Wesco International Inc (WCC) 2003 Q2 法說會逐字稿

WESCO International Inc. Second Quarter 2003 Conference Call. This call is being recorded. With us today from the company is the Treasurer and Director of Investor Relations, Mr. Dan Brailer. Please go ahead, sir.

Thank you, Bill. Good morning ladies and gentlemen. Thank you for joining us for WESCO International's Conference Call to review the second quarter 2003 financial results. This morning, Mr. Roy Haley, WESCO'S Chairman and Chief Executive Officer, and Mr. Steven Van Oss, WESCO'S Chief Financial Officer will provide an overview of the earnings press release issued this morning. Means to access this conference call via web cast, was disclosed in the press release and was posted on our corporate website. Replays of this conference call will be archived and available for replay through midnight eastern time, July 30, 2003. Following the commentary of Mr. Haley and Mr. Van Oss, we will open the session to your questions. This conference call may include forward-looking statements and therefore, actual results may differ materially from expectations. For additional information on WESCO International, please refer to the company's annual report on Form 10-K for the fiscal year ended December 31, 2002, as well as other reports filed with the SEC. The following presentation may also include a discussion of certain non-GAAP financial measures. Information required by regulation G with respect to such non-GAAP financial measures can be obtained via WESCO'S website, www.wescodist.com. I would now like to turn the conference call over to Steve Van Oss, Vice President and Chief Financial Officer.

Thank you, Dan. Good morning and thank you for participating in our call. I would like to start the discussion by putting this quarter's performance in the context before getting into these specific results. WESCO has been and continuous to be profitable and all of our operating units reflect different areas of market focus or geography continue to be profitable as well. Our business model is affected and the markets we operated appeared to be stabilizing. We are making progress on improving our product margins and our activity levels, as measured by the number of transactions processed or projects managed is high, although the dollar value per unit has declined. We continued to be selected as a preferred supplier partner by demanding high profile customers and because of this we believe we are holding or gaining market share. We are generating positive cash flow and paying down our debt. Our capital structures have been significantly improved and we have comfortable with quoted position. Overall, our company is in a strong position and what we believe to be a trial of this economic cycle. Having said this, we know we must regain positive momentum of our top line sales performance to deliver stronger operating results. We have launched a variety of improvement initiatives and we build up momentum that should deliver favorable results through out the balance of the year. Our result through the second quarter reflects the positive impact to our margin improvement and cost containment initiatives.

Gross margin dollars and percent were the highest since the fourth quarter of 2001, despite a continued week economic environment and lower sales. Cost containment programs have resulted in a good SG&A performance in light of higher employee medical and retirement related cost. Included in this quarter results, are over $3 million of unusual one time cost associated with legal bills and accrued settlement fees for certain legal matters. Our interest expense continues to decline and as previously discussed, we finalize the favorable adjustment income tax expense of $2.4 million relating to the close out of a 1999 Federal Income Tax audit resulting in net income for the quarter of $7.4 million, a 32% improvement of the second quarter of 2002, in spite of a sales decline of $28 million. Free cash flow generation in the first half of the year was used to reduce debt net of cash by $46 million from yearend 2002. In series of capital market transaction over the past two years, has significantly strengthen our balance sheet. These transactions coupled with the continued free cash flow generation has positioned the company with considerable operating flexibility, a $178 million of liquidity and no significant debt maturities until 2007. We are in the final stages of completing the annual renewal of our accounts receivable securitization program and we will strengthen this program with addition of a 3-year term component. The new facility is anticipated to include up to $350 million in total commitments with up to $100 million consisting of a 3-year term with remaining amount at a 1-year term. Upon completion of the next 4 weeks, we will further extend to determine our debt commitments and our liquidity will improve by approximately $50 million from our second quarter position to almost $230. Now for our second quarter results, sales were $820 million for the second quarter and were down $28 million or 3.3% from the second quarter of last year. Sales increased by $29 million or 3.7% over the first quarter of 2003. Improvement over the first quarter is on the low end of what we would expect to see due to normal seasonality.

