Wesco International Inc (WCC) 2010 Q2 法說會逐字稿

Good morning and welcome to the Wesco International second quarter 2010 earnings call. All participant will be in a listen-only mode . (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Dan Brailer, Treasurer and head of Investor Relations. Please go

Thank you. Good morning, ladies and gentlemen. Thank you for joining us for Wesco International's conference call to review the second quarter 2010 financial results. Participating in the earnings conference call this morning are the following officers. Mr. John Engel, President and Chief Executive Officer; Mr. Steve Van Oss, Senior Vice President and Chief Operating Officer; and Mr. Richard Heyse, Vice President and Chief Financial 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.

We have filed with the SEC a supplemental financial data presentation providing a summary of certain financial and end-market information to be reviewed in today's commentary by management. This presentation is also available on our corporate website. 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 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 by 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. We delivered a strong second quarter marked by broad-based improvement in momentum across our entire business. Our growth initiatives are contributing positively to our results, which were significantly better than typical seasonality. Our second quarter sales are up 10% sequentially versus the first quarter and were up 9% over last year's comparable quarter. It is encouraging to note that experienced positive sequential sales growth in all four of our major end markets and in all six of our major product categories.

The second quarter results highlight our ability to take advantage of growth opportunities and improve our position versus the market as the economy slowly recovers. Overall this is translated into operating margins of 4.1%, up 80 basis points sequentially, and EPS of $0.60 in the first quarter,(Sic-see press release) clearlydemonstrating the operating leverage in our business model.

On a year-over-year basis, operating margins expanded 80 basis points after adjusting for temporary cost and discretionary benefit reductions in 2009. We're continuing to invest in our business to deliver above-market profitable sales growth and are making good progress on our previously outlined eight major 2010 growth initiatives. Sales in our Industrial and CIGN markets and Data Communications product lines showed particular strength in the quarter, posting gains of 25%, 11%, and 25% respectively versus last year. We again increased our global accounts opportunity pipeline to a record level and expect to see strong stimulus opportunities in the second half of this year and next. Of particular note is the continued growth in our backlog, which was up 7% sequentially and 7% year-over-year, whileConstruction sales grew 4% in the quarter.

Now shifting to our capital structure. We're continuing to take a disciplined and balanced approach to delevering our capital structure. We reduced our debt by $115 million year-to-date and increased our liquidity to a record level of $576 million in the quarter. We believe that our capital structure is in excellent shape and we have the required financial flexibility to support our strategy of above-market organic growth plus the accretive acquisitions.

During the quarter we acquired Potelcom, a well-run $25 million business, which serves the utility, industrial and government markets in Alaska. We welcome Potelcom's employees to the Wesco team. The acquisition of Potelcom is consistent with our strategy of increasing sales in key industry segments and geographic regions.

We see excellent opportunities to continue to strengthen our portfolio, accelerate our growth initiative and further improve our market position, as we expand our business through the recovery phase of this economic cycle. Our current outlook for the overall economy remains unchanged. We expect the economy to recover slowly over the next several years. For the remainder of 2010 the positive momentum in the industrial and government end markets is expected to continue, along with further pressure and contraction in a nonresidential construction and utility end markets.

The market remains highly competitive, and our customers needs for supply chain efficiency and effectiveness are greater than ever. The Wesco team is stepping up to meet the increased demands of our customers as we focus on providing complete supply chain solutions. I would like to thank all our Wesco employees for their extra effort and commitment and working together to actively sell and support our entire portfolio and products and services to all customer groups. Now Richard Heyse, our CFO, will provide details on our second quarter results and our outlook for the third quarter. We'll then open it up for the question-and-answer session. Richard?

Thanks, John. Good morning. First, I will share with you our second quarter results and then conclude with our third quarter outlook.

Wesco's second quarter sales were 8.6% year-over-year and 9.6% sequentially. Sales for the quarter compared to last year included a positive impact of 1.9% from foreign exchange. Product selling price increases, driven primarily by rising product costs due to year-over-year commodity prices, are estimated to have positively impacted second quarter comparable sales by approximately 3%. The impact of foreign exchange and price increases on sequential sales was 40 basis points and approximately 70 basis points respectively. As John previously noted, Wesco saw a favorable sequential sales trends across all four major end markets and all six primary product categories.

Wesco's second quarter gross margin performance was 19.3%, identical to the second quarter of 2009. Despite continued pricing pressure, billed project margins for the quarter improved slightly relative to 2009 levels. Second quarter sequential gross margins were down 50 basis points due to the mixed shift associated with strong sequential Construction sales growth and expenses associated with increased inventory related reserves. As noted in previous calls, Wesco has a series of initiatives targeting gross margin expansion, and we expect those efforts to have a favorable impact in the second half of 2010.

SG&A expenses for the second quarter were $186 million, or 14.8% of sales, compared to $170 million or 14.7% of sales in the second quarter of 2009, and to an adjusted $180 million or 15.6% of sales in the first quarter of 2010. I would like to note that the adjusted first quarter figure excludes the $3.4 million non-cash charge related to the sale of our LADD joint venture space. Second quarter sequential SG&A increase was primarily due to increased commissions and other variable costs associated with the increased sales, and increased expense accruals also directly associated with higher business activity levels. In the second half of the year, we will continue to effectively manage our cost structure while investing in our growth initiatives to drive Wesco's growth at greater than market rates.

