Wesco International Inc (WCC) 2014 Q2 法說會逐字稿

Good morning, and welcome to the WESCO second-quarter 2014 earnings conference call.

(Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to Dan Brailer, Vice President of Investor Relations and Corporate Affairs. Please go ahead.

Good morning, ladies and gentlemen. Thank you for joining us for WESCO International's conference call to review our second-quarter 2014 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, Senior Vice President and Chief Financial Officer.

In addition 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.

There are no adjustments to our second-quarter year-over-year comparisons. However, any reference to year-to-date comparisons will be adjusted for the first quarter of 2013 results to exclude the nonrecurring impact of ArcelorMittal litigation insurance recovery.

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.

Finally, the following presentation includes 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 and in our filings.

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.

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

Thank you, Dan. Good morning, everyone.

Our second-quarter results reflect strong sales execution along with improvement in our end markets and seasonal recovery from the severe winter weather conditions experienced earlier this year. We delivered 6% organic sales growth -- our best results since mid-2012. Over the previous seven quarters, our organic sales growth had not exceeded 3%.

More importantly, in the second quarter, we delivered growth in all geographies, in all end markets, and in all product categories, with lighting and communication each being up double-digits.

Sales in the US were up 5%. Sales in Canada were up 7% on a local currency basis. And sales for the rest of the world were up over 13%.

July is off to a good start, with sales growth rates trending in line with second-quarter levels. Backlog grew in the quarter, and our book-to-bill ratio is tracking above 1.0 at this point in July. We are seeing favorable indicators with our customers, including further strengthening in the nonresidential construction market, which we expect will result in ongoing growth in our key markets.

We are now six months into the previously announced organization changes that were focused on accelerating our One WESCO strategy. We are pleased with our progress as the new organization takes action to drive sales execution and deliver above market sales growth.

We will continue to implement and build out this new organization over the next several quarters. This includes making continued investment in our growth engines and operational excellence initiatives, while maintaining operating cost discipline.

Accelerating our One WESCO value proposition is a top strategic priority, and our leadership team and new organization are sharply focused on improving our market position, both organically and through acquisitions. Customers are responding favorably to our One WESCO efforts, based on the increasing number of opportunities we are pursuing across our MRO, OEM, and capital spending demand streams.

Moving to industrial on page 4. After being down 3% in 2013, we have driven a return to growth and industrial in the first half -- a significant improvement over the results last year. Sales momentum accelerated in the second quarter, with sales being up 5%, driven by growth with OEM and oil and gas customers.

Channel inventories appear to be in balance with current demand, due to customers maintaining tight inventory controls. Second quarter bid and RFP activity levels for global accounts remain strong and exceeded the record first-quarter level. Overall leading indicators in the industrial market remain positive, while notable customer trends of increased outsourcing and supplier consolidation remain in place.

We were awarded a new, multi-year electrical MRO contract with a global oil and gas company for their downstream operations -- that is, their refining, their chemical, and their pipeline operations -- in the second quarter. Our previous relationship with this customer included responsibility for their upstream operations only. This noteworthy win demonstrates the growth potential that exists when we are successful at implementing our One WESCO checkerboard strategy with customers.

Moving to construction on page 5. After a challenging start to the year in the first quarter, we're seeing clear signs of accelerating construction momentum in both the US and Canada, with overall sales to construction customers up 17% sequentially. Versus prior year, sales were up 2%, driven by mid-single-digit growth in the US and also in Canada on a local currency basis.

We remain very well-positioned in Canada through the combination of WESCO and EECOL. And were awarded an electrical distributions product contract for a large Canadian hospital in the quarter, which also includes opportunities to add other product categories in the future.

Our backlog is solid and provides good support for the ongoing construction season this year. Leading indicators in a [non-resi] market support a continued improvement in activity levels, both this year and next.

Moving to utility on page 6. We are pleased with the strength of our utility business in continuing to deliver above-market sales growth. Sales to our utility customers grew 6% versus last year, following the 23% growth we experienced in the second quarter of 2013. The second quarter marks the 13th consecutive quarter of year-over-year organic sales growth, driven by new wins and an expanding scope of supply with our existing utility customers.

In the quarter, we were awarded a material management and delivery contract with a utility contractor for a large transmission line project. This further demonstrates our capability to provide solutions across the entire utility power chain.

Moving to CIG on page 7. Sales of CIG customers were up 5% in the second quarter, marking the fourth consecutive quarter of year-over-year organic sales growth, driven by solid momentum in commercial, institutional, and government markets. It is clear that our end-user-focused One WESCO value proposition for CIG customers is continuing to yield results.

Now moving to acquisitions on page 8. With the closing of Hi-Line Utility Supply in the second quarter, we have now completed 11 acquisitions since June 2010, including three so far this year. These acquisitions have strengthened our electrical core, added new product and service offerings to our portfolio, expanded our global footprint, and improved our overall market position.

Our acquisition pipeline remains strong and we see excellent ongoing opportunities to further strengthen our Company via acquisitions.

Now, Ken Parks will provide the details on our second-quarter results and our outlook for the third quarter and the full year. Ken.