Although daily sales rate decline slightly quarter over quarter, monthly sales rate improved sequentially throughout the quarter with the sales rate for the month of June being the best recorded so far this year. As we have discussed for several quarters now weakness continues in the major industrial groups that are heavy users of electrical equipment and MRO products. Reflecting the continued softness in capital spending and its impact on activity, construction, and other industrial market segments, our sales to customers in these markets are down 5% to 7%. Activity levels for our customers in our manufactured housing and recreation vehicle markets continue to be severely depressed. Correspondingly, our sales in to this market were of 10% to 12%. Utility operations were down in the 8% to 9% range and Canadian operations were up 8% to 10% primarily on the strength of the Canadian dollar and international operations were up almost 15% as a number of large project orders were completed. On the strength in new programs, sales to customers through our integrated supply programs were up almost 10% over the second quarter of last year. Gains in new programs in our national accounts programs offset the majority of weakness experienced in current programs where industrial customers have experienced weak end user demand. On a year-to-date basis, sales to our national account customers are up slightly. For the quarter, pricing did not have a significant impact on sales volume. Overall, the total electrical price index for June was up 3/10 of a percent from last year. Looking at our gross margin and expense rates, the second quarter gross margin was 18.4% in comparison to 17.6% for the second quarter of 2002. Sales and business mix did not play a significant role in the margin change.

Our billing margins increased by approximately 70 basis points over the second quarter of 2002 and 60 basis points over the full year of 2002. Gains and billing margin have covered lower than historical levels of supply or rebate in cash discounts. SG&A expense for the quarter at $126 million is up $3.4 million or 2.7% over the second quarter of 2002, and included approximately $5 million of additional accruals for retirement related benefits and an estimated one time accrual for legal bills and potential settlements seized on certain litigation issues which the company feels is in its best interest to try to settle in lieu of protractor litigation. Adjusting for these items, SG&A declined by 1.3% from the second quarter of 2002. Reduction in SG&A dollars were achieved through company wide cost reduction actions with a primary impact coming from staffing and related compensation and benefit program expense reductions. Since March 2001, our staff re-balancing program was initiated, full time headcount has been reduced by over 850 personnel or 14% with staff reductions continuing in the second quarter of 2003. All sewerage-related costs have been absorbed in the related periods. We will continue to take actions to reduce and/or rebalance headcount as the economy now performance dictates. Turning to earnings, Second Quarter operating income was $19 million or 2.3% of sales versus 21.6 million or 2.5% last year. Gross margin dollars were ahead of last year despite the sales would fall and offset a significant portion increased SG&A spending. Operating income increased slightly over the first quarter of 2003. Interest expense and other cost totaled 11.8 million for the second quarter of 2003 compared to 12.8 million in the second quarter of 2002 and a 11.8 million in the first quarter of 2003. The decrease in expense from last year resulted from lower debt outstanding during the quarter. As anticipated, the company's fixed the floating swap arrangements were called by the issuer in June of this year. As a result monthly interest expense on the net basis will rise approximately 225,000.

The company received a $4.5 million payment in conjunction with the unwinding of the swaps. We will continue to work on planning initiative to lower effective tax rate. In the first quarter of this year we recorded a $600,000 favorable adjustments to our tax revisions. As a result of utilizing a one time net operating loss carried forward from an acquired company. As a result, the effective tax rate for the first quarter was 28.4%. Last quarter we disclosed we were finalizing an IRS tax audit may be in a position to record a favorable tax adjustment in the second quarter. The audit has been finalized and the company was able to record a $2.4 benefit primarily relating to additional tax basis and fixed assets, which resulted in a net tax provision of $200 benefit for the quarter. Our normalized ongoing effective tax rate on a go forward basis is estimated to be in the range of 34% to 36%. At this time, we believe that our current tax reserves are adequate. Second quarter net income are $7.4 million increased to $1.8 million or 32% over the second quarter of 2002, despite of sales decrease of 3.3%. Due to higher gross margins, lower interest costs, and lower taxes. Dead income from the quarter was 52% higher than the $4.8 million recorded in the first quarter of 2003. Earnings per share for the quarter was 16 cents on net incoming of $7.4 million dollars in comparison to 12 cents for the second quarter of 2002 and 10 cents for the first quarter of 2003. For discussions on debt, work capital, cash flow, our accounts receivable securitization program will be treated as if they were on book. Operating earnings and reductions in working capital have been used to reduce debt and improved the liquidity position of the company and additional progress was made in the second quarter of 2003. Total debt net of cash plus the total of accounts payable commitments decreased to $18 million from year-end.

