Wesco International Inc (WCC) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2008 WESCO International Earnings Conference Call. My name is Caressa, and I will be your coordinator for today. At this time all participants are in listen only mode. We will be facilitating a question and answer session towards the end of this call. (Operator Instructions)

I would now like to turn the presentation over to your host for today's call, Mr. Daniel Brailer, Vice President and Treasurer. Please proceed.

Thank you. Good morning, ladies and gentlemen. Thank you for joining us for WESCO International's conference call to review the second quarter 2008 financial results. This morning participating in the earnings conference call are Mr. Roy Haley, WESCO's Chairman and Chief Executive Office; Mr. John Engel, Senior Vice President and Chief Operating Officer; and Mr. Steve Van Oss, WESCO's 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 ended December 31, 2007, 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 the respect of such non-GAAP financial measures can be obtained via WESCO's website at www.wesco.com.

I would now like to turn the conference call over to Roy Haley.

Hello, everyone, and thank you for joining us. In a few minutes, Steve will provide a recap of performance for the quarter and John will describe activity levels in our key customer segments. But I'd like to open the meeting with a brief update on a couple of areas of Company-wide emphasis and priority.

Last year during our second quarter earnings call, we announced a new initiative to combine a program of continuous sales force development with our ongoing commitment to productivity and performance enhancements driven by the application of "Lean" methodologies. I'm pleased to report that WESCO's personnel have made excellent progress on both of these initiatives.

We've now surpassed 70% of our initial target of adding 200 net new customer facing sales personnel over an 18 to 24 month period; and programs that we launched to upgrade recruiting capabilities, maintain information on local market talent, and deploy new training programs are rapidly gaining momentum.

I am confident that we'll reach our target of expanding the sales and service organization by almost 10%, but more importantly we're changing the dynamic of historically reacting to attrition and making selective additions to a well supported and long-term strategy of continuous recruitment and sales force development.

Now "Lean" is an important and critical part of this process because new sales personnel are naturally going to be producing at a below average level during their first 6 to 18 months in a new position. Additionally, new infrastructures required to support training, recruiting, and [own] boarding. We couldn't accomplish all of this while maintaining our low-cost structure without achieving productivity gains across the entire organization.

As you've seen in our report, our SG&A expenses are well controlled despite a variety of cost pressures, and our overall productivity barometer of sales and earnings per employee has again hit best ever performance levels.

Now you might ask, "Is all of this sustainable?" Now, personally I believe that our performance gains and positive momentum are sustainable. As in other companies and industries, we too have taken some big hits with weakness in selected market segments, increasing product and commodity costs, and escalating fuel and delivery costs. But because of our operating reach, our highly diversified and well-balanced customer base, and operating discipline, we're able to absorb and adjust to market conditions. Our business model is resilient and we've achieved a level of size and scope, profitability and cash flow to continue to invest in organizational capabilities, marketing and customer development programs, and new talent.

As you can tell, we are committed to building a bigger and stronger organization. Even in weak economic conditions we see expansion opportunities in markets and product categories where we may not have been as focused in the past, and with existing customers looking for operational efficiencies, energy cost savings, and technology driven solutions. We're confident that the increased attention we're giving to our already very strong sales organization will pay dividends over time.

Well, with that opening, let me now turn it over to Steve and to John.

Thanks, Roy. Good morning, everyone. Before we get into a more detailed look at results, I think it's appropriate to provide a few comments to put the quarter's performance into context. First, we produced our best ever-top line performance and our second best ever earnings per share result. Cost controls were effective as we reduced our overall employment levels during the quarter, while continuing to add to our sales force.

Working capital performance improved sequentially. Although we experienced gross margin contraction due to Mix and the time lag associated with pushing supplier price increases through the channel, and like others we are dealing with the rapid run-up in transportation costs, we are confident in our ability to regain and improve our gross margin performance. Overall, our organization grew solid results for the quarter and is now better positioned for continued growth in both the near and longer term.

Looking back a little, we previously communicated that on the first of this year we created a joint venture and sold a majority interest in our LADD operation to its primary supplier, Deutsch Industrial Products Division. Effective with this year's first quarter, we no longer report the LADD results in our financial statements as revenue, cost, operating profit, et cetera.

Our 40% interest in the new joint venture is now reported on an equity basis as other income below the operating profit line. The LADD operation is an excellent business, and our partnership with Deutsch has further strengthened the operation. Financial results for the first six months are ahead of last year.

And lastly for comparison purposes, in the second quarter of 2007 we recorded a non-cash benefit of $4 million in SG&A expenses due to favorable foreign exchange gain associated with our Canadian operations which we consider to be of a onetime in nature. This compares to the second quarter this year where we had a net benefit to SG&A expenses of approximately $1 million for items of a onetime nature.

