Wesco International Inc (WCC) 2007 Q2 法說會逐字稿

Good day ladies and gentleman and welcome to the second quarter earnings conference call. My name is Denise and I'll be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question and answer session towards the end of the conference. (Operator instructions).

As a reminder, this call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Daniel Brailer, Vice President, Treasurer, Investor Relations and Legal. Please proceed, sir.

Good morning and thank you, Denise. Good morning ladies and gentlemen. Thank you for joining us for WESCO International's conference call to review the second quarter financial results for the year ended 2007. This morning participating in the earnings conference call are Mr. Roy Haley, WESCOs Chairman and Chief Executive Officer; Mr. John Engel, Senior Vice President and Chief Operation Officer; and Mr. Steve Van Oss, WESCOs Senior Vice President and Chief Financial and Administrative Officer.

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 seven days.

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, 2006, including the risk factors described therein 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 WESCOs website at www.WESCO.com. I would now like to turn the conference call over to Roy Haley.

Good morning and thanks for joining us. On an overall basis, the quarter was quite good with new records of performance, lots of improvement activity and a lot of things that have gone right. We continue to add to I'm sorry. We continue to add to and to develop our organization with additional management and sales positions.

Our acquisition assimilation and integration programs are fully staffed with numerous initiatives to achieve planned synergy and a small acquisition was completed near the end of the quarter.

Profitability, cash flow and after tax return on invested capital have been very good with ROIC, including our investment and acquisitions and repurchase shares reaching record levels. Organic growth is the only aspect of the business that has not performed as expected. We didn't achieve our total sales revenue objectives.

I believe that our organization is responding appropriately with both the previous and planned additions of new sales and marketing personnel, new vertical market growth initiatives, successful renewal of major customer agreements, new mechanisms for continuous tracking of major bids and sales opportunities, and a shift in our lean process and productivity improvement efforts to a greater emphasis on sales and service capabilities.

We have major opportunities in our sales pipeline and we believe that sales performance will be improving. Steve will now take you through a financial and operational review and John will discuss customer and market segment activity before we go to a Q&A. Steve?

Thank you, Roy. I'd like to start with a high level overview of the quarter's results and our conclusions regarding the company's performance. As evidenced in our earnings release, we posted company best ever sales and earnings per share results and record second quarter operating profit and net income. Consolidated sales were up 14% over last year's second quarter. As Roy mentioned, organic sales were essentially the same as last year, which was well below our expectations for the quarter. We'll discuss our actions and expectations for top line growth in more detail later in the call.

Consolidated earnings per share were $1.17 verses $1.05 in the second quarter of 2006. Strong working capital performance during the quarter drove significant free cash flow of $50 million to self-facilitate the purchase of nearly 2.2 million shares of WESCO stock for approximately $137 million during the quarter.

Since 2004, we have spent nearly $1.2 billion on acquisitions and share repurchases while also reducing our financial leverage. Return on invested capital at 16% including the investment in CSC has doubled since 2003 and reflects good earnings growth and high asset efficiency. The integration of our CSC acquisition continues to progress well and the combining of our businesses has produced very positive reactions from suppliers and customers. CSC contributed $181 million of revenue during the second quarter.

As stated last quarter, we expect CSC to add $675 million to $700 million to revenues in 2007 and feel confident that we will meet or exceed our original projection of $0.35 to $0.40 of corporate earnings per share accretion.

Consolidated gross margins at 20.3% were identical to last year's second quarter, despite a negative sales mix and the absence of approximately $8 million or 50 basis points of commodity based inventory profits. Consolidated operating profit pull-through at 13% was below our targeted level. With flat organic sales, operating profit pull-through on core operations was negative.

Overall, cost containment actions were effective at maintaining our SG&A expense compared to last year. SG&A dollars declined sequentially by $10.7 million or 130 basis points. We achieved second quarter free cash flow of $50 million even with almost 5% sequential sales growth over the first quarter of 2007.

Year to date free cash flow was approximately $120 million and helped facilitate the purchase of 5.2 million shares of our stock for approximately $335 million. In all, our averaging borrowing costs are low and have improved over the last three years despite a rising interest rate environment during most of that time period.

With liquidity at over $184 million in strong free cash flow, we continue to have ample capacity to fund organic growth, purchase additional stock and make accretive acquisitions.

