Mary Ann Bell - VP, IR John Engel - Chairman, President and CEO Dave Schulz - SVP and CFO.

Deane Dray - RBC Capital Markets Sam Darkatsh - Raymond James Ryan Merkel - William Blair Matt Duncan - Stephens Inc. Andrew Buscaglia - Credit Suisse Christopher Belfiore - UBS Steve Tusa - JP Morgan Luke Junk - Baird Steve Barger - KeyBanc Capital Markets Inc..

Good morning and welcome to the WESCO International Fourth Quarter and Full Year 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, today's event is being recorded.

At this time, I'd like from the conference over to Mary Ann Bell. Please go ahead..

Thank you, Brian and good morning ladies and gentlemen. Thank you for joining us for WESCO International conference call to review our fourth quarter and full year financial results. Joining me on today's call are John Engel, Chairman, President and CEO; and Dave Schulz, Senior Vice President and Chief Financial Officer.

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

The following presentation includes a discussion of certain non-GAAP financial measures. Information required by Regulation G of the Exchange Act with respect to such non-GAAP financial measures can be obtained via WESCO's website at wesco.com.

Means to access this conference call via webcast was disclosed in the press release and was posted on our corporate website. Replays of this conference call will be archived and available for the next seven days. And with that, I'll turn the call over to John Engel..

Thank you, Mary Ann. Good morning everyone. Thank you for joining us today. We're pleased to take you through our fourth quarter and full year 2017 results. In 2017, we focused the organization on returning to growth. Our results speak to our success against this important goal.

Execution of our growth initiatives, strengthening end markets, and positive pricing drove our results. As we move into 2018, our priority is on accelerating our growth and delivering margin expansion. Our sales momentum is expected to drive operating leverage as we execute our pricing sourcing and lean continues improvement initiatives.

Now, let's turn to page three. We posted double-digit sales growth including our highest organic growth rate since 2011. Organic sales were up 10% despite the unfavorable impact of a large utility contract we did not renew in 2016. All end markets and all geographies posted sales growth in the quarter.

Our sales were consistently strong each month in the quarter with October up 9%, November up 10% and December up 11%. Our backlog grew sequentially, which is counter to the typical seasonal decline and expanded to an all-time record level within the fourth quarter.

2018 is off to a very good start with a high single-digit sales growth rate in January and book-to-bill above 1.0. Before I turn the call over to Dave Schulz, I'm pleased to announce that we made a strong addition to the WESCO leadership team to help us deliver continued growth in margin expansion in 2018 and beyond.

Won [ph] [Indiscernible] joined us in January to lead our U.S. business. During his 16 years of Honeywell/Allied Signal in business and operations leadership roles, Won [ph] built a track record for delivering financial commitments with disciplined execution and effectively using cross-functional teams to drive growth in continuous improvement.

We look forward to introducing Won [ph] to you at future events. I'd like to thank Andrew Bergdoll for his strong contributions at WESCO and wish him every success in his future endeavor. With that, I will note on the call over to Dave to provide further details on our fourth quarter results and our outlook for 2018.

Dave?.

Thank you, John and good morning everyone. Now, let's turn to our end markets beginning on page four. Our Industrial sales were up 14% organically, including 12% growth in United States and 15% growth in Canada in local currency. This represents our fourth consecutive quarter of year-over-year improvement.

Our positive momentum is driven by broad-based growth across the U.S. and Canada and both year-over-year and sequential sales growth in most of our industrial market verticals, including oil and gas, metals and mining, OEM, and technology.

Our global accounts in integrated supply opportunity pipeline and our bidding activity levels are healthy, providing a positive setup for 2018. During the quarter, we renewed a multi-year contract to supply electrical MRO materials and support capital projects for upstream, midstream, and downstream operations of a large global oil and gas company.

Our industrial customers continued to pursue supply chain process improvements, cost savings, and supplier consolidation. While they remain focused on managing their costs, they continued to be optimistic about their future growth prospects and capital investment plans.

With our extensive portfolio of supply chain solutions, WESCO is helping our Industrial customers reduce their cost, operate more efficiently and better plan and manage their projects. Turning to page five. We posted a second consecutive quarter of growth in construction, with sales up 9% organically, including 7% growth in the U.S.

and 13% growth in Canada in local currency. Sales growth was broad based across the U.S. and Canada, resulting from increased business momentum with nonresidential construction and contractor customers. Sales to both industrial and commercial contractors grew again this quarter.

Backlog was up 20% year-over-year and 5% sequentially, providing a positive setup for 2018. We expect continued non-residential construction growth, supported by investment-friendly U.S.

tax reform and increasing Canadian infrastructure spending along with strong rebuilding in customer capital investments to drive productivity and support continued growth. This quarter, we were awarded a contract to provide electrical equipment for the renovation and expansion of a water treatment facility in Canada.

Moving to page six, our utility business repeated their exceptional third quarter performance. Fourth quarter sales were up 9% organically or up 18%, excluding the impact of the contract that we exited at the end of 2016.

Again this quarter, we drove above market growth and gain market share by expanding our relationships with investors-owned utility and public power customers. We also recorded approximately $50 million of utility sales to support natural disaster recovery efforts in Puerto Rico and California.

