog starts coming through, you'll start to -- the company will start to outperform the underlying markets again?

Stephen A. Van Oss

Yes, I'll maybe restate that a little bit. I'd say, from a share perspective over that period of time, we've gained market share in what you've seen as an increase on that with the difficult comp in the first half of 2013 after almost 3 years of significantly outperforming that. So just again on a share basis, we're extremely comfortable what we put in place. The investments we've been making in our Global Accounts group drive a lot of those capital projects. We had a significant, I'd call it an abnormal comparison first half of 2012 being extremely strong with industrial capital projects that were being taken by WESCO with our Global Accounts and our other business position that were comped against in the first half. And then I would agree with your statement with our backlog build, we should be seeing that being released in the latter part of 2013, moving into the first 2 quarters of 2014.

John J. Engel

I think we're clearly -- our view is residential construction market is clearly in recovery. It has historically led non-resi. So that's a good indicator. The other early warning indicators ABI, et cetera, are positive. What about specifically for WESCO? We've been running above 1.0 book-to-bill ratio every month this year. We're building backlog sequentially. As Ken mentioned through the second quarter, we were up 5% at the end of Q2 versus December. And we just grew back backlog another 2 percentage points in July. So these are good leading indicators. I think the question mark remains and no one knows, and we're not making a specific call on this now, in terms of what the time phasing is going to be of the nonresi recovery. Historically, there's been good linkage in over multiple cycles in the U.S. in particular. If you go back multiple economic cycles, there is a clear view of resi recovers in a certain way, here's how nonresi follows. We would hope that, that is the case, but we're not seeing that as of yet, right. It's kind of -- it's more of a protracted recovery. Nonresidential is down this year in terms of starts we put in place. So it still has not kicked in the recovery. When it does, it represents an upside, I think, for all of us that play in that segment.

Martin A. Sankey - Neuberger Berman Group LLC

Last question that I have is pull-through margin. The company has targeted in the past, say, 50%-plus pull-through margin. Given the increase, the investment activity, we saw the changes in mix that the company is -- has with the EECOL and Datacom, et cetera, does that -- is that target still operative or once we get past the source [ph] closed by the EECOL acquisition?

John J. Engel


Kenneth S. Parks

Yes. As you said, it's hard to maintain it at that level as the core business is under pressure on the top line so declining a bit. But that is still our target. And when you look at the outlook for 2014, that's built into our outlook then and into our long-term modeling.

John J. Engel

And to put in a kind of a fine point on that because I think part of your question when EECOL -- EECOL comes out, it becomes part of our base, right, at the end of this year. So we kick it in next year if we didn't do any additional acquisition. At the framework that Ken outlined, in terms of the base business growth. That's right in our power alley to deliver 50-plus percent pull-through. We've done that over a long period of time. So absolutely, yes. Right?

Kenneth S. Parks

At a 2%, 1% flat organic growth, we can't deliver 50% pull-through, unless we take significant cost structure out, unless we're dramatically expanding gross margins at a much faster rate than we have been.

Matt Duncan - Stephens Inc., Research Division

I'm Matt Duncan with Stephens. Just really quick following up on Sam's earlier question on the piece of the EPS guide that were tieback into acquisitions, can you break that out for us?

Kenneth S. Parks

At this point, I'll reiterate that acquisitions are in there. I would tell you that they're all anticipated the 2 to 3 points of top line growth is anticipated to be accretive. I wouldn't want to put much around as far as numbers around it. It's probably a few pennies or so. We're really looking at the continuation of the initiatives that we have in place in the last few years as far as margin expansion. You saw the organic pickup to something that's a little bit more healthy when it comes to what Martin was talking about on pull-through and maintaining, as we always do, cost leverage.

Matt Duncan - Stephens Inc., Research Division

Okay. And then 2 final ones real quick. On your debt leverage, where would you expect that to be by year end this year? You're roughly right at the high end of the range right now or you think you can get by the end of the year?

Kenneth S. Parks

You can kind of look at it this way, if you want to use a kind of a thumb approach. You can see that we're taking down 20 to 30 basis points each quarter. So that would put you somewhere in the 3-ish range by the end of the year

John J. Engel

0.2 to 0.3 turns.

John J. Engel

I'm sorry, 0.2 to 0.3 turns. That's just on focusing on debt reduction -- cash to debt reduction.

Matt Duncan - Stephens Inc., Research Division

Okay. And then following up on that, obviously, gets you to a point where you can move forward with some of the deals you would have in the pipeline, right now, as you guys think about what product categories you like outside electrically. You obviously added safety in a bigger way last year. What other areas can we expect you to focus on going forward?

