Wesco International Inc (WCC) 2011 Q2 法說會逐字稿

Good morning and welcome to the WESCO Distribution Inc second-quarter earnings call. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Dan Brailer, Vice President. Please go ahead.

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

A supplemental financial presentation has been produced which provides a summary of certain financial and in market information to be reviewed in today's commentary by Management. We have posted this presentation on our corporate website and filed it with the Securities and Exchange Commission. The 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 reg-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. Our second-quarter results are excellent and reflect a continuation of the strong business momentum that we have been generating since early last year. Organic sales net of acquisitions and foreign exchange grew 13% in the second quarter, marking the fourth consecutive quarter of double digit organic sales growth. This sales trend is continuing in July. Backlog, which also grew double digits, was up 21% versus last year and up 9% sequentially in the second quarter. Execution of our growth strategies is on track and is producing positive results. We are encouraged that customers are responding well to our one WESCO initiative to actively sell and support our entire portfolio of products and services across their operations.

We experienced organic sales growth in all four of our end markets, and in all six of our major product categories in the second quarter. Sales into industrial, construction, utility and CIGN markets grew 18%, 13%, 6%, and 3% respectively versus last year. Sales outside the United States and Canada grew 20% versus last year and sales to government customers were up 25%. US construction sales were also up double digits and grew 12% versus last year, despite a very weak end market. Sales of our data communication products were up 11% on a year-to-date basis and 1% in the second quarter versus prior year. We significantly built backlog in data communications during the quarter, growing over 30% sequentially, and backlog is currently at a record high.

We're in the middle of a successful conversion of the information technology platform of our data communication operations. While conversion is going very well, it did impact billings for the second quarter. We are seeing a rebound in billing with rates through the first half of July up low double digits. We expanded gross margins to over 20% in the second quarter against a backdrop of what continues to be a very challenging competitive environment. These second-quarter results highlight the effectiveness of our sales and marketing programs, and demonstrate our continued ability to take advantage of growth opportunities, while profitably capturing share and improving our market position.

The three acquisitions that we made over the last year are also exceeding expectations and have strengthened our business. Acquisitions contributed approximately $0.10 to a reporting earnings per share in the second quarter and contributed a total of $0.19 in the first half, which puts us at a run rate well above our first -- our full year expectations. Our acquisition pipeline is the largest that it has ever been and we see excellent opportunities to continue to strengthen our portfolio in 2011. In addition, we continue to be de-leverage our capital structure and increase our liquidity in the second quarter. We have the capacity and financial flexibility to fund our strategy of above market organic growth plus accretive acquisitions.

Overall, execution of our sales growth and margin improvement initiatives have translated into strong financial results. Operating margins of 5.6%, net income of $50 million, an EPS of $1 in the second quarter were up 150 basis points, 81% and $0.40 respectively, over last year. The operating margin expansion was the result of an effective combination of gross margin expansion and operating cost leverage. Operating profit pull through was over 60% for our core business in the second quarter, and is above our long-run target of 50%. The strength, diversity, and operating leverage of our business model are clearly reflected in the improving profitability of our business.

We entered the second half of 2011 with positive momentum and a robust pipeline of growth opportunities. Our long-term outlook remains unchanged. We expect the economy to continue to recover slowly over the next several years. Remain focused on continuing to execute our one WESCO growth strategy, and further improve our market position against this economic backdrop. We are ahead of schedule in achieving the financial goals that we outlined last year in our first ever investor day. We will host our 2011 investor day on August 9 in New York, where we will report on our progress in more detail and provide strategic and financial plan for the next three years. Now Richard Heyse, our CFO, will provide details on second-quarter results and our third quarter and full-year outlooks. Richard?

Thanks John. First I'll share with you our second-quarter results and then conclude with our outlook for the third quarter and the full year. Our second-quarter sales were up 21.1% compared to last year, including a 1% positive impact from foreign exchange and a 7.4% positive impact from acquisitions. Our organic year-over-year growth rate for the quarter was therefore 12.7%. This is our fourth consecutive quarter of double digit organic growth. Year-over-year price increases for the quarter had a favorable impact of approximately 3%. Sales increased 6.5% sequentially, including a 0.9% positive impact from acquisitions and a 0.4% positive impact from foreign exchange, resulting in a sequential organic growth rate of 5.2%. This organic growth rate also includes a 1.6% positive impact from one additional work day.

Quarter end backlog, excluding the impact of our three recent acquisitions, was up 21% over last year's second quarter. This increase exceeds our Q2 organic sales growth rate of 13%, and is up 16% from the end of 2010. Backlog represents firm orders in hand for future delivery and provides some indication into future sales activity for the next several quarters. Our second-quarter gross margin was 20.1%, up 80 basis point year-over-year. The increase in our second-quarter gross margin reflects a positive impact of our margin expansion initiatives and was driven by acquisitions, improved cost activities, price realization, the buyer volume rebates, and inventory management programs. Sequentially, gross margin was up 10 basis points. SG&A expenses for the quarter were $214 million or 14.1% of sales, compared to $186 million or 14.8% of sales in the comparable 2010 quarter. Approximately $12.2 million, or 44%, of the year-over-year SG&A increase related to our three recent acquisitions. Sequentially, sales were up 6.5%, however there was no increase in second-quarter SG&A expense dollars compared to first-quarter levels.

