Wesco International Inc (WCC) 2013 Q2 法說會逐字稿

Good morning and welcome to the WESCO second-quarter 2013 earnings conference call. All participants 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 like to turn the conference over to Dan Brailer. Please go ahead, sir.

Good morning ladies and gentlemen. Thank you for joining us for WESCO International's conference call to review our second-quarter 2013 financial results.

Participating in the earnings conference call this morning are the following officers. Mr. John Engel, Chairman, President, and Chief Executive Officer and Mr. Ken Parks, 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.

Additionally, relating to this morning's release of our earnings announcement, an earnings webcast presentation has been produced which provides a summary of certain financial and end market information to be reviewed in today's commentary by management. We have filed the presentation with the Securities and Exchange Commission and posted it on our corporate website. During today's call, we will be web casting selected slides from the presentation to facilitate our review of the results. As John and Ken go through their prepared remarks they will reference specific pages that relate to their comments. In order to accommodate as many investors and analysts as possible, we respectfully ask that you try to limit your questions to one per person.

This conference call includes 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. To make the year-over-year comparisons more meaningful, we have adjusted the nonrecurring favorable items from 2012 in the first quarter of 2013. The reconciliation of the adjustments is shown in the appendix of the presentation. For the remainder of today's call John and Ken will reference the adjusted amounts. As such, the following presentation includes a discussion of certain non GAAP financial measures. Information required by Regulation G with respect to such non GAAP financial measures can be obtained via WESCO's website at www.WESCO.com.

I would now like to turn the call over to John.

Thank you Dan and good morning everyone.

Our second-quarter results reflect solid execution in a soft economic environment with end market conditions consistent with our prior expectations. Our bidding activity levels have picked up and business momentum improved through the quarter, with June core sales per workday being up 2%, driven by growth in lighting and continued strength in utility. On a sequential basis we experienced sales growth in all six of our major product categories, with data communications being up double digits.

We remained focused on what we can control. That is the execution of our One WESCO sales, productivity, and lean initiatives. We posted record sales in the second quarter and record operating profit as well, excluding the ArcelorMittal litigation impact. We continued to invest in our eight growth engines and six operational excellence initiatives while maintaining operating cost discipline.

In the first half of 2013 we added over 100 personnel in our global accounts, integrated supply utility, and safety businesses, as well as our pricing and supply chain management functions. Meanwhile we continue to execute our lean productivity initiatives. As a result, overall core headcount was down during the first half and core SG& A declined $3 million year-over-year in Q2 after being flat versus prior year in Q1. In the second half of the year we are opening a large new One WESCO location in Los Angeles and will be completing a regional hybrid distribution center network for our Datacom business in the US. We also plan on opening several new branches in the US and Canada along with the a new hybrid DC in Montreal. These continuing investments approve our ability to provide One WESCO solutions to our customers and support delivering our profitable growth objectives.

We continue to be pleased with the performance and effective integration of our recent acquisitions. Conney grew 5% in the second quarter and has been effectively integrated into our WESCO operations. The EECOL integration is also progressing well and we remain on track to deliver our EPS accretion expectation of $1 this year. Sales momentum in Canada has moderated, however, driven by a late and rainy spring. In the second quarter WESCO's Canada sales were up 1% versus prior year, ex EECOL.

EECOL's Canada sales were down approximately 2% versus prior year. Construction projects came to a halt and contractors redirected their activities to storm recovery efforts as Alberta experienced its worst flooding in history. As a result EECOL's direct ship project business declined in the quarter, but their warehouse sales continued to grow versus prior year. At this point we have only seen project deferral's and not any project cancellations.

For the first half net income grew double digits while operating margins expanded 20 basis point to 5.7% driven by improving gross margins and continued effective cost controls. We remain committed to our long-term gross margin target of 22%. We are making very good progress improving from 20% in the first half and 20.5% in the second half of last year to 20.9% in the first half of this year. Overall we delivered a solid result in the first half given the economic backdrop and challenging end market conditions.

Free cash flow generation remained strong at greater than 80% of adjusted net income in the first half and continues to be directed toward debt reduction. As a result leverage has been reduced at 3.5 times on a pro forma basis and is now at the top end of our targeted range. Our acquisition pipeline remained strong and continues to be actively managed and we see excellent opportunities to further expand and strengthen our portfolio in the second half of 2013 into 2014.

Our third quarter starts so far in July is consistent with our first-half results with overall sales being up approximately 13% versus prior year. Backlog is at a healthy level entering the second half and our book-to-bill ratio is tracking above 1 at this point in July.

Now Tim Parks will provide details on our second-quarter results including highlights of our end markets and our outlook for the balance of 2013. Ken?

Thanks, John, and good morning.