John J. Engel

Yes, and I think, we've been very consistent with that Matt. We've used that 1 page as the MRO ski slope, and we've highlighted 4 verticals in that. And prior to Conney, we had not done an acquisition in the safety space, right? So Conney was the first safety that happens to be a well-run professional industrial MRO distribution model. If we have to answer it, I think, if you look at the last 8 that we've done, past this prologue. So it will be -- if we get the opportunity to really strengthen our core electrical base, which is our deep roots, like what EECOL did for us. If we have the opportunity to do that in a particular region or a particular market, we will do that. So we're not -- we still look at high attractive electrical targets, but if you look at these other acquisitions, it allowed us to -- we expand in essentially our product and service category, right? We added new capabilities and supplier relationship that we can now plow through our multi-site sales and service models for customers, whether it's Global Accounts, Integrated Supply or the like, right? So I think what you will see in the future, in the short to midterm is more of the same. Now if we can pick up some international content along the way, terrific. We did that with TVC. That's not why we did the deal, right. We did it to strengthen our communications and security offering and expand in the broadband, but it gave us $80 million plus in sales in Central and Latin America. EECOL, why did we do it? Once in a career opportunity to create a leadership position in a very attractive Canadian market, that was our strategic rationale, fundamentally. But it gave us a terrific position in a number of countries in South America, first and foremost, Chile and Peru, with outstanding set of capabilities and value proposition. Now we can use that as the base to build off of, which is the strategy that are less outlined.

John Anthony Baliotti - Janney Montgomery Scott LLC, Research Division

John Baliotti with Janney Capital Markets. John, you announced a couple of contract wins in the second quarter earnings release, and I'm curious are there identifiable catalysts, is there something in common about those that you could kind of think about as applied to future contracts wins or as you approach some bids for future contracts?

John J. Engel

Sorry, the last part of it John?

John Anthony Baliotti - Janney Montgomery Scott LLC, Research Division

The catalyst for those contracts wins to kind of think about those [indiscernible] moving on.

John J. Engel

Let's do this. I'll ask Andy to comment on that question with respect to utility. I'd ask David to comment on communications and security and Kevin on Global Accounts. So we announced recently, a few very large significant wins. And so in terms -- let me -- I'll paraphrase this, to see if I have it right, John. In terms of what the real customer need was the application need, how we we're able to win that opportunity. Do we see that being a catalyst for other customer opportunities, as we are moving through the third and fourth quarter, I think is your question? Is that your question.

John Anthony Baliotti - Janney Montgomery Scott LLC, Research Division

Yes, it is.

John J. Engel

So why don't we touch on for Utility. Andy, Utility; David, communications and security portfolio; and Kevin, Integrated -- or Global Accounts, Integrated Supply, okay?

Andrew J. Bergdoll

On the Utility side, the answer is yes. If you go back to 2006, we talked quite a bit about the Duke Integrated Supply as being a foundational kind of business model transition that then value team in utility consolidation of spend, helping utilities managed their spend, driving supply-chain productivity. That's really been in the team that's evolved and we've developed more tools and more robust capabilities to implement those. But it's really an extension of that. So -- and we see lots more of those opportunities on the market.

David S. Bemoras

And I would just reiterate, the customers that we're talking to, especially those that are building data centers globally and those that are actually -- there's one particular company, which we worked that we've signed an agreement with that is deploying materials for federal government agencies throughout the globe all of these companies want to bring more simplicity, less complexity to the supply chain and do more with less. And as I mentioned in my presentation, there's very few companies today in the U.S. that have the ability to collapse as many product categories in the supply chain as WESCO does. And the infrastructure we've built internationally, what we're seeing in particular was the technology companies that are building data centers across the globe. What we're seeing is the lightbulb go off when they see how many product categories we can address. Just how much pain they're having, managing those categories across way too many suppliers, and we come in and the value proposition resonates. Other competitors we have in the data communications space, either don't have an international footprint or don't have the ability to address all the product categories that we can. So it puts us in a real nice sweet spot so to speak, right, to be able to communicate something. And this is really a top of line issue for these customers. And the team that Kevin has and his organization is very well equipped to deliver the message and the implementation resources that we have both here in North America and now, across the globe to create a high degree of credibility that we can actually deliver what we're doing.

Kevin Kerby

And then from a Global Accounts and Integrated Supply perspective, look, it's our calling card. The win that I talked about today which is $18 billion refining a pipeline company, we always use that as a catalyst for future wins. Word gets around in the supply chain when we have this signature wins, whether it's in a refining area, or whether it's in a technology area and we're always leveraging that. So we see those wins and we use them effectively to catalyze future success.