Second-quarter operating profit was $85.0 million or 5.6% of sales versus $51.3 million or 4.1% of sales for the second quarter of 2010, a year-over-year increase of 66%. Our operating margin expansion of 150 basis points was driven by a combination of 80 basis points of gross margin expansion and 70 basis points of operating cost leverage. Operating profit pull through, measured by incremental operating profit dollars divided by incremental gross profit dollars, is a financial metric WESCO uses to gauge the effectiveness of leveraging sales growth, gross margin improvement, and cost management. Our second-quarter core operating profit pull through, which excludes acquisitions was 62%, significantly above our long-term target of 50%.

Core operating profit pull through for the first half of 2011 was 52% even after adjusting for the unfavorable 2010 first-half impact of $3.8 million of non-cash charges associated with our lab joint venture divestiture. As we invest in our growth initiatives, we continue to focus on delivering above market profitable sales growth, while ensuring effective leverage of our operating costs. Our first half year-to-date sales growth of 20% plus combined with year-to-date core operating profit pull through of over 50% demonstrates our ability to deliver both sales growth and operating cost leverage objectives.

Our second-quarter effective income tax rate was 29.4% compared to the 28.2% rate experienced in the comparable 2010 quarter. Second-quarter net income grew 81% to $50.2 million and resulted in an EPS of $1 per share on 50.3 million fully diluted shares outstanding. This compares to reported net income of $27.8 million and an EPS of $0.60 per share on 46 million fully diluted shares outstanding in the second quarter of 2010.

As John noted, our 3 recent acquisitions contributed an estimated $0.10 per share to our second-quarter results. Second-quarter free cash flow with the use of $20 million compared to use of $4 million in last year's second quarter. On a year-to-date basis we have generated free cash flow of $7 million. Assuming normal second half seasonality patterns we believe that full-year free cash will be at or above our expected target of 80% of net income. Our all in cash borrowing costs for the quarter, including commitment fees, was 4.6%. Liquidity, defined as invested cash plus committed borrowing capacity, at $414 million, improved from $338 million at year end and $354 million in the first quarter.

As of quarter end our performer financial leverage ratio was 2.9 times total par value debt to EBITDA. This compares favorably to last year's ratio of 3.7 and is well within our target leverage range of 2.0 and is well within our target leverage range of 2.0 to 3.5 times.

Now I'd like to discuss our third quarter expectations. We experienced strong second half growth rates in 2010 with sales up 15% in the third quarter and 18% in the fourth quarter. That positive momentum is carried into 2011 where we have grown sales 25% and 21% respectively in the first two quarters versus last year. Our July month-to-date sales trend is also consistent with second-quarter growth rates. Typical third quarter sequential sales growth rates have been in the 0% to 3% range. Our outlook is that third quarter 2011 sales are expected to increase at least 18% from third quarter 2010 levels, and at least 2.5% sequentially.

Our sales growth as (inaudible) includes the impact from acquisitions and our growth initiatives, but assumes that pricing and foreign exchange rates remain consistent with second-quarter levels. Third-quarter growth margins are expected to be at or above 19.8% or up 30 basis points year-over-year, but down slightly sequentially due to expected inventory reserve rates and supplier volume rebate rates converting the typical third quarter levels. Our third quarter operating margin has been anticipated to be at or above 5.4% of sales, a sequential change that is consistent with our gross margin expectation and represents an operating margin that is an improvement of at least 80 basis points over third quarter 2010 levels.

Our third quarter interest expense assumption is for modest reduction in expense from the $13.9 million amount in the second quarter. We are increasing our anticipated tax rate to 30% to 32% for the third and fourth quarters due to the profitable growth of our Canadian and international operations and their associated impact on our overall corporate tax rate.

Next I would like to turn to our full-year outlook. Due to our strong first-half performance and our outlook for the second half of the year, we are raising our full-year 2011 estimates for the second time this year as follows. Full-year sales growth is expected to be at or above 19%, up from the 17% growth estimate provided last quarter. This expectation assumes second half pricing of foreign exchange rates are consistent with those experienced in the second quarter. Gross margin for the full year is expected to be at or above 19.9% an increase of 20 basis points from our Q1 earnings call estimate. This would represent an increase of 20 basis points on a full-year basis versus 2010.

Operating margin is expected to be at or above 5.1%, an increase of 20 basis points from our last earnings call. This would represent an increase of 90 basis points on a full-year basis versus 2010 and is above the 50 to 70 basis point improvement goal we outlined in our investor day last year. Our full-year effective tax rate is now expected to be in the range of 29% to 31%. We expect free cash flow to be at least 80% of net income for the full year. In conclusion, we're pleased with our sales and profitability momentum and our outlook for the remainder of the year is favorable with growth upon our year-to-date results. I would now like to open up the conference call to your questions. Operator?

Thank you. We will now begin the question-and-answer session. (Operator Instructions) At this time we will pause momentarily to assemble our roster. In order to allow all listeners on today's call to have an opportunity to ask questions, we ask that you please limit yourself to one question at a time. Our first question comes from Adam Uhlman of Cleveland Research.

Good morning. I'd like to start with the increased revenue growth outlook for the year, 19%, the prior was 17%. I'm wondering where you are feeling better about the business and the various end markets that you serve?