As noted in our press release this morning, we closed on the acquisition of Cascade Controls Corporation. With two locations and $11 million of sales, Cascade is a well established distributor of automation controls in the Northwest that provides our company with enhanced capabilities to serve our customer base of original equipment manufacturers. Cascade represents a good example of a large pool of available [bulled on] or tuck-in acquisitions for WESCO that are lower risk.

The acquisition pipeline continues to be active and we will continue to evaluate opportunities with a view towards completing more tactical, strategic and creative acquisitions.

Let's now focus our second quarter top line results, momentum, and our actions to achieve above market organic growth. From our perspective in the first half of 2007, the overall economy transitioned quickly to a level of growth well below our original expectations.

In the second quarter, unanticipated and broad based decline in utility expenditures for distribution materials along with lower commercial construction activity in our end markets, coupled with an anticipated decline in recreational vehicle and structured housing markets resulted in sales for our core operations being equal to last year.

While we are disappointed in the overall sales performance, the sales growth in our other core operations was up mid-single digits and our CSC acquisition results were in line with expectations. An analysis of the macro economic data reflecting activity in our end markets, coupled with input from internal sales management, suppliers and customers indicate a favorable environment for sustained growth across our end markets is evident for the second half of this year.

Our backlog is 6% above year end 2006 and signals what we believe to be a broad based demand for our products and services. Roughly 18% to 20% of our business focused on the electric utility generation, transmission and distribution end markets, we are well positioned to capitalize on the forecasted increase in spending on maintenance, expansion and automation of the nation's electric power grid.

Although we have a relatively small portion of WESCO sales in the residential construction market, the decline in the residential market is having some impact on our business, particularly in our customers serving the recreational vehicle, modular and HUD code structured housing markets.

Over the last three years, we have been successful in utilizing our lean initiatives to generate above market top line revenue growth and sales capacity with our existing sales force. We are now focused on adding additional capacity through a redirection of more lean activities toward sales efforts and in meaningful additions of sales and sales support personnel.

John Engel, our Chief Operating Officer, will provide additional insight into our end markets and initiatives we are undertaking to accelerate organic growth. John?

Thank you, Steve and good morning. I'd like to provide some commentary on our major end markets. First, starting with utility. An unexpected reduction in utility expenses for distribution equipment and supplies, the "D" of T&D, resulted in flat year over year utility sales in the second quarter. A significant change compared with the double digit growth delivered in Q1.

Flat sales were driven by declines with a few investor-owned utility customers and the continued impact from the soft housing market. Overall, the utility market is experiencing a shift in spending from distribution to generation and transmission. The market remains active with bid requests and key alliance proposals for a traditional distributor sales as well as new and emerging integrated supplier opportunities.

Additionally, the customer trend of outsourcing of non core functions coupled with the underlying need to strengthen the transmission and distribution network remains strong growth drivers over the mid to long term. We continue to be bullish on utility over the long run.

Now moving to construction. Commercial construction sales grew sequentially versus the first quarter but we're down versus the second quarter of last year. Challenging comparables and selected geographic markets in the U.S. drove the year over year decline. End market activity levels are generally healthy and momentum is building as we enter the back half of 2007. Bid activity is high and construction backlog is up versus the first quarter of 2007 and year end December levels.

We're continuing to execute multiple sales and lean-related initiatives targeting EPC customers and large multi-location national contractors. We've also launched a new vertical market initiative in the second quarter targeting the high growth data center market. Data center opportunities cut across all industries with strong growth in the financial, telecom, medical, government, and other data intensive high tech markets.

CSCs expertise in network infrastructure, data communications and physical security products combined with WESCOs electrical and power capabilities provides a comprehensive solution for these commercial construction projects.

As experienced the last two quarters, manufactured housing end markets which are comprised of HUD housing, recreational vehicle and modular continue to be very weak resulting in a sales decline of 9% in the second quarter. Reduced production levels were the driver of the double digit declines in these end markets. End market weakness is expected to continue at least through the end of 2007.

Moving to industrial, opportunities with multi-site industrial customers remains strong as they continue to outsource portions of their supply chain needs. Sales to customers using our integrated supply services show good strength and were up in the quarter. National accounts sales were also up in the quarter and our business model continues to be very effective with customer renewal.

Examples in the quarter include [A.K. Steel], Siemens Energy and Automation Division and MARS snack foods and new ones. Examples in the second quarter include Land O'Lakes and DBT, a mining company.

