WESCO International's 2011 Annual Investor Day - Event Transcript

WESCO International, Inc ( WCC)

Q3 2010 Earnings Call

August 09, 2011 1:00 pm ET


Dan Brailer, VP, Treasurer, Legal and IR

John Engel - President & CEO

Steve Van Oss - SVP & COO

David Bemoras - VP, Operations

Andrea Hogan - VP, General Manager Northeast Region

Les Kebler - International Business

Andy Bergdoll - VP, Utitlity

Richard Heyse - VP & CFO


Dan Brailer

Good afternoon. Welcome to the WESCO International Investor Day. My name is Dan Brailer and I am the Vice President of Investor Relations and Treasurer. On behalf of the entire WESCO management team I would like to thank you for being with us. We know your time is valuable and given the market volatility it’s especially gratifying for you to spend time with us today. And we thank you. Additionally without naming names, we know of a couple of you who have taken time from your family vacations to be with us today. And for that we thank you.

Before we get started I would like to address a few housekeeping matters. On the second page in the presentation, you’ll find the required Safe Harbor Statement pertaining to the presentation in discussion today. Many of the statements made today are forward-looking statements which involve risks and uncertainties and actual results may differ from the forward-looking statements.

Secondly, please turn all blackberries and cell phones to the silent mode. We thank you for that courtesy. We have provided to each of you there at your seats a WESCO pen to thank you for attending. These pens have a 2 GB USB memory stick and embedded downloaded on to the stick is today’s presentation. So please take this and think of WESCO as you are writing out orders.

Unidentified Company Representative

Many orders?

Dan Brailer

Many orders. Finally, safety is very important to us at WESCO. And in the unlikely event of an emergency I would direct your attention to the exit to your right and directly behind you. This is our second annual Investor Day and we’re very pleased to be with you. Today you will hear from John Engel our Chairman, President, and Chief Executive Officer; Steve Van Oss, our Senior Vice President and Chief Operating Officer; Richard Heyse, our Vice President and Chief Financial Officer. You’ll also be hearing from four business leaders who will discuss certain end markets and products categories and our strategies to deliver above market growth. David Bemoras, who was here last year will update you on our communications and security business, Andrea Hogan who will provide insight into our lighting and sustainability program. Les Kebler will highlight our international business and Andy Bergdoll will review the utility business. Also we are very pleased to have with us today three other managers from WESCO. I would ask them to be standing and be recognize as I call their name and they are seated in the rear of the room.

Diane Lazzaris, our Vice President and general counsel, Kim Windrow our Vice President of human resources and Harold Henze our group Vice President and General Manager of our Canadian operations. We would ask that you hold your questions until the end of the program when John will host the Q&A session. But we do look forward to your questions and your insights. We will be hosting a cocktail reception in the next room starting at the conclusion of our Q&A session with dinner beginning at 6:00 p.m. If you have not signed up for the dinner at the break at 2:45, please see me back and we would be delighted to have you join us for dinner this evening. And dinner will be just in the adjoining room. Please remove all belongings at the conclusion of the Q&A today as this room is reserved by another group and so we will have to remove all of our belongings and take them into the room for dinner.

Finally, we would like to leave you with three messages to take away from today’s meeting. One, we are investing in our business to drive above market growth. Two, we are consistently executing our strategy and three, we are generating outstanding financial results. It is now my pleasure to introduce you to John Engel. John?

John Engel

Thank you Dan. Good afternoon everyone and welcome to our 2011 Investor Day. Dan introduced members of our management team. I would like to take a moment to introduce one of the members of the WESCO Board of Directors. And that’s Jamie Singleton. Jamie, please stand. I want to thank Jamie and the entire WESCO Board for supporting the investments in our business and our growth plans. I think we are going to share with you today a plan that shows what we’ve done versus what we said we were going to do over the last two years and we will give an outlook on where we are going and the Board support has been terrific and Jamie, thank you very much again.

