WESCO International's (WCC) CEO John Engel on Q1 2016 Results - Earnings Call Transcript

| About: WESCO International, (WCC)

WESCO International, Inc. (NYSE:WCC)

Q1 2016 Earnings Conference Call

April 28, 2016, 11:00 AM ET

Executives

Mary Ann Bell - Vice President, Investor Relations

John Engel - Chairman, President and Chief Executive Officer

Kenneth Parks - Senior Vice President and Chief Financial Officer

Analysts

Deane Dray - RBC Capital

Christopher Glynn - Oppenheimer

David Manthey - Robert W. Baird

Matt Duncan - Stephens

Josh Pokrzywinski - Buckingham Research

Robert Barry - Susquehanna

Ryan Merkel - William Blair

Shannon O'Callaghan - UBS

Operator

Good day, and welcome to the WESCO International first quarter 2016 earnings conference call. [Operator Instructions] I would now like to turn the conference over to Mary Ann Bell, Vice President of Investor Relations. Please go ahead.

Mary Ann Bell

Thank you, Allison, and good morning, ladies and gentlemen. Thank you for joining us for WESCO International's conference call to review our first quarter 2016 results.

Participating in today's conference call are John Engel, Chairman, President and 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.

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. Replay of this conference call will be archived and available for the next seven days.

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

John Engel

Thank you, Mary Ann, and good morning, everyone. Our first quarter sales and profitability were in line with the outlook we provided on our earnings call on January 28 and later reaffirmed at our Annual Investor Day early last month. End-markets were broadly in line with our expectations for continued industrial challenges, foreign exchange headwinds and a difficult comparison versus the first quarter of last year.

Reported sales were down 2%, reflecting an organic sales decline of 7% or down approximately 6% after adjusting for the timing of the Easter holiday. As planned, we continue to tightly manage our costs and streamline our organization to help mitigate the impact on profitability.

Free cash flow generation remains strong and exceeded expectations at more than 200% of net income in the first quarter. This enabled us to complete the acquisition of Atlantic Electrical Distributors without increasing our debt leverage from the end of last year.

Our first quarter reflects tangible benefits from the One WESCO initiative that we discussed with you in detail at last month's Investor Day. We remain focused on executing our One WESCO strategy to deliver above-market sales growth, improved profitability, generate strong free cash flow and increase shareholder value.

Now, I'll turn the call over to Ken to provide further details on our first quarter results and our financial outlook for the balance of 2016. Ken?

Kenneth Parks

Thanks, John, and good morning, everyone. Overall, our end-markets are performing as we expected when we set our 2016 outlook, although oil and gas and metals and mining took another step-down in the quarter. As John said, this quarter reflects the most difficult prior year comparison of the year for WESCO. As a result of our efforts to diversify our portfolio and customer base, we were able to partially offset oil and gas weakness with growth in data and broadband communications.

You'll note that we've added end-market organic sales growth to our slides and commentary. The only difference between organic sales growth and core sales growth is that organic sales growth excludes foreign currency translation impacts.

So starting on Page 4 with our industrial performance. We experienced a 14% organic sales decline in the first quarter, driven by our oil and gas, metals and mining and OEM customers. U.S. sales decreased by 14% and Canada sales were down 21% in local currency. Growth in international provided a partial offset.

Direct oil and gas sales declined 25% this quarter on top of a 10% decrease in the first quarter of 2015. Because of this downturn and our efforts to expand our customer base, direct oil and gas sales are now approximately 7% of our total business as compared to 10% where we started at the beginning of 2015. Our reduced demand outlook, still weak global commodity prices and a strong U.S. dollar continue to negatively impact the manufacturing sector.

Customers are looking to respond to these challenges with the solutions WESCO provides, including supply chain process improvements, cost reductions and supplier consolidation. We have a strong pipeline of new business like the one we're featuring on this slide with a global consumer products manufacturer and opportunities to expand our business with our existing customers.

Turning to Page 5. Construction sales declined 4% organically in the first quarter, with the U.S. down 4% and Canada down 6% in local currency. As with most of last year, the decline was driven by industrial-oriented contractors in the U.S. and Canada, while our sales to commercial contractors were up low single-digits.