Thanks, John, and good morning. I'm going to review the results in the context of the outlook that we provided in April during our first-quarter 2014 earnings call. At that call, we expected second-quarter consolidated sales to grow between 5% and 8% year-over-year.

Sales in the quarter reached $2 billion, a record level, and an increase of 5.9% year-over-year. This includes 6 points of organic growth and 1.6% growth from acquisitions. That was partially offset by 1.7% unfavorable foreign exchange impact.

The US business grew approximately 5% organically, compared to last year's second quarter, while the Canadian business grew by approximately 7% on a constant currency basis. Pricing for the second quarter had a positive impact of approximately 50 basis points, consistent with the first quarter. Monthly organic sales growth for work days accelerated as we move through the quarter. April grew 4%, May grew 6%, and June grew 7.5%.

Sequentially, organic sales for work days increased 7.9%. That's above the higher end of the typical Q1 to Q2 seasonal improvement we usually see. And was driven by both the improving markets as well as seasonal improvement following the harsh winter weather conditions that we experienced, both in the US and in Canada.

Core backlog expanded 2% from year-end 2013 and 1% over last year's second quarter. That was driven primarily by US backlog expansion of 8% from year-end 2013 and 10% year-over-year. We believe the expansion of the US backlog signals an improving US economy and nonresidential construction markets.

Backlog in Canada grew 5% from the end of Q1 but remains down approximately 5% from the end of 2013. Backlog continues to expand as we move into the third quarter, as our book-to-bill ratios in both the US and in Canada remain above a 1.0 July month-to-date.

In April, we estimated that second-quarter gross margin would be in the range of 20.6% to 20.8%. Gross margin came in at 20.5%. That's slightly short of our outlook and down 20 basis points year-over-year, due primarily to business mix. Gross margin also declined 20 basis points sequentially, due to strong sequential sales growth in both the construction and data communication products and markets.

SG&A expenses for the second quarter were $279 million. That compares to $266 million in the prior year. Core SG&A increased $8 million over last year's second quarter, while acquisitions contributed the remainder of the growth. Core SG&A increased primarily due to higher employment levels and the related cost.

As you recall, we moved to a common date for annual merit increases several years ago. I will remind you that last year, the merit increases were deferred one quarter to July 1. This year, the merit increases were effective on the normal date of April 1. Therefore, as a result, year-over-year SG&A in the second quarter reflects the impact of actually two merit increase cycles.

While core employment has remained flat through the first half of 2014, head count is up approximately 1.5% from last year's second quarter, as we continue to selectively invest in our growth engines and our operational excellence initiatives. Within these numbers, core sales personnel increased by 4% versus last year's second quarter. Sequentially, second-quarter core SG&A increased by approximately $9 million, which is primarily due to higher employment costs stemming from the annual merit increase and variable compensation cost increases on improving business performance.

In April, we estimated second-quarter operating margin would be in the range of 5.7% to 6.1%. Operating profit for the second quarter was $116 million, and that's 5.8% of sales, with core pull-through of approximately 40%.

Interest expense in the second quarter was $20.3 million, compared to $21.8 million in the prior year. The impact of overall lower borrowing levels was partially moderated by a slightly higher weighted average borrowing rate. Our borrowing rate in the quarter of 4.1% was unchanged from the first quarter.

Net income for the second quarter was $69 million, and earnings per diluted share were $1.29 on 53.5 million shares. That compares to $1.25 on 52.3 million shares last year.

Organic growth contributed approximately $0.13 to EPS, and acquisitions added another penny in the quarter. Foreign-currency translation, primarily in Canada, reduced EPS by approximately $0.04 a share. Growth in our diluted share count, along with the slightly higher tax rate, both reduced second-quarter EPS by approximately $0.02 and $0.04, respectively.

WESCO has consistently generated solid free cash flow throughout the entire business cycle. We redeploy that cash through investment in organic growth as well as acquisition initiatives to strengthen and profitably grow our business.

At the same time, we also work to maintain a financial leverage ratio of between 2 to 3.5 times EBITDA. At the end of the second quarter, our leverage ratio was 3.4 times EBITDA. And that's still within our target range following the completion of the LaPrairie, Hazmasters, and Hi-Line acquisitions that were completed during the first half of the year.

Leverage on a debt-net-of-cash basis was 3.2 times EBITDA. And liquidity, which is defined as invested cash plus committed borrowing capacity, was $542 million at the end of the second quarter. That's an increase of $113 million compared to last year's second quarter.

Free cash flow for the second quarter was an outflow of $3 million, driven by growth in accounts receivable, as organic sales were up approximately 8% sequentially from Q1, with accelerating growth through the quarter. Our working capital performance metrics remain solid, with a two-day reduction in both AR and working capital days overall, both year-over-year and sequentially.

We expect free cash flow to accelerate as we move past this significant sequential ramp in sales. On a year-to-date basis, free cash flow was $39 million.

I'll now turn my comments to the third quarter and the full-year 2014 outlook. We expect the US macro economy to continue to show slow but steady improvement as we move through the second half of the year. Canada's economic outlook, particularly in Western Canada, also appears to be incrementally positive, following a challenging first quarter.