Let me start out by addressing the recent market volatility and our WESCO stock price. We are focused on what we can control. And that’s our execution. We have been significantly outperforming our end markets over the last six quarters and delivering results that are substantially above the targets that we outlined in our Investor Day, this meeting one year ago. This performance has been against a very challenging economic backdrop. It’s been a low growth economic backdrop and it includes some endmarkets that have been particularly challenging such as construction.

A year ago, when we provided an outlook on what the end of 2010 and 2011 looked like, we did not anticipate a GDP below 2% in the first half of 2011. We do not. We anticipated a more robust economy. We did not anticipate construction markets, end markets that were down high single to low double digits in the first half of this year. So, clearly the economy has been more challenging than what we anticipated a year ago and I have to say though when you look at our performance, particularly over the last six quarters, it shows what WESCO can do, it shows the performance strength of today’s WESCO. Today’s WESCO with our broader and stronger portfolio with our more consistent and disciplined execution and with our talented management team, we’re delivering very strong financial results and we are doing what we said we would do.

Our strategies working and our plan, our plan as it was last year and as it today is to continue to out perform the market. And we’re very pleased that you took time out of your busy schedule to be here today and it is our intention that we’re going to spend the rest of today reviewing that plan with you.

So now let’s moves to the agenda if we could and take look at the binders that are in front of you, you’ll see a detailed agenda. We’re going to walk through that, we’ve going a break plan mid-afternoon 15, 20 minute break. We do have an awful lot of materials to get through. As Dan said you got a hard copy in front and you have a soft copy on your memory sticks.

On the inside front cover of the binder I’d highlight for you a brochure that outlines one WESCO. What it means and it’s really from the lens or the eyes of the customer. So it represents the qualities and attributes of WESCO and it’s really our customer value proposition. So I’d encourage you to take some time and go through that at your leisure. In the back hand side cover, is what we call our one WESCO, our LEAN value creation solution. And these are the solutions that we take the customers, either the comprehensive array of supply chain solution that we offer to each of our customers. And this has proven to be a distinct competitive advantage for us versus our competition.

Outlined on this page is the agenda. I am going to start out by giving an update on our strategic plan and progress and talk about our business priorities and then I am going to give unlike last year give a kind of longer-term outlook of what our vision is and what our excellent value creation opportunity is for WESCO. I will then hand it to Steve Van Oss. Steve is going to spend some time going through our investments and our execution plan for our eight growth engines.

And new this year and we talked about it last year, he is going to spend substantial time reviewing what our gross margin expansion plans are. More detail than we've shared in the past. We will then move into our growth engines. You will recall for those of you that were here last year we drilled down on three different growth engines last year. We've got four this year. One we brought back but last year it was only data communications. Now it’s been renamed Communications & Security and it’s a much broader growth engine now that we've acquired TVC Communications in December of last year.

Our run rate on our Communications product and services portfolio is $1 billion plus and you will hear from David Bemoras on that. We’ve now jump ahead of Graybar and have a number two market position behind Anixter. That will be followed by Richard Heyse, our CFO. He will outline our latest expectations for 2011, what our results are and he will give you an early look at 2012. That's new for this year. We didn't do that last year, so we will give you our initial outlook and kind of the construct for how we think about 2012 and in addition we will provide a three year outlook on our financial targets and cash utilization priorities.

Last year we went through 2013 and Richard will show you that we are ahead of the pace of those targets that were set and this year we will extend that out through 2014. So let's move to the next page and let's talk about what progress we've made and how we are accomplishing our results versus our growth strategy. This was launched in the fall of 2009 and it was reviewed in detail in last year's Investor’s Day. So specifically upon the conclusion of the CEO succession plan in September of 2009 what have we done, we've defined and launched our eight growth engines.

We've initiated One WESCO, we've increased investments in our business, we've focused our execution on our top growth priorities, we've continued to aggressively develop our leaders and organizations. And we've increased the transparency of our company. This has all translated into excellent results, excellent results in the first half of 2011 that came on the heels of a very strong 2010.