John J. Engel

I don't know if we've ever stated it this way, but we won Duke 7 years ago. And the reality is -- and we did talk about when we want it, we were applying in a variation of our Integrated Supply model to utility customer. No one else had done that to that point. We actually took the Duke personnel through, at that time, we called it and Bruckner, now WESCO integrated supply. It's something where we had implemented Bruckner and industrial factories. And said, look, this can be done in a generation plant, your bucket trucks or just like a bin stock location on the factory floor. We can replenish those on a daily, real-time basis, and we can serve you with an integrated supply model. Duke was the first 7 years ago. And now, the benefits we're getting and the growth we're seeing in the utility business is variations of that integration -- Integrated Supply model that we implemented in Duke. There's different and unique aspects sometimes for a particular customers because they have unique application needs. But the benefits we're seeing in the ability to drag double-digit growth in utility when the underlying market is not growing at that, goes right back to the strategy, I think, where we invested, how we executed with our customer. David alluded to it. We think there's recent win in the communication space, has that potential. And we're having conversations with other Fortune X companies that know that company, and we're in the early days, we're in the first -- we're less than 1 year in the implementation. Duke took 3 to 4 years to really get that model mature. I want to make it clear that, again, I think that signature win in Duke was transformational for utility. What David cited as the example today in the communications and security space, we think had that potential. That's the way Kevin and his team attack Global Account opportunities and Integrated Supply opportunities. But the other thing I've mentioned is this chart that Steve showed, that checkerboard chart, very, very powerful. We picked a customer that we had good penetration with. And so many of our customers don't have that good penetration. And you can say, why is that the case. Well, the market has been very fragmented and part of it, there's not a lot of folks doing what we're doing in trying to even address it that way. So we're in the early days of One WESCO. We think there's tremendous upside to basically fill out this checkerboard for our multi-site customers. There is kind of a visual, and that is -- that's execution. Now if the customer is more of an integrated operating company, that resonates very well. Okay, because you may be serving a couple of plant locations with 80% of your product categories. If they see the value, they're going to support stepping and repeating that across all their other locations. There are some of our customers that are more like holding companies, right, where individual divisions actually compete, they don't collaborate, there's no standardization driven in terms of supply base for any particular commodity category, and that will be a tougher path but still, we have those in our customer base, and we go at it and try to nip away at it. But I think that's why, I think, we're asking each of them to talk about that. And does that help, John? I kind of put it in context, the driver, the catalyst is our customers are consolidating and their supply chains, they want a smaller number of larger suppliers, and they're outsourcing functions that they traditionally held. That is a wholesale driven change in the utility industry because of the aging workforce, with IOUs, they're outsourcing what's not core, but we're seeing that in these other customer verticals as well.

John Anthony Baliotti - Janney Montgomery Scott LLC, Research Division

So as these guys continue win contracts. Maybe a question for Steve, how -- where do you think revenues -- how do you feel in terms of leverage on the headcount, the footprint, do you have a sense of where revenues would have to be before you'd feel the need for any kind of a significant increase in footprint or headcount?

Stephen A. Van Oss

I think, if you go back and look to what we've done over the last 4 or 5 years where you saw what the EBIT margin pull-through was in terms of 5x factor on Ken's chart and my chart, and what we are able to do with that 2x on the sales and 1.5x on headcount, I think we will continue to see that. When we put together, and we'll be doing this shortly. We lay out our construct for the planning horizon for the next year and the overall, we'll sit with each one of the operating leaders. We'll talk about what their environment is, we'd look at what was in their backlog and any new significant wins to determine whether we need to do something organically to support that. And as John mentioned, we've been opening up new facilities, Harald has opened up a few, and we've been pointing that portion, although we look at acquisitions to drive the local market relevance. But for the most part, I'd tell you, we have significant upside with the LEAN and the precision-based selling, because the big piece of what we do is all around outside and inside sales support to drive pretty significant top line gains with little to no investment in people, in the short run. In the longer run, you'll see that kind of 1.5 to 2.0 type of return. But I think we have, particularly with what we've been -- with the work we've been doing with this customer stratification and a better focus on productivity, we've kind of got a period of time, maybe for the next year or 2 where we'll be able to get some outside gain on productivity in that area.

Unknown Analyst

Would you flesh out your thinking on the international expansion? Do you -- except for Canada, do you view this as a land grab where you really need to get a position? What are your expectations as far as the individual country operations? Are you willing to invest, having losses in some of those countries for a certain period of time? And what is that period of time? Just kind of, overall, what's your strategy?