Operating profit for the second quarter was $51.3 million, with an operating margin of 4.1% of sales, which is equal to the operating margin rate experienced in the second quarter of 2009. However, as noted in our press release, Wesco's second quarter 2009 results included the net favorable impact of approximately $10 million in temporary costs and discretionary benefit reductions. After adjusting for these expense reductions, second quarter year-over-year operating margins improved by 80 basis points, and operating profit pull-through is greater than 60%. When compared to first quarter's results of $38.3 million, or 3.3% of sales, operating profit increased $13 million. Second quarter sequential operating profit pull-through, even after adjusting first quarter's results for the $3.4 million LADD divestiture non-cash charge, was also greater than 60%.

The effective income tax rate for the quarter of 28.2% was slightly lower than the first quarter, 29.5%. We remain comfortable that the full-year effective tax rate will be in the range of 28% to 30%.

Net income for the quarter was $27.8 million and resulted in an EPS of $0.60 per share, versus net income of $26.4 million and an EPS of $0.62 per share during the second quarter of 2009. Wesco's diluted share count increased to 46 million shares for the quarter, which has an increase of 3.3 million shares from the second quarter 2009 diluted share count. This increased share count negatively impacted EPS by approximately $0.05 per share. The share count increase is the result of an increased average quarterly share price and the associated delusion impact caused by our convertible debentures and management stock appreciation rates.

Second quarter working capital days were flat with the first quarter and are down approximately 9% since year-end. Year-to-date free cash flow of $63 million is greater than 130% of year-to-date net income, which is significantly higher than our long-term target to convert 80% to 90% of net income into free cash flow. During the second quarter, we increased inventories by $24 million over first quarter levels to support our strong sales growth. Accounts receivable and accounts payable also increased $42 million and $6 million respectively. While working capital levels are within our historical operating range, we continue to focus on improving our working capital position.

Wesco continued to reduce debt in the quarter. We received the proceeds related to the sale of our LADD JV ownership interest on June 7th . Specifically, $40 million was received for the remaining ownership interest and $15 million from the repayment of a promissory note. These proceeds, net of payments for the acquisition of Potelcom, were used to reduce or variable rate debt. Total par debt value has decreased by $115 million from year-end levels to $760 million at the end of June. Our all-in cash borrowing costs for the quarter, including commitment fees, was 5.5%. Liquidity, defined as invested cash plus committed borrowing capacity, was $576 million, another all-time high. Financial leverage declined to 3.7 times total par debt value to LTM EBITDA from 4.2 times at the end of last year. Our targeted range of financial leverage continues to be 2 to 3.5 times debt to EBITDA.

As we look at the third quarter, we anticipate that the industrial economy will shift to a more gradual rate of recovery and that there will be continued pressure on construction and utility end markets, as John though noted. We, therefore third quarter sales to be fairly consistent historical seasonality, and so be flat to slightly higher than second quarter sales. We expect gross margins to somewhat improve from second quarter levels and operating expense to be stable sequential. Consequently, we also anticipate third quarter operating margins to be somewhat higher on a sequential basis.

At this point I'd like to turned call over to Steve Van Oss. Steve will provide additional detail on our end markets and 2010 growth

Thank you, Richard, and good morning, everyone. FirstI will provide some commentary on the major end markets we serve and then specifically focus on Wesco's 2010 major growth initiatives. I will also provide some insight on performance for our Canadian and other international operations.

On a positive note, we saw sales growth accelerate, with sales up almost 10% over the first quarter of 2010 and approximately 9% over the second quarter of 2009. Sequentially, the sales growth was driven by a 17% increase in sales to customers in our construction end markets, with sales to industrial customers up 6%. Versus last year's second quarter, the sales growth was primarily driven by a 25% increase in sales to industrial customers, with sales to construction customers up 4% despite overall weak construction end-market conditions in the United States. Macro indicators continue to point to recover in industrial end markets, with the purchasing manager's index in its 11th month of expansion.

Sales of activity levels with our utility customers increased sequentially but were behind last year's second quarter due to continuing weakness in public power markets, reflecting lower construction activity and the discontinuance of two significant investor-owned utility alliance programs. Normalizing for these two programs, our sales performance was flat to last year, and our sales to other investor-owned utility customers were up double digits on the strength of new programs and project spending. Improvement in activity levels with our investor-owned utility and utility contract customers are expected to begin by year-end.

While there's still a lot of uncertainty in the economy, we are confident in our ability to capture business in what remains a very large and highly fragmented industry. To that end, we have focused on a series of organic growth initiatives in 2010 and beyond to drive overall growth in sales and earnings. As demonstrated by this quarter's sales result, we believe we are making good progress on our targeted initiatives. A quick recap of those initiatives, which we discussed last quarter, follows.