Similar to the first-quarter sales to our industrial customers declined in the quarter versus prior year. That's driven by non-repeating industrial capital projects and delays in customer spending. On a sequential basis demand was relatively stable and industrial sales were flat. Channel inventories appear to be in balance with current demand and second quarter bid activity levels remained strong. Customer trends of increased outsourcing and supplier consolidation are continuing and we are very well-positioned to provide a one-stop shop for our customer supply chain management needs. Our opportunity pipeline remains large at over to $2.4 billion and continues to be actively managed. As a result, in the second quarter we were awarded a large integrated supply contract with a US based manufacturer. Initially we are serving five different production facilities and we have the opportunity to expand the service footprint over time.

Now moving to our construction performance on page 5. Nonresidential construction markets do remain challenged in the US, but continue to grow in Canada and then our targeted markets around the world. The continuing strength of the residential construction recovery this year is a positive leading indicator for future improvement in nonresidential construction later this year and the next. Sales to construction customers in the second quarter were down versus prior year but grew 13% sequentially versus Q1. Notably we experienced nice growth in lighting in the quarter with sales being up 6% versus the prior-year driven by LED and retrofit applications. We also saw Datacom strengthening as we progressed through the quarter and continue to secure some nice new construction wins, including a large electrical project we were awarded for precious metal mining operation in Canada.

As we enter the second half, backlog remains strong and is up approximately 5% versus year-end 2012. Bidding activity levels have increased as well and the nonresidential construction market despite its challenges remains large with opportunities for new construction and retrofits, renovations and upgrades.

Now moving to our utility performance on page 6, we are pleased with the strength of our utility business and continue to deliver above market sales growth. Organic sales to our utility customers grew 23% verse last year following 18% growth in the first quarter. The second quarter marks the ninth consecutive quarter of year-over-year organic sales growth driven by new wins and an expanding scope of supply with our existing utilities customers. Customers are embracing the efficiencies offered by our integrated supply capabilities as they look to improve their own supply chains. We continue to implement the new customer wins from last year and we're pleased to report that we were awarded an integrated supply program in the second quarter to provide a large IOU with supply change management and logistics services for their entire power generation and distribution network.

Now moving to our CIG performance on page 7. Sales in the second quarter remained weak due to ongoing government spending constraints and project award deferral's. With that said, we were pleased to see sequential sales growth in the quarter and expect some improvement in government bidding activities prior to the end of the fiscal year in September. Similar to construction and despite the challenges in the CIG market, we continue to secure some nice new wins including the second quarter award to install security systems in approximately 2700 buses and trains for a large US Metro transit authority.

Now I will move on to the financial results. On slide 8, I am going to review the Q2 results in the context of the outlook we provided during our first-quarter earnings call. As Dan indicated at the beginning of the call, I will speak to the year-to-date 2013 results adjusted to exclude the favorable impact of nonrecurring items. During our Q1 call we estimated second-quarter consolidated sales would grow between 13% and 16% year-over-year, or minus 3% to flat organically. Sales were inline with that April outlook. Consolidated sales in the quarter were $1.89 billion, an increase of 13.2% year-over-year. Acquisitions accounted for 15 percentage points of the growth and that's comprised of approximately 13 points from EECOL and 2 points from Trydor and Conney combined. ECCOL's Canadian sales for the quarter were $212 million, which were down 2 points primarily due to the spring thaw and the Calgary flooding that John spoke about earlier.

Organic sales declined approximately 1.2% in the second quarter, that is slightly better than the 1.8% organic decline that we saw in the first quarter. We did see an improved daily organic sales trend as we moved through the quarter with June sales up 2 percentage points after April and May were down 2.5 and 2 points respectively. Sequentially second quarter organic sales increased 4.8% normalizing for the impact of one additional workday versus the first quarter of 2013 organic sales increased approximately 3.2%, which is in line with our typical seasonal trend. Backlog remains at a healthy level as core backlog declined only 3.5% from last year's second quarter and grew approximately 5% sequentially from year end 2012. Due in part to the stronger sales in June, core backlog declined approximately 2% sequentially from the end of the first-quarter. Overall pricing was essentially flat in the second quarter.

In our April earnings call we estimated that second-quarter gross margins would be at or above 20.9%. We fell a bit short of that but reached 20.7% which is a 60 basis point improvement over last year's second-quarter. The strong growth in our utility business which runs at lower gross margins then the Company average put approximately 20 basis points of pressure on gross margins year-over-year. We have seen gross margins step up from 20% in the first half of 2012 to 20.5% in the second half of last year, and then again up to 20.9% in the first half of 2013. We continue to focus on delivering against our 22% gross margin target and we feel good about our progress to date.

