Wesco International Inc (WCC) 2009 Q2 法說會逐字稿

Good morning, And welcome to the second quarter 2009 Wesco International Inc. earnings conference call. All participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. An operator will give instructions on how to ask your questions at that time. (Operator Instructions) Please note this conference is being recorded. Now, I would like to turn the conference over to Daniel A. Brailer, Vice President, Treasurer and Investor Relations. Mr. Brailer please go ahead.

Thank you. Good morning, ladies and gentlemen. Thank you for joining us for Wesco's international's conference call to review the second quarter 2009 financial results. In May, Wesco announced a management succession plan effective September 1, of this year. That transition is well underway, and will result in the following management changes. Roy Haley Wesco's Chairman and CEO for 15 years will become Executive Chairman. John Engel, Senior Vice President and Chief Operating Officer will become Chief Executive Officer. Steve Van Oss, Senior Vice President and Chief Financial and Administrative Officer will become Senior Vice President and Chief Operating Officer. And Richard Heyse has now joined Wesco as Chief Financial Officer. This morning participating on the earnings conference call are John Engel, Steve Van Oss and Richards Heyse. Means to access this conference call via webcast was disclosed on the press release and posted on our corporate website, replayed so this conference call will be archived and available for seven days. Following the conclusion of this conference call, we will post on our website, a supplemental financial data presentation that provides a summary of certain financial and end market information provided in today's commentary by management.

This conference call may include forward-looking statements, and therefore actually results may differ materially from expectations. For additional information on Wesco International, please refer to the Company's SEC filings including the risk factors described therein. The following presentation may also include a discussion of certain non-GAAP financial measures. Information required by Regulation G with respect to such non-GAAP financial measures can be obtained via Wesco's website at www.wesco.com. I would now like to turn the conference call over to John Engel.

Thank you, Dan, and good morning, everyone. The global economic outlook remains very challenging. We continue to face weaker end market demand across most of our serve markets and a broad-based recovery does not appear likely during the second half of this year. Sales declines occurred across the quarter. And while our sales levels through mid July are consistent with the second quarter, we are not yet calling a bottom. Our second quarter sales were down sequentially 2% versus the first quarter, reflecting the impact of the recession, and negating normal seasonality. As you will recall, last year, second quarter sales grew sequentially 8% versus the first quarter.

We're continuing to take quick and decisive actions to reduce our costs and improve our productivity and we're maintaining our industry leading cost structure and sales per employee performance. As you saw on our press release we're on target to reduce overall SG&A expenses by over $140 million this year. Second quarter cost reduction actions, more than offset the negative operating leverage associated with the sequential drop in sales. And resulted in EBIT expanding from 3.7% in Q1 to 4.1% in Q2.

We're continuing to invest in the market segments that offer strong growth potential over the long term. They include government, energy, utility, healthcare, education, data communications and international. And we're executing a series of comprehensive lean programs focused on improving the efficiency and effectiveness of pricing, purchasing, transportation, operations and importantly, customer sales and service. Recent feedback from suppliers and customers suggests that our top line performance is better than our competitors and the overall market.

Finally, our proven business model continues to be resilient and delivered record-free cash flow in the first half. And our capital structure remains in excellent shape. Now I will turn it over to Richard Heyse our new CFO who will provide details on the second quarter. Steve Van Oss will then give you an update on our major end markets and provide an outlook for the balance of the year before going to the Q&A session. Richard?

Thanks John. This marks my sixth week with Wesco. It is my pleasure to be associated with an outstanding management team and industry leader. With significant long-term growth opportunities on both a regional and global basis. During my first six weeks I have had the chance to engage with nearly every part of our business. I have been in pressed with the depth and strength of Wesco's business model. The breadth of our supplier base, the quality our customers and most importantly the caliber and dedication Wesco's employees. However despite our strengths and a multitude of sales, marketing and productivity initiatives we have not been immune to the broad based economic slowdown. For the quarter our reported sales declined 27%. During the second quarter, margin actions which included multiple pricing and procurement initiatives were generally successful in negating the makeshift toward lower gross margin profit activity as reduced operating rates at industrial accounts drove reduced sales of higher margin stock products.

Personnel reductions to align our organization with lower levels of activity, and the closure of six underperforming branches affected over 300 positions over the quarter. Since the third quarter of 2008, we have closed or consolidated 21 branches, and made staffing adjustments of over 900 positions. In addition, discretionary spending was reduced in excess of 30% during the quarter. Furthermore, capital expenditures have been deferred or eliminated resulting in a 70% reduction in cash outlays versus last year's second quarter. Our emphasis on working capital performance, cash generation, credit availability, and debt reduction, resulted in $67 million of free cash flow for the quarter. And $199 million for the first half. A record year-to-date performance for the Company.