Adam, I'll frame it this way and I'm sure we'll get into a lot more discussion by end market vertical but the industrial recovery is continuing, so the industrial markets end markets are still continuing to grow, albeit it's at a lower growth rate but we've -- they are still continuing to grow. Now, we are very pleased with our performance against that end market backdrop. Very strong growth in the industrial end market segment for us in Q1 and now again into Q2 with 18%. Construction recovery is not restarted yet and we have been consistent in our view that recovery would be 2012 at the earliest. So we are not forecasting an improvement, really fundamentally, in end markets, however our construction performance continues to be very strong. With our first and second quarter results this year and we grew backlog significantly which is a good indicator of what our sales will be directionally over the next several quarters.

And then utility we had -- we had maintained and forecast that we got the second half of 2011 would begin to see an uptick or improvement in the end markets. We are pleased with our improvement in the second quarter versus where the business had been tracking. We did have some tough comps for a while there but just overall sequentially the business grew 9% in Q2 over Q1 it was up 6% versus prior year, so we feel good about the end market starting to begin the recovery in utility. I'm sure we'll talk much more about it as we go through the call.

Great. Just a clarification on utility. Was there any benefit from storms this quarter or is that start to roll through next quarter?

I would say de minimis.

Great, thank you.

Thank you Adam.

Our next question comes from Deane Dray of Citi Investment Research.

Thank you and good morning everyone. While we were on the different end markets, could you comment on data center. That got called out last quarter and would be curious as to what you are seeing in terms of activity there, especially in light of some news this week that the government was going to consolidate some of their data centers in total over the next couple of years?

First let me comment. Wall Street Journal had an article two days ago that talked about the government significantly collapsing a number of their data centers I think it was 800 of their 2000 plus data centers. And for us and for where we play in the market, that's outstanding news. Because it's really a shift to cloud computing. And so I think the net/net result of that is going to be increased infrastructure investment ultimately and we -- you know, not everyone is going with the cloud computing concept but cloud computing is going to represent a very nice positive end market catalyst for our Datacom oriented product and service portfolio.

That would be the first comment Deane. The second comment is I would say our Datacom results still look very solid on a first half basis. We were down in Q2. It's our own issue. We went through this conversion and it's tracking very well. You can see by our backlog growth. Our backlog growth in Datacom -- Datacom, purely Datacom not broadband, communications purely Datacom. That is, CSC plus core Datacom was up over 30% sequentially, so it just impacted the timing of our billings. It's one of our growth engines, it's one of our major growth drivers over the next four to five years. We are still very bullish on Datacom. By the way, broadband communications, which was our TVC acquisition, we didn't comment on the script but that backlog is up over 30% since December of last year. And we didn't have TVC in our results last year but I will make that comment.

We have got a very nice strong growing backlog in data and broadband communications and we are seeing very still very nice what I'll call activities in the end market. A final point which I think will portend very well for us is when you look at stimulus spending broadband technology opportunity programs are what is called BTOPs. There is over 90% of the funds still to be paid out for that set of stimulus programs. And that feeds right into our broadband and Datacom sweet spot. So I think -- I am sure we will talk more about government and stimulus in the call but we had been maintaining that this would be a very strong year for stimulus as we move through the year.

You mentioned TVC and if we look at the numbers it looks like you are trending above that $0.30 initial accretion estimate. Are you in a position yet to call out how much accretion you will be getting from this transaction?

We haven't given a full-year number but we feel very good about the first half your insight's spot on. The $0.30 was for TVC. We never really outlined an accretion number for RECO or for Telcom but it was in a very -- $0.01 or $0.02 range we never outlined that but it was very, very small. But if you look at the first half at $0.09 approximately Q1 $0.10 in Q2 $0.19 in first half if it were linear and we haven't given a full year forecast, that is a $0.38 run rate so we feel very good, Deane, about again the integration of those and how well those are going and they are exceeding expectations.

Last question for me if I could. Your comment about the pipeline never being as full. The idea on -- are there other TVC's out there or is it just a continuous opportunity to consolidate this fragmented space?

Here is the point I would like to make. We have shown ourselves to be a good acquirer for quite some time, and so it's been a part of our strategy except when we have experienced downturns. During downturns we shut off the acquisition engine. I think that what is a little different this time, and it's all part of our playing offense in investing the business. We have added a few dedicated resources to our M & A team. The quality, the depth and breadth of our pipeline and the size of it has never been as large as it is. And so we're always considered a good acquirer, so as properties come on the market they contact us. But I think our proactive activity is now better than ever and as Richard mentioned, our leverage ratio is coming down nicely as we expected and forecast it as we improve our operating results and our operating profit generation. It is part of our strategy. We signaled, we turned the engine back on, Deane, it's on and we're in the hunt.

Great to hear. Thank you.

Our next question comes from Sam Darkatsh of Raymond James.

Good morning John, Richard, Steve, how are you? Couple quick questions here, first off I know you guys are typically very conservative when you give expectations but it looks like the fourth quarter implied growth rate's moderating a bit sequentially versus Q3. Is that due to something that you might be seeing whether it is [trinking] vendor lead times or something in your order book that's showing that or is that being conservative?