Over the past six years, we have established a track record of success and expanding our scope for products and services while creating value for our utility customers.

Going forward, WESCO is well-positioned to benefit from continued improvement in the construction market, higher industrial output, the increasing demand for renewable energy, and the continued consolidation trend within utility industry. Finally, turning to CIG on page seven. We delivered 5% organic growth in the quarter with the U.S.

up 5%, and Canada up 11% in local currency. Our technical expertise and supply chain solutions are driving growth with our technology customers, who rely at WESCO for data center, broadband, and cloud technology projects.

We're also seeing continued growth in LED lighting solutions including retrofits along with fiber-to-the-x deployments, broadband build outs and fiber in physical security for critical infrastructure protection. Government sales were also strong in the quarter and we're awarded a contract to provide a turnkey retrofit for a government installation.

Moving to page eight, our outlook for the fourth quarter sales growth was between 5% and 8%. During our call in December, we indicated October and November sales were up high single digits. In December, we saw continue momentum, exceeding our expectations as daily shipment volume remains steady through the end of the December holiday period.

Actual reported sales for the quarter were up 11% consisting of organic sales growth of 10% and favorable foreign exchange contributing another percentage point. As John said at the outset, growth was broad-based with all end markets and geographies posting year-over-year increases in the quarter.

This included 9% organic growth in the U.S., 13% in Canada, and 19% in international. Our backlog was up 20% versus last year on a constant currency basis and grew 5% sequentially from Q3 to Q4, which is contrary to typical seasonality.

Gross margin was 19.2% in the fourth quarter, down 20 basis points versus the prior year and down 10 basis point sequentially. Strong sales growth in the Construction and Utility end markets, which generally carry a lower gross margin rate, drove the gross margin decrease.

We continued to make progress in passing along inflation as we again recorded favorable pricing of approximately 2% in the fourth quarter. SG&A expenses were $285 million in the quarter, which was up 14% from last year and up 2% sequentially.

Versus prior year, the increase resulted from higher variable compensation expense over $2 million from a higher Canadian foreign exchange rate and approximately $1 million in additional technical sales and operational resources. We also incurred higher temporary labor costs and increased transportation expenses to support the increase in sales.

Sequentially, operating expense was also impacted by higher variable compensation and transportation costs. Operating margin was 4.1% at the midpoint of our outlook range, now 3.9% to 4.3%, down 50 basis points from last year and 40 basis point sequentially.

With the increase in sales and gross profit for the quarter, operating leverage was impacted by the plant cost of restoring variable compensation compared to the prior year. Adjusting the base period for this expense, we achieved a pull-through of incremental gross profit to EBIT of approximately 40% in Q4.

The effective tax rate for the quarter before reflecting the impact of the Tax Cuts and Jobs Act was 23.9%. This was below our outlook of approximately 27% and down 200 basis points from last year's adjusted effective tax rate of 26%.

The favorability was driven by discrete items and the mix of income before taxes by country, including relatively stronger performance outside the U.S. Turning to page nine, our latest outlook was for full year sales growth of 3% to 4%. Actual reported sales were up nearly 5%, reflecting a strong second half.

Full year gross margin was 19.3%, down 40 basis points from last year, principally due to unfavorable geographic mix from higher international sales along with the impact of a very competitive environment in the lag in passing through supplier inflation to customers in 2017.

SG&A expenses were $1.1 billion for the year, which was up 5% from last year, but flat as a percentage of sales.

Versus prior year, the increase resulted from higher variable compensation expense, increase labor and transportation cost to support higher sales volumes, and approximately $2 million in additional technical sales and operational resources.

Full year operating margin was 4.2%, at the midpoint of our outlook range of 4.1% to 4.3%, down 30 basis points from last year. The effective tax rate for the year excluding the impact of tax reform was 24.9%. This was below our outlook of approximately 26% and 310 basis points below last year's adjusted effective tax rate of 28%.

Similar to Q4, full year favorability was driven by discrete items and the mix of income before taxes by country. As reported, our 2017 effective tax rate was 35.4%. We recorded $26.4 million of provisional discrete tax expense in the fourth quarter due to the application of tax reform.

This included the impact of tax on foreign earnings, offset by the revaluation of deferred tax balances at the new corporate tax rate. Moving to the diluted EPS swap on page 10 and looking first at Q4. We reported adjusted diluted earnings per share of $1.03 in 2017, an increase of $0.07 versus the prior year.

This increase resulted from the favorable tax rate and a lower share count along with favorable foreign exchange. At the core operations line, favorable operating leverage was primarily offset by the restoration of variable compensation as we foreshadowed in our outlook.

For the full year 2017, we reported adjusted diluted EPS of $3.93 the high end of the original outlook range we provided investors in December 2016.

On an adjusted basis, this was an increase of $0.13 from the prior year, which excludes the impact of tax reform in 2017 and the non-tax impact of the early redemption of the 2029 convertible debenture in 2016. The increased EPS in 2017 versus prior year was primarily driven by a favorable tax rate and foreign exchange.

At the core operations line, favorable operating leverage was more than offset by the restoration of variable compensation I just referenced. There was no impact on EPS from share count for the full year. Turning to page 11, full year free cash flow was $128 million or 67% of net income before reflecting the non-cash impact of tax reform in 2017.