Free cash flow for the second quarter was $24 million and debt net of cash was reduced by $27 million during the quarter, and $46 million since year-end. For the trailing fourth quarters, free cash flow was $112 million and total debt net of cash has been reduced by $99 million for 13%. Working capital improved four days over the second quarter of 2002 and six days over the first quarter of 2003 and contributed to the favorable cash flow during the quarter. The components of net debt including the accounts receivable securitization program at June 30, 2003, were our senior stock notes and other at $392 million, our finance receivables at $225 million, real-estate financing at $51 million, cash of $33 million, and $7 million outstanding on the revolving line of credit. Our liquidity to find this readily available barring capacity was $178 million in compared to $67 million from the second quarter of 2002, and a $154 million at year-end. Capital expenditures for the second quarter of 2003 were approximately $1.7 million versus $1.9 million for the comparable period in 2002. There were no shares repurchased during the quarter. In summary, we had a pretty good quarter, the softness and then markets was all set by improved gross profit margins resulting in improved operations profit sequentially and expect for the estimated one time accrual for legal bills and settlements seized discussed previously operating improved, profit improved on a quarter-over-quarter basis. Progress and working capital initiatives coupled with operating earnings, tax, and debt initiatives provided strong cash flow allowing the company to pay down debt net of cash by $99 million over the past 12 months. This progress coupled with improvement in our capital structure has positioned WESCO liquidity in accept of $178 million, no significant near term debt maturities and no restricted debt providence. We are well positioned to take advantage of any uptake in the economic activity and to remain profitable in a week economy.

Given the uneven continued weakness in economic activity experience in our end markets, the company will not be providing specific sales and earning guidance for the year 2003 at this time. However, we do offer the following general comments. Our planning assumptions reflect in economic environment similar to last year based on our current -- momentum -- momentum and continuing improvement projects we expect to see further expansion on billing margins as company-wide initiatives are continued in this important area. Working capital productivity is anticipated to improve slightly with the result in cash flow directed at debt reduction and our capital expenditures anticipated to be in the $10 million to $12 million range. We remain concerned about the current state of the economy and do not proceed in near term broad based economic recovery. Accordingly, we are taking actions to identify and implement further cost reduction and profit improvement actions. During the first quarter, we launched comprehensive company-wide initiatives to drive operating profit improvement with the assumption of a flat or declining sales environment. Well, concurrently emphasizing sales programs and sales management activities to increase market shares at local level and benefit from the momentum developed last year international accounts and integrated supply programs. These programs are beginning to favorably impact our operating results and will continue to receive top priority as we strive to continually improve our performance. At this time, I will turn the program over to our Chief Executive Officer, Roy Haley.

As Steve has indicated, we had a reasonably good quarter and various improvement programs that we have been working on are showing positive results. From an overall market prospective, our major industrial contractor and utility markets are challenged with underutilized capacity and there continued to be wide ranging constraints on capital expenditures. Competition for available businesses spheres and as you might expect, we miss some opportunities due to our emphasis on pricing disciplines and customer profitability standards. As reported, our sales into the manufactured housing and recreational vehicle market and the public utilities market had been particularly hard hit, with industry data indicating activity levels down in the 10% to 20% range. In spite of these major declines, our branches serving these markets are solid profit producers and they are responding with initiatives to broaden our product offering and selectively target new customer in each segment. In the industrial segment, WESCO sales have been stable or improving slightly. Nevertheless, industrial MRO business continues to be under pressure as staffing reductions and plant consolidations or closures are occurring in multiple industries. WESCO has been able to successfully respond and off set general market declines in our large establish base of business primarily through new awards by customers utilizing our national accounts or integrated supply service capabilities. These programs are a significant point of differentiation between WESCO and our competitors and our ability to meet the special needs of large and very demanding customers will have a positive long-term effect on our business.

We have a premier customer base and we are working hard to make sure that it is constantly expanding. There is a saying that one firm's capital spending is another company's revenue and this is particularly true in the construction segment. Lower levels of capital spending have clearly had an adverse effect for large commercial and industrial contractors. Because of our size and scope, we are constantly completing construction projects of various types and in order to just stay even, we require a continuous stream of major new construction and renovation or upgrade projects. Considering that widely reported statistics for non-residential construction show year-over-year decline of 12% to 15%. We believe that we've done a reasonably good job of reacting to an environment with fewer available projects, longer negotiation lead times, and project delays are deferrals. Sales initiatives and service improvement programs with major customers and in key markets are making it possible for us to maintain a strong market position and to develop a necessary stream of new contractor oriented business. From an operation's prospective, multiple initiatives to improve pricing discipline and purchasing performance or taking hold and yielding systematic gains in product margins. A combination of training programs, local market, and industry segment customer reviews, key supplier programs, and more comprehensive information systems tools are expected to yield further margin gains. I am particularly pleased that these margin improvements are being achieved in each and all of our major operating groups. Our cost containment programs are also effective. The SG&A expense rate is up this quarter, but as Steve mentioned we've accrued approximately $3 million out of the ordinary legal bills and fees. Given the sensitive nature of ongoing negotiations, we are not going to be in a position to further elaborate on any details at this time; however, our track record with regard to legal matters is very good and while we believe it is prudent to establish reserves at this time, we don't expect an ongoing need for accruals of this magnitude. Our LEAN enterprise initiative, which was announced during the first quarter call, is well under way.