You use the word conservative. We wouldn't use that. That is just a comment. Let me say this, Sam. Last year we had very strong results Q3 to Q4 sequentially, as you will recall. Then a year-over-year growth rate basis we had very strong results. I think that we provided an outlook for Q3. We have also provided a revised full-year outlook -- we'll be dialed in on a tighter outlook for Q4 in our next earnings call. We do have a more challenging comparable. When you look at typical seasonality for us and in what we were able to deliver against typical seasonality which Q4 is typically below Q3 historically, but look at what we did last year. Very essentially up slightly sequentially and very strong year-over-year results. I think that is what really plays in -- at this point -- at the mid-year point, Q4 is a tough comparable.

Last question. Did the pull through of 62% on a core basis, and again we can back into what the pull through might look like the next couple of quarters, but for the out years, what are your expectations there and have they changed?

They have not changed. We maintain our 50% operating profit pull through as our long run target. What we have said and we are consistent -- look there could be a given quarter or two or where we might be below it or a little bit above it. We are encouraged that we had a nice quarter this quarter in a little bit above it. Q1 we are a little bit below it on a first half basis we are right on. We are a few hundred basis points above 50 through the first half. So that is our target and we maintain that and we think our operating model very comfortably yields that. The difference this time is, and we're very encouraged. And I think it was a question on behalf of investors, quite frankly, with our strategy of playing offense and increasing our investments. I know I, and Dan, and Richard see we are getting a lot of questions as well what are you able to deliver the pull through as well. And we're very encouraged that we're able to show that we can deliver this pull through while still investing in the business.

Thank you much.

Our next question comes from David Manthey of Robert W Baird.

Good morning. First off, in terms of the backlog up 9% sequentially, I know that includes a bump from data, but if you look at that 9% how does that compare with normal first quarter to second quarter seasonal trends that you've seen historically.

It is -- good morning by the way. It is up a little bit. It is up a few points above what we would see typically.

Okay. That would include the Datacom, right? So you caught a tail wind there?

It is inclusive of the Datacom. But if you de-compose our backlog growth I would say it is very nice and strongly balanced. It does include the Datacom. Yes. The other thing -- the way we look at backlog is again -- we're not a backlog driven business but it is a good indicator. It's a good indicator if you measure relative growth rates. So when you look at 9% sequential and up 20%, 21% versus midyear point last year. I think that portends very well relative to what our future construction business will look like, because what is in backlog for us again -- and I know we have said this and I want to reinforce it is -- we don't lay into our backlog and MRO supplies contract or an alliance agreement or anything like that. It is bona fide hard orders they are booked orders and by and large it is construction projects or other types of projects. So we are consistent with that definition and when you look at -- I think the way to really look at our results, is you look at sales growth plus the backlog growth. Look at those two together. When you look at that relative to construction we've got very good momentum.

Sounds good. Second, in terms of the organic growth rate, you gave it to us overall. Could you give us -- I'm not sure how you broke in these acquisitions across the different segments, but could you give us industrial and construction organic growth year-to-year in the second quarter?

Hi Dave as far as -- in our supplemental, we break out in the slide the end markets which core which excludes our acquisition. So you can go through in each of those for example, the core was 5% sequential growth and industrial sequential growth was 4.9% and so on. So those are all broken out in our supplemental.

David I'm glad you mentioned that. When I went through the front end of my comment let me just emphasize. When I was talking about the gross by end market segment, in my opening comments, it was for core organic. It was X acquisitions. As Richard said our end market slide -- that we've been using in the supplementals now consistently for some time. Those numbers are without acquisitions. I think it is incredibly important that we focus on it that way and once an acquisition is in our sales for a full year that is when we will then include it as part of the core. For that supplemental chart reporting purposes.

Foreign exchange etc. you can apply those across the business.

Last question quickly. Could you talk about gross margin, it came in stronger than you expected. What were the key factors behind the strength. Was a based on mix or delivery method or what?

I would say it is not one item it is a combination of things. We didn't talk a lot about it but it is a tough a pricing environment as we have ever seen. We continue to face challenges with inflationary cost pressures suppliers trying to push their price increases to and through us.

Most recently, we are now seeing the effect of the rare earth impact in China's ability to control that supply chain. You may have seen. I think it has been prevalent that all the large global lighting manufacturers are significantly increasing their pricing on fluorescent and fluorescent-based lighting products due to phosphor and the impact of rare earth limitations on phosphor supplies, and manufacturing. And these are very large increases. They have targeted in the range of 25%. 25% plus increases for those product categories that they are anticipating and desiring to push through in the third quarter.

So I would tell you that pricing environment is as challenged as it ever has ever been. With that said, I would say that it is a combination of we are working hard on pricing and we're working hard on supplier costs side. We did raise our -- we saw an impact on supplier volume rebates as a result of our growth rates in the second quarter. We continue to focus on inventory management. We had strong results in our inventory management as reflected in our reserve rates and then we're getting a benefit by -- on the order of 20 basis points plus or minus due to the acquisitions that we did and that is consistent with our strategy,

When we acquire a company, by and large, we've been targeting companies with better gross margin, better operating margin characteristics. I would say very much that is a result of a combination of a lot of things. It is not one item. A side note is last year's investor day we focused on our growth engines and how we are going to do try to take share consistently. We will spotlight a few different growth engines this year versus what we have talked about last year. But one of the major priorities that we are going to address in this year's investor day is our margin expansion and Steve laid out a framework for that a year ago. We are going to take that and develop that much further in today's -- this year's investor day in August.

Got it. Thanks very much.

