WESCO International, Inc. (WCC) Q2 2014 Earnings Report, Transcript and Summary

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 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 7 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 result since mid-2012. Over the previous 7 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 communications each being up double digits. Sales in the U.S. 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're 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 6 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 investments 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 in 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 in RFP activity levels for Global Accounts remains 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 multiyear electrical MRO contract with a global oil and gas company for their downstream operation, that is the refining of their chemical and their pipeline operations, in the second quarter. Our previous relationship with this customer include a responsibility for their upstream operations only. This noteworthy win demonstrates the growth potential that exists when we are successful in 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 U.S. 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 U.S. 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 distribution products 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 the nonresi market support a continued improvement in activity levels both this year and next. Moving to Utility on Page 6. We're pleased with the strength of our Utility business and 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 to 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 3 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've 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 U.S. 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 per workday accelerated as we moved through the quarter. April grew 4%, May grew 6% and June grew 7.5%. Sequentially, organic sales per workday 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 U.S. and in Canada. Core backlog expanded 2% from year end 2013 and 1% over last year's second quarter. That was driven primarily by U.S. backlog expansion of 8% from year end 2013 and 10% year-over-year. We believe the expansion of the U.S. backlog signals an improving U.S. economy and nonresidential construction market. 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 U.S. 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'll remind you that last year, the merit increases were deferred 1 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 2 merit increase cycles. While core employment has remained flat through the first half of 2014, headcount's 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 cost 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 a $1.25 on 52.3 million shares last year. Organic growth contributed approximately $0.13 to EPS, and acquisitions added another $0.01 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 2x to 3.5x EBITDA. At the end of the second quarter, our leverage ratio was 3.4x 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 3.2x 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 2-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 the 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 U.S. macroeconomy 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 4 end markets and 6 product categories and a continued book-to-bill rate above 1.0 generating further improvement in both the U.S. 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 part 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 3 acquisitions completed year-to-date. Assuming the current rate environment, foreign exchange is expected to negatively impact third quarter year-over-year sales comparison 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 3 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 top -- tight cost discipline as we move through the balance of the 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] Our first question comes from Nigel Coe with Morgan Stanley.

It's actually Mike Sang in for Nigel. It seems like margins, or at least gross margins, have been weaker than you guided for a couple of quarters now. And I 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 specific, talk about Lighting and Datacom and -- any color there will be great.

Okay. As we moved into the second quarter, we began to see the construction cycle actually tick up -- based on what we saw in the backlog early on, start to move 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. So 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, 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 a follow-up on that. It sounds like Construction -- or it's nonres 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?

[indiscernible] guidance...

Nigel, I guess, you could -- I mean, can you clarify that 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 and the execution -- our execution in the second quarter on the top line. It's particularly -- we're particularly pleased given the significant organization changes we put in place effective January 1 of this year. So we've got growth in all end markets, growth in all product categories, growth in all geographies. We delivered an organic growth rate that we have 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. The adjustment side, just to finalize. The adjustment to the full year sales guidance was really the effect of the first quarter because we're running at 6% organic Q2, and we've given a 5% to 7% outlook, a midpoint of 6% for Q3. And when you look at our full year outlook, our revised full year outlook of 4% to 5%, and you take a look at what Q4 is, it's effectively the same range as Q3, a midpoint of 6%.

That's helpful. And just lastly for me. On the 6% organic growth in the quarter, could you maybe decompose that? I know there was a pretty big weather snapback from the first quarter. Could you talk about how much that benefited the quarter versus what the underlying growth was from the [indiscernible]?

Yes, yes. 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 that says that 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 to 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 6 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 are -- what their results look like. There's only a few that -- comparables that are out there so far. Grainger had a 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 QE's growth rate, very strong growth at the double-digit level in lighting, consistent with our growth. So I mean, I think we'll get a -- we'll all have a better chance to put this in context a few weeks from now after we see Anixter's results, Graybar's results and some of our 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, Nigel, how much is recovery from the first quarter, a little bit of end market pick-up plus execution. But it's all 3 factors.

Our next question comes from Deane Dray with 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, 3 bids in 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 then as well as that, you saw the strong growth in Utility. We showed that in John's commentary. Those 2 variables really account for, completely, the year-over-year deterioration of 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 it in the Construction part of the business.

Great. And then on M&A, this came up a couple of times in the prepared remarks, and it sounds like you've got some interesting opportunities. Can -- and maybe, Ken, can you address the -- 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?