This comprehensive program targets service improvements, which will contribute to sales performance, along with productivity gains to be realized in operating cost performance and working capital efficiency. It is our objective to fully implement the initial phase of this program and approximately 30% of our branch operations in 2003, with the balance of our branches to be implemented in 2004. We anticipate a minimum of $10 million in annual savings from the LEAN program, which is currently underway, and we can easily see how the benefits to come from our LEAN programs can be much larger as we further develop our capabilities. We have applied LEAN thinking programs in multiple market segments and in branches of all sizes, even in some of our best performing operations were getting immediate positive impact. Each individual project tends to generate more ideas and we have already to package these ideas into additional implementation phases that will take our LEAN program into 2005 and beyond with a solid program of continuous improvement. To wrap-up this part of our discussion today, I will say that we are in a tough business environment that appears to be stabilizing or be it at considerably lower levels of activity compared to prior years. Our sales activities and marketing programs are producing good results and for the most part, we are able to offset general market declines with new business. And lastly, WESCO's operating results have shown improvement in most key areas and we expect to see continuous incremental improvement. With that, we will now open the call for question and answer session.

Thank you, Mr. Haley. This question and answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the "*" key followed by the digit "1" on your touchtone telephone. If you are on a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order to receive signal. We will take as many questions as time permits. Once again, that is "*" "1" to ask your question. We will pause just a moment to assemble our roster. Now, we will take our first question from Robert Cornell, Lehman Brothers.

Morning, question here. I am especially impressed with the improvement in gross profit margin and eluded to this in a couple of ways in the conference call -- but -- and especially talking about the evolution of mix to its integrated supply, which would have lower gross profit margins. You may just touch base a bit on more detail on why the gross margin is so strong in an overall week environment considering the mix.

Bob, that overall mix is about the same as it has been for the last probably six quarters I would say and what we are seeing is some of the construction project activity which carries a component of direct shipment business at lower margins that makes us being offset by the improvement or increase volume that we get in the integrated supply business, that's one factor. And then the second factor is - is that our operations that specialize in integrated supply have really done a terrific job in their own right in improving, purchasing, and pricing and margin performance.

Yes. What's the run rate in integrated supply now, I am little out of touch?

Overall, recognizing that we have got several units that participate in that market in different ways. Overall it's into 8% to 9% improvement for this quarter compared to the same period a year ago.

Yes, I mean but how big is the businesses of -- part of the overall company?

Above this overall business for all of our integrated supply operations approaches about $0.5 billion.

Up to $0.5 billion. Yes, thank you.

And we will take our next question from Mark Koznarek, Midwest research.

Hey, good morning.

Good morning.

Could you guys comment on the pace of industrial automation sales on occasion you break that out, and I didn't hear it as you went through your end - end markets?

As you might guess with capital expenditures being down, there it is a challenge in the category that you referred to but a little surprising in overall sense and we used a category that we call controls in motors, so it's not -- may be as not as precise of definition as you are looking for, but overall that segment is performing reasonably well in looking at current year to date information, we are off of prior year to date by only 1.5%, so that's held up in the aggregate better than expected considering the situation with CAPEX.

And that would be equivalent to your ESCO subsidiary.

Well it has got more than that in there. It's a broad category and these kinds of products are sold in a variety of operations but it is a significant part of our ESCO operations with only order of magnitude of maybe 40% of their sales volume really dedicated at the automation and technical support type of products.

Okay, and then second question here I was a little puzzled by the comment early on about daily sales rate deteriorating over the quarter but then monthly sales rate improving. Can -- can you kind of walk me through that dynamic?

Yes Mark, the comment was on this quarter-over-quarter basis. So, we look at the second quarter of 2002 versus a second quarter of 2003, the daily sales rate was down. That corresponds to the quarter being down to roughly 3%. As we look at the daily sales rate from January through June, looking at each month sequentially, we saw a modest improvement through the first six months with the month of June being the best daily sales rate we've seen so far this year.

Okay. But the year-over-year is?

Is down.

Is down and has that been narrowing as we've gone thorough the year or is it pretty steady down. I mean, your overall sales of course are down 2% and 3%, so that, I imagine is pretty reflective of what the daily sales...

We had the same number of days in both quarters and on year-to-date basis, so the reflective of the overall sales.