On a consolidated basis, earnings per share for the second quarter of 2008 was $1.38 versus $1.22 last year, an improvement of $0.16 per share. Our share repurchase program was designed to capitalize on our earnings and strong free cash flow and deliver sustainable earnings accretion. The program is working. Since 2007 when we announced the first of two $400 million share repurchase authorizations, we have repurchased 8.7 million shares, or 17% of our outstanding shares, for a total of $492 million. Despite incurring additional debt in interest expense associated with the share repurchases, the earnings per share impact of this program from the second quarter of 2008 results was favorable by $0.15.

Looking at the first quarter a little more directly, as indicated we posted company best ever quarter sales results. Adjusting for LADD, consolidated sales were up 6.3% over last year's second quarter, and organic sales were up approximately 5.7% in the face of tight end markets, primarily in our utility manufactured housing and recreational vehicle end markets which have been directly impacted by the continued residential construction slowdown.

Strong net income and improvements in working capital performance absorbed the cash requirements associated with a higher sales volume and resulted in free cash flow of $38 million. Free cash flow was utilized to repurchase over 900,000 shares of WESCO stock for approximately $36 million under our current authorization program. Investments of approximately $157 million in share repurchases and $25 million on acquisitions have been made during the last 12 months.

Return on investment capital, which we define as reported net operating profit after tax, in relation to our total unadjusted capital base, including the three acquisitions completed in the last half of 2007, was 15% and reflects continued growth in earnings and high asset efficiency.

Consolidated gross margins at 19.5% were down 80 basis points from last year and 70 basis points from this year's first quarter. LADD and Mix accounted for approximately 50 of the 80 basis points declined from last quarter. Mix accounted for approximately 20 of the 70 basis points difference from the first quarter of this year.

SG&A expense as percent of sales improved by 140 basis points sequentially and was up only slightly over the second quarter of 2007 even with the headcount growth associated with our sales force expansion. The cost associated with the sales force expansion was approximately $3 million in the quarter.

We're continuing to invest in marketing programs and sales personnel which we feel will provide superior growth as we move forward. We will drive our cost containment programs utilizing "Lean," and for the remainder of the year we are targeting a net reduction of personnel from current levels while still maintaining a bias towards sales additions.

Our [all-in] borrowing costs are low at approximately 3.7%, and along with good working capital performance have allowed the Company to reduce interest expense by over $2 million sequentially and by over $4 million from last year's second quarter.

With liquidity at over $300 million and strong free cash flow projected, we continue to have ample capacity to fund organic growth, purchase additional stock, and make accretive acquisitions while maintaining targeted levels of leverage.

Let's now focus on the first quarter top line results. We said before consolidated sales were up 6.3% with sales from core operations up 5.7% above our initial expectations for the quarter. Sales per workday increased sequentially throughout the quarter and were at record levels in June. Adjusting for price inflation and the positive impact of foreign exchange, we believe our real sales were up 2% to 2.5% for the quarter.

We're seeing good momentum in our end markets that are not significantly impacted by residential construction, and our core sales growth rate outside of these markets was almost 8% for the quarter reflecting the success of our ongoing sales and marketing initiatives.

Backlog, which consists of firm orders for future delivery, increased more than 15% over both last year's second quarter and year-end. The increase in backlog was well balanced over most end markets. This signals what we believe to be sustainable demand for our construction end markets for the next several quarters.

Sales to customers in industrial commercial construction end markets were up in the mid to high single digit range. We continue to see the negative impact of residential construction market slowdown as sales in the manufacturing housing and recreational vehicle markets were down low double digits, and sales to customers in utility end markets trended positively but showed only modest growth. So far in July our consolidated sales month-to-date are up mid-single digits.

Actions to increase the capacity of our sales force have been effective as discussed by Roy, and we've added approximately 145 sales or sales related support personnel since the third quarter of 2007 with over two-thirds of those positions being added this year. While this has added to our SG&A costs, we believe this course of action will allow us to outperform the market and to gain share in the upcoming quarters in years ahead.

At this time, John Engel, our Chief Operating Officer will provide additional commentary on our end markets and initiatives that we are taking to strengthen our organic growth. John.

Thanks, Steve, and good morning, everyone. Starting out with a summary of our performance for each of our major end markets, construction sales are up 7%, industrial sales are up 6%, and utility sales are up 1% versus the second quarter of last year. All three of these major end market segments also showed improved sales momentum versus the first quarter of 2008.

Our emphasis and focus in '08 remains on sales and marketing execution and in investing in our internal capacity expansion initiating the second half of '07, while keeping tight controls on our overall cost structure.

Now shifting to commentary on our major end markets. First, starting with utility. Sales to utility customers showed good improvement in the second quarter reversing the trend experienced the previous four quarters. Overall utility sales were up 1% versus last year and were up double digit sequentially for investor on utility, public power, and utility contract for customers. Versus the second quarter of last year, sales to IOUs were up double digits offset by declines with public power customers.

Utility spending continued in spite of the residential construction downturn, so customers are shifted a higher percentage of their capital spend towards transmission related and alternative energy projects which are primarily being served direct by manufacturers.

Customers are reporting that the surplus inventory that was built up in the supply chain in 2007 has in a large part been corrected. So we anticipate that end market levels in the second half of this year will be consistent with the first half. The market remains active with bid requests, and interest in our national accounts and integrated supply capabilities remains high.

