Wesco International Inc (WCC) 2015 Q2 法說會逐字稿

Good morning and Welcome to the WESCO International second-quarter 2015 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, sir.

Good morning, ladies and gentlemen. Thank you for joining us for WESCO International's conference call to review our second-quarter 2015 financial results.

Participating in today's conference call are, John Engel, Chairman, President, CEO; and Ken Parks, Senior Vice President and Chief Financial Officer. 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 a discussion of certain non-GAAP financial measures. Information required by Regulation G of the Exchange Act with respect to such non-GAAP financial measures can be obtained via WESCO's website at wesco.com.

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 through July 30 of this year. I would now like to turn the call over to John Engel.

Thank you, Dan. Good morning, everyone.

We had a challenging second quarter continued weakness in the industrial market and in Canada, foreign exchange headwinds and a slow seasonal start in the non-residential construction markets weighs heavily on our results. Organic sales were down 3% reflecting flat sales in the US and a 7% decline in Canada. As a result profitability was negatively impacted and was down versus prior year.

In late April we acquired Hill Country a commercial, construction, electrical distributor with approximately $140 million in annual sales and then off to a solid start. We also step up our share repurchase program in the second quarter during our first half buyback to approximately 1.1 million shares.

Our capital structure is in good shape and we continue to take a disciplined approach to acquisitions that supplemental our growth strategy. As we look to the second half we expect reduced demand in commodity driven end markets and foreign exchange headwinds to continue.

Based on our second quarter results in this challenging market backdrop we're reducing our full year financial outlook. Actions initiated in the second quarter to streamline and simplify our business are expected to improve profitability in the second half. Ken will review these actions and outline the financial impact and our revised full year outlook in his commentary.

Moving to page 4 for our industrial performance. We experienced a decline in industrial in the second quarter driven by our oil and gas, metals and mining and OEM customers. With US sales down 4% and Canada sales down 12% in local currency.

Lackluster economic growth, the strong US dollar and weak global commodity prices are all laying on the manufacturing sector. Our industrial customers are responding to these challenging macro economic conditions by adjusting stocking levels, they're slowing down capital and discretionary spending both for projects and maintenance and cutting costs.

We're supporting our customers' requests for additional cost savings by providing our full set of WESCO Supply Chain Solutions. Second quarter bid activity level for global accounts and integrate supply was strong. Specifically June was an all-time record month; while customer trends have increased outsourcing and supplier consolidation remain in place.

Moving to page 5 for construction. Construction sales declined 8% in the second quarter driven by a 4% decline in the US and a 3% decline in Canada on a local currency basis. We experienced weakness for contractors serving industrial end markets in the US and Canada, while sales to commercial construction contractors fared much better.

Also in Canada construction comprises approximately half of our business. And foreign exchange headwinds continue to weigh on our overall reported construction results.

Leading non-residential construction market indicators in the US outside of oil and gas and metals and mining are generally positive. While Canada is expected to continue to see challenges due to weak energy markets.

Now moving to the utility on page 6. I'm pleased to say that our utility business continuous to deliver above market sales growth. Sales for our utility customers grew 6% continuing the positive trend over the past four years.

This marks the 17th consecutive quarter of year-over-year sales growth, which continues to be driven by new wins and our expanding scope of supply with our existing customers. Of note in the second quarter we're awarded two transmission projects contracts with an investor owned utility.

Finally, moving to CIG on Page 7. Sales with CIG customers were down slightly in the second quarter driven by 7% growth in the US, largely offset by a double-digit decline in Canada. So, the government customers in the US were up mid-single digits for the second quarter in a row after being flat last year.

Our end-user One WESCO focused value proposition for customers continued to yield wins. In the quarter we were awarded a multi-year contract with of a large technology company to provide data communications, security and fiber connectivity products from multiple data center locations.

Now, Ken will provide the details on our second quarter results and our outlook for the balance of the year. Ken?

Thanks John and good morning.

Our outlook was for second quarter consolidated sales to be flat to down 3% from the prior year. Second quarter sales ended up by $1.92 billion which is a decrease of 4.4% from the prior year. Sales declined 3% organically and foreign exchange reduced sales by another 3 points.

Acquisitions partially offset these declines adding 1.6% to the top-line and pricing for the second quarter was neutral. Organic sales growth per workday decelerated as we move through the quarter. April was flat, May was down 4% and June declined 6%.

Sequentially, organic sales per workday grew 1%. Our direct oil and gas sales continued to decline year-over-year but were weaker than expected in the second quarter which were down approximately 30% year-over-year compared to down 10% in the first quarter.

Based on the year-to-date results and the expectation for continued softness in oil prices we now expect our direct oil and gas sales to be down approximately 30% for the full year or an impact on over our 2015 sales growth of approximately 3%.

Overall backlog is essentially unchanged from the year-end 2014 with the US backlog flat and Canada up 7% on a local currency basis. Versus the end of the second quarter of last year U.S backlog declined 7% and Canada backlog is essentially unchanged on a local currency basis.

Month-to-date July consolidated sales are approximately 3% lower than the prior year and down approximately 2% organically. However the book-to-build ratio has strengthened with both the US and Canada now earning above 1.0.