Global accounts and integrated supply were Wesco's clear the industry leading today. Data communications and low volt products, where we are leveraging our North American footprint and our extensive data communication and security capabilities. EPCs and contractors that benefit from our extensive sourcing capabilities and extended branch network. Utility distribution and generation opportunities that utilize coordinated integrated supply solutions. Governmental agencies and other customers that are positioned to benefit from the release of stimulus funds. Healthcare and education organizations, which control spending across multiple facilities. International activities focused on energy-related projects in integrated supply opportunities. And lastly, lighting, which represents a large category of spend that is well positioned to benefit from state and federal energy efficiency initiatives and stimulus funding.

Let me now give some color on the size and activity level for four of these organic growth priorities. In global accounts and integrated supply, we are seeing a continued expansion in interest and quote activity by large organizations to consolidate their entire MRO spend with an integrated supply or other advanced supply chain solutions. Sales to the global accounts and integrated supply programs experienced strong broad-based demand, both on a year-over-year and sequential basis.

During the quarter, we experienced increased activity in existing programs along with the initial ramping up of several new programs. Activity levels with our global account customers improved with our industrial opportunity pipeline, expanding to another successive record level. We experienced growth in the discovery and proposal submittal phases due in part to a growing number of OEM and global oil and gas opportunities. We are also encouraged by our global account customer wins in the second quarter, where we had a total of nine new customers or expanded relationships. We continue to invest in the capacity of both our global accounts and our integrated supply platforms through additional resources and initiatives and see these as significant drivers of profitable growth.

Data communications project activity and our opportunity pipeline in enterprise cabling and security are strong, and our sales and marketing initiatives are continuing to yield positive result. Sales were up 25% over last year's second quarter, and backlog improved significantly over last June and over year-end. Sales growth continues to be driven by project activity, while discretionary day-to-day business with contractors has continued to be below historical levels, reflecting the continued soft construction environment. Key wins during the quarter were posted in the government, health care, and education verticals with seven project awards, each in excess of $1 million.

Our data communications geographic expansion program utilizing existing Wesco facilities is working well and has continued into 2010 with ten new branches openedin the first half of 2010, and another eight planned for the remainder of the year. This is in addition to the 11 new branches opened since this program started in 2008. The program has resulted in immediate sales growth and incorporates a model which results in profitability within the first year of operation. Thisbranch-within-the-branch expansion strategy increases cross selling and service opportunities into our blue chip customer base and provides a solid platform to drive strong organic growth over the next five-plus years.

In the government and stimulus area, we continue to focus on our efforts on federal initiatives, state, local, and international government business and stimulus-related opportunities. Our online clearing house continues to grow and now encompasses over 89,000 potential projects. Our government team maintained momentum on sales and marketing initiatives, resulting in a 31% increase in sales to government agencies and government-related contractors over last year, and 12% sequentially. The sales increased came primarily through the contractor channel, with key wins at military installations and hospitals, as well as new state and local contract wins. Stimulus bookings to date increased 48% during the second quarter to $77 million. Expect to see continued growth in government-related sales as we enter the third quarter with our government and stimulus pipeline opportunity in excess of $390 million.

The last growth priority I will cover today is contractors and engineering procurement consulting firms. In the second quarter Wesco sales to construction contractors were strong, despite continued weakness in the US nonresidential construction market. We believe this demonstrates the strength of Wesco's multiple contractor channels and diversified construction market exposure. We have taken actions to better combine our supplier relationships, geographic coverage and materials management solutions, especially with the large EPC groups and contractors, to improve our penetration into this end market. We believe our growth initiatives and strength in the channel was reflect in our second quarter's Construction sales performance, which was up 17% sequentially and 4% over last year. Additionally, our backlog is up over 7% from last year's second quarter as well as 7% sequentially.

We are pursuing growth by creating and delivering more value to our existing contractor customers and by adding new accounts in geographic growth areas and targeted vertical market segments. With our lean value-add solutions, we've created programs to provide superior value to our contractor customers by giving them the expertise to help their clients save energy, while at the same time delivering a high return on their investment. Recent forecasts for overall nonresidential construction market starts indicated an expected decline of approximately 20% in 2010. Trend-wise, the Architecture Billings Index, or ABI, is up from the lows of 2009 and has shown an improving trend for the past 12 months. We experienced Construction sales growth against a tough economic environment in the quarter, and we feel encouraged by successes in our construction initiatives. However, we continue to hear contractor customers express serious concerns over future activity levels.

Let's finish the market overview with a quick review of our international operations performance for the quarter. Wesco's Canadian business has operated successfully for many years. Our team is experienced and has improved market share significantly over the last several years. We offer comprehensive solutions for our customers operating in the production-intense natural resources, mining and large infrastructure project markets. We delivered strong performance in the quarter with sales up 13% over last year and up 10% sequentially. Backlog is at a record level and is up greater than sales versus last year and last quarter.

In our other international operations, we are continuing to target international expansion in higher growth economies where markets remain strong. Sales outside of North America grew over 50% versus last year's second quarter and are ahead sequentially by over 20%. We are focusing on key customer and employee acquisition opportunities and will continue to strengthen our operations with investment in people, facilities, and inventories to further expand in our capacity and capability to service our customers globally.