We're confident that our share in this market is steady, and we remain well positioned to capitalize on the forecasted future increases in spending, on maintenance expansion, and automation of the nation's electric power grid infrastructure.

Now shifting to construction. We saw positive momentum in the quarter with sales to construction customers up 7% versus last year and up double digits sequentially across since the first quarter. Construction sales results were well balanced with all geographic regions posting positive sales growth versus last year and last quarter.

Backlog strengthened as well in the quarter and ended up 16% versus year-end and 4% versus the end of the first quarter. Despite forecasts of the declining construction starts this year, nonresidential construction continues to present project opportunities across the major market segments that WESCO serves.

Tight lending conditions, high commercial office vacancy rates, rising commodity prices, and contraction in the residential construction market are continuing to raise concerns across commercial segments. Infrastructure related construction segments which are longer cycles such as power, energy, communications, and medical are expected to show continued demand in 2008.

As evidenced in our results, we're continuing to gain traction with national and regional contractors including engineering procurement construction companies or EPCs by applying our national accounts model to service their project management and supply chain needs across their many locations.

And finally we're continuing our capacity expansion program to add sales personnel and increase our sales coverage in attractive growth verticals and geographies while executing senior management sales engagement programs to drive additional penetration at new and existing customers.

We also saw growth in the second quarter in data communications sales. They grew low single digits driven by strong sales to government, education, and datacenter customers, partially offset by softness in low voltage audiovisual products. Our sales and marketing initiatives remain focused on combining CSC's expertise in network infrastructure, data communications, audiovisual, and Internet technology based physical security products with less through the electrical and power capabilities geographic footprint and national accounts position to provide solutions for both construction and industrial customers.

We're making good progress and are encouraged by second quarter wins in multiple industries including energy producers, food processing, financial services, and others. Our outlook is for increasing demand for bandwidth in commercial, government, and residential fiber to the present applications as customers migrate to higher capacity network architectures such as 10 gigabit Ethernet, and invest in datacenters and improve the security of their facilities and IT networks.

Now moving to industrial. Sales to our national accounts and integrated supply customers also showed good strength in the quarter and were up 13% and 7% respectively. Despite the recent performance in the ISM index and the GDP rate, feedback from our customers in the industrial MRO market is generally positive, consistent with their high levels of capacity utilization and industrial production.

Bid activity levels remain high, and the national account opportunity pipeline remains at an all time record level. Our national accounts business model continues to demonstrate its effectiveness with two major customer renewals in the quarter and two new Fortune 500 customer wins in the quarter. We're continuing to place the priority on providing value added services to our customers, and selling the complete WESCO portfolio products to serve their needs in electrical and non-electrical MRO, capital projects, and OEM materials and value added services.

In summary, we consider most of our end markets to be in reasonably good shape except for utility and manufactured structures which continue to be impacted by the lower residential construction activity. We're encouraged by our improved sales momentum in the first half of 2008. As we enter the second half of the year, we're continuing to make the necessary adjustments including more aggressive sales execution, margin improvement, and cost management actions and are confident in our ability to execute in a tougher economic environment.

Now back to Steve.

Thanks, John. A couple of quick comments on commodity prices, and then we'll look at the third quarter. Our best estimate of the top line impact of overall price inflation per quarter is in the range of 2.5% to 3%. Commodity prices were relatively stable during the last two quarters of 2007 but ramped up in the first half of this year prompting the acceleration of price increases from our suppliers. Copper prices averaged $3.22 a pound last year and have averaged around $3.67 a pound for the first half of 2008.

While the commodity stock market has been quite volatile, the street price for copper based products did not fluctuate as rapidly as the stock market's. Steel prices have also risen this year. Sales of copper and steel based products are up sequentially and on a quarter-over-quarter basis.

While we continue our practice of aggressively marking up our inventory to current market levels and push supplier increases through the channel, we were unable to realize meaningful inventory profits during the quarter. Margins for these product sets are up slightly over the first quarter of this year and basically flat for last year's second quarter.

Looking at the remainder of the year, typically our seasonality [such as] the first quarter has the least sales, and second and third quarters are similar and the strongest, and the fourth quarter is down sequentially from the third quarter but higher than the first quarter.

Economic data pertinent to our end markets continues to be mixed. The current weakness in the credit markets and softness in residential construction markets have the potential to weaken future end market activity levels.

At this time, the consensuses view is overall market activity levels will be somewhat slower for the remainder of the year. We are confident that our sales and marketing initiatives and our strong market position will enable our Company to perform better in the second half of 2008 than in the first half of the year.

In the third quarter, we expect to see sales growth rates quarter-over-quarter in the range of 4% to 5% after adjusting for the LADD joint venture accounting. LADD sales were approximately $25 million in the third quarter of 2007. Gross margin percentage should show a slight improvement sequentially, but we will be facing challenges with additional anticipated supplier price increases and higher delivery costs.