Gross margin was 19.9% in the quarter and that's down 60 basis points from the prior year and down 30 basis points sequentially. Gross margin was driven lower by business mix, lower rebate accruals and continued competitive market pricing pressures.

SG&A expenses for the second quarter were approximately $275 million compared to $279 million in the prior year. Notably core SG&A decreased by $8 million compared to last year. And that's primarily due to lower employment levels and variable compensations costs as well as ongoing discretionary spending controls.

In addition we launched actions to further reduce structural cost, primarily in the US that's through personnel reductions and brands consolidation and enclosures. Approximately 300 positions were eliminated during the second quarter, in addition to the closure or consolidation at six branches. The cost of these actions largely offset the second quarter savings that were generated by them.

We've identified additional personnel reductions and branch closures and consolidations that will be completed during the second half. We now expect these initiatives combined with our ongoing discretionary spending controls to generate approximately $0.40 of EPS that'll come through primarily in the second half of the year and that's $0.10 more than we previously expected.

The acquisition of Hill Country added approximately $4 million of incremental SG&A to the second quarter. In April, we estimated second quarter operating margin would be in the range of 5.3% to 5.5%. Operating profit for the second quarter was $90 million, 4.7% of sales and fell short of our outlook due to the lower than anticipated sales and gross margin partially mitigated by cost reduction actions and ongoing cost controls.

The effective tax rate for the second quarter at 29.3% came in line with our outlook of 29% to 30%. And the change year-over-year in the tax rate is due primarily to the mix of profits between the US and Canada.

Second-quarter earnings per share declined from $1.29 last year to $1 in the current year. The contribution from core operations declined approximately $0.25 year over year as the benefits of cost controls were more than offset by the impacts of the sales decline, one-time cost associated with the branch closures and personnel reductions and gross margin headwinds, while acquisitions contributed an additional $0.2 of EPS for the quarter.

Foreign currency translation reduced EPS by approximately $0.07 in the quarter and the higher tax rate had a $0.02 negative impact. The lower share count primarily driven by repurchase of approximately 750,000 shares during the second quarter added $0.03 to EPS.

Compared to our outlook lower than expected sales and gross margin were partially offset by incremental cost controls, lower diluted shares and the contribution of Hill Country. Free cash flow was solid at $35 million for the quarter or 68% of net income and a $120 million year to date or 122% of net income. Our working capital metrics do remain healthy.

Historically WESCO has generated strong free cash flow throughout the business cycle. Our first priority, is to redeploy that cash to strengthen the business and generate ongoing profitable growth through both organic and acquisition investments while maintaining our financial leverage ratio between 2 to 3.5 times EBITDA.

At the end of last year we also announced the $300 million share buyback authorization and as previously stated we purchased approximately 750,000 shares in the second quarter under that program. Year to date, we repurchased approximately 1.1 million total shares for $75 million.

Our leverage ratio at the end of the second quarter was 3.3 times to EBITDA, that's after the repurchase into the shares as well as the completion of the Hill Country acquisition. That's up from 2.9 times to EBITDA into the first quarter and remains within our target range.

Leverage on a debt net of cash basis was three times EBITDA at the end of the quarter. Liquidity for invested cash plus committed borrowing capacity remains healthy at $527 million at the end of the second quarter as down approximately $111 million from year-end and down only slightly from the end of the second quarter last year.

Interest expense in the second quarter was $18.6 million versus $20.3 million in the prior year. Our weighted average borrowing rate declined approximately 10 basis points sequentially and from the prior year to 4.0% for the quarter. We remain comfortable with our relatively equal waiting of fixed and variable rate debt.

I'll now turn to the third quarter and full year 2015 outlook. We expect third quarter consolidated sales to be flat to down 3% over the last year's third quarter, including a Canadian currency exchange rate at $0.79 to the US dollar. We expect operating margin to be approximately 5.7% to 5.9% and the effective tax rate to be approximately 29% to 30%.

Based on the year-to-date results, and the underlying business trends we're revising our full year sales growth outlook to a range of the down 3% to flat and lowering the operating margin outlook range to 5.3% to 5.5%. We continue to expect an effective tax rate of approximately 29% and a Canadian exchange rate of $0.79 per US dollar.

Resulting EPS is now expected to be in the range of $4.50 a share to $4.90 a share and that's a reduction of $0.50 to both ends of the previous outlook range. This change is primarily the result of the softer sales outlook and the impact on gross margin from competitive pricing and lower supplier volume rebates partially mitigated by the impact of cost control reduction actions along with the contribution on the Hill Country acquisition.

We expect free cash flow for the year to exceed our usual target of 80% of net income.

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

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

(Operator Instructions)

David Manthey, Robert W. Baird.

Yes, hello, guys, good morning.

Morning, Dave.

Morning, Dave.

First off, on the construction weakness. I understand the industrial side of the business, given the current environment. But could you discuss your construction trends, relative to what seems like a relatively healthy and maybe even an improving market? And, I know WESCO is more than just straight structures, but this seems weaker than the overall environment. Can you help us understand that?