Our expectations for segments of the non-residential construction market, including commercial, educational and healthcare, remain modestly positive. Our South America business was recently awarded a contract to supply and install materials for a new medical center being built in Ecuador. Our latest acquisitions, Hill Country, and Needham Electric in 2015 and AED last month, also provide us with attractive opportunities for construction growth.

Now, moving to Page 6. Organic sales to our utility customers increased slightly. The U.S. was up 1%, driven by growth with investor-owned utilities and utility contractors, while Canada was down 5% in local currency. Notably, through 2015, WESCO has recorded five consecutive years of sales growth in this end-market.

The renewable energy market continues to perform well and provide good growth opportunities. During the quarter we were awarded a contract to provide high-voltage materials for a wind farm substation for a large energy developer. We believe that the utility sector is in a consolidation phase, providing opportunity for larger distribution partners like WESCO, who can meet their increasingly complex supply chain needs.

Moving now to CIG, on Page 7. Sales were flat organically, reflecting 2% growth in the U.S. and a 10% decline in Canada in local currency. Our communications and securities sales were up low single-digits in the quarter, following solid growth throughout 2015.

We expect continued growth in data and broadband communications, driven by data center construction and retrofits and cloud technology projects. We were recently awarded a contract with a large national telecommunications provider to supply infrastructure materials to multiple U.S. locations in support of their fiber optic network build-out.

Slide 8. During our last earnings call and at our Investor Day we expected Q1 sales to be down between 1% and 4%. First quarter consolidated sales were within that range at down 2%. Organic sales declined by 7%, adjusting for the two extra workdays in the quarter. Pricing was flat.

Foreign currency translation reduced sales by 3%. The acquisitions of Hill Country, Needham and AED added 4 percentage points to sales and the additional two workdays in Q1 added 3%. Our core backlog increased 7% from yearend 2015 and was down 4% from the first quarter of 2015.

During the first quarter, the U.S. backlog excluding acquisitions increased 12%, while Canada backlog increased 3% versus yearend 2015. Gross margin was 20.0% in the quarter, down 20 basis points from the prior year. But importantly, up 50 basis point sequentially.

Billing margin stabilized, as this quarter was flat to last year's first quarter and slightly higher sequentially. SG&A expenses for the first quarter were $269 million, including acquisitions, which added approximately $10 million of incremental SG&A. Excluding acquisitions, core SG&A decreased by $6 million compared to last year.

This reflects our cost reduction actions over the last four quarters to eliminate approximately 550 positions and eliminate or consolidate 25 branches along with ongoing discretionary spending controls. Q1 core SG&A increased by $10 million sequentially, as certain variable compensation costs were reinstated in the New Year.

Operating margin was 3.9%, within our outlook of 3.8 to 4.1% and down 90 basis points from the prior year. The effective tax rate was 31.9%, up 250 basis points from the prior year, and higher than our outlook of 30%. The settlement of an outstanding prior-year tax matter increased the first quarter effective tax rate by approximately 340 basis points.

Moving to Page 9. First quarter EPS was $0.77 compared to last year's $0.90. Core operations reduced EPS by $0.13, while foreign currency translation primarily in Canada reduced EPS by $0.09. Tax-related items reduced EPS by an additional $0.03. A lower fully diluted share count resulting from share repurchases and the impact of the convertible debt increased EPS by $0.08, while acquisitions contributed an additional $0.04 to EPS.

Free cash flow in the quarter was again strong at $75 million or 217% of net income. WESCO has historically generated strong free cash flow throughout the entire business cycle. Our capital allocation priorities remain the same.

As a first priority, we redeployed cash through organic growth and accretive acquisitions to strengthen and profitably grow our business. Second, we work to maintain a financial leverage ratio of between 2x to 3.5x EBITDA. And third, we have remaining $150 million in our existing share buyback authorization to repurchase shares.

Following the completion of the Hill Country and Needham Electric acquisitions last year as well as the AED acquisition in March, our leverage ratio is at 3.8x EBITDA or slightly above our target range, but flat to yearend 2015. We anticipate that continued solid free cash flow generation will enable us to bring this ratio back within our target range in the near term.

Leverage on a debt net of cash basis was 3.5x EBITDA. Liquidity, defined as invested cash plus committed borrowing capacity, remained healthy at $585 million at the end of the quarter.