SG&A for the quarter was $266 million compared to $231 million in the second quarter of 2012. The acquisition of EECOL, Conney, and Trydor accounted for all of the year-over-year growth. At $228 million, core SG&A remains unchanged over the last three quarters and down approximately $3 million from the second quarter of last year. Core employment was down approximately 1% from last year second quarter and down slightly from year end 2012. We continue to closely manage our overall cost and, as John mentioned, we selectively are investing in our business to support our growth engines and our operational excellence initiatives.

In April we expected second-quarter operating margins to expand to at least 6%, operating profit for the second quarter grew 14% to $110 million improving operating margins to 5.8% of sales which is an expansion of 10 basis points over Q2 of last year. Sequentially, operating margins expanded 20 basis points. Interest expense in the second quarter increased to $21.8 million versus $11.5 million in the prior year as a result of the acquisition related financing. As a part of this financing we were able to obtain very attractive rates and as a result our overall weighted average borrowing rate for the quarter declined to 3.9% from 4.9% last year. Finally the second quarter effective tax rate was 25.8% and net income grew 11% to $65 million compared to $59 million last year.

Taking a look at slide 9, second-quarter EPS grew from 9% to a $1.25 from $1.15 in the second quarter last year. As we have shown in the chart, the core business was a $0.12 drag on EPS driven by the 1.2% organic sales decline, 30 basis point gross margin headwind, and growth in WESCO shares, partially mitigated by SG&A reductions. On the other hand acquisitions contributed approximately $0.22 of EPS accretion in the quarter. EECOL's contribution for the quarter was approximately $0.19 of EPS and stepped down slightly from Q1 due to the lower volumes previously discussed. Year-to-date EECOL has contributed $0.41 of EPS and we maintain our outlook that EECOL will be accretive to WESCO earnings per share by approximately $1 in 2013. A note, we completed the acquisitions of Trydor and Conney safety in July 2012. As we move forward, they will therefore become a part of the core results beginning in the third quarter.

On to cash, we have a history of generating strong free cash flows through all proportions of the business cycle. Over the last eight quarters we have generated a $0.5 billion of free cash flow or approximately 110% of net income over that period. Free cash flow for the first half of 2013 was $108 million and that is up $5 million from the same period last year and equal to 87% of net income. As we have indicated, the acquisition of EECOL increased our levered ratio above our targeted range of 2 times to 3.5 times EBITDA. As we stated at the time of the acquisition, we are committed to prioritizing near-term cash redeployment towards debt reduction until we are comfortably within our target range. We reduced our leverage ratio in Q1 and then again in Q2. At the end of June, our reported leverage ratio was 3.9 times EBITDA which is down from 4.7 times at year-end. More importantly, our pro forma leverage ratio improved to approximately 3.5 times or just at the top end of our targeted range. We expect to continue to de-lever the Company as we move through the year.

Our overall cash redeployment strategy remains unchanged. Over the long-term, our first priority for cash redeployment is to invest in the business through organic growth initiatives and acquisitions. Liquidity defined as invested cash plus committed borrowing capacity was healthy at approximately $429 million at the end of the second quarter and has increased nicely from the $300 million level it was out at the end of 2012. ROIC at the end of June was 10.2%, although the EECOL acquisition is expected to reduce our overall ROIC in the short term we remain focused on our long-term target of 15%.

Now to the Q3 and full-year outlook. In January we indicated that the economic recovery was expected to be weighted to the second half of the year, with a flattish organic top line in the first half and Mid-, single- digit organic growth in the second half. Including EECOL, we expected full-year sales to grow between 16% and 18% for the full-year. The first half results first 2013 have been consistent with that outlook. Organic daily sales are down a little more than a point to date. However, we no longer expect mid single-digit organic growth in the balance of the year. Instead we now expect flattish organic sales for the full-year with only modest organic sales growth in the second half, offsetting the small organic decline in the first half. Overall full-year sales are now expected to grow between 14% and 16% including acquisitions.

In the third quarter we expect organic sales to grow between 2% and 4% and total sales to grow 17% to 19% including EECOL. We expect gross margins to expand to approximately 20.8% in Q3 and approximately 20.9% for the full-year driving operating margins to approximately 6.2% in the third quarter and 6.6% for the year. We're also narrowing our effective tax rate Outlook range to between 26% and 27% for both the third quarter and the full year.

Putting all this together we now expect full year diluted earnings per share in the range of $5.15 to $5.35, and that's excluding the favorable impact of the litigation matter recorded in the first quarter of this year. The reduction from our previous EPS outlook of at least $5.75 is driven fully by the reduction in our second half sales at expectations as the protracted economic recovery continues to move to the right. We do continue to be pleased with our execution One WESCO initiatives, gross margin expansion, and cost income.