Yes, Dave. On a local currency basis, Canada was down 3%. So, let me start with Canada and I'll move to the US. Canada was down 3%, so we clearly had begun to see the impacts in the Canadian market of global oil pricing and global commodity pricing. When you get underneath the covers and look at that, both WESCO and EECOL were down, roughly equal percentages. And the WESCO sales declines were driven more out in the Western provinces, in the prairies, as would be expected, versus us seeing some, partially offset by growth that we're seeing in Greater Toronto area. And that's true for Canada for overall. And in EECOL, we saw declines in not all four regions, but in three of the four regions. So, that's the Canadian picture.

When you move to the US, we did a sampling of a series of projects across a number of our contractors that we serve in the US, and many of our contractors serve a variety of projects, different types of projects. There aren't pure commercial-based contractors. Many of our contractors serve multiple segments of non-resi. What we've clearly found is, those projects that were focused on infrastructure were down significantly -- in some cases, no projects, right? So, remember there's no MRO stream with what we sell to contractors. It is truly project business. So, when the project's done, if there's not another project, there's no sales until you get that project.

And, what we found on, really, a kind of, across the board -- both in US and Canada, for that matter -- on the commercial projects, is nice growth. And so, I spent a good number of weeks in June and July visiting a series of branches and doing some personal inspection of what the activity levels are. And so we're seeing growth with commercial and other segments, outside of what's being driven by infrastructure. We've had some new wins in healthcare, in education. And our product categories of Datacom and lighting grew in the quarter. But it's not enough to offset, Dave, what we're seeing with the contractors that are serving the infrastructure-oriented markets.

And, by the way, one other thing I would mention, some of those projects -- they're not all large projects, right? So, for some oil and gas companies in particular, there's smaller projects that are tied to their maintenance and their turnaround efforts. And what we've seen is, a good number of them have deferred or kicked out -- kicked the can on some of their turnarounds. So they can't do that forever. I think that will have to ultimately -- those activities'll ultimately kick in. But that's another aspect that's driving it, as opposed to just that new construction.

Okay. Thank you.

And, you outlined some of your cost-cutting efforts. Last quarter, you said you were still adding to the sales force. I would imagine that's come to a halt now. But when you look at the range of things that you've done in terms of headcount reductions, facility consolidations, any mandatory unpaid leave, things of that nature -- would you say you expect your SG&A to be flat to down, then, in the second half, as the majority of the benefits from those efforts start to kick in?

Yes, absolutely. As mentioned in the comments, we took actions in the quarter that reduced headcount as well as branches. But while that generates a gross savings, there is a cost of doing it. So, in the second quarter that kind of neutralized itself. And we expect to see the majority of those savings come through in the second half, as well as the impact of the ongoing cost controls. When you roll all that up, you should see exactly what you outlined, which is flat to down SG&A in the second half of the year.

Got it. Thanks very much.

And Dave, one last comment: with respect to the sales force, and how we're managing it, I think we're clearly trying to drive productivity there, and that was a driver and some of the headcount actions that were already executed in the second quarter. With that said, we are still doing selective additions in some areas, where we're underpenetrated, and we've got confidence that with increased coverage capacity, we're going to get a nice uptick in sales. So, we're taking a scalpel approach relative to the front-end and being very thoughtful about where we need to incrementally invest.

Okay. Thanks, John.

And, our next question comes from Deane Dray of RBC Capital Markets. Please go ahead.

Thank you. Good morning, everyone.

Good morning, Deane.

Hey, I wanted to get some more color regarding the 30% projection for down in your oil businesses. And the context here is oil is not one of your core end markets. And I know you've had to put that together from a bottom up analysis of what your exposures are. So, how do you arrive at that 30%? What sort of precision do you have? And, just to clarify, does that include FX? Or is that on a local currency basis?

So, we built it up, as you know, as we went into the December outlook call. And that's where we defined it to be about 10% on a direct oil and gas exposure for the total of our sales. It's a little more than half in the US. That's what we stated at that time; 25% to 30% in Canada; and the remainder in the rest of the world.

The precision around those numbers has actually stayed pretty accurate. We look at it on a customer-by-customer basis. We built it up on the branches and the locations where we serve those customers the most. And it's obviously moved around a little bit. The reality is, the overall exposure has moved down as we've moved through the year, only because the sales have moved down. But at 10% of total sales, it's stayed -- the precision around that number has been pretty accurate.

When you talk about what our outlook is for being down 30%, we did the same thing. We actually do forecasting of our business at the lowest level, at the branch level. And as we're getting those forecasts in, we're having the branches break out their oil and gas exposure in both our US business, finance leaders, and operational leaders; as well as the Canadian CFO and Canadian operational leader, has been able to calibrate that data each month as we move through the year.

So, as we look at the second half, what I would tell you, because your follow-on questions would likely be, where has decline gotten larger versus what we thought since we started the year, saying we thought it would be down 15% to 20%. And now we're saying around 30%. The Canadian numbers have stayed relatively the same as far as projections of decline from beginning of year to the end of the year. Where we've seen that grow to be a little bit bigger and take us to 30% overall, is in the US exposure, as we look at some of the Gulf Coast regions, some of the large projects, as well as some of the California coastal exposures. So where we would see the more impacted in the second half is in the US, and that's what'll take us to the 30%.