With second-quarter organic sales growth in all foreign markets and six product categories and a continued book-to-bill rate above 1.0 generating further improvement in both the US and Canadian backlog, we remain positive on our second-half sales growth outlook. We'll continue to selectively invest in our business, while we expect to see the benefits of prior investments in both our top line as well as our bottom line over the coming quarters.

Separately, our acquisition pipeline remains robust. And we expect acquisitions to remain an important and ongoing parts of our growth strategy.

For the third quarter specifically, we expect sales to be up 5% to 7% over last year's third-quarter. And that includes the impact of the three acquisitions completed year-to-date. Assuming the current rate environment, foreign exchange is expected to negatively impact third-quarter year-over-year sales comparisons by approximately 50 basis points.

In the third quarter, we expect gross margin to be approximately 20.6%. And operating margin to be in the range of 6.3% to 6.5%. The third quarter effective tax rate is expected to be at approximately 28%.

For the full year, we expect sales to be up 4% to 5%, including the three acquisitions. This updated outlook compares to the 3% to 6% growth expectation provided in January and reflects the first-half performance.

For the full year, we now expect gross margin to be approximately 20.6%. And operating margin to be approximately 6%. The revised outlook adjusts second-half gross margin expectations to be reflective of our first-half performance, including the continuing nonresidential construction recovery and the highly competitive pricing environment, especially on larger projects. As always, we'll continue to exercise [tough,] tight cost discipline, as we move through the balance of year, to help mitigate gross margin pressures.

The full-year effective tax rate is expected to be approximately 28%, and that's consistent with the first half as well. As a result of the revised outlook, we now expect earnings per diluted share in the range of $5.20 to $5.40, compared to the previous range of $5.30 to $5.70 that was provided in January. We continue to expect free cash flow to be approximately 80% of net income for the full year.

With that, I'll open up the conference call for your questions.

(Operator Instructions)

Nigel Coe, Morgan Stanley.

It's actually Mike, standing in for Nigel. It seems like margins -- or at least, gross margins -- have been weaker than you guys for couple of quarters now. Understand the mix went against you this quarter, but could you maybe talk about why you're finding it tough to get visibility on that, in terms of planning? Maybe specifically talk about Lighting and Datacom, and any color there would be great.

As we move into the second quarter, we began to see the Construction cycle actually pick up, based on we saw in the backlog early on, start to positive. But it actually moved more positively than we anticipated. As well as some of the large jobs that we called out.

In the prepared comments, we talked about 17% sequential growth in the Construction side of the business. We came in at 20.5% gross margins. Our range was 20.6% to 20.8%. We always want to be within the range. But what I would say is that we saw stronger growth in some of the parts of the business that we've been very transparent about the fact that they run at slightly lower-than-the-overall average gross margin rates, while more equal at the operating margin level.

Okay. Maybe just to follow-up on that. It sounds like Construction -- or it's non-resi broadly, what was doing better for you this quarter? Is there an end market that's offsetting that to get back to the unchanged guidance?

(Multiple speakers) Can you clarify the question? I guess, here's how I would maybe put the first half in context. We had a very challenging first quarter, due to winter. We're very pleased with the sales momentum our execution in the second quarter on the top line. We're particularly pleased, given the significant organization changes we put in place, effective January 1 of this year.

We've got growth in all end markets. Growth in all product categories. Growth in all geographies. We delivered an organic growth rate the we had not seen since the first half of 2012. And what we basically reflected in our third- and fourth-quarter outlooks is a growth rate that is consistent with, not the first half, but the second quarter level.

Got it. That's helpful. And then lastly -- (multiple speakers)

Just a final -- the adjustment to the full-year sales guidance was really the effect of the first quarter. Because again, we're running at 6% organic Q2. And we've given a 5% to 7% outlook. The midpoint is 6% for Q3. When you look at our revised full-year outlook of 4% to 5% and you take a look at Q4, it's effectively the same range as Q3 -- a midpoint of 6%.

That's helpful. Lastly for me -- on the 6% organic growth in the quarter, could you maybe decompose that? I know there's a pretty big whether snapback from the first quarter. Could you talk about how much that benefited the quarter, versus what the underlying growth was from (multiple speakers) [normal operation]?

I had this comment and question at EPG, too, and I'll answer it the same way because I feel strongly that there's no doubt we had projects that got delayed and impacted in the first quarter -- that moved to the second quarter. And we've been very vocal and said that's not perishable demand. And so we did get some benefit as a result of the Construction projects moving out of the first quarter into the second quarter. We've had some uptick in our end markets as well -- principally in Construction. But I would also say that's coupled with a significant improvement -- and we're very pleased -- in our sales execution. We're only six months into our new organization, and we're very encouraged with the execution that we're getting.

I think the best way to put this in context, honestly, is to holistically look at how others -- what their results look like. There's only a few comparables that are out there so far. Granger had growth rate that's below the 6%. And you look at Philips in North America with lighting -- pretty challenging numbers. We grew double-digits in Lighting. You take a look at Hubbell's growth rate. You take a look at Acuity's growth rate -- very strong growth rate at the double-digit level in Lighting, consistent with our growth.