I will finish with some comments on our mergers and acquisitions strategy. A longstanding element of Wesco's growth strategy has been the acquisition of companies to provide geographic, product category, and customer and supply or expansion. We have a track record of successful integration of operations and delivering profit accretion with our acquired companies.

In June we added another company, Potelcom, the leader supplier of utility, construction and industrial customers in Anchorage, Alaska, to the Wesco family. This accretive acquisition with sales of $25 million, combined with our existing business, gives Wesco the leading position in this area and provides a solid platform for product category additions and deeper penetration and expansion into the local customer base.

In summary, we believe we are well positioned through our numerous growth initiatives, strong financial position, and acquisition capabilities to deliver profitable growth during this protracted recovery. At this point, I would like to open the session for the question-and-answer period.

(Operator Instructions). The first question is from Matt Duncan with Stevens.

Hey, good morning guys.

Hey, Matt.

I guess the main question I've got for you is getting back to the gross margin for a minute. And I want to kind of better understand the gross margin differential between construction-related sales and maybe industrial MRO sales. Understanding obviously that the Construction sales more of a bulk sale, sothere's probably some volume discounts there, relative to the more onesies and twosies in industrial MRO. But was there margin weakness within Construction, maybe from price remember? Or was it purely mix related, and it sounds like maybe you expect that to bounce back a little bit in the 3Q, right?

First, to answer your question on the -- was there pricing or pressure on margin from pricing, the answer was no. What happens with Construction sales tend -- there's the bulk, as you noted, or order size issue, but also the mix -- the shipment type. There tends to be more direct type shipments. And those shipments have less cost to process or serve. So when you look at -- one of the things you have to be careful at when you're looking at gross margin mix impact is you could have orders that have larger size and lower gross margin, but the operating margin is essentially the same, because there's simply less overhead associated with processing that order. While we had gross margin mix effect due to Construction in quarter, as you can see the operating margins were strong and we got the pull through that we were looking for, both sequentially and year-over-year.

Okay. Thanks, Richard.

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

Thank you. Just one thing. To get some more color on what you're seeing in the market. Is everything you're seeing essentially a sell through and customers remain cautious? At what point do you start building inventory levels?

I didn't quite catch that question perfectly. Could you rephrase it a little bit.

Yes. I'm just trying to understand at what point you guys start building inventory levels, given your topline assumptions.

Okay. We did build inventory levels somewhat during the quarter. And that was reflected in the cash usage during the period of time, which is relatively typical for this time of year. Our inventories are in very good shape as far as the turn basis and a day supply. They're right within our targeted range. We feel confident we have got, for the most part, the right inventory at the right place and at the right time to service our customers.

And, Hamzah, with respect to your end-market question, I think you want -- your question was with respect to, is it just kind of pull through or what are we seeing? Here's what we're very encouraged about in the quarter. If you look at our industrial end market segment, our largest segment, was up 25% year-over-year, 6% sequential. We did expect that to improve sequentially. But I think the year-over-year performance is notable. Construction very strong momentum, versus any measurable backdrop. 4% positive growth year-over-year, 17% sequential. So when we look at kind of our two largest end-market segments, our exposures from a mixed perspective, very strong momentum was evidenced in the quarter on industrial and construction.

Okay. Great. Thank you.

The next question is from Sam Darkatsh of Raymond James. Please go ahead.

Good morning, John, Steve, Richard, how are you.

Good morning, Sam.

I want to see if we can dive in a little deeper about -- with respect to the contractor element of your Construction business. Because it looks like that was the major surprise, at least to you folks, and certainly to many of us out here. What exactly was the surprise? I know you said it was broad-based, but trying to get a sense of -- listening to Eaton yesterday, they were talking about their surprise in the electricals business was more on the industrial side. And your industrials is pretty much in line with what you were anticipating. So if you could just put a little more meat on the bone as it relates to exactly what happened in the quarter there with contractors?

Sam, it was an outstanding result, we believe, andI would just frame it up a little bit. We continue to see intense price pressures on there. But we've got I think a superior value story that is really being pushed through that. We've got a better position with the larger contractors. Our geographic presence certainly helps in that. We saw -- it was broad-based, but there was four areas that stood out a little bit as being very strong. Our Canadian operations were quite strong, as they delivered very, very good results. Our international operations, while not nearly as large, had a very good growth in that. And we saw particular strong performance in both our Data Communications and in some project business with utilities. So all of our industrial construction facilities all had some pretty good movement as well. So good thing about it. Broad-based, we're not signaling that the end marks are good or getting better. We think this is all share taking and relates to the value proposition that Wesco brings to the table.

Now you had the directionally on slide five under EPCs and Contractors, you're mentioning that you still imagine pressure coming. Do you see that this is going to continue for another quarter or two? Or do you think it's -- just trying to get a sentence of your sustain county in the recent trends in the contractor business.

Our belief is that the end markets will continue to be weak well into 2011. We think that we're winning on a day-to-day basis. We'll see how that translates into the third quarter results.

I think, Sam, if you were to look at start data and put in place data, and obviously put in place data lags start data. You still see broad-based declines occurring at this point in 2010. We clearly expect that to continue throughout 2010. We expect that to continue into 2011. We've not called publicly as of yet where do we think that true bottoming will occur. But clearly our view is, and I think all indicators would support, that the market is still very challengingacross virtually all of the subsegments under nonresidential construction.