As far as FX in or out, it's actually -- there's enough softness around the number, I would tell you the answer is, yes, FX is in that number. FX has moved around just a tiny bit from the beginning of the year. The FX movement has not changed our outlook either for our overall sales or our oil and gas exposure.

Ken, just to clarify, in that bottom up analysis by branch, are you including indirect exposures? And how are you defining that?

No. You're not surprised to hear that, that's the harder piece to get. We obviously talk through it, because in there, there are certain regions where we talk to branches about forecasts. Take Western Canada, where we know the indirect exposure is relatively larger in certain regions or certain locations and it looks more direct than indirect. But the reality is, it's hard to define. So, when I tell you 30% down year over year, that is truly, as we define it, direct exposure. We do know that there is indirect exposure that carries on to that. And the reality is, as we believe that's what we're seeing impact, as you saw in the press release and in the commentary to this point, a lot of the industrial space.

And, Deane, I'll tag on to that; and it's not just the indirect due to oil and gas. But I think it's important to also note that metals and mining, which is another vertical that we have strengthened, that we've served over the years -- we're seeing both a direct and an indirect effect there. And if you look at our global accounts space, where we're really seeing the year-over-year declines is in oil, gas, metals and mining, and OEM -- since selected OEM customers, which that's in response to overall manufacturing headwinds, and those particular production rates may be down.

Got it. And, on a second topic -- John, in the first opening remarks, you comment on a robust M&A pipeline. And it evidently -- it looks like you passed on a big asset in the utility space. And maybe just give us some context there? I know you don't typically go after underperforming businesses. But was there an opportunity for you there? Was it price? And does that change the competitive dynamics on the utility distribution business for you over the near term?

Yes, Deane, I appreciate that question.

As you've said, the HD Supply sold their power solutions business to Anixter. And, I think as you know and I think most of our investors know, that is the portion of HD Supply that WESCO competes with. And in that business is their utility business, in serving utility customers. And we go head to head with that part of their business as a competitor. And it also includes more, I'll call it, classic electrical distribution, predominantly in the Southeastern portion of the United States.

So, any of the major -- not even major, I'll say -- any M&A activities that are occurring in our space or on the periphery, you can absolutely bet that we are aware of it. In some cases, we're aware of it before others, and we get a chance to potentially drive some type of exclusive transaction. But in all cases, we're engaged in the process. We're constantly evaluating all opportunities.

The way I would answer the question is this: with that set up, Deane. Look, we feel really good about our utility business. If you look at the momentum that we have, the value proposition, the consistent results -- and as I've said, it really was the first part of our Company we focused on, this one WESCO strategy and we're yielding strong results. So we respect the HD Supply's utility business and their capabilities. We've been competing with them a long time. We feel really good about our business.

I would say, in terms of Anixter taking them on, it's going to be very interesting to see what Anixter attempts to do with them. That's about all I'll say. From our perspective, though, we've got high confidence in our business, our capabilities, and I think we've got a really strong track record in core utility over the last four-plus years.

Thank you.

Thanks, Deane.

Steve Tusa, JPMorgan.

Hello, good morning.

Good morning, Steve.

Can you just talk specifically about the automation channel? You talked about the OEM is a little bit of new news there, and how weak that was. Is that related to any particular industry? Or, do you have a hard time figuring out where those OEMs are sending their machines? I think most of them are, like, packaging guys, right? Any further color on that OEM channel would be helpful.

Yes. I would say that our OEM business, Steve, has a very broad mix to it. So it's not just the machine builders that you alluded to. And clearly the machine builders are an important segment for the automation and control side of our business, among others, where we're partnered with Rockwell and other major suppliers. But our OEM mix, our OEM business, is actually much broader than that. Keep in mind that over the last 10 years we've done a series of acquisitions in the value-added distribution space that have been focused on the OEM demand stream. It started with Carlton-Bates, back in, literally, a decade ago.

And then, we've done a number of other acquisitions -- RS Electronics, AA Electric, and the light that we've integrated in with Carlton-Bates. So my reference to OEM challenges were specific with respect to some of our global accounts customers. Across our broader OEM customer base, we're seeing a mixed bag of results. In some cases, we're getting some growth. In some cases, it's somewhat flattish. With certain customers, it's somewhat down.

From a product category standpoint, I would say that category is relatively stable. We had growth -- as I mentioned earlier in response to Dave's question -- we had growth in lighting, we had growth in our Datacom, we had growth in our IP security. And then, where do we have declines in from a product category standpoint? Within wire and cable and core electrical distribution and control, and the rest of the categories kind of fit in the middle. So, that just gives you a spectrum, Steve, of where we're seeing categories growing versus categories declining in second quarter.

So, do you think the stuff with your partners, like a Rockwell on the automation side, or whoever else -- a Siemens, or whoever else you may be selling -- is that growing for you? Is that stable and flat?