Yes, Deane. 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 will be back within the band within 12 months. And that still is the case. I think, we've done 11 acquisitions since the middle of 2010. The majority of those were done without an investment banker in the process. And 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 bankers 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. And so we really let that be the gating factor on timing. We're comfortable with where our leverage is right now, particularly with the accelerating momentum in our core business. The 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 so broad-based, and I think that will speak to the organic engine is 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 speeds the whole cycle.

And just last question for 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. So great question, Deane. Great question. I would say the 3 types of opportunities. The first would be strengthening our electrical core, of which EECOL was a testament to that, a very strong strengthening in the electrical core. The second would be very attractive adjacent product categories that we think we can bring to our customers through our One WESCO strategy, our Global Accounts, Integrated Supply business models and the like, and a good example of that is the safety, where we did Conney in the U.S., we did Hazmasters in Canada. It's important to note that the U.S. market is 10x the Canadian market, rule of thumb. So that Hazmasters acquisition in Canada was like doing an $800 million-plus safety acquisition in the U.S. on a relative basis to the Canadian market. And then the third category would be selective international opportunity. I think if we step back and reflect upon our global footprint today versus 5 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 that -- I wouldn't say that's the top priority of the 3 categories, but your question was what's in the pipeline. So they fall into that third category as well. I would say the first 2 categories are where our biggest emphasis in priority is, strengthen our electrical core that adds to our scale and our leverage and in the attractive adjacent categories.

Our next question comes from Noelle Dilts with Stifel. Noelle C. Dilts - Stifel, Nicolaus & Company, Incorporated, Research Division: So I had -- I mean, this is kind of a basic question, but I'm still struggling a little bit understanding the revenue, you're narrowing of revenue guidance -- growth guidance. You came in this quarter kind of in line with the guided range. It sounds like nonres is accelerating. I'm just struggling to see maybe what piece is a little bit -- is falling a bit short of your expectations.

Yes. So here's the way I think about that range adjustment. We started the year at 3 to 6. And as you said, in the second quarter, we came in within the range that we had guided to for the quarter alone. We took the opportunity at this midyear 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 at the top end of the range due to the performance in the first quarter, due to the weather issues. Because 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. Noelle C. Dilts - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay. Fair enough. So -- and then on the -- last quarter, you talked a bit about implementing price increase -- some certain suppliers implementing price increases in the 2% to 5% range. It sounds like maybe there was a struggle to kind of implement this pricing. I'm actually curious to know if anyone has implemented 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 supplier -- announced supplier price increases in our last earnings call, what was planned for and preannounced for the second quarter was in that range, 2% to 5%, Noelle. And that's typical for a second quarter and it's -- that's not across the entire supplier's portfolio. I think it's really important to understand, that's what the price increases are that they're 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 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 around how tough the pricing environment is in pushing pricing through. So it's a challenging pricing environment, suffice to say, in 2014. I don't see it getting easier. As we look into the third quarter, right now, preannounced and planned supplier price increases, again, on selected products, which are a subset of our suppliers' portfolios, are in the 1% to 4% range. So again, we work very hard at 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.

Our next question comes from David Manthey with Robert W. Baird. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: First off, on the gross margin. It sounds like it was a shift between these segments, as you talked about. But 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 say special order is more akin to stock, it's stock-based, you do some value add then you ship the product typically out of stock. But when you look at the margin 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. So every quarter, we look to is there a business mix shift, which is what Ken alluded to, or is there a shipment category kind of mix shift. In this quarter, it was business mix shift exclusively year-over-year and sequential and not the shipment category shift. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: All right. And then just following that a little further. Given the fact that you're looking at the gross margin a little bit lower, does that mean that your assumption is the mix continues to be like it is or continues 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. In fact, we expect it to be reflected in the second half of what we saw in the second quarter.

But you're right, Dave. I mean, let's just stay on Industrial for a minute. We actually were really pleased with the 5% growth in the second quarter. I mean, I think, 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%. So they're as you would expect. And they typically do that when we're really executing well. But Construction picked up as well, right, in the second quarter. And so U.S. was mid-single digits. Canada was mid-single digits local currency. When you put it through the FX, now you see the overall Construction was up 2%. So we would expect -- we've got both of those kind of 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. David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division: 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. But I guess that remains to be seen.

That's specifically 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.

And I think this ties into Noelle's question, too. Look, we're taking a thoughtful, we think, an objective look at what we think the second half is, given what we've done in the first and second quarter, the market, our improved 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.