With that I would now like to open the call up to your questions.

We will now begin the question-and-answer session.

(Operator Instructions)

Our first question is from David Manthey from Robert W Baird please go ahead Sir.

Thank you, good morning everyone. First off, I guess everyone is interested in what is going on at EECOL in Canada. Could you talk about the trends through the quarter and into July? I think you said that there was some early seasonal impacts there. Could you just talk about how that is trending? And then second if you could discuss the outlook for EECOL and Canada in general over the next 12 months particularly given the energy and industrial exposure you could talk about those in particular. Thank you.

David, good morning. Thank. Yes. Well, I think we mentioned overall that our sales momentum improved through the quarter overall for WESCO. It was really driven by our US and international operations outside of Canada. The sequential improving momentum was moved through the quarter was driven by those parts of the Business. Canada looked the opposite. It actually degraded as we moved through the quarter. Part of it was the later spring impacted the overall quarter. But the flooding had a particular and acute impact in June. So that is what was happening underneath the overall reported results and that's continued so far into July.

I mentioned that are July sales versus prior year consistent with the first half, but the mix of July is consistent with how the quarter ended at the end of the second quarter. We do think that the weather impact, particular the flooding impact should result in some upside opportunities over time. But clearly contractors were impacted. Efforts were redirected to supporting the recovery efforts. We have not seen any project cancellations. I repeat, it just been deferrals at this point.

In terms of our overall outlook, and let me also I'm sure the question will come up, had we quantified the weather impact which is inclusive of the flooding for Canada. It is approximately $15 million in the quarter and that's not just EECOL that is for WESCO Canada plus EECOL. So that's for both we can give a little additional color. In terms of the overall Canadian economy we see the economic indicators improving slightly at the midyear point as we enter the second half of the year.

I think this is very consistent with the back of Canada's expectation for gradual pickup in activity and we are still bullish on the Mid-, to long- term growth prospects. So I mentioned that were still investing we're opening some locations were going to open up a DC in Montreal. And we see really the demand for Canada's heavy crude to still be strong by US Gulf coast refiners, as well as pipelines are built. Not just the Keystone pipeline. At some point we believe that will go through, but also pipelines to the Canadian shores. I think that will result in a boost in demand, as well. Ken, I don't know give anything else to add.

No I think that covers it.

David did that help?

It does, and if I could just ask one more quick one here. In terms of the utility business obviously doing very well. Could you talk about what the growth would be if you excluded sort of shifting any major alliance contracts just -- is it growing excluding project wins? When I say project, I mean major.

I think it's really important to understand there is two drivers to our growth, and it is hard to separate or attribute what the contribution is, but I will at least take a shot at them. One is winning new customers and we had a series of nice wins over the last 18 to 24 months. This win in the quarter is substantial. It is a very substantial win so we're very excited about that. The second driver of our growth, and it's really important to understand is expanding our scope of supply with our current utility customers. And think of it as kind of a One WESCO implementation for utility, which includes additional safety products, MRO supplies and so -- and both are contributing to our growth.

Maybe one way to look at it is by spend market segment in utility or customer segment, our investment owned utilities are driving very strong double-digit growth. Our public power is growing and it's in the Mid-, to upper single- digit range positive growth versus prior year in the quarter. So it is not just coming from the IOUs. And so I think that again speaks to the scope expansion. And the scope expansion isn't just products, but it's also supply chain management services of the ilk like what we have done for Duke, because that is being stepped and repeated into other relationships. Does that help?

Yes, thanks a lot, John.

Okay.

Our next question is from Christopher Glynn from Oppenheimer, please go ahead.

Thanks good morning. Just noticing that the midpoint of guidance seems to have operating margins ticking up sequentially in the fourth-quarter, which is maybe a little bit atypical. So, just curious the thought process behind that.

Yes, what is kind of changing this year versus prior years, we talked a little bit about in the first quarter, is that EECOL actually has a trend where they have a increasing level of sales and therefore profitability each quarter through the year, through each of the four quarters. So their fourth quarter is typically their strongest. That weighs a little bit more positively on our year-over-year trend in the fourth quarter than what we typically see. In addition to that, as you know the second half of last year weakened, so we have the benefit of better comps, specifically in the fourth-quarter, and those are really the two big drivers.

Okay and then you know gross margin core down 30 year-over-year called out the utility mix. I think it would've it is similar headwind in the first quarter, though, and presumably partially in guidance. So just wondered if there are any other moving pieces during with the gross margin in the near term.

Well one of the other things and we talked a bit about it on the call already is the move in Canada. And as you know we've talked about pretty openly Canada and EECOL are our highest profitability businesses. So as that took a step down from Q1 to Q2 and that had a sequential weighting on the gross margins.