Yes, first of all, I think the companies you mentioned are terrific companies. We have excellent relationships.

Of course.

And I think that -- I feel good about -- there's this level of stability in those relationships and how that's performing. Net-net I would say the overall industrial market is not recovering at the rate, overall, that we all had hoped and expected at this point in the cycle. But we're not seeing a lot of volatility there.

So, you're not destocking that stuff or anything like that?

Oh, absolutely not. And, in fact, I think we're very focused on -- if you look at our working capital, Ken mentioned that in the quarter our working capital metrics are healthy. We have not, we, WESCO, gone into a mode where we've been trimming our inventories. We're very focused on, strategically, our availability metrics and our fill rate metrics inside each product category. And we think it's incredibly important that we maintain those metrics to effectively support customer satisfaction. Where I mentioned destocking in my comments earlier, was with respect to customers driving destocking from their perspective in their warehouses. And, in fact, some customers are very aggressively trying to push more inventory back on us. And have us pick that up and manage it, whether it's a VMI program, or as part of one of our other broader value-side creation solutions.

Got it. Okay. Yes, that helps a lot.

Just to be clear, your automation business is -- it sounds like it's flat basically, or it's down?

I'll say it's stable.

Okay. Thanks.

All right. Thanks, Steve.

Robert Barry, Susquehanna.

Hello, guys. Good morning.

Good morning, Rob.

Looks like the gross margin trend has gotten a little worse sequentially. Any reason to expect it should improve in the back half?

Yes, let me give you the sequential movement, because it's important to consider as I give you a full-year comment. The sequential movement is driven primarily by changes in the volume rebate accruals, and we talked about business mix a little bit in the competitive pricing. Effectively, as we see the top line soften up a bit, as you know from watching the business closely, that puts a bit more pressure on our volume rebates year over year. It takes a little bit of growth each year to keep that absolute number of volume rebates flat without program changes.

So, as we move from first quarter to second quarter, we adjusted those accruals to some degree. And that had a little bit of a catch up in it from the first quarter when the outlook was a little bit stronger. So, if you think about the year, what I would tell you is, I wouldn't anticipate any real significant improvement in gross margins as we move through the balance of the year. We might get a little bit of uplift if the business mix shifts a little bit, if we see a little bit more health on the industrial side. And, then the reality is, as we continue to work programs with our suppliers, we will also continue to try to drive improvements in programs, not just driven by volume year over year.

But, a lot of words to say. I think that the outlook for margins is probably relatively stable to what you see in the first half, as we move through the balance of the year.

Okay. That's helpful.

The $0.40 on cost saves -- is that heavily weighted to the fourth quarter? Is it more balanced between 3Q and 4Q?

There's probably a bit more in the fourth quarter than the third, driven by, as we remove positions from the organization, that saving starts to generate relatively quickly. And we mentioned the number of positions that we took out in the second quarter. As we consolidate branches, which are a little bit more heavily weighted to completion in the third and fourth quarter, those savings flow a little bit later, because there's more cost, there's more actions, there's more things to be done to have that completed. But I would tell you that on the $0.40, it's not overly skewed to the fourth quarter. It's a little bit more heavily weighted as far as net savings to the fourth.

And then as we think about next year, annualizing that, maybe, it's a little more than $0.40?

Part of the incremental savings this year is due to structural cost reductions related to the headcount in the branches; and a portion of it is due to our ongoing discretionary controls -- cost controls around travel, overtime, all those kinds of things that we can squeeze pretty quickly -- and we've been doing that for the last couple of years.

As we look out into 2015, what I'm going to tell you is, I'm going -- I'm 2016 -- I'm going to defer that answer a little bit until we get to the outlook section. But what I would try to have you think about is, not all of the savings that we're generating this year are structural. So therefore, it doesn't all get annualized into a 2016 number. But as we get closer to our 2016 outlook, we will definitely size that for you.

Got you. And, then, maybe, just finally, 3Q looks like the sales outlook, flat to down 3%, is at the midpoint, a few points better than 2Q, even though the comp's a little tougher. Sounds like oil and gas getting worse. What do you assume is getting better that's going to drive that lift?

Well, we mentioned that the book-to-bill rate is stepping up and we can see the parts of the business where that book-to-bill ratio is stepping up. The July month-to-date numbers -- the US is still running where it was running in the second quarter, at a flattish year-over-year number on an overall consolidated basis. Canada has improved a little bit, month-to-date. While still down, it's not down as much. So we do think oil and gas'll get tougher; we expect to see maybe a little bit of improvement in the commercial side of the construction business, as well as continued health in the utility space. So those are probably the biggest variables of movement.

Great. Thanks, guys.

Thank you.

Ryan Merkel, William Blair.

Hello, good morning, everyone.

Good morning, Ryan.

So, I wanted to ask about the rest of world segment was down quite a bit in the quarter. Can you just talk to what was the big driver there?