Interest expense in the first quarter was $18.8 million versus $20.9 million in the prior year and our weighted average borrowing rate for the quarter remains stable at 4%. We remain comfortable with our debt, equally balanced between fixed rate and variable rate instruments.

Capital expenditures were $4 million in the quarter, slightly below the prior year. We continue to invest in our people, technology and facilities through both capital expenditures and operating expenses.

On Slide 11, I'll now turn to the second quarter and full year 2016 outlook. We expect second quarter sales to be down 1% to 3%, with the same number of workdays as last year. This includes the impact of acquisitions and an average Canadian exchange rate assumption of $0.77 to the U.S. dollar.

We expect operating margin of between 4.5% to 4.9% and an effective tax rate of approximately 30%. As a result of our year-to-date share price movement, we're assuming a fully diluted share count of slightly more than 48 million shares for the second quarter.

Month-to-date, April consolidated sales are approximately 2% higher than prior year and down low single-digits organically, benefiting from the shift of the Easter holiday into March this year. The book-to-bill ratio was positive at slightly above 1.0 overall.

We also reaffirm our full year 2016 outlook, which we provided in our December outlook call. Our sales change from flat to down 5%, operating margin between 4.8% to 5.0%, an approximate 30% effective tax rate and resulting EPS in the range of $3.75 to $4.20. We continue to expect free cash flow to net income of at least 90% and we're closely monitoring the current market environment and our customer activity levels, and will implement further cost-out initiatives as appropriate.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from Deane Dray of RBC Capital.

Deane Dray

A lot of good color and market color in your prepared remarks, and maybe if I would start in construction, since that's one of the more pivotal end-markets for you guys. Really interested in how you're building backlog in that business since yearend? And maybe take us through what kind of quote activity, what kind of projects and visibility are you seeing in construction?

John Engel

We're encouraged by the backlog build. Ken took you through the numbers. So the core in the U.S. is up double-digits from yearend. And Canada also grew backlog. So we're encouraged by that.

I think if you were to compare that to typical seasonality, it's a bit better than normal seasonality. So it's an encouraging data point. And it's consistent with what we thought would happen, right, as we moved into the year that there was the opportunity for some incremental improvement in construction, as we move through the year.

The bid activity level is high. And certain segments of non-resi we're seeing as being performing a bit better than others. And that's consistent with what we've seen in the last couple of quarters. We are still seeing a decline with the industrial-oriented contractors, but we're seeing a partial offset with the commercial-oriented contractors.

Maybe a little bit more color in terms of the performance geographically, because I think this will be helpful. We've got essentially nine regions in the U.S., and you'll recall back at Investor Day that we did some organizational streamlining and realignment, and when Andy Bergdoll gave his presentation, he talked about a streamlined organization design structure in the U.S.

When you take those nine regions for construction in the quarter, one region was down double-digits, two regions were actually up double-digits in sales growth versus prior year, and the remainder six regions were either up-to-down in the single-digit range.

When you start looking at that landscape and you want to overlap those regions versus what the kind of the economic makeup of that particular territory, it's showing where the challenges are. And the challenges are, again, in the longer infrastructure-oriented industries.

In Canada, we're seeing, again, more strength in the east versus the west, which is not surprising. And I'll focus kind of on construction overall. We're seeing a nice balance of projects. The prairies are down significantly. They're down double-digits, not unexpected, given the oil and gas and mining exposure. B.C. is actually up double-digits on a combined basis, WESCO and EECOL, but the prairies are down significantly.

And in fact, I'll give a little bit more color on that. EECOL's prairie business is down less than WESCO's, and you would expect that given the mix. As we've taken you through in the past, WESCO is much more project oriented, and so we're seeing a much more acute contraction there, not unexpected across the prairies.

And EECOL is more oriented towards kind of the walk-up contractor as well as MRO and serving end-users direct with those real-time supplies that keep facilities running, and they all have the same project mix. And so they're down as well in the prairies, but not down as much. So our wins are in the areas of healthcare, education, commercial. We're still seeing nice demand in lighting and data comp. So hopefully that helps, Deane.