SG&A, the percent of sales, and joint venture income should be similar to what we saw in the second quarter of 2008. Operating margins are expected to improve sequentially or anticipated to be in the range of 6.3% to 6.6%.

Our tax planning initiatives have been very effective. At the present time we anticipate that 2008 full year tax rate will be around 32%. Working capital productivity should be maintained, 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 2008 is anticipated to be approximately 44 million shares.

In summary, we had a strong quarter and are encouraged by our progress on sales initiates and are working hard on the margin front. We are looking forward to setting record-breaking performance and best ever earnings per share for the year. Our view for the remainder of 2008 calls for more aggressive action on the sales front and will require us to continue to capitalize on sales opportunities to meet our growth objectives.

We are confident in our ability to execute in a tougher environment and expect to grow our core business in the low to mid single digit range for the year even given a more difficult environment than 2007.

Caressa, at this point could you please open the call for the question and answer session?

(Operator instructions) Your first question comes from the line of Dean Draye from Goldman Sachs. Please proceed.

Thank you and good morning, everyone. Steve, could we just follow-up with your comments -- the clarification on the organic revenue growth? In your remarks you said 5.7%, and is there any foreign exchange in there? [Some times] the question whether you include Mexico or not. So that's the first question.

Yes, foreign exchange results are in that. It's approximately a point, and it's primarily coming out of Canada. But that would be--Mexico would be included in our core as well.

Okay, so you would take--so from a--or comparable to other measures of organic revenue, it's 4.7% if we exclude FX and acquisitions, et cetera?

Correct.

Okay, good. And then beyond that, you also said and I missed the clarification, but 2% to 2.5% of real core growth, and I wasn't quite sure what you were--what that pertained to.

It's the way we look at it, 5.7% reported on our core business, or comparable business, take out roughly a point for foreign exchange, and then take out roughly 2.5% or so for what we consider to be the price inflation impact on it and we get that type of a number (inaudible).

So that's a volume reference.

That would be more of a volume reference.

Perfect, okay. Got that. All right, and then second question is to help put in context the decline in gross margin because this has been one of the positive points in the overall view on WESCO for the past several quarters is that you have not chased below margin business. and that was the--anything north of 20%. That was one of the positives that you could draw from. Now as you dip below that, you did mentioned that Mix had some--had a negative impact, but just address specifically about Mix. How much of that do you expect to reverse over the next couple of quarters, and did you chase low margin business during the course of the quarter?

The first comment -- there's several items in there, Deane. The LADD joint venture is not in the 2008 numbers. We believe that was about 30 basis points of the change, Mix was about 20, and we wouldn't characterize the remainder of the decline as chasing low margin business. It would be more of a character, and I'm sure John can weigh in as well, of the amount and the magnitude of supplier price increases that have been driven by the recent run up in commodity prices. And it's more of a lead lag impact on that, and we expect to regain a portion of that going into the third and fourth quarter, and that'll be somewhat dependent as I mentioned earlier on the velocity of supplier price increases that we anticipate to see over the next six months.

Yes, Deane, this is John. Let me make a few additional comments. We are experiencing really an unprecedented number of supplier price increases. It's been a challenging environment. We've faced this in the past.

So we're seeing a large number, and we're seeing larger magnitude as well. And I think as we've talked about in the past, a portion of our business is competitively bid in construction -- construction customers and contractors and utility and industrial OEM, and we're executing a price increase strategy on commodities, which we've walked you through in the past, as well as working hard to push through price increases to our customers, including national accounts.

And national accounts customers, there's typically a lag factor and it takes some time to manage through. We're also working the transportation cost side of the equation. We've rationalized a number of our service providers and are working on customer freight charging and fuel surcharge strategies on customer deliveries that are uniquely -- we look at for each of the business models in the program.

I would tell you that the margin disciplines, the pricing disciplines and the mindset and culture is as strong as ever. Our entire field sales and national account organization is focused on this as a top priority. And we've been hit on the input side and we're aggressively working with customers to push it through on the output side, and we've shown the ability to manage this effectively over the years.

Steve gave a data point on July sales to date versus June, up mid-single digits, so July margins versus June halfway through the month are up slightly sequentially and they're flat to up in all shipment categories.

So I'm not declaring success at this point; I think it's a challenging environment. But we do have the disciplines. We did not chase low margin business.

Okay, just to make sure we're clear is that last quarter in terms of guidance on gross margin expectations that you would be flat sequentially, and that did include, from what I understood, the LADD-JV impact. So I'm not sure how you can say that that turned around against you when it was already in your guidance.

Yes. I got two comments on that. One, there was a mix change a little bit further than what was anticipated, as we saw some very good results of our initiatives of driving the project business. And secondly, the impact on the transportation costs and on the price increases frankly came in higher than what we anticipated.

So I really feel that this is more of a timing issue at this point in time than a systematic change and I would back up what John said. We have a laser focus on this area and we're not chasing lower margin business.