Great, Thanks for repeating that. And then just lastly, the midpoint of guidance, what would be a plug for the interest expense?

Interest expense, I think it's fair to say if you look at the run rate where we are for the first half, it will step down slightly through the balance of the next two quarters, but you could probably just kind of get there that way.

Okay great thanks again.

Thanks.

The next question is from Deane Dray, from Citi Research please go ahead Sir.

Thank you good morning everyone.

Good morning.

Hey John, you stepped through positive data points between industrial bidding activity, sequentially better at construction as well as the sequentially better in core revenue growth through the quarter. Of those maybe you can expand on the construction activity, especially being up sequentially. And I know you all have a project tracker, and maybe you could give some color there specifically on what kinds of projects you are seeing being added.

Yes well we were -- it was an encouraging data point in what was otherwise a quarter that quite frankly did not meet our expectations, so I do need to say that the quarter did not meet our expectations and we are aggressively driving execution. With that said when you look at construction it picked up very, very nicely sequentially. We are absolutely seeing increased bidding activities, and I'll tell you Deane they're pretty pervasive. Now that needs to translate into orders, that needs to translate into sales ultimately. Our backlog is holding up well. It's healthy, and I would say I think parse construction a bit.

We are absolutely seeing an improving momentum in Datacom. Datacom was down 1 point X percent in the quarter, Q2 versus prior year, but heavily driven by the government portion of Datacom, I.e the Datacom is going to government contractors and government projects, which was down 12%. Government was down 12% the second quarter. If you pullout government for Datacom it grew. And I think what's important to note is the Datacom momentum improved as we moved through the quarter, which was encouraging to us. Feedback from our sources both suppliers and customers would suggest that second half is setting up more positively for Datacom, and there is an overall expectation I think in the industry that they'll be growth, you know, in the core Datacom markets in the second half.

For our IP physical security part of the Business, which is not large, It's nowhere near as large as our major competitive, but it's still growing very nicely. It grew very strong double digits again in the second quarter, and after being up double digits in the first quarter. And David Bemoras highlighted that in last year's investor day, so it's a nice growth engine.

In terms of other parts of construction another bright spot was lighting. And so lighting was up 6% versus prior year in the quarter, which we felt good about, and it was driven by again not new construction yet. So I think we are setting up nicely for when new construction kicks in, but it was driven by retrofit renovations upgrades and LED. And were getting some feedback from at least a couple of our suppliers have told us that our LED mix is at the high end of the range and leading our competition. So another decent data point.

ABI still is in a positive territory. I think the big question is, and we have talked about it, is the traditional linkage and interdependency between residential construction recovery and nonresidential construction recovery. And clearly resi's in recovery, non resi will follow. But our view is very similar to what it has been for a few years. It is a protracted recovery. It's going to come. Not sure of the amplitude, but it seems to be shifted out to the right. With that said, we are encouraged by a number of these leading indicators.

And as John pointed out, he talked about the Datacom backlog in the opening part of the comment I would also add to that just a give us some feel about the backlog in US overall, while we saw Canada backlog stay at a healthy level from yearend 2012, we quoted that overall backlog was up 5%. If you look at the US in totality, including Datacom and looking across the Business, it was actually up more than that. So we actually saw some strengthening in the backlog higher than the 5% level in the US business.

That's real helpful and just last one for me John, would love to hear the sales pitch for the analyst meeting in August. What is going to be new, what is the format, and are there any particular themes you'll be highlighting?

Thank you for that Dean. We can't scoop ourselves. Well, we very much look forward to seeing you in two weeks. I think similar to what we've done in prior years, we will have a number of our business leaders present. I think what we're excited about this year, honestly, and because our investor day typically takes a longer-term view and talks about the major initiatives. You know we've been working on this gross margin thing for some time, and we think we're absolutely getting some nice traction there. So Steve will explode that in some detail. And I think we will give an updated view of industry structure, where we are positioned in the industry.

We think our strategy of the initiatives were investing in and driving growth organically, plus the acquisitions, is working. We are encouraged that we are at the top end of our leverage range now, and we are going to continue to focus our cash flow on debt reduction. But I think it sets up for continuing to run this play-book. And our portfolio is larger and more diverse now, so we'll give some deeper insight. Obviously now that we have had Conney and Trydor on for full-year and EECOL on for the better part of seven, eight months we will be able to give some much deeper insight into how they're going to contribute to our profitable growth. And then finally we will give an outlook, as we have done historically, in terms of what our framework and financial expectations are for 2014.

Great. Looking forward to it. Thanks.

Great Dean, Thank you.

Our next question is from John Ballotti from Janney Capital Markets, please go ahead.