Our next question comes from Brent Rakers of Morgan Keegan.

Good morning. I was hoping you could expand a little bit on the lost revenues in the quarter from the Datacom business as to whether you think -- I think you seem to suggest you don't think that is a market-based issue but if you could elaborate a little bit more on some specifics there?

We grew low single digits, we grew basically 1%, 1.5%, 2%. It is basically just stuff shifting to the right. It is not an end market issue at all. As Deane mentioned earlier, the Wall Street Journal article, indication of an end market driven growth opportunity. They are prevalent. Our backlog is filled with some terrific data center projects and Datacom and broadband projects and the backlog is up significantly. Our backlog for pure Datacom is at an all-time record high and with that kind of growth -- we have not seen that kind of growth rate ever. So it's about all we are going to say on that. We're not going to get into any specifics, except to say we're in the middle of this IT conversion. We have taken our time doing it. We expect that conversion will be completed -- substantially completed in the third quarter. Some may roll into the fourth quarter. But we have got a good piece of it behind us now and so far in July the results are encouraging because our sales are up low double digits in the first few weeks in July.

John I'm sorry. Just to clarify. Do you think the reduction in the revenue growth rate was specific to WESCO, related to this conversion being a distraction or do you think it was projects slipping from Q2 to Q3?

It is a WESCO issue. I think what we have tried to do philosophically is provide great insight into our end markets, our product categories. We've been clear about strategies and how we are executing. You could take a look at our results and in the aggregate we think they're outstanding and we think all the pieces are really strong. This is one area -- I mean we would expect it and would hope that it would have been high single to low double digits in the quarter. It wasn't. It's a self-imposed issue. But it is temporary and as I said, the conversion is going exceedingly well. It just had some impact on billing rates.

John, just related to that. Is there any cost issue tied to that conversion in the second quarter?

No.

Great thank you very much.

Our next question comes from Scott Gaffner of Barclays Capital.

Good morning. Going back to the acquisition front a little bit, I wanted to get some more details on the financing flexibility you've got right now. How much room do have available and I guess the 6% converts have a right for conversion during the third quarter. Does that have any impact you think on your financing flexibility for any of these potential acquisitions of the pipeline?

As far as the right to conversion it doesn't make economic sense to convert the 2029 so we don't expect to see conversions on that front. They have the right but it doesn't make sense. As far as financing flexibility, we have said before in the past that for the right acquisition we would consider leverage modestly north of four to four times leverage. So we have adequate room in our balance sheet for what we are looking at for the right acquisition we have base really strong track record as far as capital market transactions that we would be able to arrange the financing needed to fund any acquisition that we think is strategically a good fit.

Okay. And then on the stimulus spending. I think you said $400 million plus of stimulus pipeline still, and government. You threw those both together. How much longer do we have to go until that number starts to come down, do you think?

This is a -- this is an area when ARRA was conceived and then passed we had a lot of questions about it. I'm glad you asked about this. We maintain very consistently that where we play in the value chain, number one. Number two for the types of projects that would benefit WESCO that we would see the benefits starting in the mid-to latter part of the timeframe over which stimulus funds would be spent. And by and large that is what we are seeing. And so we have had a very nice contribution last year and we're seeing it this year.

Basically 45% of the funds targeted for targeted programs have not been spent yet relative to stimulus, and depending on what area you look at the electricity delivery, and energy reliability set of programs which where Smartgrid is included, 75% of those funds remain to be spent and paid out. As I mentioned earlier, the BTOP, Broadband Technology Opportunities Program, over 90% of those funds remain to be paid out. Energy efficiency, renewable energy, which under that is wind, LED lighting, solar et cetera. 60% of those funds remain to be paid out. This is all public information that you can refer to. We feel very, very good about our approach to the government market and government customers. And stimulus is benefiting us and we would expect it to benefit us in 2012 -- 2011 and as we move into next year.

With all this said, you can think of stimulus as a bubble. You can think of stimulus as a bubble. As the bubble starts to bleed down, we see still a terrific opportunity, quite frankly, in the government market. And the reason is -- and this is why it is a major growth engine for us -- we have been traditionally and historically underrepresented in terms of our share position in government. We started investing in government pre-stimulus. We had identified that as a growth opportunity after we acquired CSC. We still see ex stimulus later when stimulus that bubble does kind of go down -- that we see significant opportunities to continue to strengthen and grow our government business.

Fair enough. Just switching gears a little bit here real quickly. You said utility distribution grid spending, I think you said it was starting to improve. Was it sequentially better as we move through the quarter or was that sort of a steady run rate throughout the quarter and maybe a little bit more color there so we can calibrate that?

For utility we grew 9% sequentially Q2 over Q1. And I would say we are predominately biased towards the D of TND because that is what gets sold through distribution. With that said, we have a nice generation support business, we can support generation projects but that would show up in the form of construction. And we're increasingly trying to play in a transmission space with projects and service offerings. I would say it was relatively balanced. We feel really good about the 9%. On a transmission side, we have got both material supply and services supply capabilities and I think we had identified a strategy for transmission to put ourselves in a position to play in an increasing way in that part of the power chain. Generation through transmission, substation to distribution. I am very encouraged at our results in that. I'll tell you one of the areas where to drill down in more detail in our investor day this year is utility. We are going to drill on that a bit and show exactly what we are doing across the entire power chain in terms of strategy and offerings and the progress we're making.