We also had a third comment on where we go forward on this from a mix perspective, and our industrial businesses remain strong, but we're seeing even further successes in the project business, and on balance we'd expect to see that mix continue forward, so a little bit more negative mix on the gross margin, but it also helps us (inaudible)should see integratively very good cost controls and that helps in that environment as well.

Even with the addition of the sales force, which added about $3 million of cost to the quarter, we were able to maintain very good cost control, so I feel real good about the business overall.

And just to clarify, when you talk about unprecedented supplier price increases, we agree, we see it, does that enter into the equation for potential inventory gains or is that strictly a copper price intra-quarter?

The inventory gains are related to copper, specifically, mark-ups. And the broad base of supplier price increases are something we need to manage through all our day-to-day business as we're driving and bidding with customers.

Great. And then just a last question -- leverage as you exit the second quarter. Last quarter you had 2.9 times your range as 2 to 3.5 Where do you stand today?

Three.

So that's still within that band of copper gains, so you've got flexibility, buy-backs, and acquisitions?

Yes, lots of flex. Our liquidity improved and is at a five or six-quarter high. Leverage was maintained at right -- right in control we've got a lot of flexibility. Everything is in good shape there.

Thank you.

Your next question comes from the line of Sam Darkatsch from Raymond James. Please proceed.

Good morning, gentlemen. How are you?

Morning, Sam.

Not to continue to harp on whether you're chasing low margin business or not -- did you see the promotional environment in the industry ramp up or get -- remain pretty acute? Is that part of the problem also or is it just a timing issue as you're just struggling to get the prices through to customers as quickly as you're seeing it?

It's a timing issue. I didn't see anything extraordinary in terms of promotional activities in the marketplace.

Okay. Second question, you noted encouragingly that things tended to progress better as the quarter progressed. Is that by volume basis or is that on an overall sales basis, John? Because again, there is the -- your volume was about half of what the overall sales growth was.

Yes, the -- I would say my comment was we were encouraged by the growth for each of our major end markets / customer savings versus Q2 last year, and then sequentially in Q2 in total versus Q1, we saw very nice growth across all three major segments, Sam -- construction, industrial and utility.

And if you were to look at a sales per workday basis, we also saw that ramp through the quarter, but that is typical. But it was nice to see that trend continue this year, as it had in prior years.

On a year-on-year basis -- I'm trying to get the seasonality out of it -- so on a year-on-year basis the volume growth was stable to accelerating as the quarter progressed? Is that how I should look at it?

Yes, if you look at it and go back and you back out price from previous quarters and everything, I'd say we're probably two (X). It's another additional point on what we consider to be real volume growth. I'll reiterate what we've said in the past -- this is a bit of an art versus something specific. We don't make and manufacture. We can't say I had 100 washing machines this quarter and 98 last year.

So part was volume and part was price. We sell a million SKUs a year so we look at price indexings across our major product categories and with discussion with suppliers. We do it consistently as we look at it. It may not be precisely accurate, but it's consistent. And our impression is that we're getting real volume growth better than we did last year.

And you mentioned that Mix was -- I think, Steve, you said the 20-basis point degradation to the gross margins, which I guess signals that your MRO or your out-of-stock is not growing as fast as the project business. Are you seeing any signs of encouragement there or a little bit of pick-up there, or is it still real sluggish as customers are trying to trim back on discretionary spending?

I don't think it's sluggish per se there. I mean, it's certainly -- we believe we're taking share. It's really a rate of growth issue. We're still having good growth rates in the industrial markets, and they look pretty good.

Okay, thank you.

Your next question comes from the line of Brent Rakers from Keegan. Please proceed.

Good morning. Just to follow up just even more on these gross margin questions. In your guidance you don't seem as convinced as you do with your rhetoric in terms of this only being a timing issue. How should we be more convinced in terms of the third quarter bouncing back up to let's say a 20% number?

The challenge really is is that we have a continually (inaudible, microphone inaccessible) that continues to wave the price increase that's coming through there, and we're working the equation hard, and I think that we are confident -- I know we're confident we'll get through that, but I don't know that we'll necessarily bounce up above the magic 20 number in the quarter.

Steve, let me take it from a different way, then. In terms of your guidance for the third quarter, you refer to continued constant price increases that are being put through. Does your revenue guidance reflect all these new price increases, and is that guidance consistent with your gross margin number that seems to be guiding a little bit more cautiously?

I would say yes to both of those. The gross margin guidance on the organic timing will (inaudible, microphone inaccessible) if you take like the national account type of customers that are commodities, we can get those through pretty rapidly. They have monthly openers on others. You might have to wait a bit longer period of time, but we're making good progress in that regard, so.

The second quarter sales came in a bit higher than we anticipated, and we're calling for similar growth rates in the third quarter on a quarter-over-quarter. So I think that's baked into that already.

And what is your --

And Brent, this is John to add one point, that -- and again, it's still early in the quarter, but if you look at July, as Steve mentioned and as I mentioned, versus June on a sequential basis, it's tracking. I mean, mid-single digit sales growth and margin slightly up sequentially. So it's consistent with the commentary on future versus future sequentially.