Bid activity levels remain high with the national account opportunity pipeline at an all time record. Focused customer sales (inaudible) events and joint calls with key manufacturing partners continue to expand in number and increase in effectiveness. By increased marketing activities in the second quarter including national sales promotions, new product launches, trade shows and national accounts sales blitzes are continuing in the third quarter.

The improving macro economic environment as measured by the ISM Index, a high level of capacity utilization and increased manufacturing production reflects the strengthening second half of 2007.

Shifting to CSC. CSC continues to perform consistent with expectations and delivered a strong quarter. Long term growth prospects remain attractive driven by one, the growing demand for bandwidth and commercial government and residential applications. Two, new commercial construction with an emphasis on data centers. Three, growth opportunities within the physical and network security markets. And four, the overall trend of convergence. That is the convergence of voice, data and video.

Now shifting to our top line revenue investments in sales and marketing. As discussed last quarter, we're continuing our investment in sales and marketing. These resources are targeting attractive growth market segments such as utility, international, healthcare, government, and now data centers where we have significant market penetration potential. The focus is on expanding our sales capacity to increase our customer penetration and growth in these priority growth verticals as well as local branch markets that offer strong incremental growth opportunities.

We are targeting over 200 additions to our sales force over the next 18 to 24 months and we're investing in new branch operations in select, attractive growth geographies.

In summary, our lean initiatives focused on operational administrative processes continue with a greater emphasis now being placed on sales and service. We have an extensive set of sales and marketing initiatives under way which gives us continued confidence in our ability to provide value for customers. We're well positioned and it is our objective to regain our sales momentum in the second half of 2007. Now back to Steve.

Thanks, John. Before looking at the third quarter, I want to comment on copper price trends and its impact on our results. Copper commodity pricing continued to increase during the second quarter. On average, copper pricing was essentially the same level as last year's second quarter and 28% higher than the first quarter 2007. On balance, this should provide for comparable top line revenue comparisons quarter over quarter.

Gross margins for this product set should be steady sequentially, but below last year's third quarter due to prices last years ramping up sharply from the first through the third quarter.

Now for the third quarter of 2007. Given the current trends in macro economic and end market activity, we expect the second half of 2007 to be stronger than the first half. We believe that growth in the industry for 2007 will be below the mid-single digits and our performance will be in the same range. The third quarter of 2007 we expect to generate growth in our core businesses of approximately 2% to 4%, both sequentially and over the third quarter of 2006.

Third quarter sales from CSC are expected to be between $180 million and $190 million and total sales for the quarter are expected to be in the range of $1.55 billion.

Gross margins should increase slightly during the third quarter and SG&A as a percent of sales should improve by approximately 10 basis points from the second quarter of the 2007 rate reflecting a positive leverage on higher sales.

Depreciation and amortization is expected to be approximately $9.5 million for the quarter and the tax rate is anticipated to be around 32%.

Working capital productivity should be maintained on a day supply basis and free cash flow over the next several quarters will be directed at debt reduction and WESCO share purchases.

Based on share repurchases to date, share count for the third quarter of 2007 is anticipated to be approximately 48 to 49 million shares and average 49 to 50 million shares for the full year.

In early 2006, we communicated a new overall target for operating margins in the range of 8% by the end of 2008. We remain committed to deliver on that target. Our view for the remainder of 2007 remains positive and we believe that we are well positioned to capitalize on nonresidential commercial, industrial and infrastructure construction projects and the forecasted increased spending on the nation's electrical grid. We look forward to another year of delivering excellent service to our customers, improving our operations, providing rewarding and growth environment for our employees and creating superior shareholder value.

Denise, at this point will you please open up the call for question and answer session.

(Operator instructions). Your first question comes from the line of Curt Woodworth from J.P. Morgan. Please proceed.

Hi. Good morning. Steve, you commented that you remain comfortable with hitting the 8% margin target, which I think kind of a mid/late '09 goal. What gives you the confidence that you can still reach that target and what kind of organic growth do you need to get there?

Curt, we still remain confident on that target. It has a couple of base assumptions on that, one of them being an organic growth rate, but also that being a general economy that's in that 2.5% to 3% GDP range. That's where we've been seeing kind of on the high end of that range for a period of time. We certainly did not like to see the first quarter at 0.7% and the 8% target is predicated on having economy that is what I call a normal sustainable range.