And if you look at the June numbers, in that regard, they are about equal. So, to your point, if you look at it at one point in time, that gap has in fact narrowed. The difference is that the trough for us was January and February of this year if you look at it at a multi year trend, we have seen improvement coming back from low point early this year.

So June is actually kind of flattish versus a year ago?

Yes.

Great. Okay. And then a final question - kind of related topics, billing margins or net of price and I am wondering if you can talk about price, how that did in the quarter relative to the competitive environment, have there been any kind of material changes in major competitors. I know that the bankruptcy is in people exiting the business - it sort of ongoing theme here. Is there have been any of that?

You are - you are talking about product pricing to our customers?

Yes.

Pricing is under attack by customers of all types and all sizes and we are, as I have mentioned, that a fearfully competitive market environment right. There is the continuous pressure of reverse auctions that are going on in a variety of industries on a continuous basis. There is a shift of certain product acquisition by certain customers seeking product from low cost country, markets and producers, and so there is a constant pressure on price. We have -- we recognize how powerful a factor overall margin is in our business and it is - it's not really all that unique or complicated. We have to always be working on buying better to have a cost pattern or cost structure that will support the necessary pricing in the market, and we have to be very disciplined on our pricing decisions and the consistency of those pricing decisions across our large organization. Though, it is a combination, the improvements that we have got and we have talked about this on a fairly regular basis. We have really started working away at this well over a year ago and our challenge is that we have a lot of large customers with more or less fixed contract pricing levels, and so when changes take place in the producer costs and those get passed on to us, we have a very difficult time of being able to pass that on to our customers. So, we have been attacking the need for improved margins with disciplines in pricing, control over discounts, and through purchasing initiatives of various types, and we have made good progress and we have got a lot of momentum that will carry us through for some time to come on additional improvement incrementally over time.

Okay. So it sounds like that there has not really been relief from a competitive standpoint.

Absolutely not.

Okay.

In fact, to your point, when some one is in a deep financial crisis, we run the risk that they price even more competitively to try to maintain a presence or to sustain themselves, so we do not find that working to our favor. I'd like to think that it would, but -- it just not -- that is not going to happen, given the fragmented nature of our industry.

Okay. Thanks for that discussion, I appreciate it.

Then we'll go next to Rob Damon [ph], 21st Century Research.

Could you give us your view on the manufacturing out sourcing trend to Asia. How this trend is impacting the business and does WESCO have any plans to expand more aggressively into Asia in order to capitalize on its trend?

Good question. Our customers and our suppliers who are in the manufacturing or industrial market segment are almost all talking about some form of low-cost country sourcing, and in particular about China, and part of the reason for that is the fact that the Chinese currency is pegged [ph] to the Dollar at a lower level and at least for the pursuable future that will be a cost advantage, at least on material and labor cost in that regard. So, there is a lot of interest by a lot of different companies both customers and suppliers enforcing products in China and in other locations and we have to be on top of that because we have to be responsive to what the cost patterns are and what the challenges are. There is still tremendous value in the supplier brands and the marketing and the engineering and product development of the key suppliers that we worked with and there is tremendous value in that and our marketing plans and strategies are almost all exclusively focused on the support of our supplier partners and their branded products, so from the standpoint of alternative sourcing from our standpoint, our interest here is really working with our suppliers to enhance their supply chain and their cost structures as best they can.

What about your customer's industrial facilities closing up shop here in the US, moving part of their manufacturing or all your manufacturing to Asia, you can see what customers, therefore, leave, are you able to service that customer in Asia? Do you have the facilities to do that? Would you every consider making an acquisition in china to better position yourself for that trend?

Several years ago Rob, we did do some due diligence work to identify potential acquisition candidates in Asia. The focus at that time was really more in Singapore, Philippines, and Japan. We are in current discussions about really more of a make sure we are up-to-date and know the issues associated with operating in China. We do sell product today into China but not on the same basis that you are talking about with [indiscernible] and investment grounded in China. Having said that we have a symposium that we are putting together right now with multiple companies that we will be talking and understanding their strategies in China with the intent to also figure out what our opportunities and our needs would be. Should we desire to make such an investment, so it is currently in a, I will call it as strategy assessment stage, and we had began that process, but we are right at the beginning of it.

Okay. Thank you.

Then we'll take our next question from Sarah Thompson, Lehman Brothers.

I may have just got a little lost in the conversation around the improvement in the billing margin, so can you just tell me if this is what is going on. To some degree you are getting better pricing from suppliers. This helps your margins and on the other side you are just not discounting as much to customers.

It's both of those.

Okay.