Yes, I think we've taken it through that business before in terms of mix. It's really, when you look at our model there, it's driven by global accounts, integrated supply, and capital projects. And it's very much oriented towards the larger infrastructure industries. And so the challenges in the global mining, oil and gas markets, along with foreign exchange -- you know, foreign exchange impact isn't just Canada/US, but it's the other countries we operate in as well. And what we've seen is the same effects we're seeing in Canada, in the US, in those large infrastructure industries impacting us. We've had some nice new wins over the last year, year-and-a-half, and those are rolling out. But, it's a lot of headwinds wrapped around oil, gas, metals and mining, fundamentally, Ryan.

Right. That's what I figured.

All right, then second question on oil and gas. This might be hard to answer, but I'm assuming that the upstream piece is what's really hurting there. Are you able to break that down, see how the downstream and midstream portions of that market are performing?

It is primarily the upstream piece. So I will tell you that part of the growth in the decline outlook is sizing a little bit more decline into the downstream side. We've seen that as a part of the movement in the first half of the year. But I would still tell you that the biggest chunk of the decline, year over year, that we're seeing so far, is still in the upstream side; incrementally softer in the downstream side.

And that's not unexpected, right? I mean, this is what we expected. And the challenge is that -- specifically, I'll give you some examples in Western Canada, where our customers are looking at prioritizing productivity projects, and would -- I'm using the term productivity. So, getting more out of what they've already have in place and operating, as opposed to the new projects in the front end investments. So, with that said, there's been deferrals of turnarounds and maintenance. But fundamentally where the project activity is being evaluated, appears to be more of that type. And so that builds a challenge as you move forward, because, to the extent that the new upstream projects are not being worked at all, when that ultimately turns on again at some point in the future, there will be a time lag, right, until that impacts our sales results.

Right. Okay. Thank you very much.

Thanks a lot.

Christopher Glynn, Oppenheimer.

Yes, thanks. Good morning.

Good morning, Chris.

Hey, just wanted to look at the volume linearity, with the third quarter expected flat to down 3%. So it implies 5% to 8% sequential improvement, which seems like a lot by historical linearity. Just was wondering what's driving that?

The same things as we outlined just a few minutes ago. A little bit better on the commercial construction side. We know program ramp schedules in the utility space. Those are bigger, chunkier programs. We know how they roll up. We have a couple that are ramping up. I would say the same thing on the integrated supply business.

And those are the biggest movements in the sequential set of numbers. We're not expecting anything significantly different in our current outlook for the overall industrial space; and CIG is relatively small as a percentage of total sales compared to the others. So, it's really more on the construction, utility, and [with] space.

Okay. Thank you for repeating.

And, of the $0.40 savings for the year -- did you quantify how much of that was realized in the first half? Where if -- that was a neutral, right?

No, there was a little bit realized in the first half because we launched it back as we were going through the first quarter. It was probably, I'll say, 20% or so, realized in the first half, the remainder to come in the second half.

Okay. But, the $0.40 is a net number, correct?

Correct.

Okay. Thank you.

Thank you.

Matt Duncan, Stephens Inc.

Hello, guys.

Good morning, Matt.

Good morning, Matt.

Just going back to the construction business for a minute. It was really wet in Texas, and the Northeast had a lot of weather as well. Was there any short-term impact from that kind of stuff? Or was that really just a softer end market that hopefully gets a little better?

I wouldn't call out any weather, Matt. I mean, I heard a little bit of noise about it, but not material.

Okay. Ken, on the SG&A cost-cutting actions. The SG&A dollar expense was a little higher, I think, than a lot of people expected in the quarter, and it sounds like you had some expense and some benefit and maybe they offset each other. But how much expense was there? And then, was there any one-time cost -- I assume so -- associated with the Hill Country acquisition in that number?

Yes. Good question. And I want to make sure that, that comes across clearly as you're thinking about the SG&A and OpEx numbers. In the quarter, as far as, quote/unquote, one-time costs related to the acquisitions, there was a little bit. But, it wasn't a big number. It was not a big number that would call out to you. I did point out in the script that, in the quarter, Hill Country contributed about $4 million of SG&A. That would not have been in our outlook when we gave you the outlook in our April call at the end of the first quarter. So you have $4 million of step-up just due to the roll-in of Hill Country. And then, if you take that out, we were down in core SG&A. As I pointed that out, around the $8 million year over year.

As far as the cost actions, there were a few million dollars of costs related to the actions that we took in the quarter and the costs related to people and closures. And slightly more than that in savings. And I'll just say, slightly more than that; they essentially netted each other. We effectively worked to manage that to where that it was a net-neutral and we would be able to generate the flow-through of the savings as we move through the second half of the year. But, really no big chunky numbers that you would typically look at and think of as restructuring.

But I would just think of the net impact of the programs in the second quarter were neutral. No significant one-time acquisition costs, other than the roll-in of Hill Country from an SG&A perspective. And then the savings start to flow now that we're in July and moving through the rest of the year.

Okay. And the last question I've got, just on M&A. Your leverage is back up towards the higher end of the range. Does that preclude you guys from doing any kind of larger acquisitions right now? Do you have to be a little more careful with the balance sheet, to given that the sales are in a decline position at this point? Just, how are you thinking about the size of M&A that you can do right now?