We have a lot of initiatives going on that relate to the margin expansion across all of our product sets and end markets and we continue to have very good cost control. I think if you look at what happened this quarter with the flat organic growth, our SG&A costs were very well maintained. We're down from where we were in the first quarter and even with what I'd call normal wage inflation and benefit costs, we were flat to last year second quarter, so I think we've done an excellent job of maintaining the cost structure and with some top line growth, we can continue to see that we should able to do the leverage improvements that we've done in the past.

Okay. In terms of the acquisition pipeline, can you comment on how robust it is? Are you seeing potential for larger transactions and given that the buyback is largely completed, what's the strategy in the back half of the year in terms of share buyback for acquisitions?

As we stated before, our intent would be to execute on the full program of the share repurchase that we announced in February during 2007 and I don't see anything out there now that would cause us to deviate from that. There's really not a change in our acquisition strategy or activity as the share repurchase vis-a-vie acquisitions was not an either/or.

We have good capacity on our existing debt lines and historically the company has had readily available at competitive pricing access to the debt markets. We're looking at several small/medium sized [bolt-on] acquisitions at this point in time. We've got the activity level on acquisitions is pretty active. I'd say above historical averages, but maybe a little bit below what we saw the frenzy building up at the end of last year. We've got a good, strong operating model.

We have an acquire of choice for a lot of companies. We've got a good track record of merging the management in well. There are some larger acquisitions we're looking at adding at that this point in time, but its way too early in the cycle to really talk about anything further.

I guess I'd summarize saying that we remain committed to drive our organization towards good organic growth and we'll supplement that with what's been our track record of adding accretive acquisitions and there appears to be plenty of opportunity out there do that.

Great. Thank you.

Your next question comes from the line of David Manthey from Robert W. Baird. Please proceed.

Thank you. I was wondering relative to the progression month by month through the first quarter, I believe you said that January and February were somewhat flat and March picked up to 6% growth and April is running at about the same pace. Could you talk about the progression in May and June and what do you think led to A) the spike up in March and April and then B) the spike back down in May and June?

Dave, typically we would see on a sales per work day progress throughout a quarter in April, May, June type of a movement on that. Most of the surprise we saw, if you want to call it that, happened in the last couple of weeks in June, really the last eight or so work days and it hit pretty hard particularly in our utility end markets. And it looked like the category of what I call the investor owned utilities really put some brakes on their inventory purchases.

We've had some meaningful discussions with just a few of those that indicated that they in fact were really driving some inventory out of their channel as they were trying to meet certain return on investment targets that their companies had.

We don't at this point feel like this is a systemic issue that's going to continue on that, but we were surprised. It was primarily in that area as well as -- and I think John mentioned a little bit to add a little color on some of the commercial construction areas. It progressed through April/May pretty much the way we thought from a seasonality standpoint. We saw in the last week or so in June where we anticipated getting a lot of project activity that just didn't materialize.

John, do you have anything you want to add to that?

Just maybe a comment first on utility. It really was again contained within the investor owned utilities. Public power customers grew in the quarter. Investor owned utilities were down year over year in the quarter, kind of mid-single digit range. And if you take our top 15 investor owned utilities, that was down by a higher single digit range. We really saw that kind of isolated into the investor owned utility as Steve mentioned.

They have -- these are public companies that have return on capital as a primary driver. They've got commitments to meet, so one of the levers that they can pull is the operating and maintenance budget and that inventory lever they can pull pretty easily.

Overall, we see the utility market as being very healthy despite the unaffected decline in demand for distribution materials and supplies in the second quarter.

On the construction site, we really saw a couple factors when you put the quarter in context. One is in several markets we've seen residential contractors and distributors adjust to the steep decline in the resi market by shifting their focus to commercial construction and we're clearly seeing that trend. That results in additional competition for labor and material apply and we've maintained our position in our strategy. We're not going to sacrifice margin for volume. We're going to continue to do that going forward.

Secondly, I would say that there was some challenging comparables in a couple different regions when you look at our performance in the quarter versus last year's construction landscape. For example, two of our branches in the Gulf region saw a pretty significant decline versus last year's sales, particularly the one customer that was rebuilding and upgrading their major oil and gas refining operations. They have a major phase two refinery expansion that's just begun. Originally it was slated to start in the first/second quarter and now it's moved out, we expect starting here in the third quarter, but really kind of kicking in the latter part of the fourth quarter.