But I think that, just to add to that, If you look at the sequential results being up close to 20%, being up 17%, and the increase in the backlog, we were certainly booking more business than we even shipped with that. And that's a good sign for Wesco in some pretty turbulent markets.

Thank you.

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

Hi, good morning.

Good morning, David.

Hey. First off, I'm wondering -- could you help me understand how you're thinking about the pull-through margin?Because by my calculations I'm coming up with something in the 19% range. And I'm just wondering how that squares with you were saying you were satisfied with that number?

If you look -- we're simply looking at the change in gross margin. If you're talking about year-over-year, it's also relative to, if you take 2009 and adjust out the temporary cost destructions -- cost reductions and discretionary cost reductions we called out in last year's script, which was about $10 million. Because those weren't sustaining. Those were temporary, as we noted. And looking at year-over-year and adjusted 2009 to 2010's result. And if you make it adjustment, you get into that 60% range.

On a year-over-year basis?

Correct.

David, I would add to that, maybe adding a little bit of a historian's view. We looked at a period of time from about three or four years after we entered -- exited the last downturn, where Wesco's target was to deliver 50% pull-through of earnings on additional gross margin dollars. We did that 12 quarters in a row. Our model is outstanding,and anytime we see generally growth periods on the topline in excess of 6% or 7%, we expect to be at those levels. And if you look, as Richard said, if you just adjust for the temporary reductions -- and I would add to that, we did that consciously in 2009 to take some temporary benefit reductions and mandatory unpaid leaves of absences to maintain our sales force and maintain our team in place to take advantage of any opportunity for market share growth, which we definitely got in the first -- in second quarter this year. So we think our strategy was accurate on that.

And if you adjust for that $10 million of cost, you're about 70% pull-through versus the first quarter -- second quarter of last year. And then so if you want to say , okay, but that's temporary thing. Look at the sequential growth, which would be apples to apples, because we put the benefits back in place in the first quarter. We did not have any mandatory unpaid leave of absence in either quarter. And on that basis, even adjusting for the LADD one-time charge, it's 65%. So the pull-through,the leverage in the business is strong, and we are executing on it. No doubt

Okay. But your pull-through is typically sequentially very strong from first quarter to second quarter. But you are satisfied with the level you hit this quarter?

On an operating base, absolutely.

Okay. All right. And then, second, in terms of the guidance where you're currently seeing good momentum from the first quarter to the second quarter, but then you're talking about guiding to a more normal sequential pattern from 2Q to 3Q. And again going become in history, Steve, which you're talking about, if you look at '04 and '05, your revenues were up mid-single digits in those periods. I'm wondering how you're thinking about that, and then what factors might lead that number to be a little bit higher than what you're guiding to, if that were to happen?

Well, again, as Steve and John touched on in their comments, we've got two factors at play. Continued recovery in the industrial economy, and we think that's going to be going onward. We pretty much had the same view point for the last year or so, that the industrial economy was going to recovery steadily but slowly. And to Steve's point, there's still pressure in construction and some of the utility markets. So those two effects will somewhat offset each other. So our view is that we'll see more normal seasonality. I think to answer your question about assuming that there were some -- industrial recovery was much stronger than our anticipation or something of that nature, clearly you could see better improvement. But our view has been for a while that the industrial economy was going to recover slowly and gradually over a number of quarters.

I think to just add a little additional commentary to that. Look, industrial, our largest end-market segment, great year-over-year growth, but sequentially 6% growth. And so our view, David, that is it 6% going Q2 to Q3, or do we see some moderating of that. And that's what Richard mentioned in his commentary. That we still think the industrial economy is recovering, but on a sequential basis, at least our outlook and our plan is for some moderation on a sequential basis. Construction grew 17% sequentially and again positive year-over-year. So we are very encouraged by our results in the second quarter. The question will be -- because again that's a lumpier business --how does that develop as we move through Q3 and Q4. We're confident in all the initiatives we have underway, and we're encouraged by our progress, but our outlook, which I think where your question is centered, does in fact assume that construction end markets are going to be -- continue to very, very challenged.

Got it. Okay. Thanks very much, guys.

The next question is from Adam Uhlman of Cleveland Research. Please go ahead.

Hi, guys. Good morning.

Good morning, Adam.

Good morning, Adam.

Just a clarification on the last question. Last quarter you guys had forecast the overall end markets flat to down 2% for the year. And I'm wondering if there's been any change to that market outlook?

I think, as we mentioned, we think that the markets -- we're going to return to more of a normal seasonality, flat to some modest growth in the second to third quarter, and then fourth quarter usually turns down a bit for us. So I think our view is similar, but again, more of a return to normal seasonality from here on out.

Okay. So maybe the same as what you were targeting last year?

Yes, same to a bit better.

Then, Richard, a question on the gross margin. In your prepared remarks you had mentioned an inventory reserve expense that came through. Was that meaningful to the gross margin this quarter?