As we move into the second half of 2011, we clearly have positive business momentum. Our investments are paying off, we are taking share, we've restarted our acquisition engine and we are producing very strong earnings growth. It’s our momentum and our track record of execution over the last six to eight quarters that gives us great confidence as we move through the second half of 2011.

Let's take a look at the numbers now in a little more detail. This is sales operating margin EPS and total shareholder return. On the top left is our sales results you can see that over the last four quarters we've had strong double digit sales growth, we've grown double digit sales on an aggregate roll up basis and also on an organic basis. More notably our backlog growth has exceeded our sales growth over those same four quarters. And as you will all recall our backlog is essentially project business. So it’s a good indicator, a good precursor for what portend for our construction projects going forward. The top right is our operating margin expansion, strong results. I think the takeaway is our operating model is working and our operational pullthrough is very strong.

And we had clearly talked about, that's kind of a foundational element of our business model and we are demonstrating that as move through this recovery period. Bottom left is EPS results and what we are demonstrating now I think is a track record of consistency in of meeting and beating expectations. And fundamentally on the bottom right is total shareholder return. The period that we measure here was the last six quarters. So it is from January of 2010 through the end of July 2011 and we’ve benchmarked against five key indices for us. We look at a lot more than that but I think for illustrative purposes today we picked two of the major industries, S&P 500 and Russell 2000. You can see we substantially outperformed them and three of our investment peers, Grainger, Fastenal and Anixter.

You have seen this chart before, this is our growth engines, our strategic calculation is on the left. These are our eight growth engines on the right. One is the business model or a series of business models, global accounts and integrated supply. We did a drilldown of that last year for our focused end market segments namely construction, government, utility and international and on the far right. Our major product and service categories, communications and security, lighting and sustainability and wire & cable.

As we’ve spoken about over the last few years, we are disproportionately investing in these eight areas and we continue to believe that they offer substantial opportunity for us to continue to drive and deliver above market sales growth.

On this page is the foundation of our strategic health is the operational excellence foundation. It’s comprised of these six key initiatives that are enterprise wide processes and functions and we execute these through a combination of LEAN and One WESCO and I will talk about One WESCO more in a few charts, but specifically what are these six? Marketing leadership, sales management, sourcing effectiveness, pricing effectiveness, service excellence and most importantly, talent management.

The first five Steve Van Oss will develop in his presentation and the four business leaders will touch upon the marketing sales and service elements. It’s the sixth one I want to spend a few moments on today. And we talked about this last year. We clearly are a people business and talent management for us is all about recruiting, retaining and developing the best and brightest.

We launched the talent management process in the spring of 2005, the origins of which are GE Session C process or Allied Signal’s MRI process. It had a profound effect on the company, clearly. The top 75% of our Top 100 leaders are new to the company on a new operating role over the last three to four years.

The ten senior managers who are here today, sitting in front of you and the three in the back in the last three to five years are new to the company, will have a fundamentally new or expanded operating roles. So, we absolutely are a people business. We continue to invest in our people. We’ve now launched something called WESCO University which will develop over the next decade which is a compilation of our training capabilities and programs. For us, the town equation is a key differentiator in our ability to serve customers and provide them value, sustainable value over the mid to long term.

Now, let’s shift to One WESCO. So, what is One WESCO. When we launched it and we talked about it briefly last year. We are going to develop it a little further in today’s Investor Day. We launched it in the beginning of last year and it’s gaining terrific momentum across the company. It’s all about integrating all our efforts, all our efforts around the customer.

If you are a supply chain company or you are a distributor, you have a choice to make or you are going to optimize the supplier or you are going to optimize the customer. We absolutely are optimizing the customer. And we are developing unique knowledge around the customers’ needs and application and we don’t exist with other suppliers and we have a terrific stable of supplier partnerships. But for us its all about the customer and One WESCO is about bringing all of our products and services and solutions to bear on every customer relationship be it an industrial customer and all their operations globally, be it a major construction contractor, be it a governmental agency, be it a major utility.