I think we'll all have a better chance put this in context a few weeks from now, after we see Anixter's results, Graybar's results, and some of our other major supplier partners. But it's our feeling that we clearly -- a big component of the step-up in growth rate is the result of our improved sales execution, tied to the new organization. It's really hard to parse nice, Nigel. How much is recovery from the first quarter, a little bit of end market pick up, plus execution. But it's all three factors.

That's great. Thanks.

Deane Dray, Citi Research

I'd like to stay on the margin question for the second quarter. Just if you could clarify the impact of mix in the quarter. I know on a going-forward basis, the uptick in Construction means more of the competitive bidding -- three bids and a buy. But what was the mix impact this quarter?

Within the industrial segment, one of the largest growth drivers in the quarter was our growth in the integrated supply business. And as you know, that tends to run at lower than -- not just the overall industrial average margins, but also lower than the WESCO average overall. And that as well as that you saw the strong growth in Utility. We showed that in John's commentary. Those two variables really account for -- completely -- the year-over-year deterioration in margins.

The rest of the businesses ran at consistent margins, year-over-year. There was no decline in any of those businesses on a per-business basis. And then sequentially, there was a 20 basis point decline that we called out. And that truly was driven by the strong step-up from Q1 to Q2, as you would expect and we expected, in the Construction part of the business.

Great. And then on M&A -- this came up a couple of times in prepared remarks. And it sounds like you've got some interesting opportunities. Maybe, Ken, can you address where you stand on leverage? You're still in the comfort zone. You've shown the ability to flex up. And so should we expect to see -- if deals are coming -- that you'd flex up, temporarily, above that leverage comfort zone?

Dean, I think we've articulated and have demonstrated with our actions the ability to flex above it temporarily. But when we do that, we say, we would be back within the band within 12 months. And that still is the case, I think. We've done 11 acquisition since the middle of 2010. The majority of those were done without an investment banker in the process. It's important to note because we have this pipeline -- it's a very robust pipeline -- we've got some very attractive opportunities, and we're aggressively working a whole series of opportunities on a continuous basis. We need to be prepared when the events that are out of our control -- a governance transition event or whatever that event is -- an event that's out of our control causes the acquisition to become available. We need to be positioned to move.

The fact that the majority of the 11 that we've done since June of 2010 had no investment banker speaks to, I think, the quality of our process, the way we manage the pipeline. We're working these relationships. In some cases, some of these opportunities have been worked over multiple years, as EECOL was. We really let that be the gating factor on timing. We're comfortable with where our leverage is right now, particularly with accelerating momentum in our core business. The organic growth rate picking up to 6% -- I can tell you that the Organization feels really good with the ability to step that up. And the fact that it was a broad-based. I think that will speak to the organic engines back-kicking into gear, particularly after a disappointing 2013. That's going to result in a very nice catalyst for expanding our bottom line, driving good cash generation, which feeds the whole cycle.

Just last question from me. How would you characterize that M&A pipeline, in terms of where does it overlay on your current mix and geographic presence? Does it extend your geographic --

Yes. Great question, Dean. Great question. I would say the three types of opportunities -- the first would be strengthening our electrical core. Of which, EECOL was a testament to that -- a very strong strengthening electrical core. The second would be very attractive adjacent product categories that we think we can bring to our customers through a One WESCO strategy, our global accounts, integrated supply business model, and the like. And a good example of that is safety, where we did Conney in the US. We did Hazmasters in Canada. It's important to note that US market is 10 times the Canadian market -- rule of thumb. So that Hazmasters acquisition in Canada was like doing an $800 million-plus safety acquisition in the US, on a relative basis to the Canadian market.

And the third category would be selective international opportunities. I think, if we step back and reflect upon our global footprint today versus five years ago, we were in less than 5 countries with physical assets, people, capabilities, et cetera, inventory -- and now, it's approximately 20. And so we've got a much stronger footprint. And I think -- I wouldn't say that's the top priority of the three categories, but your question was what's in the pipeline. So they fall into that third category as well. I would say the first two categories are where our biggest emphasis and priority is. Strengthen our electrical core -- that adds to our scale and our leverage. And then attractive adjacent categories.

Noelle Dilts, Stifel.

This is kind of a basic question, but I'm still struggling a little bit understanding the revenue -- your narrowing of revenue growth guidance. You came in this quarter in line with the guided range. It sounds like non-resi is accelerating. I'm struggling to see, maybe, what piece is a little bit falling a bit short of your expectations.

Yes. Here's the way I think about that range adjustment. We started the year at 3% to 6%. As you said, in the second quarter, we came in within the range that we have guided to for the quarter alone. We took the opportunity at this mid-year point, obviously, to take a look at the full year and say, where do we think this entire year ends up? And the guidance change on revenue is really driven by good performance in the second quarter; a continuation of expectation for good performance in third and fourth. But taking a point off of the top end of the range, due to the performance in the first quarter, due to the weather issues. If you really take it apart, we took down the top end of the range for a point on the top end. But we actually took up the bottom end of the range from 3% to 4%. And that's reflective of the current performance and the good outlook for the second half.