That customer alone we're looking at over $20 million in electrical projects that will be required for that project over the next 18 to 24 months. That just kind of brings a fine point to the competition level. Some projects shifting. Overall, I will state though, and we got a strong view, the nonresidential construction market is generally healthy, but I think these are some of the dynamics that we're seeing in the quarter.

Okay. Thanks a lot. Just to clarify one issue there. In terms of your electric utility business, do you have any idea of how much of that is repair and maintenance versus new construction? I'm just trying to get a read in terms of the secondary or tertiary impact from the residential construction market.

Dave, we don't track it specifically like that. There is a large what I call a maintenance component of that as it goes along. There's definitely an impact on the residential slowdown as far as it relates to new builds where you're putting in a new development, you're putting in all the pull-line hardware, the meters, the transformers. There's definitely some impact. We see that reflected in the spending budgets of the investor owned utilities as well. I don't have a precise number for that, but it's probably in the 50/50, 60/40 range. That's something we can get into at a later time.

Great. Thank you very much.

Your next question comes from the line of Adam Uhlman from Cleveland Research. Please proceed.

Hi. Good morning. I was wondering if we could elaborate a little bit more on the top pricing environment that you were just talking about because it's interesting to me that we've seen a recovery of capital prices so far this year and your suppliers have been raising price and a lot of your other distributor peers are seeing the pretty favorable environment out there in terms of pricing. Could you talk a little bit more about what you're seeing maybe in the industrial markets and some of your other served markets?

Adam, could you clarify what you mean by favorable pricing environment so I can adjust a little more to your question?

Sure. Price realization above your product costs or price realization overall.

I would say on a price realization what we generally see on that is it's very difficult to get. It tends to be a lag that we have to be able to push it through the channel. We are effective in doing that. We've got a tremendous amount of emphasis internally in our organization, both from a process discipline as well as from a price maintenance platform from our technology.

We did not see a tremendous amount of upward price structure or realization during the second quarter and if you look at some of the areas of commodity pricing, that tends to be pretty dramatically related to where the stock market is and we handle that pretty well.

What we did do organizationally, though, is you saw copper rise dramatically in '06 from the first to the third quarter. It fell off in the fourth quarter of '06 and then into the first quarter of '07. We had the ramp the run-up. We moved our inventory level or the pricing inventory for our salespeople up to market as fast as we could during the run-up so we were sitting on inventory that was priced at replacement cost.

As it fell off a little bit, we did not want to sacrifice profitability, so we were pretty aggressive at maintaining a margin level on what I call higher based level of inventory. That fell through the first and second quarter. You saw that from a gross margin impact. It had a little bit of a negative impact on the quarter, but we think that we did the right thing and we're well positioned right now as I think the industry's inventories have adjusted to the new levels at this point time.

Adam, we're seeing price competition being as intense as it's ever been, quite frankly. Suppliers are continually trying to push price increases through us. We're not seeing it at the rate that we had last year and customers are continually looking for price reduction and/or increased value for the same price. I think the resi impact clearly we're seen that impact where these resi contractors is an indirect impact on our business. The residential contractors and distributors that had a high resi mix component of their business are shifting their focus to commercial construction.

This has occurred previously in this industry and that speaks to a driver for increased competition. We're not seeing a more relaxed pricing environment and we clearly, clearly have a strategy of not sacrificing margin for volume. That's not going to change.

I think overall when you step back and put the quarter in context and you effectively look at flat organic growth for the quarter and you look at what we've done with overall gross margins and with operating costs, and given just the entire environment of I'll call it intense competitive pricing pressure and competition, we think that's a very solid quarter.

Okay. How much volume do you think you'd sacrifice during the quarter or year to date?

That's very hard to put a number on. It's something where we've got very strong we've gone through in the past our process on how we manage and try to optimize and control margins and we've got a threshold set. It's something we're continuing to look at in, quite frankly, each of our branch operations and across our businesses. Each of those operations are trying to manage that balance.

What we clearly don't want to do, again, a little finer point to not sacrificing margin for volume. We don't believe that we should go chase very, very low margin orders, particularly with customers that are three bids and a buy in price shoppers anyway because at the end of the day you execute that order, your margins feel some downward pressure and what are you left with? Have you locked in a customer where you've got some loyalty and we can sell the stronger, broader WESCO value proposition going forward? The answer is no.