The decrease in pre-cash flow versus the prior year was driven by higher in receivables to support strong fourth quarter sales growth, including 11% of sales growth in the month of December.

Average accounts receivable days have remained relatively consistent the last two years and cash collections against our accounts receivable balance have been strong in January. Our debt leverage ratio was 3.5 times trailing 12 months EBITDA, back within our target leverage arranged in accordance with our expectations.

This reflects the repayment of approximately $60 million of debt in the fourth quarter. During the year, we repurchased $100 million of shares outstanding. Leverage net of cash was 3.2 times EBITDA. We maintained strong liquidity available cash borrowing capacity of $794 million at the end of the quarter.

Interest expense was $18 million in the fourth quarter and $69 million for the full year. Our weighted average borrowing rate was 4.2% for the quarter and 4.1% for the year consistent with historical averages. We believe our debt is appropriately balanced between fixed rates and variable rate instruments.

Capital expenditures were $6 million in the fourth quarter and $22 million year-to-date. WESCO has a history of generating strong free cash flow throughout the entire business cycle and we expect this to continue. Our capital allocation priorities agreement consistent.

The first priority is to invest cash in organic growth initiatives, in accretive acquisitions to strengthen and profitable to grow our business. Second, we targeted financial leverage ratio between two and 3.5 times EBITDA. Third, we return cash to shareholders through share repurchase under our three-year, $300 million share buyback authorization.

We are currently evaluating options to repatriate cash provided by the Tax Cuts and Jobs Act of 2017. We expect that our use of any repatriated cash will be consistent with our existing capital allocation priorities. Now, let's turn to our outlook for the first quarter and full year 2018 on slide 12.

For the full year, we are reaffirming the forecast that we provided in our 2018 outlook call on December 13th. This included sales growth in the range of 3% to 6% and operating margin between 4.2% and 4.6%. As a result of the Tax Cuts and Jobs Act of 2017, we expect a reduction in our full year effective tax rate to approximately 21% to 23%.

This increases the range of our diluted EPS outlook to approximately $4.40 to $4.90 on the same diluted count of about 47.5 million shares. We also reaffirm our expectation to generate free cash flow of more than 90% of net income.

For the first quarter, we are projecting sales growth to be in the range of 6% to 9% and operating margin of 3.5% to 3.8%. Operating expense will include a $2 million charge, resulting from a foreign currency devaluation that occurred in the beginning of 2018.

Additionally, the first two quarters of 2018 will reflect higher variable incentive compensation expense as described in our 2018 outlook call. We expect our effective tax rate of approximately 22% in the first quarter. With that, we'll open the call to your questions..

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Dean Dray with RBC Capital Markets. Please go ahead..

Thank you. Good morning everyone..

Good morning Deane..

Hey. Like to start with the -- good news is this is a fabulous organic revenue growth quarter. And this is exactly the stage of the cycle, where we would expect to see WESCO see that kind of sales growth. But the operating leverage was a bit disappointing. And you called out the higher variable comp.

May be kind of what's going on in the temporary labor and the transportation cost? Because this is where we would have expect to see kind of a better operating leverage result? And may be Dave can also tell us how you get to an adjusted pull-through? I hear that 40%. I'm not sure what you're, excluding from that? So, maybe you can start there.

Thanks..

Sure. Deane, good morning. It's Dave Schulz. So, within our expense profile, as we had an increase in sales, we did to have IR expenses for temporary labor. Again, we used temporary labor to augment our existing staff and particular to have handle the heavy orders that we saw flowing through -- particularly at the end of the fourth quarter.

We also did see an increase in our transportation rates. So, relative to what we saw earlier in the year, we did see that increase in cost, particularly with the higher volumes that we were experiencing during the heavy holiday transportation period.

On the adjusted pull-through question, as we mentioned in the prepared remarks, our adjusted pull-through was about 40% on the quarter. That simply taking and adjusting the base period for what we would have paid out on a like-to-like basis for incentive compensation.

And so again, the base period did not include the full paid up incentive compensation that we recognized in 2017..

Got it. And then just as a follow-up. Maybe give us an update on the whole price cost dynamic that we're looking at here in 2018? I heard that -- I'm just now saying you got two percentage points in price, which is a really good.

Talk about the dynamics and the lag about getting where the suppliers are now pressuring you as well? And are these going through on a timely basis?.

So, as you called out, we did have a 2% impact from being able to pass through the inflation from our suppliers. We saw product inflation across multiple categories. Again, with the inflation that we saw on copper in the quarter, obviously, our wire and cable business experienced inflation that we were able to pass through to some degree.

As we talked about consistently over the past couple of quarters, it's still a very competitive environment out there. And we still are having difficulty getting full pass-through of the inflation from our suppliers down to our customers. And again, we have seen that continue in the fourth quarter.

I would say that the environment is relatively consistent Q3 to Q4..

Yes, Dean, I'll add to that. Q4 again behaved very similarly to Q3. I think we're very encouraged with our step up in sales growth rates. And we're seeing customers being more optimistic and talking about more robust plans for spending in 2018.

And so I think we're still in that part of the cycle, where the ability to push through price increases is lagging. Enough quarters in a row of end market demand.