Yes. It was just north of 10 basis points. It's just simply -- our scrap rates haven't gone up. It's just simply as activity levels go up the way we book our reserves, there's also an increase in reserves for inventory due to the increased activity levels.

Okay. And then related to the guidance for the gross margin, price picked up quite a bit this quarter. When would you expect that to begin to maybe directionally help the gross margin rates?

I mean as far as your pricing year-over-year was, was up primarily due to the commodity. But if you look sequentially, pricing was relatively stable, and we expect that also second, third quarter. The prices in the market will be relatively stable. And there's also a lagging effect, aswe see. It takes time. We've been through this, and we know at length in the past. It takes time to work any broad-based general pricing increases, [call them] inflationary-like, through the entire chapter. There's that lag factor.

And I think some of our peers have noted that they were a bit in their price increases. We were not in the first quarter. But I think there are some peers out there getting a bit of benefit on margin in second quarter from just catching up on their price increases.

Got it. Thank you.

The next question is from Ajay Kejriwalof FBR Capital Markets. Please go ahead.

Thank you, good morning. Just wanted to follow up on that pricing question. So pricing was stable in the second quarter, expect to be stable going forward. I'm trying to connect that with the raws, where some of the raw materials have come down sequentially the last couple of months. And we've heard comments from other distributers about product cost deflations. So just trying to connect the two together. Does that -- for you, pricing stable and maybe raws coming down, does that help margins going forward, or how should we think about that?

I think a good way to look at that, Ajay,is to think about the momentum and timing of price increases. It means our cost is going up. We have to push those through to customers. There's generally a little bit of lag on that. If you push the exact amount of the cost -- price increase as the cost, then your margins really don't change. The other thing is commodity prices change on the spot market. Rarely do you see the same movement in the timeframe. Directionally it's the same, but you don't see the same velocity into the overall prices, because suppliers can't push it through. We don't get a push-through as quickly. So there's a lag on that impact as well. So generally speaking, price increases over time is good for distribution company. And prices coming down over time hurts just on a raw dollars basis. We tend to maintain the gross margin percentages, either up and down, given time.

Got it. And maybe if I can slip one more in. On the data center growth, good color on branch openings and what you've done last few months, but maybe if you can help frame that growth potential for us. What do you think that branch-within-branch could help you on the topline in the next couple of years?And then how does that profitability compare with the rest of the business?

Well, it's a great program. If you look at it on a year-over-year basis, just the branches that were opened at the end of 2009 and then throughout 2010, added about 3.5 points to the growth they had, and it sequentially added almost two points of growth. So topline growth is pretty immediate. Our expectations, if you look at it and how we have 20-plus of them either planned or open,it kind of sets itself for a double digit growth as you run into a year, two years into their existence for a couple of years. So we're really trying to drive this area hard. We acquire as great company some years back. We've got it well integrated, and we're making good progress in that regards.

From a profitability standpoint, we see that they would be equivalent to the overall divisions profit performance after two-plus year period of time,but they'll break even or make a little bit of money in the first year. So we are investing in it. It is going to really help drive the topline much faster than the market. And we'll do a little bit of what I call the inch worm on the profitability basis. As we invest in that,because of the size, is roughly 10% of that business, itwon't significantly negatively impact, but will have some slight bit of a headwind on it. And then as you get a couple of years out, it will be right smack in the sweet spot. But we see a lot of opportunity continue to do this and grow faster than others.

The other comment I'd add, when we launched that program, we had an expectation that they would be operating in the black and turn profitable in the first year of operation. Now that we've got a number of those under our belt, so to speak, we're highly encouraged that in fact is the case. And so we do think there's really significant opportunity to continue to expand the geographic footprint, leveraging Wesco's current geographic position with our Data Com branch expansion.

Very helpful. Thank you.

The next question is from Anthony Kure of KeyBanc. Please go ahead.

Good morning, guys. Just a quick question. Want to drill down into the Data Com again. I think a couple of years ago I saw something that made up 20% of your construction market. Just given the growth that you've seen over the last year or so, 18 months, can you just frame how big piece of that Data Com is of construction now?

Yes. If you looked at -- I think last year's numbers were, I'm going to round just slightly, 40% of Wesco's total business was in the construction market, roughly 15 points of that was our data communications element of that construction market. And it's growing at about -- well, it grew 25% last quarter, and our overall Construction grew 17%. So it's becoming a slightly bigger impact on that.

And you'll -- I think you'll recall, we did this after our fourth quarter or was part of our fourth quarter earnings release. The supplemental we posted had a product category mix chart. And it showed full-year 2009 versus full-year 2008. And we saw a nice positive mix shift in terms of Data Com , Lighting and Supplies. So -- and it was north of -- I'm going to round it --it was close to two points. So we're encouraged by that. We would expect -- that's why we did identify data communications products and solutions is one of our great growth engines. We would expect that that would be able to deliver superior growth versus the overall enterprise and help pull

Okay. If we were to X-out the Data Com growth, could you give us an idea of what Construction would have done by itself?

It still would have been up pretty significantly. We're up in the neighborhood --

(inaudible -- multiple speakers) For example, if you looked at -- we didn't break this out, butif you look at the Wesco's performance in nonresidential electrical contractors in the US only, for example, our business is performing significantly better than the overall market, or as far as -- we are clearly taking share, both in the traditional nonresidential electrical contractors and in the data com.