Our liquidity position at the end of the quarter was $389 million and improved by $82 million over last year. In April, we strengthened our financial position by successfully renewing our accounts receivable facility for three years extending the term into 2012. We are highly confident our proven business model will provide ample free cash flow and credit availability to fund operational and other financing requirements in 2009 and beyond.

Specifically now let me turn to our second quarter results. Adjusting for the negative impact of foreign exchange, consolidated sales at $1.1 billion decreased 25.4% versus the same quarter in 2008. Additionally, lower commodity prices, primarily copper and steel contributed to lower revenue. Sales of products with high copper and steel content declined by approximately $130 million, versus the second quarter of 2008, due to lower pricing and lower volume. And accounted for approximately 30% of the sales decline for the quarter. Sales of these products were down $15 million sequentially. Deteriorating end market activity throughout the quarter resulted in significantly lower sales to customers in our industrial, OEM, construction, and utility end markets.

Sales to customers in Canada, on a Canadian dollar basis, were down mid-single digits during the quarter. Backlog which consists of firm orders for future delivery ended the quarter down 6% from year-end and 2% from the first quarter. Consolidated gross margins at 19.3% were down 20 basis points versus last year, despite improved product selling margins due to a heavier mix of project business, and lower supply rebates. Sequentially gross margins declined 90 basis points due to lower product selling margins, inventory adjustments, and lower supplier rebates.

SG&A costs were reduced $37 million, or 18% versus last year and included $2.2 million of severance related charges and $12 million of cost savings related to our second quarter mandatory unpaid leave of absence program, and the elimination of discretionary employee benefit programs. Sequentially, SG&A costs decreased $18 million. We are on target to remove $90 million of annual costs related to personnel, facilities, and annualized spending. In addition, reduction in volume driven and variable cost items such as transportation expense, and incentive payments should result in an additional $40 million of reduced expenses in 2009. Finally, discretionary items such as benefits suspensions and unpaid leave of absences, will yield approximately $30 million of savings in 2009.

In summary at current operating levels our annual cost structure is targeted to be reduced by approximately $160 million, or 18% of our cost structure, and we expect to realize over $140 million of those reductions in 2009. Our all-in borrowing costs are low at approximately 3.3% and in combination with the reduction in our debt levels have allowed the Company to reduce period interest costs by $2 million from last year's second quarter. As a result of implementing the new accounting standard converting convertible debentures, we reported noncash interest expense of $3.6 million and $3.8 million respectively in the second quarters of 2009 and 2008. The effective income tax rate for the quarter was 24% versus last year's second quarter rate of 30%. The full year 2009 tax rate is expected to be approximately 27%.

Net income for the quarter was $26 million resulted in EPS of $0.62 per share, versus net income of $58 million, an EPS of $1.33 per share last year. At this time, Steve Van Oss will provide additional commentary on our end markets and the initiatives we're undertaking to deal with the current economic environment, and expand Wesco's market share. Steve?

Thank you, Richard. Good morning, everyone. I will be providing some insight on the activity levels for each of our major end markets and then we will discuss Wesco's outlook for the second half of the year. Sales for our construction, industrial, OEM and utility customers were down 27% from the second quarter. The sales declines were broad based, across end markets and have continued at a similar rate into July. Sales to construction customers were down in virtually all geographic regions. New project activity has slowed, and project delays and cancellations continue at a rate similar to last quarter. The nonresidential construction market is large. And we are well positioned to increase our participation rate in the available business and develop significant new customer relationships. Our construction sales and service initiatives continue to be focused on large regional and national contractors, particularly those involved with healthcare, educational facilities, data centers, energy, and government infrastructure-related projects. Additionally, we have a strong relationship with large EPCs who are executing international infrastructure projects.

The near-term growth outlook in Western Canada, Middle East, West Africa and the Pacific Rim is positive supported by investment in the oil and gas, metals and mining industries. Backlog, which includes construction oriented firm orders declined in the second quarter, but at a rate less than our drop in sales. We are seeing contractors putting more emphasis on the financial health and stability of their potential distributors and their supplier selection and project award criteria. This is a positive trend for Wesco.

Project activity in our opportunity pipeline in enterprise cabling and security remains healthy as our sales and marketing initiatives are continuing to yield positive results. This was reflected in key wins in telecommunications, financial services, and government in the quarter. We have continued our data communications geographic expansion and have opened four communication supply locations within existing Wesco branches in the first half of 2009. Five such editions were made in 2008. We're planning further expansions for the remainder of 2009 and 2010. This branch within a branch expansion strategy increases cross selling and service opportunities into our blue chip customer base. Our long-term outlook is for increasing bandwidth demand as customers will continue to use information technology to drive productivity improvements, invest in data centers, improve the securities of their facilities and IT networks and seek green solutions that are cost effective and reduce power consumption.