In terms of supplier price increases for what's being planned presently for the first quarter and we have good visibility and know what each of our supplier partners are planning and we're by category. It's very consistent with what we saw over the last couple of years.

In general -- generally speaking, I'd say the price increase is our plan between 2% and 5%. There is always a few specific product categories, but may be a bit higher than that.

But I'd say at least current estate as we sit here today what our suppliers are planning, it's very consistent with the last couple of years and I'd say consistent with what we expect at this part of the cycle.

I do feel that when you look at our relative gross margin performance year-over-year and sequentially in the third quarter, in the fourth quarter, we're down in the kind of the 10 to 20 basis points range. We've had some mix headwinds a bit.

I feel that we're getting some really good traction at the transactional level for a good portion of our business. And again, that is a top priority -- the number one priority as we move into 2018. We wanted to return the growth in 2017. I think you'll all recall been a few years since we. We did deliver that in 2017.

Now, it's -- and critically important as we continue to leverage and accelerate that topline growth and get the margin expansion. And when I speak about margin expansion, I'm talking the core operating model is the operating margin expansion.

So, which was your question?.

Got it. Just squeezing one last one. John, you clarify that when you said, you face some mix headwind in the quarter.

What is the most important of those that you would highlight?.

Well, utility grew -- again had -- retrospect had an exceptional year as it kept six very strong years. But when you look at utility, even without adjusting for the contract we chose not to renew, which is $100 million impact, we were double-digits in the quarter. If you take that out, we grew 18%. So it's just very, very strong growth in utility.

And that does run lower gross margins as we spoke.

And as we mentioned in the prepared comments, we had roughly $15 million of sales in the utility in the fourth quarter that supporting disaster recovery efforts, both -- some in Puerto Rico that was tied to the storms that Caribbean last year in the third quarter and some in California in response to restoration and support as a result of the California wildfire.

So, I would say utility, it was notable and that drove some of the upside versus our outlook on the top line in Q4 as well as international. And then, Construction has grown as well, started to pick up versus stock and flow mix. So, I call out those three factors, Dean..

Real helpful. Thank you..

Next question comes from Sam Darkatsh with Raymond James. Please go ahead..

Good morning, John, Dave.

How are you?.

Good morning Sam..

Good morning..

My question has to do with tax reform and the potential impact on industry pricing. I mean, the electrical distribution business to me at least is interesting, in that -- it's low margin, it's heavily weighted selling process, but importantly, it several large U.S.-based companies against the couple large French-based companies.

And I'm wondering whether the much lower relative cost base for the domestic players WESCO included will incentivize the U.S.

companies to turn around and use tax relief as a weapon for pricing? And am I thinking about this correctly? And if so, how might this effect you in light of the typical three bids go-to-market industry structure?.

It’s a great question, Sam. I would say that the large players in the electrical distribution industry that you referenced, they all have public equity or public debt or both. And so I think they're very focused on -- as we're one of them, we're very focused on our margins and delivering margin growth. So, I think that's a critical point to understand.

When you step beyond those handful of companies that are large and have national or global capabilities on a national footprint in the U.S. that you alluded to and you look at the large number of private competitors, they typically run lower operating margins as it stands today.

And when you look at how their businesses are run rather sales and compensation programs are very much focused on kind of building and gross margin up through sometimes operating margin kind of not post kind of pretax, not post-tax.

So, I don't -- I heard no indication -- seen no indication yet of this tax reform benefits being as a strategic prize weapon. Furthermore, we've had no conversations with customers yet, whether saying, what a minute, that tax reform should result in lower supply chain cost for us.

So, I think -- I do think it is an opportunity and we're hearing that with our customers clearly. And now you're starting to see a number of companies speak about that in the press. But tax reform benefits and the impact it has potentially across our entire customer base both industrial, CIG, and utility as well.

With the expense thing of capital expensing and the impact -- positive impact on project, we're hearing a lot more discussions from customers. And now we see 2018 being a different year, we're going to get on with our capital spending. Now that's verbal and anecdotal right now. We need to see that translate into real orders.

With that said, I do want to go back and note that our backlog performance in the fourth quarter -- what's being up 20% at the end of the year is extraordinarily notable. But what's even more notable -- I've been with this company now since 2004.

This shape of the backlog was very counter of a normal cyclicality historical seasonality that we see in the fourth quarter and that's with bit of a challenging winter, right? So, I think when you look at that -- that does speak to I think our execution, our performance, but also some improvement in the end markets in terms of those projects that were frozen beginning to be released an additional capital looking to be spent in 2018.

I think it's an excellent setup for 2018..

My last question John, if I could. Your pricing companywide was up too, but I'm guessing or not by vertical basis, it would not be uniform up to industrial, CIG, utility, what have you. My guess is that industrial and CIG were up pricing wise more so than two.

Is that the case? And can you put a little bit of quantification or help in terms of what pricing might look like by vertical?.

Yes, we never really break it up by vertical, Sam. The only thing I would say -- and Dave mentioned, I'd give you a look kind of a different way to look at it, may be a different lens by product category.

So, what are seeing and parts of our portfolio, which is not a large percentage, but parts of our portfolio that are more commodity or spot market driven. So, wire and cable, so copper, obviously product that have steel even with pricing starting to step up, we'll see some impact, resins which impacts PVC.