Sarah and we work hard on both of those initiatives. Over the last couple of years, we've developed and established some incredibly useful information systems tools that were necessary for tracking price discounting throughout the organization. The nature of our business unfortunately still has a significant characteristic of 3 bids and a buy associated with placing an order. Generally, prevalent outside of our national account are larger cooperate agreement, which are rigorously negotiated and then held in place for some time. In terms of smaller or regional or local customers and certainly contractors, it is very much of bid business. Accordingly, it is a very efficient market and there is a lot of price checking going on all the time, therefore, we have to give our grant pricing digression to a large number of our personnel. And because we have that digression, we also then have to have these controlled. So, big part of what we have been doing and I mentioned it, it's combination of training, it's customer reviews, it's information systems, and it is policies and controls and standards on this level of competitiveness. So, there is a lot in here on controlling the pricing levels that are negotiated at a point of interest and is happening a hundred times right at this instant throughout our network.

That's helpful. The reason -- the reason -- I asked the question is, I guess, I am missing a piece. If your markets are weak, there is a lot of pricing pressure out there. You have been able to expand same time, expand billing margins, who you are taking the market share from? That's the part I am having trouble understand.

Well, in terms of market share, I think what you are seeing is not an unusual phenomena and, that is, this is an era of the large company, and we have the capabilities to satisfy large company needs over large geographies and we typically when we add new customers into the integrated supply or national account kind of a program, these are customers that we've done relatively little work with in the past and all of a sudden, we have the opportunity to be their principal supplier in 10 to 50 to 100 locations and someone was providing that business in a local market arrangement in the past, so generally speaking, we are being successful against the large number of what we referred to as locally limited distributors.

Okay. That is really helpful. That is all I have. Thank you very much.

And we will take our next question from Bernard Horn, Polaris Capital.

Yes, good morning. I just wanted to follow up on the comment made regarding the legal reserves. I wonder if you could just give us some more, just maybe you can repeat that comment and/or clarify with respect to the category of legal issues that you are dealing with. Whether these are cooperative events or they are customer disputes and so forth.

The nature of our business is such that the typical -- the occurrence of the legal matters typically going to be on a commercial basis often associated with collecting for services provided or related to employee matters of one form or another and what I would tell you is that given the environment, we are in currently, we are facing challenges in both of those areas. Generally speaking, however, what we can't say is the that this falls in the category of employee related matters at this point and if you would allow us, we are -- we are -- not at trial, we haven't gone to trial, we don't have a case excepted for trial, but we have a situation that we think we can and should settle because of the cost of dealing with the all the due diligence work and data gathering likes. So, that is where we are. We have very few situations of these types that amount to any significant amount of exposure other than when we get into situation that involve bankruptcy related matters that require a lot of work to try to get some form of collection out of it.

Okay. Thanks.

Then we'll next to Cathy Nolan [ph], Solomon Asset Management.

Yes, good morning. Could you elaborate on the benefit, dollar benefit year-over-year in currency on your net sales and either gross profit or EBIDTA.

Yes, they have been on a year-to-date basis, Cathy, a nominal impasse, a slight charge based on currency, under a $100,000 or so. We've seen improvements in the Canadian and we are seeing some deterioration in the Mexican exchange.

Okay. I must -- under -- misunderstood your comments, because I thought you said year-over-year currency was a benefit to you during the quarter, this was not accurate.

Well, I was talking about on our sales activity.

Yes.

We benefited on the sales from exchange rate in Canada. If you look, we had a -- we had a 8% to 9% quarter-over-quarter sales increase in Canada, a lot of that was exchange rate driven, we took that out and kept in a Canadian dollars. We had seen about a 2% increase in sales.

Okay.

As far as exchange rate and impact on the P&L, year-to-date it's de-minimizes under a $100,000 net.

Okay. And can we assume then looking at your SG&A line. What's a good number that uses a quarterly run rate, can we just back out the 3 million in expense and say.

That would be a good starting point and then we look at changes in volume with plus or minus to that.

Okay. But the current in your business is about 123 million.

Yes.

And if you could just say, in terms of cash flow from operations, the number that we would find on the cash flow statement. What would that have been for the quarter?

Our cash flow for the quarter was about $24 million.

Okay. And that's the cash flow for now.

That includes the adjustments for the impact of our accounts receivable securitization program. When you look at the GAAP numbers, the increase or decrease in that shows up in financing. I just wrote that all on book, and that's what included in that $24 million number.

So, if there is any increase or decrease in AR would be in the 24 million number.

It's already reflected in that. When you see the numbers that come out in queue, you'll see use of funds, because we paid down our accounts receivable securitization during the quarter.

And that's reflected in the 24.

Yes.