Green and sustainability is expected to be a growth driver over the mid-to-long term. Wesco is conducting symposium style events in major cities across the US to provide education on the opportunities and benefits of energy efficient buildings and data centers. Our last three sustainability centers were held in Phoenix, Dallas and New York and each included over 250 current and new prospective customers in attendance. Customer supplier feedback has been very positive. We have positioned our Company to be a trusted business advisor and product and solutions provider for our customers, as they work to meet their energy efficiency requirements and sustainability goals, while operating in the cost effective and environmentally responsible manner.

We continue to track the flow of government funds associated with the American Recovery and Reinvestment Act of 2009, which is expect to fuel new construction and retrofit projects that require many of the products and services that Wesco sells. We have developed a target list of stimulus-related projects and have launched specific sales and marketing initiatives to capture these opportunities. Our initial efforts have yielded an encouraging number of opportunities and proactive customer sales call activity is high and increasing. We're also encouraged with the overall results we're seeing in our targeted government market efforts.

However, due to project timing considerations, it is unlikely that the industry will see significant benefits from the stimulus plan investments in 2009. And, in fact, the stimulus plan may be delaying projects as customers wait for qualifications of projects for stimulus funding. We do expect that stimulus-related opportunities will arise at an increasing rate into 2010 and 2011.

Now moving to industrial. Sales to our national accounts customers declined in the quarter, driven by reduced MR demand associated with low capacity utilization and tight purchasing controls. Our integrated supply and OEM customers most of whom are diversified manufacturers reflected the overall weakness in the industrial market and declined more than 30% as destocking pressures continued through the quarter.

National account bid activity levels remain very high in the quarter. And our national account opportunity pipeline expanded to another successive all time record level. to another successive all time record level. Purchasing executives at our customers continue to be concerned about supply chain integrity and are looking for large financially strong companies to mitigate their risks. We believe our increased activity levels reflect their heightened concerns and overall favorable assessment of Wesco. Our customer facing initiatives continue to be focused on providing value-added services and selling the complete Wesco portfolio of products to serve our global customer needs in MRO, capital projects and OEM materials and value-added assemblies by expanding our scope with current customers while incurring new customers. We're encouraged with our national account customer wins in the second quarter where we added a total of 13 new customers, across six different industries.

We maintained our 100% renewal rate for the twelfth quarter in a row renewing five customers and currently have a majority of the Fortune 500 companies as our customers. Our utility customers have been focused on addressing only the required maintenance activities, although transmission-related and alternative energy projects remain a priority over the mid-to-long term. Utilities are continuing to evaluate their power demands and are adjusting their inventory levels and capital spending accordingly. We are seeing an increasing number of investor-owned utilities and public power customers apply for Federal grant money under the provisions of the stimulus plan. Specifically targeting energy efficient lighting, systems upgrades and smart grid programs which will require product sourced through the distribution channel. We have a large pipeline of MRO alliance opportunities and the market remains active with big request and interest in our lean customer value creation programs and integrated supply capabilities. We're actively involved in new customer presentations, and remain well positioned as utilities look to rationalize their supply chains and respond to government stimulus funding to improve the national electric system infrastructure.

I will now comment on pricing and then take a look at the rest of 2009. Overall we estimate there was approximately $40 million to $45 million of aggregate negative price impact on sales for the second quarter as the positive impact of 2008 general price increases were more than offset by lower commodity prices. A continuation of copper prices at recent levels will negatively impact sales of copper related products for the remainder of 2009 when compared to last year. And will result in slightly favorable comparisons to the first half of this year. Margins in this category should hold constant for the balance of the year.

For the remainder of the year given the volatility in virtually all of our served markets we will not be giving detailed earnings guidance. We remain confident that our sales and marketing initiatives and our leading market position will enable our Company to perform better than the end markets as we maintain or improve current positions and grow with new customers. July activity levels have continued the trend we experienced last quarter. At this time, our best estimate is for top line revenue for the year to be down in the range of 22% to 25%. Assuming some modest improvement starting in the fourth quarter.

Third quarter revenues and results are anticipated to be in line with the second quarter's activity levels with gross margins improving sequentially and SG&A costs reflecting the full benefits of second quarter staffing adjustments. We anticipate taking another $1 million to $2 million of severance charges in the third quarter as we continue to adjust our cost structure in line with incoming quarter rates. Capital expenditures are expected to be in the range of $16 million for the year. And our debt facilities are in good shape with the April renewal of our accounts receivable securitization facility. Also in late 2010, we have the potential to have our $150 million convertible debenture put back to the Company. While this redemption could be readily financed through current debt capacity or free cash flow during the next 18 months we are exploring effective alternatives to further strengthen our liquidity and extend term as we continue through difficult economic times.