So, we think about wire cable conduit into more commodity like portion of our portfolio, which again is not a large percentage, but that's where we're seeing -- that market moves much faster with -- it's more spot market driven. So, we're seeing those prices go up.

But -- and there though that's a very competitive dynamic, because that is the subjected to the X bids and Y to this more commodity like in nature as opposed to what's engineered in, that we value and services around. That will give you a little insight in terms of what's driving the mix of the pricing.

Again, not inconsistent with what we expect at this part of the cycle. When I mentioned in response to Deane's question earlier, what we're seeing from suppliers planning for Q1 is kind of a more broad-based 2% to 5% and that's were consistent with what we expect for the first quarter of the year as well as this part of the cycle..

Thank you..

Our next question comes from Ryan Merkel with William Blair. Please go ahead..

Thanks. Good morning everyone..

Good morning..

So, just want to go back to operating leverage for a minute. Can you just help us with the cadence of operating leverage just to level set everyone? Clearly, fourth quarter or even first quarter are still little soft.

But should we see an infection in the second quarter and then a much stronger second half?.

Good morning, Ryan. It's Dave Schulz. As we highlighted in our December outlook calls, we mentioned in our prepared remarks. Relative to 2016 -- I'm sorry, 2017 first half, we did not have the full payout of incentive compensation as we planned our 2018 guidance and what we've already shared with you, we have included the full pay out.

So, there will be some front half distortion. So, we would anticipate that our front half would have the impact of that restoration of incentive compensation Whereas in the second half, we have that in our 2017 base, that's included in our 2018 outlook as well.

So, you would see more of a profit improvements in the second half relative to the first half..

Okay, that's helpful. And that's kind of where I'm getting at. When you report first quarter and guide for second quarter, I guess, we shouldn't be expecting any big inflection in 2Q in terms of operating leverage. It's more second half story..

The notable difference is more second half versus first half in terms of the pull-through and the operating leverage. Again, the answer is yes..

Okay. And then is -- back to pricing.

Is up 2% fair for our models for 2018?.

Yes, we don't forecast that and it's heavily mix dependent. So, 2% is a bit higher than what we've experienced historically. We typically are more in the 1% ranging as the cycle unfolds let's say.

Again, I think the reason what we're seeing with the 2% is more driven by -- particularly our mix and set our partners and the categories I mentioned earlier response to Sam. So, I do think in general, those conditions set out Ryan, which I mentioned earlier that end markets are improving. There is increased optimism in our -- with our customers.

They're looking at -- so they're "rate" -- industrial rates are picking up and desire -- and willingness to spend capital, that sentiment is improving.

So, when you think about that in the context of and the potential positive impacts of tax reform on an overall economic growth, you integrate all that and says look, we're facing an improving economy, which will support increased inflation in 2018 in a more consistent and broad-based way and that supportive, I think for distribution, to work with our supplier partners and manage price to the channel to our customers..

It make sense. Might if I just slip in 1 more. Just a follow-up there. I guess, I'm going with this is, the sales guidance for 2018 up 3% to 6% just seems very conservative to me -- more conservative than usual and especially to your price and all the good things are seeing.

So, I guess, what am I missing?.

So, two points I'll make. Remember, we had a two speed year in 2017. And so our comparables -- and we went through this in our Investor Outlook call. So, we essentially have significantly easier comparables on the topline in the first half versus the second half. So, that's the first point. And we did mentioned that in our Investor Outlook call.

Since then, what's different since our Investor Outlook call is we ended up much stronger on the topline than we thought. We had a very strong December count normal seasonality like I mentioned. In the backlog performance was exceptional, again, counter to normal seasonality.

And so -- but at this point in the year, it's been our practice of not to take a look at the full year guide and adjust that. That something we typically do at the mid-year point..

Understood, very helpful. Thank you..

Our next question comes from Matt Duncan with Stephens..

Good morning guys..

Good morning Matt..

So, wanted to get back on the operating profit pull-through discussion. Just make sure we understand how this lays out correctly. So, I guess the biggest thing I'm almost concern is the right word. But want to make sure I've got down here is, if you can't get your cost covered with price.

It sounds like us to the position where you're not quite able to price along with cost.

Can you do a 50% operating profit pull-through in that environment? And should we expect to see 50% plus in the back half of this year?.

Matt, it's Dave Schulz. So, again, we're very clearly focused on improving margins. John pointed out, that is our number one priority as we enter 2018. Obviously, we do have some year-over-year comparisons, particularly related to incentive comp as we've already discussed, that will make that first half pull-through extremely difficult.

But as we get into the second half and as we think about our full year, we are still targeting that second half 50% or greater pull-through, particularly because we don't have that unfavorable comp year-over-year on the incentive side.

So, again, as we see the market develop, this is a company that has always demonstrated the ability to control cost very effectively. As the market evolves, we will continue to manage our cost of aggressively and we are squarely focused on delivering that 50% pull-through in the back half..

I mean, -- and Matt, it's very, very critical that -- and I'll tell you it is the number one focus and priority of our team. Again, returning the growth in 2017 for us was paramount and now it's critical that we maintain the topline trajectory.

And I think get excellent momentum, supported by some improvement markets, but also our owned execution is performing -- is increasing and improving. And then, getting that pull-through on the growth. And so 2018 is all about continuing the growth and getting the margin expansion..