Thank you. John if you looked at -- you made some positive comments about how the quarter ended and how the third quarter is starting. And, coincidentally, durable, US durable goods and data came out today, and it looks like across-the-board new orders were pretty positive, as well the backlog growth was a nice trend upward. And it's been the first in a couple of months. So, if you look at -- I am guessing the two areas you might see, that would be industrial and utility, and that's combined about 60% of the Company. Are you seeing any of that yet, or is it still too early, relative to with the data said today?

Well, John, again the way July is setting up so far, when you look at the composition, the composition -- you know I said in my prepared comments that is approximately 13% so far in July, book to bill is above 1.0. It is actually well above 1.0, and so that's encouraging. But the composition is a bit different, because it is very much reflects so far what we're see in July, how we ended the second quarter. So let me emphasize again you know we saw positive, and sequential, and improving momentum in US based operations and outside of Canada, international outside of Canada. And Canada experiences sequential slow down as we move through the quarter because of June.

That flooding impact, we're still feeling the residual of that and the project shifting in July. I didn't mention earlier, I don't believe, so let me mentioned now, and make this point, that if you look at the composition of EECOL's Canada sales, it is really the project part of the Business, the direct shift that took the big hit through the quarter in general, but particularly in June, and we are still feeling then July.

Their warehouse sales grew, and their warehouse sales were up approximately 2% in the second quarter, and that is continuing here in July, so that is my comments overall about by geography. Industrial, we have a particularly tough comp we had with some large non repeating projects last year. Sequentially our momentum is kind of flattish, but if you were to adjust for Canada, we're actually up a bit as we move through the quarter. So I think a little positive momentum vector there. And utility, we're doing really well. We are significantly outperforming the market. And again, it, as I mentioned, it's new wind plus scope expansion. So hopefully that helps that additional color.

Okay, Great. Because it seems, as Ken had pointed out, that you do have some easing comps as the second half did start to decline through the balance of the year. And it seems like, from what the data we saw today, that that could complement the easing comps in the back half.

Yes right.

Great thank you.

Thanks John.

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

Hi there this is Flavio. I'm standing in for Hamzah, today. I was just wondering if you could give us some color on pricing, how pricing is trending, especially given where the commodity prices are? And if you are expecting any pricing pressure to continue?

It is flattish, and so we are getting no benefit of anything. I think Ken shared that comment earlier. It's overall flattish. And I would not signal that the pressure is any worse than what we normally face. I think what is driving the competitive dynamics is not any pricing effect, it's the overall demand across the value chain. And I would maybe make this comment, the industrial customers that we are serving, and we are trying to expand our scope of supply with, they are in good shape financially. They have a lot of cash on their balance sheet. There is still, we think a lot of pent-up potential for capital project spending, and even increased maintenance efforts and the like.

But, it takes confidence on behalf of them, and what their end market demand is going to look like. So I think in this protracted recovery period where there is fits and starts, and there is not much growth, if anything, economically, the bigger stronger players have an opportunity to take additional share. And that is the real effect, though. It's really the demand view versus the pricing dynamics that is causing any issues that we're seeing now in the market. Inflation is under control it is really the demand.

And that said, you see in the webcast presentation back up we always give you an outlook on what pricing is to date. As John said, would not expect a lot of additional downward pressure, but is you're looking out to the second half of the year there is really probably no anticipated uplift in pricing from our perspective. I think we're kind of dealing with this kind of neutral pricing environment in the near-term for the balance of the year.

That makes sense. That is a very good detail so on that note of the demand side, on this sluggish demand environment, how do you think about your investment span. And if the demand keeps on being weak or weakens, which buckets of the investment do you focus on and re-prioritize, and which ones do you --

Yes, Flavio, it's our growth engines and I cited that even though -- we believe we have done a good job with maintaining our cost discipline and controls over the last three to four quarters. It really started midyear last year when we started seeing the top line slowdown. We have not gone and taken major structural cost takeout actions, but we're very aggressively and diligently managing our discretionary cost controls and challenging any headcount replacement, and also applying our lean initiatives to certain back-office operations and processes. And we have actually reduced headcount, reduced headcount in 2013 as we moved through the year, and it started actually in the middle of last year.

So we reduced overall headcount yet we have increased our investments in, and I cited that in my comments global accounts, integrated supply, utility, international operations, and Conney, our safety business, as well as our pricing and sourcing functions. So we are putting, net our headcount is down, but over all underneath of it the mix has been shifted to top line generating personnel and margin improvement personnel in the pricing and sourcing functions. So we will give much more insight onto this on our investor day. Obviously, resource allocation and prioritization of where we put the investment is critical. That's one of our top jobs, and we think we're doing a decent job.

I agree with that. Thank you so much, and I will jump back in the queue.

Okay thanks.