And then again, giving this constant push up in price inflation, do you have kind of a guidance number as to what you think the contribution from price would be in Q3 or Q4?

No, I don't have that right now.

Presumably, though, Steve, higher than the levels in Q2, correct?

It's hard to tell, and it really depends on you tell me what copper and steel are going to do. Those are a couple of bigger components. We had a pretty significant ramp-up in steel. That's since re-stabilized, and copper's actually pulled back a little bit from its high, so.

And also, what these suppliers decide to do. In some cases, they give you some warning; in other cases they try to push things through faster, as we're facing the same issue on their input side of the equation in terms of rising transportation costs, fuel costs, and commodity pricing.

And then just final question for me, when we look at other industrial distributors reporting, we have not seen a material pressure on the gross margin line in this quarter. Any maybe -- can you maybe explain what the difference might be between a Wesco and some of these other industrial distributors?

My comment -- I'm sure John has a view as well -- is if you look at it from a customer bias standpoint, we tend to have larger customers, deeper relationship scenarios that are a bit more competitively bid. And when you have that situation, you have the distributor channel perhaps having different cost basis of when they bought materials that were raising prices. Other people may not have as high a target, so.

And that would be coupled with, again, our -- which is a great strength, but we will need the long-term -- our national account customer base, our integrated supply customer base. So the nature of those relationships is such that you've got to manage the price increases through and it's not -- nothing is automatic. And so it requires muscle and work, and we've shown ability to do that again. But that translates into effectively a lag factor.

One last comment, Brent, is that industry structure plays into this a bit as well; and in the electrical industry, the predominant pattern for our competition, whether it be regional firms or local firms, is pricing after the fact, meaning that the prices in the marketplace, adjusted after supplier price increases, some of the distributors you may be looking at are in effect pricing with catalogue pricing established in effect in advance.

And while we would perhaps like to be in that particular situation, that's not the competitive environment that we operate in, or the way customers have been trained for 50 years. So it's -- again, I'm not trying to make any excuses, just that we are operating in a competitive environment and we have to adapt to that environment as well.

Great, thanks a lot.

Your next question comes from the line of Matt Duncan. Please proceed.

Good morning, guys.

Good morning.

First question I've got is if we look at the SG&A cost reductions that you guys have put in place here, what type of costs are you cutting out? If you're growing your sales force, what are some of the areas that you're trimming in?

Primarily this would be in the branch operations as far as administrative, clerical and warehouse operations, and then at the headquarters level and administrative we're able to continue to grow and keep a tight lid on head counts.

Okay, so that would be the areas that you would look to continue to pull costs out going forward as well, then?

Right, and we're doing that -- this isn't just cutting costs out and sacrificing in quality and service. Our lead initiatives continue to be very effective in making us more productivity, eliminating waste out of the channel, and it gives us a pretty clear view on productivity improvements.

I look at your construction business and you've got a big increase in backlogs; sales are up nicely sequentially. That kind of goes against what other people are saying is happening in non-residential construction. Can you address why you think it is you guys are still successful at getting growth there, and as you look out at the market, what do you see from construction kind of for the balance of '08 and as we get into '09.

Yes, I love that. This is John. Let me try to address that. What we're seeing, and we're encouraged by what we're seeing, is really our execution. Commercial construction activity, from our perspective, is being led by healthcare, higher education, data centers, industrial projects, and are associated in the oil and gas production and refining and alternative power.

And throughout the second quarter, we were awarded numerous projects that will ship throughout 2008 and conclude in 2009 and beyond. Most notably, we had wins that included power generation plant upgrades, a large office building in New York, an airport upgrade in California, a new hospital in Pennsylvania, and a government facility expansion in Virginia.

So what we're really seeing is, and what we're encouraged by is the positive results that we're getting from our increased focus on EPCs and national contractors, the application of our national accounts model. We're beginning to see the productivity of our sales force editions. We've been focusing on a number of these vertical growth markets for some time, and it's translating into two things, really-- backlog growth that we saw sequentially in the quarter, which we're encouraged by, and nice sales growth results sequentially in the quarter.

And again, it's not just one segment. As I mentioned before, the sales growth, geographically, all the regions we have across the U.S. grew.

John, if I'm hearing you correctly, it sounds like a lot of the types of projects you're winning right now are sort of infrastructure stuff -- healthcare, government, power, oil and gas -- the kind of areas of the market that I guess are a little bit safer right now. So is your focus more on that stuff and kind of away from commercial office building and that kind of thing right now? Where are you focusing your sales energy in the construction business?

I would say that has traditionally been a great strength of Wesco and a bias, and that is a focus. We think we have a terrific value proposition there.

And we also will pick off nice commercial projects and have that capability. In addition, what I didn't mention, Matt, which I should, is we've got an aggressive set of green and sustainability initiatives. We've got the industry's first green catalogue that's been published. And we are taking that green value proposition to our customer base, both in construction and industrial, and that's translating into some nice growth as well.