In summary, we had a reasonable quarter against a continuing tough economic backdrop. We believe we are taking market share and we are further addressing our cost structure in the face of weakened market activity. Our near term focus is on providing superior customer service and executing on our sales and margin initiatives with realtime right sizing of the business and maintaining ample liquidity and credit availability. The actions taken in the last three quarters, along with the second half actions that are underway, should position Wesco to outperform others in our industry both commercially and financially. At this time could you please open up the call for the Q&A session?

(Operator Instructions) The first question is from Shannon O'Callaghan of Barclays Capital.

Can you give a little sense on the, other than on the copper and steel-related goods how does pricing pressure otherwise and can you give us a, since last call you mentioned some increasingly competitive bidding environment for projects and things, can you give a little flavor around that and any associated pricing pressure?

Yes, good morning, Shannon. I will tell you that, that trend has continued. If you step back and look at the end markets and the contraction in the end markets in the second quarter were worse than the first. We felt like we've seen the competitive intensity stocking up and you recall last time we said there were a large number of electrical contractors and distributors bidding each and every opportunity, they increased by two to three times and that the project opportunities we're seeing, for the majority, are -- are smaller project opportunities. So I would say that trend is increasing, or has increased through the second quarter, so pricing is a challenge, and it's something we worked kind of optimized and balanced every day with how we work our pricing strategy on the bids that are out there.

Okay. I guess I will honor the one question limit then. Jump back in later. Thanks.

The next question comes from John Baliotti of FTN Markets.

John, or Steve, I know taking market share is difficult to quantify because a lot of the market is private but what are you looking at macro-wise to stabilize? Is capacity utilization is that the biggest driver you think? Does that have to move up a couple hundred basis points or does it just video to flatten our? Or how do you see that impacting your customers?

John, I think you asked two questions. One, how do we determine market share. As you know it is a very fragmented market selling hundreds of thousands of products. So it's not a precise science. We do get good information in Canada, for example, through the electrofed numbers and we had significant market share gain in the first quarter quarter and we feel confident in the second quarter although we don't have the results on that. As far as the second part of your question, the things that we look at, -- it varies by kind of, end market segment but the industrial I think is where you're focused on. We look -- take a hard look at industrial production, capacity utilization, and manufacturing employment. We have seen a -- an improvement in those numbers, over the last two or three months, as far as a trend goes. But the absolute numbers are still below levels that we would be looking at to say things are completely stabilized.

And I would add in our discussions with our customers and, we have a very strong set of blue chip industrial customers, if you look at what has happened over the last three quarters, across the industrial manufacturing base a tremendous amount of capacity has been taken out of the equation. And the capacity has been in the form of permanent head count reduction, I am speaking with respect to our customers, short shifting, destocking, inventory destocking, et cetera,. I think in talking with a number of our customers, they are in a position where they -- they need to see with high confidence, end-market -- their end-market demand coming back. Before they begin to truly add back to the capacity equation, where I will say tighten -- loosen the controls on the purchasing side of the equation. And there is going to be a lag. And so -- we have gone through -- we're feeling the effects -- we, collectively, the industry, are feeling the effects of this dramatic capacity reduction and destocking, and I think it is going to require end-market demand, with a -- with our customers for some period of time to begin to pull through. Before we see a meaningful change in terms of additional capacity increase, and it will be with adding shifts back initially. And then, beginning to restock inventories.

Just a follow-on to that. Do you think the -- with the delay of projects, that could possibly be a positive in terms of shortening that lag if -- if your customers just feel that things are stabilized, without capacity utilization stuff going up did you get a sense that some of those projects that they just feel better objectively that some of that stuff may come out sooner?

John, I go back to kind of the earlier comment what we have seen in the macro number, somewhat across the board, a deceleration of the decline. We have actually seen the ISM numbers, the capacity utilization, the manufacturing employment ratios trending up, although have not broken the -- broken the expansion points. So I don't know if that helps you at all.

Yes no, I -- I think I understand your position. Thanks.

The next question comes from Sam Darkatsch of Raymond James.

Good morning, John, Steve, Richard, how are you. If I could ask for some additional quantification as it relates both to pricing and your end markets what specifically was the effect, dollar-wise of -- or percentage-wise of pricing in the quarter ex the commodities was my first question? And then secondly you mentioned the construction utility and industrial and OEM combined were down about 27%. Could you put a little meat on the bones in terms after they were down individually?

Sam on the pricing comment a little bit of a -- of a science there but when we look at all of our datapoints our conclusion is the series of 2008 price increases that were really ran through the first nine months of last year on the general products have tended to hold up and probably provided a slight positive, the $40 million to $45 million decline related to pricing we discussed in the quarter would be directed at commodity pricings primarily copper and steel. So I think we have done a good job as an organization of holding on to the general price increases and we have, like others had to react to the change in the commodity prices.

In terms of the end markets, we said 27% overall, Utility, down 18%. Construction and CIG institutional governmental, commercial institutional governmental down 23%. And industrial, which includes industrial OEM down 34%, Sam.