I think we've shown the ability and the desire, given the right opportunity, we'd be willing to go above our [self-thought] prescribed control band of 2 to 3.5 total debt-to-EBITDA. So, we showed that before with EECOL, and we show how quickly we can de-lever. And then, remember the cash generation portion -- ability of the business is terrific, and anything solid shaping the first half.

So, the answer is no, Matt. I think the important thing is -- and I know we've gone through this in the past -- we view that as one of our two value creation levers. Obviously, the core business, the organic part of the business, is value creation lever number one. And we talked about the performance and the challenges there, and what we're doing about it.

Value creation lever number two is acquisitions. And we don't look at that episodically. So we got a phase-gated process, we manage a pipeline, and we're working that continuously. We do have very much a disciplined approach, where we will make the decision when a property is put in play whether we want to play. In many cases, we try to put certain properties into play at certain times and be exclusive, right? Of the last 12 acquisitions we've done since June of 2010, the majority of those had no investment banker in the loop.

This is really an important point. So, we were able to inspire the transaction. And yes, they wanted to be part of us. We wanted them to be part of us. And, obviously, in that case you probably have a pretty decent price. It's a win-win from both parties' perspective. So, that's the approach we take and we're not going to turn it on again, turn it off again, in terms of our evaluation, analysis, screening, and pipeline management process. We do have the discipline to make the decision as we move through these processes. Do we move things through the phase gate or do we pause?

And we don't ever disclose what we were analyzing and what we were engaged in, because at any given time there's a -- let's just say there's a number of non-disclosure agreements that are in place where we're working with various companies, and that's continuous, But, I can tell you, there's a number of acquisitions so far in the first half, and in the second quarter, that we were far down the path on, that we decided not to move forward. And that's not atypical. Because either we couldn't agree on valuation, or conditions changed in their respective business, or a multitude of factors.

So, I wanted to give you a little more color on the answer. The short answer is no.

Okay. That helps. Thanks.

Thanks, Matt.

Josh Pokrzywinski, Buckingham Research.

Good morning, guys.

Good morning, Josh.

So, just to go back on this construction comment that you pointed out in the slide, had in the prepared remarks, about these contractors who are working on more industrial versus commercial construction. Do you have a sense for how that lays out? I guess I would have thought that, when you say construction or contractor business, that really is a proxy for more commercial-type activity. Is that more of an even split of commercial versus industrial than maybe people thought? Or is it just hard to pin down?

I'll give you a little bit of color and John may want to give you some commentary as well. But it's not just hard to pin down; it also moves. So, when we look at customers -- because that's how we track our activity, we track it by customer -- we can see it in the system. We know what certain EPCs have done, what they're doing with it this year. And there are cases where it's a big contract, and because we're aware of the big contract, you think about how that gets through the business. It comes through with an RFP proposal, a quote, a contact negotiation. But we'll know where that's going. But there's a big group in that 30%-plus of our business that we don't have hands-on visibility all the time to know where that work is occurring. The big ones we do.

So, from year to year -- and I think John mentioned earlier -- we took a look at it as we saw construction moving in the quarter, going in and looking at -- sampling a project; or, it wasn't really a methodical sampling. But we knew where we had big jobs that were moving year over year, comparatively. And we can tell that the downs were more on the industrial side of that space, of the construction space. And the ups were more on the commercial construction.

That's probably a proxy directionally for the moves in the entire population within that construction slice. But I would be very cautious, because I don't think I could give you a really accurate number to say, I can take that slice of the pie and tell you that X percent is industrial and X percent is really commercial-based. Because it does move.

And the only other thing I would add -- I don't have really much to add -- that was a good summary, Ken -- but, Josh, would be that, I think a lot of times there's different folks that use the word commercial as a proxy for non-resi. Now look -- there's some good data out there, and different people cut it different ways. But if you want to reference McGraw Hill Dodge, their definition would say commercial's roughly a third of total non-resi construction, right? And then, there's many other segments: manufacturing, education, healthcare, et cetera.

So, there's many ways to cut this thing. What we were trying to distinguish was, by going in and looking at specific projects with specific contractors, where we are seeing the activity. And, where we're seeing the activity, as Ken said, just to put an exclamation point on it, is -- we're seeing growth with commercial, we're seeing some growth in healthcare, some growth in education. So, some of these other verticals that are outside of the heavy infrastructure-based project activities. But, in many, for those, we're seeing -- that's like a light switch, right? They're lumpy and some of that activity has ground to a complete halt.

Is it fair to say -- and that's very helpful color, I appreciate that. Is it fair to say that those are probably a bigger part of the base than maybe you had thought going into your sampling?

No, not at all. I mean, again, just think about the others -- I'll just take you back over time, WESCO's deep roots are construction. So, core WESCO is construction. The legacy WESCO is a construction, way back in the Westinghouse space. And it was basically, very little -- virtually very little -- resi. It was non-resi, and it was broad-based. And then, over the years, how has our mix evolved? Well, we've taken you through that in terms of the acquisitions. And when we picked up Datacom, the Datacom acquisition, you have seen us built on that platform. That also is construction of a different ilk. But we are a broad-based non-residential construction. But you name the type of project, and we're capturing and doing it somewhere in the Company.