So we're seeing an increase in lighting retrofits and energy conservation, retrofit, the whole series of products that will help really serve that green and sustainability set of needs we see our customers having today. And honestly, we look at that as really a very strong growth trend that will only accelerate through the next decade.

Great, okay. And Steve, just a couple of quick numbers questions, and I'll get back in queue here. What was the revenue contribution from the three acquisitions you've made since the second quarter of last year and this quarter?

Pretty nominal, if you look. It was like a half of a point. There were three relatively small but very nice acquisitions that -- the largest of which, in our manufactured housing, we've essentially got that fully assimilated and integrated into our core business and we're losing visibility on that from an acquisition standpoint.

So for the most part, consolidated sales and core sales are converging to be the same number, so it's not a significant number.

Okay. And I guess just looking at those, J-Mark would probably be down revenue-wise since you bought it, given their end markets. Would that be a safe assumption?

I would say the end markets are definitely down. We've had some tremendous success with that acquisition in integrating their business into the big position that we had in those markets from a West Coast standpoint.

Okay. And then last two things. First, can you address how rising fuel costs impacted the margins? And then the last thing, what you're seeing out there in the acquisition landscape right now. Thanks, guys.

Yes, the fuel costs, we're certainly sensitive and we've got a number of initiatives to neutralize that and not have a material impact on the margins. The bulk of our fuel costs are on the delivery side, and that hits us in SG&A, and we were able to absorb and manage that in other areas to keep the SG&A under control. So the bulk of our fuel, while there is some in gross margin, the bulk of ours hits in the SG&A area.

And as far as the acquisition front, still we're always active in the pipeline. We don't have anything significant in the near term, but continue to see attractive opportunities out there, and we've got the balance sheet to be able to take advantage of that when and if appropriate.

Okay. Thanks for answering my questions.

Your next question comes from the line of Shannon O'Callaghan from Lehman Brothers. Please proceed.

Good morning.

Morning.

On SG&A a little more, I mean, you mentioned some of the areas you would go after. Can you just size for us a little bit how much opportunity there is here as an offset to some of the gross margin pressure, and can this -- in the face of the sales force expansion, can this actually continue to go down as a percentage of sales? Is 13 kind of a floor for that, or can you give us a feel?

Counting in reverse order, the 13 range we would consider to be a long-term floor, but certainly in the near term it's one that we'll continue to I think protect around that level.

We continue to add the sales force, but as we mentioned in the second quarter, our net head count was down slightly, so we're trying to pay as we go there. We believe in that investment. It's showing some dividends now, but will pay much bigger dividends kind of a year out, and don't intend to slow down on that.

Our basic SG&A structure is one such that roughly two-thirds of our cost relates to payroll and payroll related costs, so it is a people issue and with the natural inertia of inflation that's out there on the base, we have to continue our productivity just kind of to maintain parity there. So I wouldn't expect to see big changes from the absolute dollar standpoint. The rate gets impacted by the top line.

And that's where our kind of our "Lean" programs, which are in full strength and we're aggressively driving, give us that operating cost leverage as we grow the top line and we get the productivity off that base. And that equation's worked very well for us over the years, and that's an equation we still have in place. That's why we have all this emphasis and focus on kind of the sales force expansion and sales force productivity and effectiveness issues.

Okay, great. And then just on the markets, I guess on utilities specifically, a nice improvement there from what had been some tough declines. What gives you confidence that this isn't a blip and that the second half can kind of track along like we've seen in 2Q?

Yes, let me talk about that, give a little more color on utility. We are encouraged by the results in the second quarter. It represents a different set of results versus the last four quarters, and we experienced double-digit sequential sales growth for all three major customer segments and that's including utility public power and utility contractors, so in the second quarter versus the first.

And versus the second quarter of last year, our IOU customers were up double digits. Public power was still down, and utility contractors were just down slightly.

So overall, I think just from a momentum perspective, when you look at it, our value proposition, our national account / integrated supply model is playing extraordinarily well with investor-owned utilities. We're now starting to see some interest with large public power utility customers as well. It's a small industry, and so many of our customers are aware of what we've been doing with Duke and implementing that integrated supply model, which is on track. And so that's boding well for us.

And we're also encouraged by the utility contractor side, the sequential improvement in the second quarter over the first. So the commentary is really around a much more solid quarter in the second quarter; and as we move into the second half of this year, we see the kind of Q3 tracking like Q2, absent or just as (inaudible) of anything we see in terms of major hurricane activity.

Okay, great.

One item on the utility industry would be the power generation plant construction. We have a lot of activity on this front, and you see it in a couple of different areas. Whether that has to do with new plants or expansion or with environmental controls that are being applied to existing plants are in effect being used as a way to reduce the environmental issues around carbon and other by-products.

So that's going to continue to be a very big development over time. Most of that kind of activity we actually end up working through contractors as opposed to utilities. It is the utility industry, but the engineering and construction firms, the big firms along with others that they might subcontract to, end up being our particular customers in those situations.

We're well positioned with these firms. These are long projects, but they're also very big, and so that's another positive factor that is on the horizon for us.

Okay, thanks a lot.