Deane Dray

It really does. And what are you looking at now with regard to gauging stabilization? I mean, we can see you come in towards, yes, within guidance. You're not at a positive pull-through yet, but gross margin declines was less than what we were looking for. So if you pull this together, how do you characterize the data points on the stabilization of your business?

John Engel

One of the most positive data points from our perspective is margins. And Ken spoke to this, you see the gross margins, and okay, they're up sequentially. They're down a little bit year-over-year, quarter-to-quarter, Q1 of this year to Q1 last year. We did have some drivers that drove gross margin down in Q4. So it's nice to be up sequentially, but we needed to be up sequentially.

What's more important, and which Ken called your attention to, and I want to emphasize is, billing margins. And billing margins are flat. That's equivalent to our product margins x SVR and x inventory adjustments, with a flat Q1 '16 and Q1 '15 and they're up sequentially, Q1 '16 to Q4 '15. That to us is a good indicator of two things, because I don't think the pricing environment has gotten any easier. So, one, is the execution of our One WESCO initiative that we took all of you through in much more detail at our recent Investor Day. And two, there is an indication of stabilization there, right. So that I think is one of our strongest data points.

We're still not calling the bottom, because when you look at particularly in industrial or where we have these exposure to the longer cycle industries, oil and gas, metals and mining, we still have -- the comparables get much easier in the second half. Q2 was down, but not down to the degree that Q3 and Q4 was. So I would say we're bouncing along the bottom. We're not hearing about a lot of new actions that customers are taking currently or planning. So I think a lot of the bigger actions they had started previously, in last year, and in Q1 of this year and were taking.

With that said, I still want to caution, I think oil has recovered a bit. Commodity prices have come up really across all commodities. You look at copper, aluminum, zinc, steel, even gasoline and diesel fuel, they have all risen across the first quarter. But they're still well below the average pricing in 2015 and in 2014.

So when you put that all together and what we're seeing in our activity levels, we feel that there is a stabilization kind of occurring and we feel actually better about our execution into this end-market environment, which really was our top priority as we entered 2016. We wanted to improve our execution.

Deane Dray

Just one quick one for Ken. At the March Analyst Meeting, you took a page from the UTC playbook and added a specific line of contingency to the guidance, which we certainly welcome, both sales and margins. And just for where we stand today, how does that continue to look? Have you taken anything out of it yet?

Kenneth Parks

Yes, I would say at this point, based upon how we performed in the first quarter, directionally the contingency is still there and probably a little bit stronger.

Operator

Our next question will come from Christopher Glynn of Oppenheimer.

Christopher Glynn

Just talked about the billing margin up sequentially. Is there a seasonal impact there or is that signaling a true strategic directional turn there?

John Engel

Q4 to Q1 is not a large seasonal mix. As you get into the middle quarter versus the ending quarter versus the beginning of the year, there's a little bit of shift mix-wise there. But I would say the way we look at it is the pricing environment is not any easier. You've already seen what other companies have been reporting relative to pricing and margin pressure. So I think it's reflective of we're getting some traction on our initiative.

Kenneth Parks

And Chris, the billing margin, there is not a lot of seasonality. There is a little bit of seasonality between Q4 and Q1 on gross margin, specifically last year to this year. As we adjusted SVRs, our volume was down last year more than we had initially planned it to be. And so as we restart the SVR accruals this year, you get a little bit of a lift at the gross margin level, which is a couple of steps below the billing margin.

Christopher Glynn

And then, overall, just maybe a little update on the timeline of gross margin to execute expansion from going to deeper layers of SVR and CRM deployment, things like that?

John Engel

I would say, at our recent Investor Day we obviously laid that out in much more detail. And hopefully the takeaway that you all were left with is we've worked this hard for a number of years. We have some new -- we have new talent in new roles, and we have a crisp set of initiatives that we're executing.

With that said, we're in the early days. So I would say, we're executing against those initiatives and that road map. But early days, we're not claiming that we're at any success whatsoever yet and our journey has begun with our new set of initiatives.

Kenneth Parks

And we also tried to highlight that that improvement will come in small numbers of basis points, not big chunks at a time. So we're going to obviously continue to drive those initiatives, report them out to you. But we probably won't sit in front of you in any quarter and say, and by the way this initiative completed and gross margin stepped up a significant amount. It's going to be consistent detailed work in driving basis point after basis point.