We feel very strongly, again, about the philosophy we have in place that's served us well. That's not changing as we move forward.

Adam, I think the thing to be pointed out is what the actions we are taking as it relates to getting the momentum on the sales going back up again and that's continued redirection of more efforts of our lean into driving efficiency which we were very good at doing over the last three years on a relatively flat sales force.

And as John and I have mentioned on a couple of occasions, it's a significant focus and the addition of Sales Management, Sales and Sales support people to increase our capacity in that area to really drive sales at a profitable margin. We're really going at it and trying to get more value add, maintain good profitability and increase the capacity of our front end for the top line revenue.

Okay. Just to clarify that, you said earlier you were adding 200 salespeople to the sales force. How many sales people do you have now?

We've got roughly 2,500 combination of outside/inside sales people and another several hundred in CSC.

It's an 8% to 10% increase in the bandwidth.

Okay. Thank you.

Your next question comes from the line of Deane Dray from Goldman Sachs. Please proceed.

Thank you. Good morning, everyone. Just to follow up on a couple of those points and when we talk about and think about the trade off that you've made in the quarter between changing some low margin business. Wouldn't that be reflected in your gross margin and the fact that you held gross margins where you did? Can we interpret from that that you did continue to pass on some of its low margin?

Dean, if you kind of look at the gross margin being flat to last year, and last year you recall the impact of some of the commodity that we talked about in the ramp up, we think that we actually expanded our gross margin. I think we are confident that we actually had some expansion on the gross margin.

I don't want to overplay that piece of the low margin orders, because we did have some end markets that were pretty challenged and we think the broad base not just WESCO, but across the industry and specifically utility component as well as the recreational vehicle, modular housing area which is down significantly.

John mentioned our sales were down in the high single digits. Those end markets are down 20% to 25% and we've maintained and actually improved our margins in those areas. We feel pretty confident that we're doing the right things and that the investments we're making now and continuing to make are going to pay off down the road.

Just on that point, if you wanted to, you could have painted your top line sales numbers with a couple percent higher to show organic revenue growth, but it would have come at the expense of your gross margin. Is that fair?

That always is the case. There are certain product order opportunities that are out there that are extremely low margin, but are there for the taking.

We'd rather see that discipline. And then just to circle back on the additional sales people in some of the redirection of SG&A resources, I just want to make sure that we get some assurance that you're building the sales force and the infrastructure on SG&A appropriately for this more moderated top line environment for the second half.

I know it's sort of a build it and they will come, but I just want to make sure you're not stressing the fixed cost component of SG&A over the next couple of quarters.

Deane, basically when we look at our sales force we try to drive the commission sales force. In a small degree, it's a pay as you go. In the first couple of quarters you have to provide some type of a draw. It could have a slight negative impact.

And think about what we said about redirecting our lean resources to get capacity on that. We also would intend as we do the sales force adds to look at a higher growth on maintaining the administrative operating costs on that so we can get the leverage on that and really focus the resource additions. If you want to put us into a manufacturing context, into direct labor. For us it would be adding in the sales force.

Deane, our lean initiatives are focused on process improvement productivity are as strong as they've ever been. We've still got tremendous opportunities to drive productivity. I would say that that clearly has been our emphasis, has been a foundation for how we've managed the business over the last four years since lean was launched. We're in year 4/5 of a decade-plus journey. That will not change. That fundamentally will not change. Is it fully built into the fabric of the company culturally? It's something we continue to work on, but here we are in year 4/5 after launching lean and it's getting stronger and stronger every day. So just think of that as the foundation or the underpinning.

What we're talking about here under the lean initiative for sales shifting the emphasis to sales and service and focusing specifically on I want to put a finer point on it -- sales management, includes territory management and some selective sales force expansion focused on these key verticals where we've got significant opportunities to expand our position, as well as selected local branch geographies that are well run operations, growing double digit, have excellent characteristics through the first half, but have opportunities to grow and can put an incremental sales resource to use and get very quick return on that investment.

And then fundamentally as Steve said our go to market model and the way we manage our sales is not going to change. It's the outside sales force is commission-based and that we think is a key element of how we [incentivize] and drive the performance of the sales force. That's not going to change.

Got it.