Thanks a lot. I'll defer to others.

The next question comes from Matt Duncan of Stephens Inc. Please go ahead.

Good morning, guys. I have got kind of a big picture question, then one just kind of small housekeeping item. The housekeeping item is if you could give us the month-to-month sales trend in the quarter and the bigger question really goes to your gross margins, which were down about 90 basis points sequentially. Talk about sort of all the different pieces that drove that and then where you see gross margins going for the rest of the year?

The quarter sales were -- pretty much a month-to-month basis were right around that 27%. There wasn't a dramatic change. We didn't see a major deterioration. We didn't see a major improvement in that and if there was a slight trend it was maybe just a tad weaker at the end, our July activity is more in line with kind of the median of that. So, you call that a slight improvement. So that is kind of the trending, not enough really to directionally to give us confidence or cause us concern, that things have changed dramatically.

The margin, walk down there, there are a couple of things down there, a third or so of that decline on a sequential basis would be due to adjustments in our estimates for the year as relates to supplier volume rebates and as you know we try to do a very tight job on that quarter-to-quarter. We made a -- based on the -- John mentioned the 30%-plus reduction in activity, industrial, that has a heavy mix of products that are stock-related that drive in a big way our rebates. So, we made a year-to-date adjustment on that. So that had a pretty significant impact on the gross margin.

In addition to that, you saw it in our cash flow. I think the organization did an outstanding job of driving productivity in our working capital. Good free cash flow. Part of that was a big reduction in our inventories and there is full absorption accounting which we account for in our gross margins, was a negative impact on that. The mix was roughly the same as the first quarter. And John mentioned in certain categories we had the competitive pricing was difficult. It was pretty much -- not totally isolated but was concentrated more in that stock business and with industrial sales being down 30%-plus we just saw a bit more competition in that. So far in July, we have seen some slight improvement in our -- in our gross margins so we're pretty confident that we have got a handle on that and we will be able to turn that back in the right direction in the third quarter.

Okay. Thanks guys.

The next question is from Adam Uhlman of Cleveland Research. Please go ahead. Mr. Uhlman, your line is open please go ahead.

Hi, good morning,. Just to start off with clarification. Could you remind us what the margin differential is between the stock business and the nonstock business? On gross margin?

It is -- the direct ship business versus stock usually runs about two-thirds. The direct ship business will be roughly two-thirds of the gross margin that our stock margin relates to. We also look at that from a -- kind of an operating margin impact. Our direct ship business tends to have less cost associated with it. Certainly has less working capital related to it. So, we are -- at the bottom line, or return on invested capital perspective, a bit agnostic on whether we get stock or DS type of business through the sales line. It does play a little havoc with the gross margin percent but it tends to even out a little bit on the downward side. You can see that with the sequential change in gross margins, we still expanded our operating profit and that was on the -- some of that business requiring less physical handling as well as our cost containment initiatives.

Okay. And then on the inventory, is Wesco itself done destocking or another way to put it where would you like to get inventories maybe by the end of the year?

We would love to have inventories go up by the end of the year because of increased sales. I will just state that as a preference. But our inventories are in pretty good shape. We have had a nice reduction from year-end as far as -- we also look at the days supply of inventory we have had on hand and we have reduced that by over 10 days, since the end of the year. At this type of an activity level, we have a little bit more cleaning up on the inventory but not a material amount.

The only thing I would add there is like -- we think we have done a nice job, you know, sizing inventory and responding to, you know, the weakened market demand and decline in sales. With that said, our top priority is maintaining appropriate inventory availability. Inventory availability and then, managing it such that we have high fill rates. It is all about customer service. And, in these challenging times we have seen others in the marketplace that we compete with take action dramatically reducing inventory which positions them, many times, not to have the product that the customer needs or to provide the appropriate customer service level. So for us the high ground is very important, is all about customer service, inventory is a good thing. The right inventory is the appropriate thing. So that we can serve our customers.

Great. Thank you.

The next question comes from Hamzah Mazari of Credit Suisse. Please go ahead.

Just a question on the industrial side of your business. Could you give us a sense of how the MRO piece of industrial is tracking in terms of top line on monthly basis, how it is trending in July and how should we be thinking about any contracts that are coming up up for rebate and any risk to those over the next couple of quarters? Thanks.

Yes, good morning, Hamzah, here's how we're viewing industrial who the quarter and I will give it two lenses. If you look at it from a national account lens we feel very good, about the continued strengths -- and the recognition of the strength of our national accounts sales and service model. Our 100% contract renewal rate continued in the quarter -- we actually had five contract renewals, five national account contract renewals in the quarter. We particularly put an emphasis not just trying to expand with current customers. Now granted their spending levels are down but we want to expand the product reps and portfolio with each of our customers. But as importantly, if not more importantly we're trying to capture new customers. We're very encouraged with adding 13 new national account customers in the second quarter and that represents on an annualized basis over $100 million of incremental revenue.