On a sequential basis -- and it's not -- it's not easy to break this out perfectly, butlet's just say in general, on a sequential basis, the momentum in Data Com as a product category, versus Construction as an end market, we're roughly equivalent Q1 to Q2, sequentially. On a year-over-year basis, Data Com obviously grew much, much better than overall Construction. There's no perfect way to pull it out exactly right. But if you were to do it, you'd still find that Construction would I'd say be roughly flat to maybe down a point.

Got you.

And if you -- and even that measure versus the overall construction market were very -- that was Steve's comment in the prepared script that talked about our multiple -- the diversity of our Construction business, the multiple channels, the market, and the broad-based results, and we're encouraged by as a result of all of our initiatives. Even taking Data Com out, I would say the construction story is very strong and surprisingly strong.

One last point, so we don't leave you with a conception. All of our Data Communication product and sales are not through the contractor market.

Okay.

It's a large share, but it's not 100%. So don't get totally -- don't take that the data communication comment and just translate it 100% into the construction.

We sell into the government, we sell into other segments, and there's some Industrial mix in there as well. What we're mixing here is that the end market versus a product category.

I see. Okay. That's helpful. Thanks. Just want to follow up one more on the Data Com. It sounds like you're taking share, obviously, with that kind of growth rate,if we're just taking Data Com. Who do you think you're taking share from? Is it the smaller private guys, or is it maybe the large public incumbent? If you were to put some color around that. And why do you think you're taking share in either of those cases?

I think we're not going to comment on our competitors. I think for us the overall measure is what's our view of the market and are we -- with our investments and the execution platform we have in place, are we growing faster than market. I mean, that's really our focus. We're not -- we don't make it a habit and we don't like to comment on a specific competitor or competitors. And for us it's the overall growing faster than market is actually our top long-term financial objective that we -- that we will grow faster than the market, organically, supplemented by accretive acquisitions.

John didn't answer the who intentionally. And we won't. The why is clear. We have great momentum with our suppliers. They see that we're making the investment. The branch within the branch -- there is going to be 30-plus new openings, andsince we acquired our data communication capabilities, and we've got a buzz in the marketplace as being the employer of choice in that area. So there's a lot of positive momentum.

Okay. Thank you. That's helpful.

Our next question is from Brent Rakers with Morgan Keegan. Please go ahead.

Yes. Good morning. I guess I wanted to take the pull-through issue a little bit differently. If we could maybe focus on pull through relative to the original Q1 guidance. I mean, it looks to me like approximately $75 million in revenue, better than the midpoint of guidance. And then take into the EBITDA line about $2 million to $2.5 million. I was wondering -- I mean obviously I think thepull through is much better than that. But I was hoping maybe you could you dissect the EBITDA line and revenue differential, and that -- why that leverage wasn't much better there.

Maybe we can do a follow-up call, but I think ifyou look versus our guidance, again, there was some mix effects. And so the guidance was not presuming the same kind of strength in Construction. But if -- I think when we looked at relative to our -- we're also fairly satisfied. If you look into our guidance and what we achieved, we felt the second quarter results were fairly strong.

Could I just ask a quick follow-up to that?Does -- do the businesses -- I mean, does the stock business, the core Industrial business, provide better leverage than the Construction business does? And then maybe on the Construction business, does it leverage the existing cost base?

The sale -- both sales leverage existing cost base. Simply when you have direct-ship business, you don't have to handle it through your own warehouses, hence the cost to process the order is less, but also margins are somewhat lower at a gross margin level. Operating margins are essentially the same. Likewise, stocked products; you have to stock it, you have inventory. Gross margins are higher, but again operating margins fairly equivalent in the end. So I think what we've said, we're relatively agnostic on the type of sale, as they all have about the same impact on operating margins. They simply have their own relative cost to serve -- to deliver that sale.

Hey, Brent, maybe another way to look at itI think will help with what you're struggling with a little bit here. Over time, that's spot on, we are a bit agnostic. But if you have a shift in a short period of time, say a quarter or two quarters, when you have a bunch of project or direct-ship sales coming through versus stock, your cost structure doesn't adjust to that immediately. So you still -- we'd still have people in place in the branches, et cetera, et cetera. So if it's a momentary spike, you would get a little bit less pull through on our DS business than you would over a period of time. Over a period of time we would adjust the people and expenses and warehouse costs, et cetera.

Great. Thank you.

The next question is from Steve Fisherof UBS. Please go ahead.

Hi, good morning.

Good morning.

Wondering how your win rate experience has been in the stimulus, relative to our expectations. And I think, Steve, you mentioned the $390 million pipeline. I'm wondering how you see that playing out in terms of timing and mix of types of projects?

Yes, we think our win rate is pretty good. We've got extremely detailed, as I mentioned, by project. We were up almost 20,000 opportunities identified through stimulus programs from the end of the first quarter. We've got a very strong tie-in to our supplier base with whatever they're doing with their marketing programs. So we think we're getting a fair amount of the wins on that. And a lot of this has a long lead time to it. So we were getting into some customers, maybe we didn't do business before. We'll get that through the stimulus. I think the real upside side to that is, on an ongoing basis, we now have a customer base that we've penetrated deeper, we know how to get into the project activity at an earlier phase in the cycle. And it should lead to long-term business, beyond what the stimulus spending is.