Your next question comes from the line of Dan Leben from Robert W. Baird. Please proceed.

Thanks. Good morning, guys.

Morning.

Can we take a little bit deeper dive on the non-residential construction portion of the business? Could you try to help us break it down and understand the mix in terms of how big you are in the kind of different sub-areas? So kind of the commercial side office and retail, schools, government, energy, a lot of these areas you've talked about, etc.?

Yes, Dan, this is John. We really do not have a good way to roll that up, and we don't -- virtually it's impossible to do it. When you think about our business and the way we go to market and the types of customers we sell to -- they're EPCs, they're national contractors, regional contractors, it could be direct with end users.

When you look at all the various channels, it's just we don't have a good way to really segment that and break it out except to say -- to highlight some of our key wins. And we know what kind of key wins we have and what types of projects they are, so.

The other factor is that the contractors that are our customers will work on a range of projects, typically. Now, there are some that are highly focused to a particular market segment, but most of them have a sort of a generalist approach to their work and they'll bid on a variety of projects in the commercial space. It could be casinos, but they could just as easily do an airport.

One strategy that we discussed in prior quarters was taking a national accounts model approach to large national contractors. I mentioned a few quarters ago that we secured national agreements with three large national contractors. Those three were up double digits in the quarter; but when you look at those three, for example, as Roy mentioned, they serve a really -- if you look at all the non-residential commercial construction segments, they serve them all and they even serve high-end residential and multifamily dwellings.

So it's extraordinarily difficult to really get a precise number segment-by-segment, or sub-segment by sub-segment, let me say.

Okay, great. And then two quick questions for Steve. First, could you talk about the contribution to sales growth from the new sales people that you've hired?

Not directly. We try to look at that inside each one of the branches and it's a tough number to get at for some of the same reasons that John was talking about. We are confident that they will be as productive in time, but they're certainly not at the same productivity level.

And just to give a little more color and insight into that, this is part of an entire -- let's say an aggressive sales management process, so when we've put a new sales resource into a location, we don't just hand him the phone book and say okay, you have this geographic territory, go find new customers.

Our leaders in that location put together a business plan, we approve it, they look at the accounts and how they're balanced, and they re-balance the account. So there's some -- which basically frees up captive accounts on the current sales force that's in that particular branch.

So it's very difficult to get a rolled-up aggregate number, but that process and approach is critical to managing territories in each of our given locations.

Respecting your time commitments, we'll take one more question and then wrap up, if that's okay.

Your last question will come from the line of Steve Fisher from UBS. Please proceed.

Good morning. Was there any kind of turning point in the quarter that you start to see those supplier price increases ramp up to take the margin below guidance, or was it just kind of more steady as the quarter went along?

It really started hitting more in the latter part of May. It was more towards the end of the quarter. And that speaks, we believe, to some of this lead lag issue that we have.

Okay. And then just confirming the 2% to 2.5% volume growth -- that was better than you were expecting for the quarter?

Somewhat, yes.

And where -- was it that the improvement in the utility market or was it the strength in construction and industrial, or was it just sort of all of those factors?

I would tell you that (inaudible) on a positive note, it was more broad-based for us, both in end markets and in geography.

At a macro level, I'd say industrials tracking where we thought, very strong, and we feel good about it. It's tracking where we thought. Construction, we saw some improvement. With the backlog in the sales and the balance of the sales and in utility we saw the improvement. So I'd say it's kind of a little bit construction plus utility.

Okay. Great, thanks a lot.

Okay, let me just wrap up. We had a number of questions about margin and margin improvement. This is something we pay a lot of attention to at a lot of different levels. We have the information systems capabilities to zero in on where issues may be. We know how to drill down to specific products and specific customers. But at the end of the day, these are negotiations that we have to have and frankly, no one -- no customer welcomes a price increase. And one of the questions that I think Steve had is how did these develop and when did they develop?

This is a little bit of the problem. They are a continuous factor and if you go to see a customer every two days, and every two days you're announcing or bringing another price increase, before long they don't welcome you or agree to see you any longer.

So these are tough issues for us to push through these kinds of issues because they're not simply price at time of delivery for a good bit of our business, including business that's in our backlog that perhaps has been negotiated three months ago or even five months ago.

These are somewhat fixed. Now, generally when we do that we've got protection from suppliers. But in the current environment with the dramatic increases, particularly with steel, suppliers are changing the rules of the game. We're attempting to forestall that so that we're not put in a position where we've got quotes outstanding and agreements from suppliers on those, and yet there's an inconsistent follow-through, I'll call it.

So we've got a lot of work that we're doing with our own customers and with suppliers. We know how to go about this, we know where we have to put our energy, but we've got a lot of, if you will, hand-to-hand combat-type negotiations to get these things through on a timely basis.

We'll be working on this diligently over the remainder of the year, I'm sure; maybe even into next year. It's a focal point, something we think about and look at and work on every single day.

Let me close by simply saying that we appreciate your continuing interest in Wesco, and we look forward to seeing you in your travels or ours. Have a good day.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.