Our opportunity pipeline, opportunity pipeline, not orders, but the potential orders that we're off working, has increased dramatically in the second quarter. Sequentially to a new all time record level and our bidding activity levels remain up versus the same period last year on the order of 40%. So I would say what we experienced in the last downturn from 2001 to 2003, was the ability to grow our national accounts business in the face of the -- let's call it the recession or the economic downturn, this has been such a precipitous drop in production spending levels overnight, that that is what is impacting our initial sales but in terms of opportunity pipeline, the winds that we're getting, and the -- kind of the recognition and feedback on our national accounts sales and service model, and now the ability to sell all the Wesco products to those customers, we have a broader portfolio this time with CFS, Carlton Banks and others, we're very bullish in terms of our position in industrial. And the market will come back. As I alluded to in my opening comments, and this is very significant our overall sales declined 2% sequentially in the second quarter versus the first. That bucks normal seasonality. Last year we grew 8% from Q1 to Q2. A big part of that was industrial. And so, I think that it does not mean that Q3 will -- is going to be that much easier. I am giving you more of a mid-to-longer term view. So -- we feel good about the winds, as I said, good about the momentum and we're putting a lot of effort in that area.

Just a clarification. Is it fair to say that your MRO industrial business is down 15 to 20%? I am looking to see if you can give us a number.

We are -- that business is down more than that. We talked about that. It is down over 30%.

That's industrial as a whole or the MRO piece of that?

End market, industrial as a whole, the driver of that would be MRO, okay, so that is kind of -- I would add a fine point to what John talked about just national accounts. This is a key strength of Wesco, bid activity has been high. When you look at that, these national accounts relate to the day-to-day MRO activity. You would expect those to be down at the overall level at the 30% plus. They are down less than half of the run rate that we're seeing across the entire population. So these accounts are big. We renew them at 100% rate and we're getting deeper penetration and we should be able to continue to move forward.

To put the fine point on it. Overall industrial, which we include OEM with that, Hamzah in the quarter was down 34%. Utility was down 18. There was also MRO like activity in utility serving generation plants, et cetera, so -- and our national accounts business, was down mid teens.

Okay thank you that is very helpful, thanks.

Which is in industrial.

Thank you.

The next question is from Bernard Horn of Polaris Capital.

You partially answered the question I had on national how that five step process that you track is working this year so basically it sounds like that process which last quarter you reported was at an all time high is at even a better all time high now in the early stages but despite the fact you're winning these accounts it is still showing -- the national account business is still down 15%. Compared to the -- so there is something else going on beyond the national accounts. So I am just trying to understand if you take out the new stuff that you're winning -- or if you're not winning new stuff then are you just down 15 or is the 15 offsetting an even greater decline?

Okay I understand your question. Let's step back. The opportunity pipeline that we track as five stages in it, and we quantify that and that dollar value of that pipeline increased dramatically in the second quarter to an all time record level. We have had a consistent process over the years so that is encouraging number one. Number two, it is also encouraging that we had 100% contract renewal rate for the last 12 quarters in a row and we had five contract renewals in the quarter. Put that aside. We had 13 new wins. Now when you win a -- an industrial national account you're awarded the contract but then there is an implementation period. We have a dedicated team of resources that implement the contract and our branches in the local geographies that are next to the plants of the customer we won will do the implementation. That implementation process depending on the size and complexity of the plants can range from 6 to 12 months. With 13 wins that we had in the quarter -- we have been reporting on wins every quarter, that will ramp in the coming months.

Okay. And then the -- if you take kind of the same-store sales if you can, growth, ex the new business, is it -- is it still kind of -- about that 15% decline?

I think -- so that -- exactly the way to look at it. Our total national accounts customer base was down mid-teens in the quarter. And that is substantially -- it -- that is not down as much as the overall end market. Not down as much as the OEM side of our business and other parts of industrial, et cetera,. And so it -- you can look at that and think about that as we're expanding with those customers, expanding the scope, and that does represent some new customer ramp-up from prior wins and prior quarters. But overall, from an end market perspective, even though, as Steve mentioned the trend of capacity utilization and industrial production is inching up sequentially it is still way below the expansion mark and so spending is way down. And that's the fundamental issue. It will not stay that way. Eventually spending will come back. And we're positioning ourselves to have more product position with those customers, these new wins and that all will take off as spending comes back.

If you think about the same-store comment you made, the activity level in existing accounts are down, 30%-plus probably. We're offsetting some of that with the new wins. We have not lost accounts. When activity level resumes we will have kind of a multiplier effect. We will get the new wins run rate on top of the existing production coming back on. But the overall customer activity is down. We're negating some of that by getting new accounts into it.