We've got to keep a balance and we will.

Thank you, Roy. Just a couple clarification on the electric utility market and we cover companies like Hoover Industries, so we've seen the appetite and the build out of the grid and have been seeing a 10% to 15 % end market expectations for growth over the next several years which is well above trend line what we've seen in the past several years. In the consequence of this shift to more distribution and generation, aren't more of the products being shipped directly from the OEs as opposed to going to distribution?

Yes, Deane. Let me respond by saying if you look at traditionally how the utility industry was structured and if you break it into power generation, transmission and distribution; absolutely right. When you look at power generation and transmission and you look at the supply base, you'll see a number of those products have traditionally been served via a direct basis, i.e. not through direct channel partner and the distribution portion of the utility market, the "D" of D&T has been more classically served through distribution. So overall, we remain bullish on utility.

It's clear utility companies are investing heavily in the entire, I'll call it value chain from generation through transmission into distribution. What we're seeing is kind of a shift in given limited capital funds a shift in investment from distribution to transmission, but we believe any investment in generation fundamentally, which we've all seen the surveys whether it's 10 or 30 or 50 new power plants that are going to be built in the next decade, the fact of the matter is there's going to be new power plants built and the increased investment in transmission is stripping away some of the investment for distribution.

But fundamentally the grid and what's called the distribution grid, has needs; maintenance needs, upgrade needs, et cetera that need to be addressed and from a consumer standpoint, and we're all consumers, the issue of power quality and reliability. No matter where you're sitting in the continental U.S., we've all faced issues in terms of power interruptions or power quality issues that I think consumer sentiment will continue to be a strong growth driver.

So fundamentally, we step back and look that we're as bullish as we've ever been on utility. We feel very good about our position. We have gotten feedback from a number of our manufacturers that they experienced strong growth in the quarter on the direct side, serving the transmission side of utility and that particularly in the months of May and June they saw some decline on the distribution side. That's feedback from a number of suppliers that we are partnered with on the utility side. It's clear what we saw in the quarter, but that does not change or reduce whatsoever our bullishness over the mid to long term.

Dean, historically the level of activity for industrial and commercial products that go through distribution have been in the range of 70% to 80% of the total output of manufacturers. In the utility market it was in the 20% to 30% range and over the last five years has been increasing over time. That's a good dynamic for distribution and for the services that a distributor provides, but it clearly is a much lower percentage of product going through distribution as opposed to it going direct and it's in that range now of 30% to 35% range of total product that goes into the utility market. It's still coming from a direct ship from the manufacturer.

Very good. Just a last question and Steve in giving guidance for the third quarter, when you talk about 2% to 4% sequential top line growth. Is that assuming any market share gains? Typically, WESCO aims to grow a percent or two above the market from share gains. Is that assumed in that range?

Historically we've seen share gains over big periods of times or even quarter over quarter and sequentially. That's really coming more this time, Deane, from what we see of a comprehensive, bottoms up, top down review of where we think the business is. ISM data for the last three months has been pretty strong. We tend to lag a little bit with general economy so expect that to be an element that would indicate a bit stronger second half. A lot of detailed conversations with our inside sales force and sales management on the status of projects to their discussions with customers about what's being released, looking at the capacity utilization and employment data. All would tend to belay a stronger second half.

Historically we would generally see our second and third quarters being a little bit more equal, but we've seen trends before where we've had this type of a growth third to fourth quarter. I can't tell you it's just market share gains. We believe it's really more related to the overall activity in our end markets and the momentum feels like it's improving.

Thank you.

Your next question comes from the line of Sarah Thompson from Lehman Brothers. Please proceed.

Hi. Good morning, guys. Just a couple of quick questions. Can I have a total debt number?

Pardon me?

What's the total debt?

It's about $1.3 billion and change; up about $600 million from this time last year which reflects a half of -- $525 million of purchase of CSC and then the $335 million of share repurchased offset by some pretty good cash flow.

Okay. Great. You mentioned on the free cash flow, you mentioned that free cash flow was about $120 million for the quarter.

$50 million for the quarter and a little bit north of 120 for the first half.

Okay, so 50 for the quarter and then a little north of 120 for the first half. One last question on the acquisition. Do you have an annual EBITDA contribution from Cascade?

It's not material. It's in the neighborhood of three quarters to $1 million.

Great. Thank you very much.