Okay. Great. Thank you.

Then we'll take our next question from Keith Hogan [indiscernible].

My questions were actually answered. Thank you.

We will go next to Andrew Casey, Prudential Equity Group.

Good morning, thank you. Couple of questions on the modest DSR improvements for June, you have any doubt of that suggest that continue it in July.

July is typically a very spotty kind of a month, principally because of a lot of holiday, plant shutdowns, vacation issues and so forth. So, our experience over a number of years is that July is often times of month that is below June, running so far at this month is I just tell you we are looking a kind of a flat month to last month. That in some respect it's positive to what I am seeing right now. I have been traveling around quite a bit visiting our operations and I am a little surprise that because we are running in to a lots of industrial firms that have taken one or two weeks shutdowns or partial workforce reductions or vacation-type activities.

Okay. Thanks. And then on the second question, can you help me understand the caution on the outlook uncertainty, I know you haven't given any outlook, given that you are seeing trend of modestly improving DSR through June. Is the uncertainty mainly related to negative macro trends in the construction activity, that is, you are a little concerned that improvement in other areas is not really strong enough to offset that, can you help me understand?

It is the macro issues as much as anything and you see this with the sort of fluctuations in a variety of macro economic indications in trends, we have what looks like a pretty good month followed one or two flat spots and then either up or down and so forth, so -- that's - it's generally trying to anticipate when we will see some expansion if you will in capital expenditures, that's a big issue, and is not just contractors as I mentioned -- one -- one firms capital is another's revenue and a lot of our CAPEX spending opportunities are [indiscernible] a lot of our customer opportunities on industrial facilities that have to do some form of renovation or expansion. We see the same thing in utilities right now. We know that the infrastructure needs upgrading but they are in a capital constraint mode and -- we -- at some point, that will break loose, but we are down in a position to estimate that at this point.

Okay and -- then -- then one follow up on that is would you characterize the trend kind of year-to-date that you described kind of modest improvement, is that been for lack of a better term kind of whack-em-all industry by industry where one's up one month then the next two months it's down and it's replaced by something else?

There is a pattern or there is the occurrence, so that I can tell you that that's really the pattern, what we see is that that -- we're making some - we're seeing modest stabilization or modest gains in some areas, offset in other areas. We really didn't expect, for example, the manufactured housing business to be off like it is this year. At the beginning of the year, the industry was projecting significant gains; we were very well positioned. We thought there would be big gains as well. In fact, in February, we knew that was not the case. In fact, it is down again this year in the 20% range after being down by a similar amount last year, so there's huge adjustments taking place there. I'll tell you, we also didn't really expect the kind of adjustments that utilities of all sorts are going through. They are all in a capital conservation mode, there were some excess investment in a variety of different ventures and they are -- in a -- in a cash conservation mode, but the infrastructure, there we know has to be maintained and upgraded and we're confident that that will come back. It's just an issue of timing. With regard to other industries, yes, there are clearly is kind of an up and down aspect depending on either market conditions or competitive factors in those markets. And we see that whether you're talking about PetroChem or the -- even the auto industry, on one hand it kind of looks good with a lot of volume but there's not expansion of significance going on. And so, in that case, our success is really in a share capture mode, and that comes slowly. And it's a little uncertain, even though we have a lot of activity underway and there are lot of things that could break and be favorable to us, the timing, it becomes the problem. Decisions are drawn out at this point in time.

Okay. Thank you very much.

We will take our next question from Joe Garner, Emerald Asset Management.

Good morning, most of my questions have already been asked but let me ask to press to just financial questions here. Number one, what was the rebate comparison year-over-year in the second quarter?

We were up slightly.

Okay. And secondly, in the press release you indicated that you would expect to return to a normalized level for the effective tax rate through the balance of the year. What would be a normalized rate?

34% to 36% range Joe.

Okay. Great. Thank you very much.

We go next to Brendan Miles, Octagon Credit Investors.

Hi, good morning. With the intense pricing on an environment that you were talking about earlier, could you talk a little bit about the acquisition pipeline, the M&A environment, you see smaller guys just kind of going out of business and you are scooping up their business or is there anything in your acquisition pipeline?