Fair enough. Is there much of an inventory reduction that is still going on on the part of your customers and is there any way for to you try to figure out whether the -- now that inventory reduction has taken place and now we're getting kind of replacement sales and what the -- kind of sustainability of that replacement sales and what level that replacement sales level is at?

The answer is it is still continuing, it continued through the quarter. The answer is it is still continuing. We have discussions with customers each and every day about where that is and where there outcome is. There is range. We're not saying that destocking is done because the trend has still been downward. At some point it is slowing -- it is slowing. But we are not stating that it has bottomed as of yet. Does it bottom middle of this quarter or will take the earlier part of the fourth quarter, we don't know. Again it is going to be a function of customer by customer.

Well, thanks. As always very good job on your disclosure and information that you provide, and keep it up, thanks.

The next question comes from Steve Gambuzza of Longbow Capital.

Good morning,. I was just wondering if you could just update your expectations on free cash flow for the year given your revised sales outlook?

Yes, as you saw we had great cash flow of $200 million through the first half. You can look at where our net incomes and see a big driver of that has been working capital reductions. We're in pretty good shape right now in our working capital. Receivable days have improved since year-end. I told you our inventory days, so assuming sales stay in this type of a range we have gotten the lion's share of of that working capital liquidation into the free cash flow. We would turn back towards in the second half of the year a more normal kind of 90%ish to 100% of net income as free cash flow.

I guess that would then -- that the end of the inventory reductions combined with, hopefully, more favorable sequential copper pricing, should help support the case for improved gross margins in the back half? Is that fair?

That would be an accurate statement.

Okay thanks very much.

The next question comes from Deane Dray of FBR Capital Markets.

Thank you, good morning,. I was hoping to get some insight into your -- the assumptions underlying the change in sales guidance when going from down from 15 to 20, to down 22 to 25. How much would you attribute that to either deterioration in the commercial construction markets and/or the lower CapEx plans for utilities.

Deane, we put the bulk of that has happened in the industrial accounts where we saw the biggest dropoff. The commercial activity, while as not as robust, was not as impacted as negatively. Utility is off but off less than the overall. It has been driven more by the rate of industrial production.

The only thing I would add Deane was we're down 27% in the second quarter. Construction was down 23%. Industrial 34, utility 18. We didn't expect to be down 27 in the second quarter. We do have data through July. We have got some insight in terms of how this quarter will potentially unfold and so, we have given all the latest information how the quarter closed in July we factored that into Q3 and Q4.

Got it. I would have -- I may have missed this but did you comment on what the backlog is as of the end of the quarter?

Yes, we did. It -- we saw some decline in the backlog, but not anywhere near the rate of sales. It's actually held up reasonably well. It was down slightly sequentially and down mid-single digits since year-end.

Great then just last question. Anything on -- on account credit issues, writeoffs, delinquencies and so forth.

No, I mean the absolute dollars of our bad debt expense in the quarter was up a little bit. Not to be surprised. I would say that our organization has done an outstanding job on that. Our agings have held up. The days of receivables has actually dropped so the performance of the portfolio has been quite good.

Great, thank you.

The next question comes from David Manthey of Robert W. Baird. Please go ahead.

Hi, guys, good morning,. This question might be for Richard. Will the areas of cost reductions and the amounts be itemized in the slide show?

No, in the supplemental slides that we issue we will have categorization, I think that is sufficient for modeling and what you need for building your models.

Okay I just wondered because you went through them and I didn't catch them all and I didn't want to have you repeat them if they are going to be in the slides.

They are going to be in the slides, yes.

Okay great. As it relates to the $140 million or $160 million ultimate run-rate here is the 140 -- are you saying that is incremental to where we stand at the end of the second quarter, meaning that $70 million you hope to capture in the second half? Is that how to read that.

The 140 is what we expect for full-year 2009 versus 2008. The $116 million is the annualized impact of all the actions we're taking. As you understand some of them are being taken mid year so, we won't get the full benefit in 2009.

So as we stand here at the end of the second quarter, how much of the 140 has already been captured?

Of the 140, approximately 120 of that is -- has been captured. We have about 20 million more actions in the second half.

Dave, a way to look at that would be kind of look at where our run-rate was for the second quarter from an SG&A standpoint and think about maybe a full impact of the staff reductions that were taken in the second quarter, rolling to the third quarter, staff reductions in the third quarter being offset by the severance charge. So you're probably looking at kind of a $4 million to $5 million improvement rate on the SG&A costs going from second to third quarter.

Okay and then ramping a little bit further as you get the full benefit in the fourth quarter?