Sounds good. See you in a couple of weeks.

Okay.

Our next question comes from Noelle Dilts of Steeple Nicholas.

Good morning and congratulations on a nice quarter. I would like to go back to two of the prior questions and just get a little bit more detail. First going into the gross profit margin improvement, I understand that that came from a number of sources but could you comment specifically on how much you think came from your margin initiatives and also discuss a bit what happened with product margins in the quarter? And then secondly, on the government side of the business I understand that there is still a strong pipeline, but you've been looking for this year looking at kind of mid-teens growth and you had flattish sales to government contractors in the first quarter, 3.4% growth in CIG in this quarter, at this point has that been moved out to more of a 2012 issue or a 2012 growth or are you expecting a pick up in the back half of the year?

Noelle, I'll take the first part -- the second part of your question and I'll let Richard address the first. CIG shows us 3% or 3.4% growth organically if you look at the supplemental that one page five of the supplemental. What is important to note is our government sales or more importantly our sales to government agencies and government contractors show up in CIG but they also show up in construction to the extent they are sold to construction-oriented contractors, that ultimately serve the government as the end user. Our government sales when you look at all -- entities in that value chain were up 25% in the second quarter. They were flat in the first quarter, you will recall in our last earnings call we discussed that, and we mentioned in our last earnings call that we did have a challenging comparable in Q1 of last year and we were highly confident that we would grow our sales to government agencies and contractors double digits in 2011. So we're very happy to say, here we are a quarter later and we grew 25% in the second quarter. So on a first half basis we're essentially up double digits nicely and we would expect to do that for the year.

Great thanks for that clarification. I see where I messed up.

As far as the margin expansion, there were several factors. For example, as we target acquisitions, we look for acquisitions that have margins that are at or above our current level and that was the case for the acquisitions we've done in the last year. A significant piece of our margin improvement was due to the improved mix driven from our acquisitions. Also, as we have increased our growth rate expectations for the year, that also improves the rebate rate -- the rebates that we get due to reaching growth targets with our suppliers. And also another factor was our inventory management programs and reduced loss rates in the quarter. There was a number of factors that really drove the gross margin expansion and really hard to point to any single one.

Okay, and can you comment on your product margin specifically? Did those expand in the quarter?

Sequentially product margins were expanded, modestly. Again, with the acquisitions year-over-year product margins were up significantly.

Okay thanks.

To put a fine point on that. We think this still represents one of the biggest opportunities over the mid to long term for WESCO and we outlined in last year's investor day a 200 basis point opportunity in core gross margin expansion over -- as we look out into the mid to long term, that is an area were are going to detail in this upcoming investor day. We think that the fact that we are holding product billing margins flat to slightly improving and we have been doing that. Through the recovery portion of this economic cycle when we are facing the most challenging pricing environment that we have ever faced, we feel very good about the ability to do that. That is the result of our margin initiatives.

And that is something where I should have been clear. For recovery in price increases we have continued our track record of recovering the price increases that we have been seeing from our suppliers.

If we didn't do that the natural -- it is a pressure curve. If we didn't make a lot of progress by the very nature of how our business works, our margins would compress over time. Because suppliers are increasing pricing and customers do not want to except price increases by and large. We have to sell them on why that is important and the value associated with it. So, left to its own devices we have margin compression over time in this type of challenging environment. So to be flat to slightly up we feel good about it, and when we look at margin it is billing plus, it is project margins plus all the elements that impact gross margin. That is our focus. It is the entire equation that supports gross margin.

Great thanks so much.

Next question comes from Hamzah Mazari of Credit Suisse.

Good morning, this is Chris Parkinson on behalf of Hamzah. Most of my questions have been answered. Could you add a tad more color on what other lines of businesses you would look at on the acquisition front? I know you can't mention anything specific. But, given a lot of other distributors that are diversified guys are broadening out to adjacent product lines what would be primarily of interest to you in addition to Datacom?

We are not going to name two or three categories. Let's say that we -- I'll answer it this way. We think our capabilities and business model extends horizontally to many other types of product categories. Look at what we have done in communications -- both data and broadband communications. On a run rate basis exiting last year we had $1 billion position in that combined product category. Whereas back in 2005, before CSC, it was under $100 million. So that is a great example of how acquisitions coupled with organic growth strategies supported call it a more richer portfolio from a product mix perspective.

The other acquisitions that we have done over the last five or six years Fastec, J-Mark were product category expansion and strengthening plays, and I could go on and on. So I think our track record has been that and it will continue. You'll recall last year's investor day and Richard and I have been showing it in our presentations to the -- at the various investor conferences. We have a chart on acquisitions that shows the MRO ski slope and all of the various categories and we have outlined a few that are particularly attractive but I would say we don't feel constrained to any of those. I think our -- we have shown the ability to extend our model horizontally.

Just a quick follow-up. Based on your guidance range and the implied gross margin pull through. Can you add a little more color on how you are thinking about additional growth initiatives and SG&A as we progress into the back half of the year and how should we think about that sequentially?

Again, we've got our 50% pull through target. We have outlined our growth initiatives. We are making decisions every day in terms of where we add incremental sales resources and where we add locations. We have added -- now we've added a total of 20 locations that are Datacom oriented since we've acquired CSC. We added an additional one in the quarter. So we continue to do that and look, the model is working. We are showing that we can deliver above 50% pull through while trying to step up some investment in sales resources and additional locations. So that's been our strategy and our target.