The short answer is no -- there are no active projects being actively pursued at this particular point in time. We backed away from the acquisition market, I am going to say 18 months ago and it was due to the uncertainty that we had as we conduct due diligence to be able to have some sense of forecasting the revenue of various countries that we were looking at, and I will tell you we are very glad that we missed the vote on number of those as we look back in retrospect. And it was a function of us having if you will some standards or limits on what we were willing to do, and I am glad we did. Since that time, in many ways, the market for acquisition in our industry, you would think would be up and we think there would be a lot of dialogue, but it's been really relatively quite. There have been a number of companies that have gone out of business; in some cases, their assets have been picked up out of bankruptcy, but it's been relatively quite for the last year or so. We are -- we due ourselves as a consolidator in the industry, we are interested. We do try to pay attention to particular opportunities, but we have been cautious up to this point. And to some extent, that caution continues until we see a stronger foundation in terms of what the economic activity is going to be over the next 18 months or so.

Is there any -- is there any thing you could add to sort of the discussion within the industry among some of the larger players or other people kind of behaving the same way you guys are or what do you see? I am not asking to really speak for them, but what would do you see with respect to some of your?

As I say, it's been relatively quite for the last 12 months or so, other than some assets being picked up out of bankruptcy. And so I think just from what we see, there has been some slow down in that regard. Its public knowledge that the -- actually the world's largest distributor of electrical products were excelled, is in various stages of considering how they may sell that business or even consider meet possibly a requirement, break it into pieces, but to some extent that speculation in the press and that would be a huge transaction or huge series of transaction as some thing took place in which certainly change the competitive landscape. Rexel was an active acquirer given that appears to be a situation that is going to be sold. They are not active in the market at this point in time. So, again I can't comment on what the others are doing except to say that we don't see a lot of activity at the present time. With respect to your comment about company is going out of business and the like, I think that there is certain amount of resistance by owner operators to sell their business in the down market because they have a tendency to believe that the market will come back and therefore value will go up. So, there is some reluctance I think on the part of the individual owners to consider transactions at this time, which is also contributing to kind of an acquired time.

Thanks a lot for that color.

Once again ladies and gentlemen that is "*" "1" if you have any questions or any follow-up questions. We'll go next to [indiscernible].

A couple of quick question. One, when you [indiscernible] that swap, was that of 4.8 million cash payment to WESCO or did you guys pay that?

That was pay -- was $4.5 million payment, was a payment to WESCO.

Okay. Is that included in -- the -- that $24 million cash flow from [indiscernible] number?

No, we would not be in financing and would not be in the operations cash flow.

Okay. I think you guys did a decent job stretching out payables in the quarter, you closed the target?

No, actually the payables is from a days were flat and we're on the, basically, on the low end of what we had been historically from throughout the 90s in early 2000. So, I would say we are very solid where there we would like to see some improvement in that. We got excellent supplier relations. We are taking an advantage of all cash discounts and we are just incrementally negotiating better terms where we can, so we are at a kind of low end where I would expect that to be on an ongoing basis.

Okay. And one last question. Have you met with the [indiscernible] lately?

We met with them and last time we met them is early June and we have stable outlooks from both [indiscernible] and S&P.

Okay. Excellent.

Once again ladies and gentlemen, "*" "1" on your touchtone telephone for any questions. Mr. Haley, we have no further questions. I will turn the conference back over to you for any additional or closer remarks.

Okay. Left me try to make sure that I haven't left any wrong impressions with anyone with the discussion of tough market condition, pricing pressure, and the like the benefit. One of the big benefits that we have is -- we operate in a huge industry. There are lots of opportunities for us, simply because the industry is so large. It's large and fragmented and that means of plenty of opportunities, so one of the things that I would like to -- that I am personally emphasizing throughout the company is our selling strategies, sales activities, and marketing momentum and we are finding opportunities that may be we weren't seen previously. So, we have -- I think a lot going on in the organization. We see opportunities. We are challenged by the economy, but we are also -- and challenged by oftentimes, the time it takes for customer of project decision to get made or finalized. We have got a lot of positive things going on right now. We started it about 18 months or so ago, calling it our grinded out strategy and we have been systemically grinding out new market opportunities, margin opportunities through pricing and purchasing, cost initiatives, and [indiscernible]. You also see that in our administrative function. It's been a grinded out process with things such as our financing strategies and programs that have yielded the terrific results in terms of balance sheet strength and liquidity and the tenacity with which we have been pursing potential tax basis improvement. So, there has been a lot going on and there has a lot of hard work, but with that has come a lot organizational strength and a lot of a good accomplishments that set the stage in my opinion for our further progress as we go forward. I am very optimistic about what we are doing with these LEAN program initiative, primarily because everything so well received by the majority of the folks in our organization and that too is going to yield some strong benefits for the organization going forward. I will close by simply saying thanks for being with us, and thanks for your continued interest in WESCO. Have a good day.

That does conclude this WESCO Second Quarter 2003 Earnings Conference Call. We thank you for your participation. You may disconnect at this time.