Our next question comes from Christopher Glynn with Oppenheimer. Christopher Glynn - Oppenheimer & Co. Inc., Research Division: Just on the tax rate of 28% versus prior 26% to 28% range for the year. I'm wondering what would've supported a 26%, given it doesn't seem like the geography mix could be varying that much.

Well, actually, for the year, if you think -- the ultimate mix between Canada and the U.S. is shifted more to the U.S. than it was anticipated, as we said, our outlook for the year of 2014. So we're really -- what -- your question about what would have shifted it down is Canada for the full year being stronger than what we're expecting it to be now. Christopher Glynn - Oppenheimer & Co. Inc., Research Division: Okay. But that -- okay. So that stands even with Canada currently growing stronger than [indiscernible]?

Correct. Correct. We still have the first quarter piece. Christopher Glynn - Oppenheimer & Co. Inc., Research Division: Okay. And then any guiding thoughts to how we 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 U.S. and the variance there, but all pretty much around where we are right now. Christopher Glynn - Oppenheimer & Co. Inc., Research Division: Okay. And then just lastly. If we look at the full year guidance, midpoint for the quarter, third quarter in the year, it sort of implies a 4Q EPS peak for the year. That's not so intuitive looking at kind of past trends. If you could elaborate on that?

Sure. So we talked about it a little bit, both John and I earlier on the call. It does imply kind of 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.

And let me expand on that. And I know I've had this discussion with a number of you. The 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?" And I've answered that very consistently that says, "We must get the organic growth top line really starting to deliver and deliver strongly. It's not one quarter. And we need to start stringing together series of quarters before we -- we're in a position to -- where we'd be willing to step up in a meaningful way the 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 that -- any step-up in, really, SG&A planned yet in the second half, and we've -- 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.

The next question comes from Shawn Harrison with 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 to accelerate into the back half of the year and is that all nonres-based? Are you seeing some other factors that work there, helping you as well?

Yes. Excellent question. We are very pleased with our results in our -- both our Datacom and broadband communications business. Let's call it our communication and securities -- 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 all the -- 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, they call it a subproduct 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 U.S. and Canada, but notable win in 20 -- first part of 2014 that are international that are starting to fuel our top line, which also include U.S. and Canadian content. So we're -- 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 communications, our communications category, and we're 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, and we've enjoyed a very nice run in Utility with driving very strong top line growth above the market. I've gone through some similar things that we've done in Datacom and some signature wins. I think we're -- and I have been alluding to those over the last few quarters. We're seeing that to start to contribute nicely.

Okay. And 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 it as we entered the year that supplier volume rebates kind of required about a 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 say we're still looking at that same kind of growth rate. So the outlook is effectively unchanged on volume rebates.

Your next question comes from John Baliotti with Janney Capital Markets.

So unfortunately, I don't have the last year's Q1, Q2, but I was just looking at these, the, I guess, the newer breakdowns you gave us in terms of the walk through in revenue growth and the plus or minus. It looked like, obviously, as we've talked about, U.S. and rest of world picked up a couple of points in the first quarter. But Canada seemed to show probably the most significant delta, and I know sequential is not the greatest way to look at things. I don't -- unfortunately, I don't have last year's. Was there much of an easier comp last year? Or does it feel like relative to U.S. and rest of world, Canada 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. So we had a late and soggy spring. It resulted in the ground being very soft. So some of the biggest 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 it, nevertheless, made it a slightly easier comp. I think, the way to look at Canada, though, is we think there was just a very nice uptick versus our momentum vector, clearly, after this tough winter in Q1. We don't have our Electro-Fed report yet on Q2 to see how we did versus market, but I would make a strong statement now, given our results, that we have -- that we performed very well versus market in Q2. We had very good balanced growth. All 4 regions in EECOL grew in the second quarter. All the Western provinces in our WESCO Canadian business grew. So -- and we had very, very strong, I would say, 2 verys, they're very, very strong book-to-bill ratios, which set up nicely as we move 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 point -- 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. Does that answer it, John?

Yes. That was great. And -- so, Ken, if you look at -- FX affected you about 170 basis points, but in terms of EPS, it cost you about 3%, I guess, if you kind of look at the base and the $0.04 that you called out. Is it the way that they're procuring materials up there? Is 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 U.S. and Canada.

