All signals go for WESCO

After completing a management buyout, what's ahead for WESCO Distribution?

By Staff -- Industrial Distribution, 8/1/1998

Q: When will the IPO go forward?

A: "We have just completed a very successful recapitalization of WESCO. These actions have the effect of overlaying a new financing and capital structure that provides us with significant funding availability to meet our projected needs over the next couple of years. On a longer-term basis, we anticipate raising funds in the equity markets in order to support our continuing program of acquisitions. Accordingly, it will be our desire to proceed with an initial public offering some time within the next two years. Our timetable for an IPO will be a function of a variety of factors, including expansion opportunities and general market conditions."

Q: Describe management's participation in the just completed buyout.

A: "During the past 41/2 years, a total of 45 headquarters-based and field executives have had the opportunity to make significant personal investments in WESCO's common stock. They, along with about 150 WESCO branch managers, have also received stock options. As part of our recapitalization, our management team had the opportunity to sell shares or cash in their options, but I am very proud to say that they have elected to reinvest this equity value, amounting to approximately $100 million, in WESCO's ongoing operations. In addition, another $15 million of common stock shares have been set aside and can be purchased by WESCO's existing equity holders and another 200 or so managers throughout our organization."

Q: What does that say about WESCO?

A: "The commitment of personal funds is an extraordinary demonstration of our management team's confidence in the future of our company."

Q: Given this level of commitment, what are your expectations for growth?

A: "Up and down the line, we think of WESCO as a growth company. Over the past four years we have invested in a wide range of initiatives in areas such as national accounts, marketing, integrated supply, branch expansion, training and development, and ISO 9002 certification. In addition, we've completed 14 acquisitions during the last three years. As a result of these activities, we have increased sales by well over $1 billion and achieved compounded annual sales growth rates in excess of 20 percent."

Q: Can you keep up that pace?

A: "Our expectations are that we will continue to grow at a sales rate that exceeds the industry average, and that a continuing program of acquisitions will supplement our growth. It is impossible to project either the size or timing of potential acquisitions, so for our planning purposes, we concentrate on increasing sales activity on a comparable branch basis at a rate greater than the industry average. This implies a target of six to nine percent for comparable branch sales growth."

Q: Will branch managers assume new responsibilities as part of the recapitalization?

A: "Our branch mangers will continue to be directly responsible for operating performance, and we count on them for all aspects of sales, service, growth and profitability. As a result, their responsibilities and their opportunities increase as branches grow and prosper. We continue to emphasize pay-for-performance culture with strong incentive compensation arrangements. The recapitalization gives many of our managers an additional opportunity to participate in both the benefits and the responsibilities of additional equity ownership. They are truly owners."

Q: How will the ownership change effect customers?

A: "What customers will see is an uninterrupted continuation of our marketing, sales and service initiatives. We continue to emphasize our ability to provide consistent and reliable service to our customers wherever they are located."

Q: Describe how Cypress Group's public capital market capabilities may effect acquisitions.

A: "We are very confident in the Cypress organization. With their help, we have completed our refinancing and bond issuance, with investment bankers saying that this has been one of the most effective refinancings ever completed in conjunction with a management led buyout. A key part of this structure involves ready access to a substantial amount of undrawn credit facilities available specifically for continued acquisitions."

Q: What are WESCO's acquisition goals for the next two or three years?

A: "Our evaluation of acquisition candidates focuses on good strategic fit, and as discussed previously, we find it very difficult to project with any accuracy the timing or size of future acquisitions. We've completed 14 transactions involving companies with sales in excess of $800 million per year in a period of slightly less than three years. The three acquisitions that we have completed thus far in 1998 have aggregate annual sales of approximately $300 million. We continue to explore opportunities that enhance our positions in key strategic markets and expand our service capabilities for major customers."

Q: Who are the leading investors other than Cypress Group and WESCO managers?