Okay. Fair enough. Last quarter, you talked a bit about implementing price -- some certain suppliers implementing price increases in the 2% to 5% range. It sounds like, maybe, there was a struggle to implement this pricing. I'm actually curious to know if anyone has limited additional pricing actions? Or if you're just not really having a lot of success in pushing those through into the market right now?

Yes. Exactly what you said is -- we did talk about the announced supplier price increases in our last earnings call. What was planned for and pre-announced for the second quarter was in that range -- 2% to 5%, Noelle. That's typical for a second quarter. That's not across the entire suppliers' portfolio. I think this is real important to understand. That's what the price increases are that they are attempting to push through, through their channel partners and, to some degree, direct -- where they serve customers direct. And it's on a subset of their portfolio.

The pricing environment is challenging. I mean, we've got 0.5 point of price this quarter, after 0.5 point in the first quarter. I think we've seen, from some of the other companies in the distribution space -- at least those that are public companies -- there's been a significant commentary about how tough the pricing environment is and pushing pricing through. It's a challenging pricing environment. Suffice it to say in 2014, I don't see it getting any easier. As we look into the third quarter, right now, pre-announced and planned supplier price increases -- again on selected products, which are a subset of our suppliers' portfolios -- are in the 1% to 4% range. Again, we work very hard and trying to push price increases through. But this is a very low inflation environment. And it's extraordinarily difficult to get those pushed through. But we'll continue to push, obviously.

Thanks. Great color. I appreciate it.

David Manthey, Robert W. Baird.

First off, on the gross margin, it sounds like there was a shift between these segments, as you talked about. Does stock, versus special order, versus drop ship -- does that even matter as much to the business anymore?

No. And in fact, there was no significant real shift between those categories.

So Dave, to answer the question directly, it can matter if there's a significant shift between DS to stock plus SO. Because let's just take -- special order is more akin to stock. It's stock-based. You do some value-add, and then you ship the product, typically, out of stock. But when you look at the margins, the range between DS and stock and SO, it's significant -- gross margin range. So it can be a big driver of a shift, potentially. In this quarter, it was not. Every quarter, you know, we look to, is there a business mix shift -- which is what Ken alluded to -- or is there shipment category mix shift? In this quarter, it was business mix shift, exclusively, year-over-year and sequential. Okay? Not the shipment category shift.

All right. And following that's a little further -- given the fact that you're looking at the gross margins a little bit lower, does that mean that your assumption is the mix continues to be like it is, or continue to move that way? It would seem like the trends you're seeing in industrial are pretty positive here. And I would think that would help on the margin.

Yes. In fact, that's exactly right. As we look at the second half of the year, we're anticipating the momentum to be consistent, by business, as what we saw in the second quarter. We expect it to be reflected in the second half of what we saw in the second quarter.

But you're right, Dave. Let's just stay on industrial for a minute. We actually were really pleased with the 5% growth in the second quarter. Sales were down 3% for us in industrial in 2013, organically. It was one of the biggest disappointments we had, quite frankly. So it's great to have a return to growth. Our global accounts and integrated supply are growing at a higher rate than the 5%, as you would expect. They typically do that when we're really executing well.

But Construction picked up as well, right? In the second quarter. So US was mid-single-digits. Canada with mid-single-digits, local currency. When you put it through the FX, now you see that overall Construction was up 2%. We would expect -- we've got both of those factored in. We essentially took our margin profile for the first half and said, that's what we expect to see in the second half. We're not going to be satisfied with that. This is actually an important point. We're not going to be satisfied with that, and we're doing everything we can to expand gross margins through our pricing initiatives, our sourcing initiatives. But that's what our expectation is at this point.

Yes. It would seem that if the revision here to the full year is because of the first and second quarter. And the growth rate hasn't really changed all that much. It would seem like it's maybe a dose of conservatism, here, to bring that gross margin down, given those trends. I guess that remains to be seen.

(multiple speakers) [Specific] to what John was saying, we are looking -- we're not satisfied with where it is. And we're continuing to look to push it up.

I think this tags into Noelle's question, too. Look, we're taking a thoughtful, we think, and objective look at what we think the second half is, given what we've done in the first and second quarter, the market, our approved execution. We are very focused on accelerating our top line growth rate above our current levels, and we're very focused on expanding margins. So to the extent we can be successful there, that represents, obviously, some nice pull through.

Right. Okay.

Christopher Glynn, Oppenheimer & Co.

Just on the tax rate at 28% versus prior, 26% to 28% range for the year. I'm wondering what would have supported a 26%, given it doesn't seem like the geography mix could be varying that much.

Well actually, for the year, the ultimate mix between Canada and the US is shifted more to the US than it was anticipated as we set our outlook for the year of 2014. So we're really -- what your question about what would have shifted the down -- is Canada for the full year being stronger than what we're expecting it to be now.

Okay. So that stands, even with Canada currently growing stronger than the US.

Correct. Correct. We still have the first quarter piece.

Okay. And then any guiding thoughts on how to think about tax rate, directionally, over the next couple of years?

I would say, at this point, it's hard to give guidance on it. But I would expect it to be kind of where it is. Now, we could move a little bit differently, as you see and as we just talked about, depending on the mix of Canada to the US and the variance there. But all pretty much around where we are right now.