That would be just the incremental benefit going from the fourth quarter of the actions taken in the third quarter. What we did, in the -- in the second quarter, will be repeated in third and fourth as relates to the unpaid leave of absence so those numbers are going to be similar, probably a little bit less than a third and fourth quarter because it becomes increasingly difficult to get the same impact on that. The benefits suspension we got a little bit more benefit, a little bit more favorable impact to that in the second quarter because we picked up the first quarter's accruals on that so that will be a little bit of a head wind into the third quarter that will be more than offset by the other actions. A way to look at it is think about a $5 million to $6 million range of SG&A cost reduction into the third quarter and then the fourth quarter is going to be dependent on how we see volume shake out.

(Operator Instructions) The next question is from Dan Whang of B. Riley.

Just a question, I think you touched on a little bit about seasonality. Obviously the second quarter revenues seeing a sequential decline, I think very unusual. Just being going back to 90s you haven't really seen that. Obviously we're in a -- an unusual period right now but you're looking for Q3 revenues flat with second quarter. Any possibility that we could potentially see some of that seasonality that was negated in the second quarter pushed through the third quarter? I know your back log was -- it really didn't change too much from the first.

From a seasonality standpoint you're right it was an unusual quarter and we usually see the second and third quarter pretty much identical. Our back log position how we're running in July says that that is probably going to remain the same. I would not equate the second quarter activity to seasonality. This is just a very, very difficult economic environment with a lot of activity being fettered down. So I don't think that that is a seasonality type of call. So -- our best expectations at this point in time, Dan, would be for -- to see normal seasonality in the second and third quarter which is essentially those two are identical. And that's -- that's what it looks like at this point in time. I don't think there was any type of seasonality factor that said something got pushed from one quarter to the other and we would expect to see that in the third quarter.

Right and the -- in terms of backlog essentially kind of holding there, I mean was there any delayed cancellations versus any new activity that went in or--?

No, not of a material nature.

Okay, great. Thank you.

The last question comes from Steven Fisher of UBS. Please go ahead.

Hi, good morning,. Wondering if you're seeing credit for construction projects easing at all, and related to cancellations, how much is due to the lack of financing versus other reasons and can you say which verticals you're suing the most cancellations in?

Yes, Steve. The credit picture doesn't seem to be changing at all and that is definitely a factor, we think both in delays, potentially cancelation and release of new jobs. I think our success on the backlog area has been more of -- it is even with the -- the environment, there is a ton of opportunities out there. I do believe credit is playing a factor. I think when the suppliers are looking and customers are looking at the distributor of choice they want to make sure the distributor is going to be there in three, six, nine, and twelve months. And we think that that is good for Wesco, we're in strong financial position. We're a large public Company. People can look at our financials and there has been a lot of comments around that as we have been in these bid situations.

And any comment on the verticals?

Nothing -- I wouldn't say there has been one, energy or health are or education or anything that has behaved significantly different over the last two or three--.

And I think that has the potential -- put the credit markets aside. That has the potential to change as we move through the second half and into next year. We didn't talk about the effect of government stimulus plan. The AARRA, and so, we have invested a good at of our time and energy and have dedicated resources going after those projects. We didn't talk about in detail, Steve, alluded to a few comments but we have a list now of over 20,000 stimulus related construction and renovation projects that we have put into our what we call stimulus clearinghouse. These are projects that we get the information on. We kind of pre-qualify, the lead, and we're pushing that out to the branches and trying to support proactively going after these projects. As opposed to waiting for the RFP or waiting for our relationship with that particular contractor or that particular supplier to result in the business.

Now, I am encouraged by how we have attacked this opportunity as an organization. I am encouraged by the pipeline that is out there that we're all working. We haven't seen that materially translate into any real business yet. I do think, look, my -- our perspective is that money is going to get spent. That money is going to get spent, it is not if. It is only when. And we think we're very well positioned to take advantage of that when it breaks free. So we're not forecasting if that has a significant material sequential or incremental impact in 2009 but it could represent a potential upside. We do think that that will gain significant momentum as we move into 2010 and '11.

That is very helpful. Thanks.

At this time, I would like to turn the conference over to Mr. John J. Engel, Senior Vice President for closing remarks.

Well, thank you all for attending today's call. And we appreciate your support. We're aggressively managing our way through these challenging economic times and we see these challenges as an opportunity. An opportunity to strengthen our Company and build on and extend our market leadership positions. In the spirit of our lean culture we're continuously focusing on providing superior customer satisfaction, maintaining our cost leadership position, strengthening our team, and delivering improved shareholder returns.

Our financial priorities remain clear. Number one, to generate sales performance that is better than the market. Number two, to improve our operating margins. Number three, to deliver strong free cash flow. And number four, to maintain a strong capital structure. We have strengthened our organization and talent base and have the strongest team that we have ever had. Where our extra effort people are our differentiator. With that, we're committed to and remain confident in our ability to exit this downturn an even stronger Company. Thank you, and have a good day.

This now concludes the second quarter 2009 Wesco International Inc. earnings conference call. You may now disconnect your line. Thank you.