Got you. Okay, that's helpful.

And then, just a follow up on a couple of earlier comments. You mentioned that book-to-bill had peaked up above one. In, I think it was June and July, in the U.S and Canada. How does that look seasonally, normal? I would imagine like as Canada strengthens in the second half, that's typical, anyway. How does that over one number compare to what you would normally expect?

It should be over one.

Yes.

That's just -- we're not citing that, Ken's not citing that to say, okay, this is atypical on a positive. But it is typical and so we would expect it to be there; that's the good news. It is.

Yes, in other words it's not moving against expectations?

Right.

Okay. That's fair.

Given everything else that's happening, right.

Got you. Understood.

Just one more on this $0.10 of incremental savings that you guys are mining out of the business. Is it safe to assume that, that $0.10 isn't netted against the restructuring charges that you had to take in 2Q to get them done? So, this is $0.10, and a lot of that'll weed out starting in the third quarter? Or is it $0.10 net, and it's really $0.15 once you get past 2Q?

Yes, now let me see if I can answer this, so it will be clear. It is $0.10 net. It will come through in the third and fourth quarter. The restructuring that we've talked about -- the costs related to the actions taken -- are netted against that number already. So when I give you an incremental $0.10, it's an incremental $0.10 on top of the net $0.30 that we've already talked about.

Got you. And on top of the -- say -- or the --.

Yes, yes, that's all in there.

Our next question comes from Sam Darkatsh of Raymond James. Please go ahead.

Most of my questions have been asked and answered; just a couple of final ones here.

This is a little bit of a nuanced question compared to some of the other M&A-related queries you've seen today, John. But after the Anixter-Power Solutions deal, you now have five players of significant size in the electrical distribution space in an industry that obviously is pretty heavily bidded and competitive. How necessary, how needed is it right now for some of the majors to start getting together in order for the entire industry to begin to earn its cost of capital on a regular basis?

I would answer it this way, Sam, and that's a terrific question.

I think we don't talk about this in quarterly earnings calls per se, but we've clearly talked about this in some investor presentations and conferences and it's part of our Investor Days over the years. Our overall view of the industry -- let's take a look at our industry, our served markets, and the complete value chain. And we operate in the middle between supplier, manufacturing partners, and customers. Our view is that it's been fragmented historically and that it's going through a consolidation phase. And I think we've seen M&A heating up in recent years; I'd say recent being coming out the trough of the recession back in 2009. And obviously there has been some major moves in our supplier partner base. It starts with an [ABB], they buy a [Valdor] and then a [Thomas and Betts] and then an [Eaton] buys a [Cooper]. And then a [Comsco] buys -- that's a portion of TE connectivity. That's significant for a data company. And as we look strategically at our supplier partner base, we see that there is going to be -- our expectation with it, right, from a strategic planning standpoint, that there will be continued consolidation.

Now let's move to our part of the value chain. If you look at our part of the value chain, it's still highly fragmented in terms of numbers of players. But increasingly, the big has gotten bigger and more diverse, and what you've just stated is, now you've got a handful -- you can count them on one hand -- of larger, more diverse players. And so our view of that part of the value chain, of which we're in the middle, and we're a leader, is that, that's also going to see a more rapid phase of consolidation. I'm not predicting in the next quarter or the next year; but I think we're in an industry consolidation phase as we look in the next multi-year time horizon.

So I think it's a terrific question; it matches our framework; it's how we look at the industry; and quite frankly, it's matched my personal framework since my early days at WESCO. And I think we're starting to see some catalysts that are causing it to accelerate a bit. So look, it will be interesting and to see how that plays out in the coming years.

A couple of housekeeping questions, Ken, if I could.

The third quarter assumption for the Canadian dollar, is that $0.79? Or is that $0.77, where the Canadian dollar is today? I was confused versus the year or versus the quarter?

Yes. And we basically got in at $0.79 for the balance of the year.

Between now and the rest of the year?

Yes.

And then, finally, you cited the reversal of the vendor rebase allowance. What was the actual impact sequentially on gross margins of that reversal?

Yes. And it actually wasn't a quote-unquote reversal; it was a catch up and the accrual adjustment. So we obviously took down the accrual process a little bit as the volume gets softer. 30 basis points of gross margins sequential decline occurred, and most of it was related to the volume rebate.

So, that does or does not snap back because of that rebate change?

You'll get a little bit because we're catching up in the second quarter for the first and the second, so there will be a little bit of improvement. But we also know that we'll be cautious about that because we are continuing to see pressure in the competitive environment as well. So that's why, in an earlier question I said our outlook, even though we don't give a specific outlook on gross margin, is that we think the second half probably looks a lot like the first half on gross margin.

We are going to take a break at this point. I think we only had a few folks left back in the queue and I know Dan's available and will follow up appropriately. And I know Dan has a full schedule already today, tonight into the wee hours into tomorrow. So let me wrap with that. Again, it was a challenging quarter, we're very much focused on executing our strategy. We think we've got a terrific value proposition and we're grinding away at the execution.

I thank you for your time today and your continued support. Have a good day.

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