Okay. And then lastly, if we look the full-year guidance midpoint for the quarter -- at third-quarter and the year -- it's sort of implies a 4Q EPS peak for the year. That's not so intuitive, looking at the past trends. If you could elaborate on that.

Sure. So, we talked about it a little bit, both John and I, earlier in the call. It does imply a fourth quarter that would be consistent on an EPS basis with what we've seen -- what we're anticipating at a midpoint for the third. But keep in mind that we also alluded to the fact that we'll continue to be disciplined about cost measures. So we will look at cost as we move through the year. We're looking at a lot of things right now. As we continue to see our growth rates move in the direction that they are, we'll support them. But we are going to be very disciplined about cost. And some of those things could be beneficial, more to the fourth than the third.

Yes. Let me expand on that. I know I've had this discussion with a number of you. This specific question I've received, I know, throughout the first half of this year was -- look, when are you in a position when you begin to relax the cost controls a bit and start incrementally investing at a higher rate? I've answered that very consistently and said, we must get the organic growth top line really starting to deliver and deliver strongly. It's not one quarter.

We need to start stringing together a series of quarters before we're in a position where we'd be willing to step up, in a meaningful way, incremental investment that would further fuel the top line and margin expansion in the future. So, it's an important point. We don't have any step up and, really, SG&A plan yet in the second half. And we're going to maintain the very disciplined cost controls we have had in place, not just the first half of this year, but quite frankly, we put in place starting in mid-2012 throughout last year.

Great. Thank you, guys.

Shawn Harrison, Longbow Research.

I wanted to delve into the Datacom business. It looked like it grew maybe 6%, 7% year-over-year, in the first half. Do you expect that accelerate into the back half of the year? And is that all non-resi based? Are you seeing some other factors at work there, helping you as well?

Yes. Excellent question. We are very pleased with our results, in both our Datacom and Broadband Communications business -- let's call it our communications and security category. It grew 5% in Q1. It accelerated to 10% -- double-digit growth -- in Q2. We think that is going to represent a very strong mark above the market when other data sets come out that would allow us all to put that into context. So we've got accelerating momentum with our communications business. And backlog, specifically for that category, is up double-digits.

Security -- IP security -- which David Bemoras presented a few years ago at our Investor Day -- which is still a small percentage of our portfolio. It's a subset, we call it a sub-product category. It's under Communications. It grew very nicely again, both in the first and second quarter, up double-digits. It grew double-digits last year. And so we feel really good about our value proposition, our supplier relationships, the execution we're getting, and we've had some significant wins, and not just in the US and Canada. Some notable wins in the first part of 2014 that are international that are starting to fuel our top line, which also includes US and Canadian content.

So our goal is to, obviously, outperform the market on the top line. And then get good pull through on that. We feel like we're in that zone, now, with our Communications category. And were going to do everything we can to keep it in that mode. I drew some analogies to some of the things that we did in Utility a few years ago. We've enjoyed a very nice run in Utility. We're driving very strong top line growth above the market. I've gone through similar things that we've done in Datacom and some signature wins. I've been alluding to those over the last few quarters. We're seeing that to start to contribute nicely.

Okay. As a follow-up -- just on gross margin. Has there been any change to your assumption for rebates for the year, given the slower first quarter? Or is the rebate expectation pretty unchanged?

It's basically unchanged. We've talked about, as we entered the year, that supplier volume rebates require [a lot of] mid-single-digit growth level on the top line, in order to retain, at an overall level, where you were last year on a dollar basis. You can see we're still looking at that same kind of growth rate. So the outlook is effectively unchanged on volume rebates.

Thanks so much.

John Baliotti, Janney Capital Markets.

So unfortunately, I don't have last year's Q1, Q2. But I was just looking at the newer breakdowns you give us, in terms of the walk-through on revenue growth and the plus and minuses. It looked like, obviously as you've talked about, the US and the rest of the world picked up a couple of point in the first quarter. But Canada seemed to show, probably, the most significant delta. I know sequential is not the greatest way to look at things. Unfortunately, I don't have last year's. Was there much of an easier comp last year? Or does it feel like, relative to US and rest of world, Canada has started to show some momentum, here?

Okay. I think I get, John, I think I get your question. Let me take a shot, and then tell me if I answered it properly or addressed your question. You may recall that, in the second quarter of last year, our Canadian sales were impacted in the Western provinces -- both WESCO Canada and our EECOL acquisition -- based on severe flooding.

Right. Okay.

So we had a late and soggy spring. It resulted in the ground being very soft, so some of the bigger projects got stalled a bit and moved out. And so that did represent -- let's call it -- an incrementally easier comparable for Canada in the second quarter. We never quantified that. It wasn't huge. But nevertheless, it made it a slightly easier comp. I think the way to look at Canada, though, is we think there was a very nice uptick, versus our momentum vector, clearly, after this tough winter in Q1. We don't have our Electrofed report yet on Q2, to see how we did versus market. But I would make a strong statement now, given our results, that we performed very well versus market in Q2.