We have a question for Matt Duncan from Stephens Incorporated, please go ahead.

Good morning guys.

Good morning Matt.

Morning.

Ken, can you maybe help us a little bit with understanding on EECOL what the EPS accretion of $1. It was $0.41 first half, so it's got to be closer to $0.60 in the back half. What drives that increase? Is it a little bit of improving sales? You mentioned earlier that you get a little bit of a sequential sales build there through the year, or is it something else?

It is really the improving sales, but driven by two things. One is the natural sequential improvement that they see in the quarters as they move through the year. And then on top of that, John talked about the impact of the weather both the late spring, and the rains, and the flooding in Calgary in June. As we talk to the business we see solid warehouse sales. We see the projects still out there. The people have been refocused on other areas. So the anticipation is that is going to start to come back in the second half and that'll help us. It's hard to call whether that is 3Q or 4Q, but the demand, we believe, is deferred, not diminished.

Okay. Well, you may have just answered my next question then, because you said typically the revenues are up there through the year, but you are down about $13 million sequentially from 1Q to 2Q. Obviously, some of that is the weather impact. Is it the deferred projects that would primarily account to the balance of that then?

It is basically the decline from 1Q to 2Q are the reasons that we noted tied to the weather. And that would primarily be in the project side of the Business.

Okay and then last thing for me on the M&A pipeline, you guys have obviously done a couple of things and have been outside electrical recently. Conney's a good example of that. Can you characterize of that M&A pipeline how much of the stuff that your most focused on is outside electrical or Datacom where you the big presence currently versus no more bolt on type deals in your core product categories?

Great question. I do not know that we have ever sized the pipeline, in terms of company revenues and the number of targets. But suffice to say it's very large. It's as large as it has ever been, and we are actively managing it. And I'll tell you it has a very good mix of some core electrical distribution companies, as well as non-electrical; call them broader-based, industrial, or specialty distribution companies like Conney.

So there is a very good mix. We continue to run our management process of the priority targets in the pipeline. It is a phase-gated process. And I mentioned that we are not going to a knife-edged switch turn on and off the M&A process. It's a core part of our strategy. It is one of our 2 key value creation levers. We are continuously managing that pipeline, as we did even after we closed EECOL in the first half of this year.

We are encouraged where the leverage ratios come in. And so I think as we have expanded outside of core electrical over the years Matt, and as we are able to deliver real synergies, it gives us even greater confidence to look at these targets that are more broad-based industrial distribution, or specialty distribution inside industrial distribution. Because we have believed and we have espoused this for some time that our business model extends horizontally to many product verticals.

We're very encouraged with Conney. Conney grew 5% in the quarter it grew plus 4% in Q. It's ticking up. We put substantial investments into Conney, and they are paying off. And we are now getting some global accounts leverage, and integrated supply leverage with that business. So there is a good example I think of taking a specialty distributor, in this case safety, have some private-label, and what are we doing? We're leveraging key asset that WESCO has, our blue chip customer base in the form global accounts and integrated supply customers. So it's a long answer and we will development this more at the investor day, but I would say recent past is pro log. Recent past for M&A is pro log

Thanks sure John.

Our next question is from Shawn Harrison from Longbow Research, please go ahead.

Hi, good morning. Just two brief questions. First off, on the second half outlook, does that include any sequential improvement in your commercial construction-related businesses? And then second, just with EECOL, second half waiting, how does that affect the free cash generation in the back half of the year? You going to be building maybe a little more incremental inventory into the back half than typical?

I don't think I would say -- I will answer the second one first, which is I do not think we'll see any incremental weight on the cash flow from me EECOL. As we talked about a lot of the incremental growth in the second half, and EECOL will come from projects, which, that doesn't sit in inventory for very long. So, I wouldn't rethink our second half cash flow outlook. The first half of the question, we certainly saw some incremental improvement in volume from Q1 to Q2 in the construction business, and we have talked several times throughout the call about the improvement in our backlog. That indicates for sure that we are expecting some improvement as we move forward. It's just very hard to calibrate how that rolls out.

I mean typically Q2 and Q3 are the strong quarters for construction. Q1 and Q2, obviously, due to winter effects, are down from that. And so we will have to see how we progress through Q3 and into Q4, and what that seasonality looks like.

Okay thank you.

Thank you.

Our next question is from Steve Tusa from JPMorgan, please go ahead.

Hi. Good morning guys. It's Drew Pearson on for Steve.

Hi Drew.

We've covered some ground. There are just a couple of quick cleanup questions. First Datacom, you talked about the improving trends there. What was the absolute growth rate for Datacom in 2Q, roughly?

For say that again.

Datacom growth in 2Q for you guys?