Steve, we -- and we talked about this really over the last year, year and a half. We built some additional and new capabilities to go after that business. We use stimulus as a catalyst, no pun intended, to implement a little different business model where we would -- we have a centralized leads generation and development group that we use to start driving opportunities into the branches. We're highly encouraged. Quite frankly, we didn't know how to set an expectation in terms of order, capture and sales growth rate. We have been consistent saying as we move through 2010, we would expect that -- those opportunities to increase, andthat they will continue through 2011. So your question is a good one. If we take account and stock of where we stand at the middle of 2010, we're really encouraged by this opportunity pipeline, the size and quality of it, and the fact that our sales are ramping. I mean they're material. We're encouraged by that, and we do expect that that momentum will build sequentially as we move through the balance of this year into next.

So as you look into 2011, I know maybe it's a little bit early, but withthe ramp-up you're seeing this year, do you think that's a headwind, a tailwind or flat for next year?

No, I think stimulus -- we've been very consistent with this. The end market for broad-based nonresident construction, the starts are down this year, double digit, put in places down greater than starts, due to last year's start data being down, recall, 25% to 30%. The end markets are going to be challenged for some time. Stimulus represents an offset to that. Because in reality, stimulus projects that are construction oriented or related will show up in non-resi construction and market data. So it does represent kind of an offset, a partial offset to the overall end market challenges in non-resi construction. So it was our conscious strategy to implement a new approach and try to win more than our fair share. I will tell you with complete confidence had we not done what we did, we would not be winning at the rate that we're winning in stimulus.

Sounds good. Thanks a lot.

The next question is from Scott Gaffner of Barclays Capital.

Morning.

Good morning, Scott.

I was just looking at the -- if you assume normal seasonality holds in the third quarter, and then you assume the same in the fourth quarter, you get to a full year topline growth of somewhere close do 6%. And it sounds like most of your end-market forecasts haven't really changed all that much. So just wondering if you could maybe bridge the gap there for us?

When we had given forecasts, we talked about market demand, and that excluded any effects of pricing or foreign exchange. So part of that gap is just those two factors, and also I think we've been doing well in the share-gain point of view. We've been performing better than our original outlook.

And then any reason why normal seasonality was hold again or wouldn't hold again in the fourth quarter?

Again, with our view of the economy we can't see any. But if -- again, if there's something changing, Industrial keeps accelerating or something like what happened last year where Industrial accelerated very strong through the fourth quarter, that could have an impact.

Right. And then just looking at the M&A pipeline. I mean, obviously, Potelcom, that was a good one. Any -- you see that continuing back on a more inquisitive track, or are there any targets available?

Yes. Look I think that it's a process that is continuous. So even through the downturn, we maintained an up to date pipeline of opportunities that included companies that would help strengthen our business position and franchise. We've shown a history, and it's been consistent from 1994 to 2001, we acquired 25 companies for over $1 billion in sales. Then we had a downturn. We shut off the external acquisition engine, and from 2005 to 2008-plus, acquired another seven for north than $1 billion. So this -- we saw this terrific opportunity in Potelcom. I think it's great addition. The actions we took with our capital structure last position us to continue to strengthen our franchise through acquisition. So our strategy is very clear. We want to deliver above market growth, organically supported by accretive acquisitions. And so if you want to view the Potelcom acquisition as a signal that when we find a good deal we're, going to do it, it'sclearly a signal. The pipeline has always been maintained. We believe that's a continuous process. Because you've got to be positioned to take advantage of those opportunities.

I'll just add, I mean, in 2009 we took a very specific point of view to defend our capital structure in what was extremely uncertain environment. We think things have stabilized. We've got the capital structure is in good shape. As John said, we've kept the pipeline active. And so past is prologued a little bit. We would expect to be more active in the area as far as completing deals.

Final point. We've been directing our cash to debt reduction. I think we have a nice debt pull-down this year. Our financial leverage ratio is now near the high end of our zone, as Richard mentioned. Our target zone of 2 to 3.5So we had signaled and committed that we would bring that leverage ratio down. I think we're encouraged where we are at the midyear point. And I think that just positions us to continue to strengthen the franchise through acquisitions.

Okay.

With that, let me break down and say thank you very much. Richard and Dan will be available for additional questions throughout the afternoon. In summary, we believe we are very well positioned through our numerous growth initiatives, our strong financial position, and our acquisition capabilities to deliver profitable growth through what we view as a protracted recovery period. There's an excellent opportunity to share gain and value creation by strong, well-capitalized companies like Wesco, as the overall economy recovers slowly over the next several years. We're encouraged by our positive momentum and results in the first half of this year, andare continuing to invest in our business and our people. And we remain focused on providing superior customer service, maintaining our cost leadership position, strengthening our team, and producing improved shareholder returns. And we're confident in our ability to deliver improved operating results in the second half. Thanks again, and have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.