Okay. Good to hear, John. Next thing on M&A. If I forecast out, which your debt levels and your EBITDA are going to look like. Leverages is certainly going to fall, I would think under three by the end of this year and perhaps even down to maybe two and a half.

How are you guys looking at M&A right now? Is the funnel pretty full? Or should we start to see deals getting done? It's been a little off key of WESCO success in the past..

Yes. So, I think nothing has changed on that front. And we see ourselves as being a leader in our industry and another part of the value chain and we continue to play a consolidated role. And I think consolidated role is through both organic growth better than market and I think you look at the numbers we're posting.

In 2017, particularly second half, I think they show up very strongly versus with the market is. And then continuing to use our strong free cash flow generation balance sheet to support the acquisition strategy. So, nothing has changed on that front. We have -- we manage our process. It's not driven.

It's pipeline -- it's a pipeline process with stage gates, and we continue to look at a number of targets. There are deals that can be done in any given day. We have a high hurdle rate and there's a lot of that we took a very hard look at quite frankly in 2017, but they didn't quite meet all our criteria.

We did choose also spent $100 million of our cash on buying back stock. And I think that was important to do, a critical to do and reflection was the right thing to do. So, I think we're very pleased that we ended the year back at the high end of our self-imposed leverage bad. We paid down $60 million worth of debt in the quarter plus -- that was good.

And yes, the operating model works well and so we feel really good as we enter 2018 in terms of the ability to do the deals as they work way through our pipeline and meet our criteria as well..

Okay. Thanks John..

Yes..

Our next question comes from Andrew Buscaglia with Credit Suisse. Please go ahead..

Hey guys. Thanks for taking my question..

Great..

I just want to dig into that backlog. Can you talk about -- maybe some of this margin performance related to some of the lower price stuff you might have booked kind of rolling off here.

Is that -- I mean, is that a something we should be on lookout for too in the next couple of quarters? And secondly, how long does it take your backlog to actually role off? Because presumably, your booking -- that 20% booking -- that backlog number, I mean, is probably full of better price stuff that should hit again probably midyear to later this year, is that correct?.

So, couple of questions there. Yes, no indication in the backlog of the margin issues. So, margin is stable in the backlog. And so I think of -- and the callout is for me very notable is just the trajectory growth of the backlog versus what is typical seasonality, which is a decline in Q4 as you move through the first part of the winter season.

To your second question, in terms of phasing of the backlog. There is orders in the backlog that will ship next week, next month, next quarter within the next year. There's typically things that go out multiple years. Sometimes, there are things that are in the 15 to 18 months kind of time horizon. So, that gives you a general sense.

That is -- and again, I've said this many times in the past -- since we're on this question I want to emphasize it again.

The backlog is representative of -- it is our booked orders that will shift and become sales, okay? We don't take any of our global accounts agreements, supply agreements, utility alliance agreements even though these are large in nature multi-year and you could think that there is a somewhat of an annuity-like behavior over the contract.

We don't load any of that in the backlog. So, this is a good indicator and more representative of the project side of our business. Where will that show up? It will show up in construction market. When we're doing the projects with contractors or EPCs.

It will show up in industrial floodplain the project directly through do, it will show up in utility and we're doing direct project with the end user investor and utility of public power customers. And it could show up in CIG as a project if again we're supporting the end user direct. So, hopefully, that's helpful..

Yes, that's helpful. And then, if you could just talk on Canada. I mean I think a lot of optimism you guys are showing here. It's got to be maybe some customers in Canada doing better with more energy prices are.

Can you just talk about Canada little bit more and how you feel entering 2018?.

I couldn't be more pleased with our performance in Canada in 2017. If you set the clock back a little over a year plus ago and what we thought the market would look like in 2017, we're highly confident of our business.

We have a very strong leading business position with our Canadian business comprised of WESCO and EECOL and we have done a few other acquisitions up there. But I could not be more pleased with our Canadian business performance in 2017. We feel like we performed very well against the market and competition.

And that's independent of the economy, but then the also performed better than many economists predicted when you look at the initial forecast a year-plus ago for 2017. We had very strong backlog growth in Canada as well to end 2017, which is a nice setup for 2018. As we look at 2018, all economies are expected to grow in 2018.

It's the first time since 2011. And it is driven by strong labor markets, the energy sector recovery, oil is now holding up nicely above $50 now and a number of other factors. So the strength of the dollar -- the comparative strength of the dollar on that export business, et cetera.

So, I think that, again, our Canadian business really shows what happens when we have a strong leading position in the market. It's well-run, it performed very well in 2017 and its set up very well for 2018 with the backlog growth in the momentum back there. And now I think very encouraged its forecast all economics will grow in 2018.

Again, that's the first time in seven years..

Okay. Thanks guys..

Our next question comes from Chris Belfiore with UBS. Please go ahead..

Good morning guys..

Good morning Chris..

So I just want to kind of go back to the elevated SG&A cost in terms of like. Could you just provide a little bit more color, maybe quantify the effect of the higher demand in 4Q on the SG&A from the and then pressure that on the margins? And then I'm asking because demand level stay elevated, which is not in the 3% to 6% growth plan.