Your next question comes from the line of Steven Fisher from UBS. Please proceed.

Good morning. Not to beat the utility exposure to death, but I guess I will a little bit more. What do you think is going to actually drive a turnaround in the distribution side of that utility spending? It sounds like it's really only a medium term that you expect to see improvement. Is it just really new capacity build over time?

I think the long term drivers are strong. We met with one of our major IOU customers earlier this week in Pittsburgh and they indicated that they see - and this is again one data point - but they indicated that they see increased shifting back to distribution spending here as we move through the third quarter and enter the fourth. There's clearly a need and there's going to be significant investment across the entire chain from generation through transmission and distribution and each of these companies are going to make those decisions on where the spending goes, [E versus D] over time.

We think again the drivers are strong for net overall investment and at the end of the day the burning need is going to be customer satisfaction and service levels. As we move through the third quarter, what we don't know what will happen it is kind of hurricane activity and other events that may drive a spike in demand. We'll see how the quarter unfolds.

Okay. Great. Can you just comment on the progress of your targeted marketing efforts at the engineering construction companies? How many companies have you penetrated so far? Have you started to generate incremental sales yet or when might you? And then could that business be expected to take you outside the U.S.?

Yes. We are beginning to see good initial results of our increased focus on EPCs and national contractors. Let me say that we have enjoyed relationships with them previously. You can think of this as a kind of emphasis focused on increased marketing, increased sales activities to increase customer penetration and to expand with those customers. The EPCs in particular, a number of the large ones we've enjoyed very long standing and strong relationships with them and these other opportunities are both in the U.S. and international.

Our international business is small, but it's growing nicely. It was up double digits in the quarter and that represents one of our growth verticals as a focus. Specifically, our focus on national contractors which we see as an emerging trend in the contractor market, we've got two new and expanded agreements that we've locked down in the quarter that should bode very well for increased growth with those two prospective customers. We feel very good about the initial results of our increased emphasis and marketing and sales on that vertical or that set of customers.

Okay. Lastly, just to clarify. It sounds like on the nonresidential construction side your commentary was more of a few big projects that have experienced some delays and not a commentary on the broader state of nonresidential construction.

The nonresidential market overall is generally healthy. We feel good about it as we enter the second half. We've got a strong backlog and our prospect of future booking is strong. In general, the market's healthy.

Great. Thank you.

Denise, we're coming up close to the top of the hour. We will take one more question before we wrap up.

Okay. Your final question comes from the line of Rob Damron from 21st Century Equity. Please proceed.

Just one more balance sheet question. If you look at the balance sheet over the next six months and you're working capital needs, can you maybe give us a little more color on what you expect for working capital going forward and also your expected cash flow, free cash flow for the second half of the year? Do you think that will be higher than what you reported for the first half?

Our balance sheet is in good shape, Rob, from a working capital performance supply inventory turns, receivable days, etc. We expect to maintain the level we're at now. We've got real good performance. I don't see that changing plus or minus by any significant degree.

As far as the total year free cash flow, we expect to see the second half be pretty similar to the first half. We had real good performance. The only caveat to that would be if we saw a significant ramp up of activity in the fourth quarter. That would have some negative impact on the free cash flow.

We've got a strong program going. The earnings are good. The working capital is in good shape. I think we will continue to see a similar performance in the second half working capital.

Okay. Thank you.

That's the last question, Roy.

Let me just try and summarize. We had a good quarter, but we missed our organic growth target. Performance balance has been quite good. We protected the profitability and we expect to continue to work on enhancing profitability in that area of performance, while at the same time we put more emphasis on our sales and marketing related activities.

While there have been some shifts in customer emphasis and there's been a good bit of discussion about the utility markets today, there's also been some delays or extended time frames in capital expenditures. We see that for example, particularly in Canada and the oil and gas region of the West. That's been stretched out somewhat also in some other markets where costs have run up or where demand for engineers and others to support the capital expenditures have been such that delays have been part of the problem.

However, our view is that our customer end markets remain favorable and we don't see any reason to be concerned about a worrisome shift in the health of those end markets. What we've been through here is a little bit of some ups and downs, but we don't see this as a long term kind of market weakness over the next 12 to 18 months. Therefore, we will be working hard to regain our organic growth momentum while working on profitability in overall performance.

Thanks for your time and your interest today. We look forward to speaking with you soon. Have a good day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.