We had very good, balanced growth. All for regions and EECOL grew in the second quarter. All of the Western provinces in our WESCO Canadian business grew. And we had very, very strong, I would say -- two [verys] there -- a very, very strong book-to-bill ratios, which set up nicely as we moved through the second half of the year.

Our Canadian backlog is still down, year-over-year. I want to be clear. It's down year-over-year. It's actually down versus December. However, it grew very nicely, sequentially. It grew 5 percentage points sequentially in the quarter. So we exited Q2 with backlog up 5% over the backlog that we entered the second quarter, which bodes well for the coming quarters.

Okay. Great. Thanks, John.

Does that answer it, John?

Yes. That was great. Thank you.

Ken, if you look at -- FX affected you about 170 basis points. But in terms of EPS, it cost you about 3%, if you look at the base and the $0.04 that you called out. Is it the way that they're procuring materials up there? I know there's not a perfect overlap -- in many cases, a totally different portfolio -- but is there anything long-term that can be done, in terms of how they procure material? Would that help at all?

No. There's really not a whole lot of real transactional-related FX. What we're talking about here is translation. So it's purely driven by the move in the currencies between the US and Canada.

Okay. Yes. Because it seemed like, obviously, you called out about $0.10 of -- call it -- non-operational hits. I mean, your tax rate is, if you want to put it in government terms, fairly patriotic. Yes. It just seems that as you integrate some of these -- the Canadian businesses -- that if there was a chance that you could protect yourself -- (multiple speakers).

Yes. It's a great question because, by and large, we're buying and selling in Canadian dollars with Canadian operations. And the majority of our supplier base, we're sourcing the products -- the manufacturing and supply partners of ours -- we're sourcing the products from their Canadian operations.

Okay. Great.

(Multiple speakers) And that's current state. So as Ken said, effectively, it's all translation. No transaction. Over time, can that be worked to some degree to the extent there's agent sourcing or other -- but that's not a needle mover, in the short- to mid-term. No.

Right. Okay.

And to finalize that -- you know, as the currency moved last year -- it has moved significantly this year -- the headwind that we saw in the first half does mitigate a bit, as we move to the second half of the year.

Okay. Thanks.

Robert Barry, Susquehanna.

Could I please start by clarifying -- did you say that in April, May, June, the sales growth progression was 4%, 6%, and 7.5%?

Correct. That was the organic daily sales growth progression.

Daily sales organic.

Okay. Could you resolve that 4% in April, versus what I think on the first quarter call, you mentioned was tracking at 6%?

Yes. At that point in time, we were X number of days through the month. I think it was probably 10, 15 days -- I can't remember exactly where we were. But the point is, it softened up a little bit, as we moved through the end of the month. I think it moved it down 1 point or 2. On a -- (multiple speakers).

And then we gave an update -- I think it's important -- at EPG. And I gave an update that said it was 5%, adjusted for the different holidays in Canada. Which was basically 1 point a delta. That's the resolution.

Okay. So it did accelerate, though, through the quarter. Exited June -- 7.5%. Now it looks like the midpoint of the outlook is for moderation again at 6%. Is that some conservatism, or are you seeing some things slow that makes you think that's a better range?

Well, the range is there for exactly the purpose it is, which is the 5% to 7%. We look out for the year, and we're really, truly, trying to back into what we think range is, like we did for the second quarter. We said that it's tracking in-line with the second quarter -- how we ended the second quarter. And so we think it's not intended to be conservative. It's intended to be a realistic range, which we're sitting within right now. And in the discussion, Robert, earlier with John Baliotti was the comparables for Canada last year was a little bit easier in Q2. And their sales came back into Q3 a bit. So that's all been factored in with the outlook that's been provided.

Right. Yes. I just wanted to clarify, because it seemed like you ended the quarter, actually, at 7.5%.

Yes.

But maybe were just talking about the average for the quarter. Okay. Just -- (multiple speakers).

The average for the quarter -- well, it was 6% organic growth for the quarter -- all-in for the Company, reported. And essentially, that's the midpoint of what we've laid out as our new outlook for third and fourth quarters.

Okay. Just one last one on capital allocation. Year-to-date, the stock's been under a little bit of pressure. You've had some pressure on earnings from share creep and, of course, very good free cash flow. Any potential shift in your thinking about stock repurchase here?

Right now, we still have the priorities exactly where we've consistently talked about them. We talk about investing in the business for organic growth, then through acquisitions, as well as maintaining our leverage ratio. We obviously -- as the Company grows and as it gets bigger and as the cash bucket gets bigger -- we'll look at all the potential cash redeployment priorities. But right now, our priority is [organic growth].

Yes. In the out years. I'll just be very clear, and I know I've said this earlier this year and reinforced it at EPG -- our number one priority is organization changes we made January 1 were very significant. We were very disappointed with the lack of organic sales in growth last year. We felt great about the acquisitions. That part of the business has been working extraordinarily well. The last 11, in particular, are performing well in aggregate. So our top priority was getting this new organization seated in place.