Would you expect to be able to reduce the impact of the year or would remain a margin headwind?.

Yes. So, Chris, It's Dave Schulz. So, very clearly, as we saw the sales, the order of volume pickup in the fourth quarter, typically of the timing of that a lot of occurring November, December. A lot of our operations did rely on increase temporary labor just continue to process and shift.

As we see the market grow, obviously, we're laser-focused on managing our cost profile. We rely heavily on a lean methodology to improve productivity at the branch level and we will continue to do that. So, -- but we did have a headwind here in the fourth quarter and we're not want to quantify.

I mean again, it's one of those things where we have seen increases in temporary labor as the demand group. We're now focused on being able to operate our business is at the branch level very efficiently. As we move forward, we have included what we believe is the appropriate margin guidance for the sales outlook that we provided for 2018.

So, we're comfortable that we appropriately accounted for this in our outlook..

Okay.

And then I think was there anything in the COGs in terms of the inventory build that was a negative that you maybe you had not planned for either that might kind of margin?.

There was nothing out of the ordinary..

It's just -- it's the mix. It's the business mix we talked about earlier..

Okay. And then just--.

And that's the primary driver..

Got you. Okay. And then, 1 last one.

I mean, last quarter, you noted four points of growth in the hurricanes and then outside of the $15 million in utility, were there any other kind of benefits from rebuilds or hurricane growth in that 10% organic growth number?.

And that's a good question because that typically when you looked at when we were storms in the past. The true rebuild activity typically at the earliest kind of six to nine months later and then can extend for years.

So, that's not in was more quick reaction, quick response to get operations back up and running versus I would -- what I would characterize as rebuild. I mean, virtually, no -- there is no build, yes..

Okay. Thanks..

Our next question comes from Steve Tusa with JP Morgan. Please go ahead..

Hey guys. Good morning..

Good morning..

Can you maybe talk about what it was a little more on the utility and market and the growth there may be what's above and below that kind of nine percentage rate?.

Yes. Thanks Steve. Good morning. Again, I made some strong commentary about the U.S. -- equally strong commentary about our U.S. business corporation we have, the results delivered, which is really a function of the quality of the team we have reading that business and the capabilities I think our value delivering.

In retrospect when you think about 2017, we felt we have a real challenge by walking away from the $100 million in terms of driving growth and deliver the growth, we feel very good about it. It's balanced.

What I mean by that, we're seeing nice growth investor utilities and with public power customers as well broad-based and so -- and we're getting growth in Utility in both the U.S. and Canada. So, from a customer -- let's call it, kind of customer vertical inside the utility end market, we have growth in public power in U.S.

And then when you look at geographically, we're getting good growth in U.S. and Canada both. I would say what works the underlying driver for utility growth. It's the same recipe we've been running. We're getting our sales as a really driven by few new customers. And they are.

But increasing the scope of supply with current customers expanding our categories, some project wins. And that's what's underlining and driving our share growth. The bidding activity and pipeline is strong. And its strong not just with the investor and utilities and public power, but also in that utility contracts or an EPC space.

We saw that really being a strength in the second half of 2017. And so we -- as we look at 2018, we expect to continue to deliver above market growth in utility. Our utility customers are looking at more comprehensively managing their supply chain. We have a complete set of solutions and services to support that.

And I think our business -- and WESCO overall is well-positioned to benefit from that there is still improvement in the housing market, there is increasing demand for renewable energy. At the overall utility industry continues consolidated on the customer and. And that trend continues to bode well for us.

So, that hopefully I've hit all the points you may want to drill in the, but hopefully that gives you a good picture..

What's the range that you're seeing? And this maybe have been asked before I hopped on a little late.

The range that you are seeing in supplier price increases?.

2% to 5%, yes. Majority are in the 2% to 5% range, which I did address that a few times earlier, Steve, in the call. I hope you'll see that in the transcript..

And your expected capture, like how much will they capture on that do you think?.

Well, again, I think that dynamic is how it always works. They have published price increases.

That's what they try -- if they "mark it up" and try to push that through the channel, but then based on the type of business it's -- they either provide SPAs, special pricing agreements, for certain types of businesses or for projects or if it's speced [ph] in, there is a competitive RFP, RFQ process. So, all those dynamics are similar.

I think the way to think about it would be, as I mentioned earlier, 2% to 5% is typically what we see at the start of the year and at this point of cycle..

All right. And then one last one. Just your inventory position. I know you guys have algorithms that kind of guide you pretty well on that front.

Any changes planned? Do you feel like you have enough inventory or lead-time stretched at all?.

Lead-time -- I think we're in very good position with inventory. I mean, if you look at our inventory numbers for 2017, we did step up our inventories. As we move through the year and we start facing this increasing demand profile, we added to our inventory position. I would say, our inventory position as we sit here today is in very good shape.

And again, to your point, we do focus on availability and fill rate are the two optimizing metrics and I think we're in good position with both..

Great. Thanks a lot..

Yes..

Our next question comes from Luke Junk with Baird. Please go ahead..

Good morning..

Good morning..

John, first question. I was just wondering if you can provide an update on your datacom business.

Maybe if you could comment both on trends in the quarter and how 2017 shaped up overall? And then looking forward in that business, what's the project backdrop look like to you on the data center side?.