Perfect, thank you.

Our next question comes from Matt Duncan of Stephens Inc.

Good morning guys. This is Jack Atkins on for Matt. Congratulations on a good quarter here. My first question is with regard to your various end markets. Are there any particular markets within your industrial business that stand out as stronger than others? And as a follow-up to that, construction was up 12% in the US this quarter, could you comment on what drove that strong growth?

Let's start with the second one first. We had very good balanced growth in construction. A variety of different types of projects. Again our backlog grew nicely and when you look at in the US -- I think that was your question a 12% growth in the US when-- you look at geographically we had very good balance across the US so we are encouraged by that. When you look at the different types of projects, it was a myriad of projects so I wouldn't cite any one particular area. In terms of industrial, we actually feel as good as we feel about construction we probably even feel better about industrial. Look at the growth rates we've been posting the last three to four quarters. They have very strong momentum.

It is driven by our global accounts and integrated supply business models and the execution of those. And I will make a comment that we are beginning to see capital spending start to rebound. Industrial companies are spending capital as opposed to hiring permanent headcount. We're beginning to see some of that rebound depending on what end market segment you're talking about. We have not had the benefit of that yet in our sales growth, so I think that is another good indicator. I would say in terms of the end market it has been -- we've had good balance but I would say in general oil, gas, metals, mining, core industrial, OEM type markets, government, big drivers in terms of the end market segments and we are we seeing a particularly nice growth.

Great thanks for the color on that, and my final question here with regard to your nonresidential construction market. You commented in the supplemental that you think a recovery in that market is 12 to 24 months out. But the market is stabilized. Could you talk for a moment about what you anticipate that recovery will look like once we get to see it? Do you expect a slow, steady recovery there or maybe something more rapid once it takes hold?

We are not planning for rapid. We are planning for slow and protracted. I think we're going to see -- that is our planning construct for nonresidential and classically you would see nonresidential lag or come after residential recovery. It is pretty clear that resi grew 6% to 8% last year and now it has flattened out. I think that we are -- not that we have a high resi exposure, we don't. But my point is we may find a little different dynamic between the resi non-resi interplay this cycle. It will be interesting to see how it unfolds. But clearly residential recovery is not within the next year or two. That is going to be very extended. At least that is our view. That is our planning construct and we're saying over the next three to five years, and so we think there is going to be a long slow recovery. All in all though, the markets are very large and I think we are demonstrating our ability to deliver very strong results against a market right now that is still declining. The non-resi market was down double digits in 2009 and 2010 and it is down 9% in terms of starts through -- in the first half. And yet we are still posting very strong results. That would be our objective, to continue to do that.

Great. Thank you for taking my questions.

Next question comes from Ajay Kejriwal of FBR.

Thank you good morning. I just wanted to follow up on that construction point you are making, obviously been going very solidly for several quarters now, even though the market is declining so you're gaining share. I would be curious to hear what you see with respect to competition from smaller businesses. As the credit eases, are you seeing any change in competitive dynamics there or expectations that those businesses come back?

Yes. I would say we haven't seen in a material way any structural changes yet. I know that there was some potential or belief that with this very steep downturn and if it is a protractive recovery and depending on the shape of the credit market recovery that some of the smaller players may begin to wither away. I would not say we were seeing a fundamental structural change in the composition or structure of that. It is a very competitive market. I think I would summarize this way. Supply and demand. Demand has not picked up. It is still down. The end market is yet supplying capacity in the form of manufacturers through distributors still has not been fully rationalized, which is feeding a very, very challenging pricing environment. That is current state. I don't see that changing in the short term.

Good. And then on your comments on the utility markets. Would be curious what you are seeing with regard to high-voltage transmission and renewable power? I think there was a comment in the presentation that you are seeing some uptick there.

Well, energy demand was demand was down in 2009 and 2010. Energy demand is now increasing in 2011 after being down those two years driven by the industrial recovery. The growth and investments we're seeing are being led by transmission projects and alternative energy. We thought it would occur the second half of this year, We're starting to see it. We don't break out the numbers in terms of our wind and solar or projects but we are seeing very nice growth. And in terms of transmission, we have been focusing on that. And so it is our hope and desire and again we will develop this more fully in our investor day because utility will be one of the growth engines that we spotlight next month. But for transmission on the material supply standpoint, we provide sourcing, procurement, and related distribution services for a whole series of products like insulators, connectors cut outs, grounding materials, security and monitoring equipment. It all applies to transmission. And then on the services supply standpoint or offering, we provide project management, support packaging kitting, and other services. We've focused -- we've talked about that before we had this downturn about our strategy to be much more than just the D of TND and we are encouraged by some of our -- I will call it initial results in that regard. We will develop that more fully next month.

And maybe one last one on pricing to clarify. First half you have seen about 3%, slightly more than 3% pricing year-on-year. Is that your expectation for the second half or is it different number?

We haven't given a specific number. What we said is our guidance -- what we estimate for Q3 and Q4 is we are assuming consistent with first-half levels.

Consistent low single or is it possible to put a number on that?

We can follow-up. We will like to get run out of time, if we could follow-up after the conference call. We have three more calls we would like to get.