We never had a global sales and marketing leader -- they're in place now. We've realigned the operations. We've established this new product categories management function. And so we are trying to aggressively drive an acceleration in our top line, organic sales growth rates, and, obviously, drive a very good -- get good pull-through on that. And work very hard on pricing sourcing to bolster gross margins, going forward. And continuing the acquisitions. So the capital allocation strategy, is optimized and focused on that in the short- to mid-term.

Okay. Sounds good. Thank you.

Steve Tusa, JPMorgan.

The free cash flow -- you talked about building in anticipation, or at least in-line with the move in sales. How does that play out in the back half of the year? Is that something that's going to come down hard in the third quarter, or is that going to be more of a fourth quarter dynamic where you get most of that back?

Weighted more towards the fourth quarter. And looking at the cycle of how our cash flow flows and our sales flow, you can see that typically, the fourth quarter is our big is cash flow quarter. We would anticipate seasonality to be similar this year. What we had this year was a sequential step-up between 1Q and 2Q that we haven't had for the last couple of years. You go back when we've seen the kind of step-up that we've seen this year between the first quarter and second quarter, and you see a similar cash pattern in the first half. So to very directly answer the question, it will, based upon normal seasonality within a year, be a heavier second-half cash flow dynamic. Not unusual, based upon our historical pattern. And as usual it would probably be more heavy in the fourth quarter, as far as cash flow, than it would be in the third.

And does this basically reflect how the quarter progressed, in that you were a bit surprised by what happened at the end of the quarter? We're seeing that in a few other instances with companies, where the inventory management is definitely not as good as it's been in the past. Perhaps because it really is a reaction to better -- surprise by better demand.

Yes. I guess, I wouldn't necessarily use the word, surprise, as much as I would say the acceleration through the quarter, certainly, was something that built up the need for working capital. But very specifically -- I mentioned in the earlier comments -- not only were our AR days improved year-over-year by two days while receivables grew, our inventory days were better as well, year-over-year. So overall, working capital improved year-over-year.

We watched the metrics closely. We saw the build coming as we moved through the quarter and saw the acceleration. We would anticipate, based upon the good-type performance of all three working capital metrics that, that would result in good cash flow for the second half of the year.

Fundamentally, Steve, it was the acceleration. It was that daily sales growth rate -- the 4%, to 6%, to 7.5% back end weighting in the quarter -- that really drove the cash usage. But on a days basis, good, strong performance, improvement year-over-year, improvement sequentially. And for inventory -- we weren't surprised. As we saw it, we have a very sophisticated set of processes that manage that. We look at inventory availability as a key metric and fill rate. I would say that's very critical to our customer satisfaction and support, and no issues there. I think is important to understand. It's really just the shape of the quarter that caused the cash usage.

And then what are you seeing on the Utility side? It just seems kind of stable. What are using there?

I would say more of the same on what we've experienced. We actually feel pretty darn good about our Utility results in the second quarter. Coming in at 6% after only being a few points in the first quarter, right -- of growth, particularly given the comparable in Q2 of last year. When you look on a two-year stack basis, this is -- we think it's a very strong result. We had growth both with investor-owned Utility, Steve, and public power. So it wasn't just driven by IOUs. Our backlog is up very strongly versus year-end. So we've got backlog building.

I would say for us, it really -- bid activity levels are strong. Our growth is being driven by new customers and increasing our scope of supply with current customers. That's been our play book the last several years, and it's working. We did want to highlight the win that we had in the quarter, because I think it's instructive. Obviously, we're strong with generation -- that part of the power chain. We're strong with D of T&D distribution. That's with deep roots are. But we continue to pickoff some very nice transmission projects and substations. That's the win we highlighted in our webcast presentation.

The only final comment I make is that solar for us, which -- it's Construction, it's Utility -- very strong double-digit growth in the first half of this year, both Q1 and Q2. Now in terms of the market, I think our outlook for load growth is still somewhat muted. We're seeing from our Utility customers continued pressure on cost reduction and desire for productivity improvements. We are seeing some invest in continuing in distribution automation and demand response, along with gas plants. But net-net, I would characterize the Utility market -- it's not picking up, in terms of -- we're not seeing a kick up in growth rates. Still, for what we do, we face to do low-single-digit growth.

Okay. One last question for you -- on the inventory side. Given that it was driven by the sequential progression through the quarter, was that -- which business -- it sounds like [non-resi] was a big aspect there. Or was that the industrial? Or what -- was there a specific business that had more of that dynamic going on?

No. I don't think that we could really tag it to any line of business.

I'd just help -- I'll answer this way, Steve. When you think about our back-end delivery service and support model, branches have some level of inventory. That's sized based upon the local demand in their market. And we have some very complex algorithms that optimize that. Versus what we hold in our distribution centers. Our distribution centers are Velocity Code I and II items. And they provide -- for the most part -- same-day delivery, if not next-day delivery, to all of our branches. They do some direct shipment to customers. It's not a large percentage. So that's really the backbone of our system. And our EOQ models and the way we manage inventory is all optimized across the network. There's no way to really parse it that way.

Okay. Got you. Thanks.

I think that we're a few minutes over, but very good questions today. I know we've got a very robust schedule lined up with Dan and Ken this afternoon. And thank you, again, for your support. And have a good day.

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