So, first, I'll start at an overall communications category level. So, communications and security, so it's datacom, broadband communications, IP security, that category for us all in, which is inclusive of all forms of communication, as I said, grew very nicely in 2017 and picked up momentum as we move through the year.

It was -- it grew up -- grew high single-digits as an overall category. In the third quarter, it grew double digits. Very low double-digits, but double-digits nevertheless in Q4. And the growth we're seeing is also balanced nice geographically. So, for that category, communications and security grew. In Q4, U.S. grew, Canada grew and International grew.

So, all the geographies grew as well. You get underneath that broadband performing really strongly. In terms of datacom, it's improved as we moved into the second half of the year versus the first half. I mentioned this in some earlier earnings calls last year.

Our first half, we had some non-repeating projects in the first half of 2016 that didn't repeat in 2017. So, our own comparables got a bit easier as we moved into the second half and things started to improve. Datacom in the U.S. was roughly flattish in the fourth quarter. So, that's a piece of the overall communications and security.

And I think we've got, again, solid backlog. And I think the overall trends that drive that market in terms of data center growth, fiber optic migration from copper, and an emerging technology such as IP lighting represent good fundamental demand in growth drivers for us as we look out.

So, if I look into 2018, 2019, 2020, it's important category for us. It still offers very nice growth opportunities and we're focused on capturing the growth..

That's helpful, John. Thanks.

And then second, just in the near-term here as we face the potential government shut down, any perspective you can just share on what the shutdown might mean for the CIG business overall? And have you built anything into guidance in that regard?.

Well, Dave mentioned this in his prepared commentary, our government portion of our CIG business performed very well as we kind of moved through 2017 in the fourth quarter, which is the first quarter of the new fiscal year of the government. It was up double-digits in the U.S. So, I think we don't have a large share in that market.

And when you look at our service offerings and our capabilities and what we're focused on, I think we're very well positioned. We have an excellent set of pipeline of opportunities. We're working the backlog, solid. So, I don't see any immediate or near-term issues on the horizon. Again, we're talking about a what if.

And whenever you have of what if, does that occur, how long does it occur and to what degree, what are their impacts? But for us, our -- we've been pretty darn resilient with our government business and capabilities..

Thanks John. Appreciate it..

And our last question comes from Steve Barger with KeyBanc Capital Markets. Please go ahead..

Hey thanks. Appreciate it..

Good morning Steve..

Morning. Just going back to the acquisition discussion. You've talked about how competitive the electrical distribution side is with private companies running lower margins.

So, are you putting more focus on industrial MRO targets to improve mix? Or are you more interested in consolidating the electrical side to help with the competitive environment?.

Excellent question, Steve. Thank you for that. Our acquisition priorities/strategy remains intact. And so if you look at the last six to 12 acquisitions we've done, let's take the last dozen plus.

Those have strengthened our electrical core or added product and service categories to our portfolio that we could sell to our customers via our One WESCO business model, right? So -- and that -- so that doesn't change as we go forward.

When you look at the last several acquisitions we did, they were in the U.S, they were in core electrical, they are well-performing operations, and they were more focused in the construction space, not residential construction, but non-resi. So, -- and they were in geographic areas where we didn't have a lot of scale.

So, I would tell you that those are the priorities. We'll continue to strengthen our electrical core very selectively. And then we'll look at product and service categories that can be added that works through our business models. We've been very disciplined over the years.

And for any deal that we do, there is -- it's an order of magnitude plus that we kill in terms of never making it through our pipeline. We've done 45-plus acquisitions since WESCO spun out of Westinghouse. So, I think we're very disciplined. We'll remain disciplined. And typically, when we buy companies that are well performing.

And in most cases, I'm thinking out loud here, on most cases, they're running higher operating margins than us so -- because of the unique set of capabilities and unique market position in that local or regional market. So, -- yes, that will remain our focus. The market structure is still very fragmented.

And so I think there is still an opportunity to consistently take share organically above the market, growing above the market plus using acquisitions to scale up quicker..

Right. And just one quick one -- sorry if I missed this. I know 2015 -- 2017 free cash flow conversion was below target due to increased working cap as sales picked up, but I think in response to an earlier question, you said inventory levels were in good shape.

So, are you already seeing better conversion as the year progresses? And would you expect a normal cadence of free cash flow generation through the year?.

That's correct, Steve. So obviously, as you took a look at our 2017 results, you can see the big cash flow draw coming from accounts receivable tied to the strong sales growth that we experienced not only in Q4, but in the month of December.

We've included in our outlook that we expect to be at the 90% or greater free cash flow generation as a percent of net income that is still our outlook. We still are very confident in our ability to generate that, particularly as we take a look at how we're able to manage our working capital..

All right. Gentlemen, thanks for the time..

So with that, there may be a few others in the queue. Mary Ann is available to take further questions. I'd like to make some closing comments. Thank you very much for your time this morning and your continued support.

And we do look forward to seeing many of you at our upcoming conferences, including Wolfe Research's event in London on February 27th, Raymond James 39th Annual Institutional Investor Conference on March 6th and 7th, and JPMorgan's 2018 Aviation, Transportation and Industrials Conference, which is going to be held in New York on March 14th.

Thanks a lot and have a great day..

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