We do have three more calls and we want to get through all three so let's keep going.

Next question comes from Matt McCall from BB&T Capital Markets.

Good morning guys and thank you for putting me in. This is Jack filling in for Matt. I had a quick question about the lighting business you had called that out last quarter as kind of an area of strength and in this quarter you only really talked about it from the rare earth supply-chain issues. Could you give us an update there and do you think the supply-chain issues in that impending price increase pulled forward any orders in to the quarter?

I don't think it pulled forward any orders because that whole 25% plus advertised pricing increase is literally occurring in the last couple weeks. It didn't occur in the quarter and couldn't have a meaningful effect on the quarter. I'm glad you brought this up. We kind of pick and choose what areas we want to drill on but we did grow our lighting product category 14% in the second quarter. We feel very good about our results and the momentum there. I think this represents an outstanding long-term growth opportunity for us. And we have talked about it and that is why it is one of our growth engines, and that is also an area that we are going to drill down on more in next month's investor day. Last year what we talked about was global accounts. When we had our investor day that is. Data communications and government and so we're going to talk about a few of the other growth engines this year, while providing an update on communications. But utility and lighting are two of the items that we're going to talk about.

Were order patterns consistent through the quarter because we have heard from some suppliers that things have slowed down to start the quarter and accelerated to finish and in to July? Is that consistent with what you saw?

I have read a number of reports, various channel checks-I found those interesting. We were very consistent through the quarter. When you look at our growth rates, our sales growth rates versus prior year we were very consistent through the quarter. We did not see that -- at the aggregate level, that phenomenon.

Great thank you very much.

Next question comes from Tony Kure of Key Bank.

Hi guys, how are you today? Just a couple of quick questions, more on the secular trend than on the data center side one of the things you talked about last year in your analyst day was getting some traction combining the electrical business with the Datacom products for some folks who might be interested in outfitting a data center with one distributor. Can you give an update on how that is progressing and have you seen any traction related to that?

We are seeing excellent traction and that is a portion and call it an underlying strategy as part of that what we call our One WESCO Initiative. The One WESCO Initiative is for a given customer. We would like to make sure we can bring our entire portfolio of products and services to bear on that customer's operations. Whether it is their MRO needs on the indirect material side, whether it is their direct material needs or OEM value-added assemblies or whether it is their capital projects. New construction, retrofit renovation upgrade in the form of a lighting upgrade, or wireless upgrade for example. We are seeing very good traction and that is just one piece of the One WESCO Initiative. But is a big one. So yes I am glad you asked about that. There's no doubt that is driving some of our electrical and corresponding our Datacom growth.

If there is one that I could add real quick, too. Also our TVC and the broadband on of the things that we are really pleased with the acquisition is that we are seeing that same combination of teams between our broadband teams and our utility teams, our broadband team and Datacom and we have been -- we have gotten a number of wins because of those joint bids where there is no equivalent supplier who can offer what WESCO is offering in that space.

And just to drill down a little bit more on the Datacom and then I'll let you go to the last question. Do you have any visibility as to what products go into the enterprise versus data centers themselves or does it all go through one big bucket as far as you're concerned?

There is a variety. There is a broad array of products that go into data center -- into data centers period. And I don't understand this or understand the second part of your question.

Meaning enterprise being goes into Key Bank for instance distributing directly to Key Bank versus --

Okay. When you look at -- Key Bank, call that an end-user customer so Key Bank has a data center but then also what is their backbone? Is that a fiber-optic backbone? Is it wireless? Is it distributed antenna system within their facility? So there's additional products beyond to your question I think I understand now, thank you. Beyond the data center for Key Bank that are part of our Datacom portfolio. So yes. Security products or key products [ Multiple Speakers ] and fiber optic connectivity products, wireless supporting wireless et cetera. Yes.

Okay. Thanks guys.

Our next question comes from Steve Tusa of JPMorgan.

Good morning guys this is Drew in for Steve. Most of our questions have been answered, I will keep a quick. To finish up with one on utilities. You have seen a couple of pre-announcements from the utilities benefiting from this weather. Historically, (inaudible) drive an acceleration of some of this great spending. Is that something you are seeing, is that something that is an upside driver for the second half and maybe calibrate that between underlying trends towards these transmission projects on the utility side?

We're not -- I'm not going to spike that out as it didn't drive us in Q2 and we are not particularly going to foreshadow or point to that as a driver in Q3. I think the way we have run our utility business historically is we never forecast or make prediction based upon potential weather impacts. With that said, utilities by their very design and us as a major partner to utilities we're quick responders. The first line of response if there is a hurricane, an ice storm in the winter, a tornado, floods, is what? Power. You have to get power back up and running in that particular area so we support utilities in that. I would say that what we see is an overall trend of energy because energy demand is up again. That is the fundamental driver. And we are seeing a huge need which we have been talking about, quite frankly, to improve the reliability and integrity of high-quality power from generation through transmission to distribution. That is the drivers.

Thank you very much today I know we went a few minutes over. We wanted to make sure that everyone had an opportunity to get their question answered and I thank you for your time and your continued support. Let me cap by saying we're very encouraged by our positive momentum and results in the first half and we are continuing to invest in our business and our people. We remain focused on producing improved shareholder returns and we look forward to delivering a strong second half to close out the year. Thank you very much and have a great day.

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