It was a little under -- Datacom growth rate in Q2? Datacom was down versus prior year a little under 2%. 1.X%. If you take Datacom sales to government out, it was up the low-single digits. But all in Datacom for the whole Company as a category it was down a little under 2%.

1 point to 2 yes.

Okay. That is helpful. And then your comment was, June was up however, on the Datacom side?

Yes, I was just saying momentum improved as we moved through the second quarter particularly, in the US based operations, particularly for Datacom. I did not give a number. I'm not going to give that number by month. But just suffice to say it had very nice improving momentum as we move through the quarter.

That is helpful. And then just some cleanups on margin items in second half. I wanted to ask specifically about incentive comp is there anything that moves around on that front and anything related to supplier rebates in 4Q, given the lower volume?

We both can look at incentive comp as we move throughout the year. So I would not expect any kind of large movements in any of that driving margin rates in any quarter, or specifically in the second half. As you look at SBR, really there is a slightly more favorable impact onto margin in the first couple of quarters of the year, and slightly less in the second. And that's not because we reestimate so much SBR it's just that we kind of book it based upon a outlook for the year on a run rate basis. So just very mathematically as you kind of think of the same amount running through the months and quarters of the year and sales increasing, then that has lesser of favorable margin impact. But it is not large, and that's the only thing I would tell you to consider.

Okay thanks very much.

All right thank you.

The next question is from Sam Darkatsh from Raymond James, please go ahead.

Good morning, John, Ken. How are you?

Good morning Sam.

Most of my questions have been asked and answered. Just a couple of housekeeping. I'm still a little confused as to why the core gross margin was down 40 basis points sequentially. Yet you had utility mix sequentially was basically flat and pricing was flat. So I am still confused as to why sequentially that was down.

I actually -- core gross margins weren't down 40 basis points. They were essentially the same sequentially. They were down year-over-year, but only slightly.

Okay I will have to recheck my math

We can help you clean that up, and we will do that with you.

The second question, you said July up 13%, but your third quarter guidance up 17% to 19%. Now I know you have some momentum that is favorable. I know you have some weather that's impacting you in the July month. But do the comparisons get easier in August and September also, or is that the higher guidance than what you're seeing so far in July purely a function of the momentum through June and July?

Yes I think there are two points to that, and that is that July to date. You know, I think we had on a month to date basis the way the July 4 holiday fell, we estimated cost us a half a day or so in our growth rate, which is a couple of points. If you think about how that would affect a month, and ona day adjusted basis. So while John quoted 13% month to date, you can kind of adjust that up a little bit, and that gets you closer to the range. Also, I would tell you that the quarter has an extra day in it for the year, so you need to compare this year to last year on a day adjusted basis. And then finally the comps in August and September do get slightly easier.

Very helpful thank you.

All right.

Our next question is Noelle Dilts from Stifel, please go ahead.

Noelle this is Dan we have time for one quick question before we wrap up.

Okay sure. You know, I was just hoping to get a little bit more detail on, you talked about strength in the international markets outside of Canada. Can you give us a little more detail in which countries where you're seeing strengths, and just parse that out a bit?

Yes, and good morning Noelle thanks for that. Yes. International outside US and Canada, and so this would be inclusive of our standard distribution model, global account customer sales that are in country as well as integrated supplies, so just to make sure I set the backdrop. It was, and it grew in the quarter and it grew low-single digits, and that is inclusive of everything that is international. I would say that, Noelle, it was pretty balanced. If you look at our international footprint outside of US and Canada, it includes Mexico, it includes some sales into Middle East, and it includes sales into a number of countries in Asia, as well as Australia, and now with EECOL in South America.

So, I think the prospects are a -- our prospects internationally are very, very strong. We actually have been throttling our growth I believe, but consciously so by being very thoughtful about what investments we make into what country and making sure the growth is profitable. And it is, it has been to date. So I think as we gain confidence and we gain confidence as we move to the right. We have been increasing investments and we will be able to even drive even better growth. So, again low-single digits very positive backlog. Backlog in international outside US and Canada is up over 20% since year-end 2012, so I think the prospects look good.

Ken I don't know if you want to add anything.

No. Well, I guess I would add just one thing, which, as you know very consistent with what John has said in each of the last few quarters, which is we grow with our customers as they expand. And as we talk about some of these wins that we've have talked about in the last couple of quarters, as well as what we are doing going forward, you would see that the growth is occurring around our solid and stable and expanding customer base. So you think about where customers grow that is where our growth is. It's not a green field it's a fallow.

So, with that let me close the call today. Thank you for your time and your continued support, and we look forward to seeing you hopefully in two weeks at our annual investor day in New York. Have a great day.

The conference has now concluded. Thank you for to attending today's presentation. You may now disconnect your lines. [End of transcript]