John J. Engel

The framework. Les?

Les Kebler

Well, in general, the strategy is to identify target market to meet our criteria and we have a 10-step process to go through that. So we really want to be in the markets that meet our value proposition. And then once we've identified the country that needs -- fits with our value proposition, we look for a triggering event, and that could be a customer engagement, a concentration of project activity, something that mitigates the risk of entry. So we prefer to go to that strategy. That's what we view as, based on our footprint today, we have many, many opportunities for expansion. So you'll see our growth over the last 5 years, that will continue, but we have plenty of opportunities to expand without kind of having a broad base scatter-gun approach to the process.

John J. Engel

But maybe to -- and I made the comment that our front and backyard, the Americas, still represent significant opportunity for us to take share and take share profitably. And to Les' point, we have significant opportunities outside the U.S. and Canada, even Mexico for that matter. And we're throttling our own growth. We have been. We still are, and so we have a relatively high hurdle rate. We want them -- we would like them to turn into black operations in year 1, as it has been in every case, pretty close, if not exactly within the first year. And we know we're somewhat shortchanging our growth prospects but the reality is that if we will chase that at this and ended up not prioritizing the appropriate resources and investments in a large fragmented market that still exists, principally in the U.S., North America and now South America, we would absolutely undermine the best -- the biggest lever to our value creations. So with that said, our supplier partners are global. It is a global supply chain. And so we need to be global, both on the supplier side of our value chain and the customer side. I think we've been thoughtful. We haven't been overly aggressive. International always made money, right? It's always been profitable. We haven't overinvested, we're okay. So okay, if doesn't make for a year. We don't buy into that philosophy. So I just -- but I think now we're in a point where we have some more critical mass and scale in certain countries. We can even be more thoughtful and incrementally more aggressive. So in South America, we can absolutely be incrementally more aggressive now that we have EECOL. In Mexico, we can be incrementally more aggressive because we've been there for a decade. It's under Les. We understand that market. There's some very nice demand drivers in Mexico in terms of what customers and businesses moving into Mexico to serve the U.S. and North American markets. So once we have enough scale, we can be more aggressive incrementally, but we're not overdriving that and taking our eye off the ball. Hopefully, that helps with the answer in U.S. and Canada.

Matthew Schon McCall - BB&T Capital Markets, Research Division

John, it's Matt McCall, BB&T Capital Markets, you mentioned the investment spending. I think you brought -- or you mentioned specifically people branches, inventory, DC [ph]. I didn't hear any numbers behind that. I don't know if you've given that in the past, kind of what's the breakdown of the growth rates have been, and I don't know if you're willing to give the numbers but any detail there would be helpful. And then when you talk about '14, what's the assumed investment level maybe relative to '13, and how does that break out people branches DC [ph] inventory.

John J. Engel


Kenneth S. Parks

Okay. So the first thing I would tell you, we haven't broken it out specifically as far as the investment dollars for those specific initiatives. But I would remind you that what we did say in the first and second quarter is we've been making those investments while holding our core SG&A flat and, in fact, in the second quarter, driving it down about $3 million. So there's dollars behind those investment, but we're always cognizant of the fact that initiatives, such as LEAN that Steve talked to, our precision-based selling, we're able to kind of constantly look at additions where they're needed and look at other things in the background that we say, we may not need to have a person there anymore. We may not need to have this process there anymore. So we wouldn't want to break out the numbers specifically, but I will point you to overall SG&A and say, we're managing well within the envelope that we work with.

John J. Engel

And the only thing, maybe to help put it in the context, I think we said this a number of years ago. We don't really talk about it. We have 4 core for processes that are enterprise-wide, strategic planning, minimum of 3-year time horizon, annual operating planning process, talent management, which I alluded to today and the fourth is continuous improvement, which is our LEAN initiative, right. And so the operating leaders, as part as Steve's overall operation this year, we have our multi-year plans. It has investment laid in, certain top line margin, et cetera, right? But then we get to our annual operating plan process. That starts off with what was the 3-year trajectory and what was the next year? In that 3-year trajectory, right, as the starting point, and we go through that in every fall. And that's where we dial in, in much more detail, here is this specific investments for the following year. So hopefully, it helps us give a little context that are kind of a rhythm of our processes then.

Okay. Cocktails and hors d'oeuvres, hopefully you can stay and continue to engage. Thank you very much for your support, and thanks for spending time with us today. I appreciate it.

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