Okay. Yes, because it seemed like obviously, you called out about $0.10 of, I guess, call it nonoperational hits. I mean, your tax rate is, I guess, if you want to put it in government terms, fairly patriotic. So yes, I mean, I guess it just seems that as you integrate some of the Canadian businesses that if there was a chance that you could provide yourself [indiscernible]

Yes, it's a good question because by and large, we're buying and we're selling in Canadian dollars with Canadian operations. And the majority of our supplier base, we're sourcing the products, the manufacturer and supplier partners of ours, we're sourcing those products from their Canadian operations. That's current state. So as Ken said effectively, it's all translation now. No transaction. And over time, can that be worked to some degree, to the extent there's Asian sourcing or other? But that's not a needle mover in the short to midterm. No.

And to finalize that. As the currency moved really last year, it hasn't moved significantly this year. The headwind that we saw in the first half does mitigate a bit as we move through the second half of the year.

Our next question comes from Robert Barry with Susquehanna.

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

Correct. That's the daily organic sales growth progression.

The daily sales organic.

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

Yes. We were -- 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.

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 of delta. So 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 just 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 the 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 that it's not intended to be conservative. It's intended to be a realistic range, which we're sitting within right now.

And a discussion, Robert, earlier with John Baliotti was the comparable for Canada last year was a little bit easier in Q2, and their sales kind of came back into Q3 a bit. So -- but that's all been factored in with what the outlook has been providing.

Right. Right. Yes, I just wanted to clarify, because it seemed like you ended the quarter actually at 7.5% so -- but maybe you were just talking about the average for the quarter. Okay. Just...

Well, yes. The average for the quarter 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 quarter, essentially.

Okay. Just one last one on capital allocation. I guess, 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, and 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 on the growth.

Yes. In the out years, I mean, I'll just be very clear and I know I said this earlier this year and reinforced it at EPG. Our #1 priority is -- the organization changes we made, January 1, were very significant. We were very disappointed with the lack of organic sales 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 and marketing leader, they're in place now. We've realigned the operations. We established this new product category, management function. And so we're trying to drive, aggressively drive an acceleration in our top line, organic sales growth rates and obviously, drive a very -- get good pull-through on that and work very hard on pricing sourcing to bolster gross margins going forward and continuing the acquisitions. And so the capital strategy, capital allocation strategy is optimized and focused on that in the short to midterm.

Our next question comes from Steve Tusa with JPMorgan. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: The free cash flow. You talked about building in anticipation or at least, in line with kind of the move in sales. How does that play out in the back half of the year? I mean, 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 biggest 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. And 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'd see a similar cash pattern in the first half. So to very directly answer the question, it will, based upon our normal seasonality within a year, be a heavy or 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. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: And does this basically kind of reflect what -- how the kind of how quarter progressed in that you were a bit surprised by kind of 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 just better -- surprisingly, 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, it 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 2 days while receivables grew, our inventory days were better as well year-over-year. So overall, working capital improved year-over-year. We watch 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, tight performance of all 3 working capital metrics that, that would result in good cash flow for the second half of the year.

Steve. Fundamentally, Steve, it was the accelerated -- it was that daily sales growth rate, the 4% and the 6%, the 7.5% back-end weighting in the quarter, that really drove the cash usage. But on a day's basis, good strong performance improvement year-over-year, improvement sequentially and for inventory, we weren't surprised. I mean, 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. And I would say we're -- and that's very critical to our customer satisfaction and support. And no issues there. So I think it's important to understand. It's really just the shape of the quarter that caused the cash usage. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: And then what are you seeing on the Utility side? It just seems kind of stable. What are you seeing 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. So when you look on a to 2-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. And 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. It really is -- our growth is being driven by new customers and increasing our scope of supply with current customers. That's been our playbook 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 the D of T&D distribution. That's where the deep roots are. But we continue to pick off some very nice transmission projects and substations. That's the win we highlighted in our webcast presentation. The only final comment I'd 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 investment 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 kind of a kick up in growth rates. Still for what we do, what we face and do, low single-digit growth. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Okay. One last question for you, just on the inventory side. Given that it was kind of driven by the sequential progression through the quarter, was that -- which business -- it sounds like nonresi was a big aspect there. Or was that Industrial? Or what -- was there a specific business that kind of had more of that dynamic going on?

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

I just help -- I'll answer it 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 and 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 1 and 2 items, and they provide, for the most part, same-day delivery, if not next-day delivery to all our branches. They do some direct shipment to the customer, it's not a large percentage. So that's really the backbone of our system. And our EOQ model and the way we manage inventory is all optimized across the network. So there's no way to really parse it that way. 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. You may now disconnect.