That’s what One WESCO is all about. On the right hand side of this chart is the progress we’ve made and it’s substantial over the last 18 months. We’ve deployed One WESCO branding. We’re fostering significant collaboration across various locations and our boundaries. Sales rep plus product specialists plus our teams in our various branches, there is still a highly localized nature to the markets that we compete in. And that’s true in distribution in the US, in Canada and globally. But we see a unique value add that we can bring by fostering this collaboration across locations and bringing our complete portfolio to bear on customers.

We’ve combined operations in some select geographies, we’re conducting specialized training as I mentioned using WESCO University. We’re extending core capabilities that were captive or resident in a certain part of the business across our entire business enterprise. One is the terrific capability for lead identification, generation and qualification. It’s a centralized high quality team that feels across our entire branch network. We’ve alluded to that in the past. It’s a capability we acquired when we acquired CSC and we built on that, added resources, added significant domain knowledge across the entire portfolio. And it is a big part of our demand generation and front end of our sales management process.

And we’ve adjusted some compensation and incentive plans to promote more team work across boundaries. So I think all in all, the results for us are very encouraging and net-net it is translating into some significant One WESCO I will call them customer wins.

David, Andrea Les and Andy will be a spotlighting number of these wins in their various presentations and I think you will begin to see the power of the broad portfolio that we have been able to bring more and more of that to bear on our customers needs, applications and operations.

This is a page that just outlines the breadth and depth of our portfolio and you can see it here. It’s extensive, coupled with our business models it gives us the opportunity to really provide that complete solution to our customers. I would encourage you if you haven’t had the chance already, either at the break or at the cocktail hour, to take a look at what we have displayed in the foyer.

We have a sampling of our product portfolio out in the foyer. Specifically we have a series of lighting products, two of the utility products, data and broadband communications products. We also have solar products this year and some general electrical products. So we tried to spotlight and highlight a number of the products that we will be drilling down in these various growth engine drilled outs.

Let’s shift to acquisitions. Our strategy hasn’t changed. Our strategy is to expand our product and service portfolio and to strengthen our position in the local market. As we've done and has been our practice historically, we've remained very focused on acquiring well-run companies with strong management teams. From our perspective today, the industry remains highly fragmented with many profitable niches. The analogy reviewed before is there is no Wal-Mart in any of our addressable wholesale distribution verticals today, highly fragmented, many opportunities.

In addition our global accounts and integrated supply business models have horizontal extension ability into other vertical and so we are able to bring some unique synergies to certain acquisition targets that some of our competitors cannot. We are a strategic buyer, make no mistake about it, we are an integrated operating company. And so when we acquired our company we look at getting those synergies as opposed to just the holding company in various individual pieces. So that's our approach.

Our acquisition engine was restarted, a little over a year ago, we've done three acquisitions since then for about a $350 million a year sales run rate. They have been terrific additions to our portfolio, they are meeting and exceeding expectations as we've discussed in our last earnings call. Our acquisition pipeline as we sit here today is at an all-time record level. How do we define record level? Number of targets, quality targets and total revenue size.

And in addition what's different today than in the past we have some dedicated resources working the acquisition pipeline. So I would tell you that our strategy of driving organic growth above the market supplemented by accretive acquisitions remains intact and it remains intact over the next three to five years of strategic planning horizon. This page outlines our business priorities and our financial objectives and our priorities are on the top left.

We've talked about and we may not have seen them laid out this succinctly. Put simply it’s the take share. Scale matters and distribution, so taking share matters. It’s to expand margins. It’s to continue to strengthen the portfolio, both through our organic investments and the acquisitions that we add to the portfolio and it’s to continue to build a high performance culture. On the bottom left is our long-term financial objectives. These have remained consistent and will remain consistent.

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