A: "Our investor group is limited to WESCO's managers and the Cypress-led investor group."

Q: How close was WESCO to being purchased by an outside buyer?

A: "As disclosed in public documents, WESCO was proceeding with a planned IPO. The alternative to the IPO was the partnership we have established with The Cypress Group. We believe that the recapitalization structure they have assisted us with will better position the company for an IPO in the future."

Q: Consolidation in electrical distribution is hot. How far do you see it going?

A: "We believe that consolidation in the electrical distribution industry will continue to accelerate. Customers are seeking local service coverage, broader based product lines and higher levels of productivity. As in other industries, we face the same challenges and opportunities of providing service and creating greater value. Compared to other distribution industry segments, electrical distribution is still very fragmented. The largest four or five companies could double their share, and the industry would still be characterized as being highly fragmented."

Q: Is there a target for WESCO's market share three to five years into the future?

A: "The industry continues to have positive growth characteristics. Over the past 15 years, there have been only two time periods during which industry sales declined. The overall industry growth rate during this 15-year period was just under seven percent. We believe that industry growth will continue to be strong as a result of new product development, increased use of electrical and electronic components, energy conservation initiatives and integrated supply and outsourcing trends. Accordingly, growth with the industry should produce favorable overall results, and even modest gains in market share can have a large impact on one company."

Q: What role will international sales play during the next few years?

A: "When describing international sales we tend to think of North America, then the rest of the world. To put this into perspective, WESCO has a significant and long standing position in Canada, and we recently made major commitments in Mexico. Today, about 98 percent of our sales volume is concentrated in or initiated from North America. However, we see numerous opportunities in providing services and support to customers doing business in the rest of the world, outside of North America. Our growing base of large national account customers and excellent relationships that we have established with engineering and construction firms opens a variety of opportunities for our company to follow and support our customers in their international initiatives. Over the next three to five years, we believe our international business could grow to be five percent or more of our total volume, or something in the range of $200 million of recurring business."

Q: What are the leading growth segments over the next few years? How significant are national account contracts and integrated supply?

A: "We clearly see preferred supplier arrangements with multi-site customers as a growth opportunity for WESCO. Our extensive branch structure and systems capabilities offer us the opportunity to provide high levels of support for these kinds of customers. In addition, we continue to make significant investments in expanding and supporting our national accounts sales organization. We also see substantial growth in integrated supply arrangements as customers increasingly turn to outsourcing for improved productivity. Other markets that we believe will continue to have above-average growth include data communications and factory automation and control."

Q: Since coming to WESCO you've faced a variety of challenges. What do you consider your top accomplishments?

A: "In the final analysis we are either empowered or constrained by our organization and its culture. There is no question that our most significant accomplishment has been the evolution of our organizational culture as people in hundreds of locations have seen constraints lifted and opportunities opened up. Four years ago we were a pretty dispirited group that lacked confidence in the future. Today, I truly believe that we have a company of winners -- people who believe in themselves and in their fellow employees in other locations and other job functions. I believe it was Andrew Carnegie who said something like, 'You can take away all of my assets, but it I retain my organization, I'll be back.' I feel the same way about WESCO."

Q: What is the top challenge remaining?

A: "Success is a fragile commodity, and I don't take it lightly. We have accomplished a great deal over the past four years, but our management team has the attitude that we are in the middle of a turnaround situation. This is a very healthy attitude to have, especially during this period of changing industry dynamics. Every day there seems to be a major announcement concerning new alliances, new competitive situations, customers consolidating, etc. We have to constantly be on our toes to maintain and protect our current position as well as move quickly to take advantage of opportunities that present themselves. I guess in a simplifying way our biggest challenge is to continue to be responsive and agile."

Q: Describe your ownership stake in the company.

A: "I continue to be the largest individual equity holder with a personal stake of approximately four percent of the equity value. It may seem like a small percentage to some, but in a company the size of WESCO, it definitely keeps my undivided attention." I