A statement by Roy W Haley, Chairman of the Board and Chief Executive Officer of WESCO International is given below.The statement has been taken from the company’s 2006 annual report.
Encore – encouragement or demand for repeat performance
After achieving best-ever operating and financial results in 2004 and again in 2005, our challenge in 2006 was to provide an encore performance. I am pleased to report that WESCO’s sales, service, and support personnel met the encore challenge of surpassing the records achieved in 2005. The year 2006 proved to be the most productive and profitable year in our history. Sales revenue increased 20% to $5.3 billion, and net income more than doubled to $217 million. Free cash flow in 2006 was almost $200 million which was more than twice the 2005 level. Records were also set for employee sales productivity, operating margin, and return on invested capital. WESCO delivered excellent performance, and shareholders were rewarded with a share price increase of 38%, significantly greater than the major market indexes for the fourth consecutive year.
Strength in the Core
The excellent performance in WESCO’s historical core electrical products distribution business was the primary driver of our 2006 results. Despite volatility in product costs in certain categories, we were able to maintain pricing and inventory management disciplines while increasing sales activity. Continued application of LEAN process improvement and productivity enhancement initiatives resulted in the ability to achieve economies of scale and record levels of operating profitability. Our WESCO veterans in branch operations were also very effective in supporting business integration activities and information systems conversions associated with acquisitions completed in 2005.
In the second half of 2005, we acquired two businesses: Fastec Incorporated and Carlton-Bates Company. During 2006, these operations continued to serve existing customers while also expanding their reach through a variety of joint marketing and sales activities throughout WESCO. Numerous project teams worked to coordinate and consolidate business practices and accomplish operating synergies. Improvements were achieved in administrative practices, financial reporting, logistics and delivery, facilities utilization, and supplier relations. Through the work of hundreds of dedicated employees, we were able to exceed our first-year objectives for increased sales, profitability, and cash flow.
In late 2006, we acquired Communications Supply Corporation (CSC). With annual sales revenue of more than $600 million, CSC ranks as our largest acquisition to date. As with other acquisitions, we have quickly begun to implement programs for joint marketing and sales and have started the process of operational and financial integration. The combination of WESCO and CSC gives us a much stronger opportunity to capitalize on anticipated levels of increased capital spending on information technology, communications, and security infrastructure projects.
As we look to the future, we anticipate that additional acquisitions will be completed and integrated into WESCO’s operations. The electrical, industrial, and construction products distribution industry is very large, highly fragmented, and predominantly privately owned. As a result, we expect that in the coming year we will be able to seriously evaluate and complete transactions with acquisition candidates that will be a good fit for WESCO’s strategy and performance expectations.
Over the last several years, we have made great progress in distinguishing ourselves with marketing communications and programs to stimulate sales activity. We are constantly refining our capabilities to access our content-rich database of historical sales activity to match target customers with tailored messages regarding product applications and solutions. Working closely with our supplier partners, we executed more than 150 highly focused direct marketing campaigns with approximately 50 major manufacturers of branded electrical products during 2006. Our suppliers who support and participate in these programs find great value in being able to efficiently access targeted segments of our very large customer base, and they are requesting additional programs in 2007.
WESCO is regularly working on many different growth initiatives and improvement projects, and we are occasionally asked whether we track the value generated by our LEAN programs, information systems investments, training, and marketing initiatives. While we have excellent reporting and tracking capabilities, we understand that no single project or activity stands alone to create value. Value is the result of the collective work and the increasing effectiveness and productivity of all of our employees. Accordingly, we measure personnel productivity at many different levels to help assess overall progress in achieving organizational leverage and economies of scale. During 2006, WESCO’s “extra effort people” set new company records for operating profit per employee, a measure that we believe best illustrates performance and progress in a service-oriented and transaction-intensive business such as ours. As indicated to the right, operating profit per employee has more than doubled over the past two years.
Achieving longer-term performance goals requires that we have a highperformance organization that can grow and keep pace with changing company and industry dynamics. In 2004, we launched a comprehensive and formalized talent management program, and each year, we extend the reach to include a larger percentage of our total employee base. In addition to more effective performance reviews and the identification of training and development needs, talent management has assisted us in proactively making organizational changes and strengthened recruiting activities.
Training programs for branch, operations, and sales managers were expanded in 2006, and we expect to add new programs in 2007 for new and experienced personnel in professional selling and customer-focused product applications. We recognize the long-term nature of training and organizational development, and we are dedicating an increased level of resources and attention to this important function.
Market conditions are generally favorable for continued growth in sales and profitability. Even with weakness in residential construction and certain industrial segments, the North American economy is resilient and remains strong. We are optimistic regarding expected growth in capital expenditures and commercial/industrial construction, high levels of capacity utilization and production output in industrial markets, prospects for increased investment in electrical power generation plants and power delivery, and long-term demand for data communications capacity and security applications.
WESCO delivered an encore performance in 2006 and again raised the bar on future expectations. Our organization is stronger than ever, and we have identified numerous areas where we can make further improvements.We thank our employees for their extra effort, and we express our appreciation to our growing customer and supplier base for their loyalty and support.