Christopher Glynn

And then on the SG&A spend, somewhat on recent years it looks like the implied second half spend steps down a little from the first half. Can you comment on that triangulation?

Kenneth Parks

So it does. I would specifically talk about the first quarter, which will carry through to your comment. Our benefits rate, if you go back and kind of look at SG&A as a percentage of sales in the first quarter, it tends to be our highest quarter. And a part of that's driven by benefits on compensation tends to be the highest rate in the first quarter, as we go through the early taxation variables on compensation and such. So the long and short of the story is to your question, we anticipate seeing a step-down in the second half, just like we usually do first half to second half.

We also told you, and this is important to point out as far as thinking about SG&A, that we would have approximately $25 million of carryover benefit from the restructuring actions that we implemented last year. We told you that that would be obviously more first-half loaded than second, because more of the actions took place kind of mid-year to the end of the year. And so that will bring down the first quarter probably a little bit more and reduce the typical step-down that you would see first half to second half.

Christopher Glynn

But the step-down is in absolute spend sense?

Kenneth Parks

Yes.

Christopher Glynn

And then, lastly, the comment on the utility sector in a consolidation phase. Can you just go a little deeper on what you see that opening up for you?

John Engel

I would say that's a relatively long-running trend that the industry is consolidating. As our customers consolidate, they take a look at their supply chain and it opens up the opportunity for us to provide our complete value proposition to them. And that had benefited us to a large degree over the last three-to-four plus years, five years actually, and so that's continuing.

I would say for the overall utility industry, we're still seeing our growth driven by increasing our scope of supply with our current customers, category expansion, project wins, taking share. Bidding activity levels are continuing at a nice healthy clip. Distribution, the D of T&D, we see as being somewhat flattish this year, as opposed to being up in the mid single-digit range.

With that said, I think it's ultimately a function of residential and commercial and non-resi construction to the extent those continue, that is resi growth continues and non-resi moves really into a stronger growth phase, that portends well for distribution ultimately.

Transmission we see flattish-to-up low single-digits, driven by grid modernization and T-line build-out for renewables, specifically utility scale renewables. I think that is one trend that is clear. The renewables growth is strong and we saw very nice growth for renewables, particularly solar. In fact, in the first quarter up very strongly in the double-digit range and solar grew for us double-digits last year in the prior year as well as we have reported to you previously.

So that's a picture of the utility market. It's flattish to very low single-digit growth. Our outlook for the year has not changed. But the opportunity to bring our entire value proposition to those customers, as they look at their supply chain and consolidate the M&A activities is a positive driver for us.

Operator

Our next question will come from David Manthey of Robert W. Baird.

David Manthey

So, Ken, I'm more interested in the magnitude of the SG&A decline, as you move through the year. If we use the midpoints of your revenue guidance and the 4.9% operating margin, assuming that you get a whole 20% GP, it looks to me like the SG&A in the remaining three quarters has to be down by more than $10 million on a run-rate basis versus what you just reported here in the first quarter.

And I guess that's in light of seasonality's going to pick up, so that's going to have some variable impact; FX is going the other way, which is going to have a few million bucks increase; and then AED is going to add something. So I'm looking at the need for a significant decrease in the face of a number of factors that are leading to an increase. And I'm just trying to understand how you're going to drive that type of a decline off of the first quarter levels?

Kenneth Parks

I'll tell you honestly, Dave, I can't follow all that math through every quarter that you're just putting out there. But the reality is, as we typically see in our outlook, there is a second half step-down in SG&A versus the first half on absolute dollar basis.

There are acquisitions coming into play there. We will continue to watch it. And as I said in the scripted comments, we'll continue and we are continuing to streamline the business and take out employees. In fact we reduced headcount by approximately 100 from the end of the fourth quarter to the end of the first quarter. And we will continue and have more plans in place to complete on branch consolidations and closures.

So we can go through maybe some of the details of the model, as you put it together off line. But that's what will drive our actual SG&A from quarter-to-quarter through the first to the fourth.

David Manthey

So the actions you just mentioned are over the top of the additional effects from the $25 million from last year?

Kenneth Parks

Correct. Specifically, when we finished last year we had done 450 or so headcount reductions. We called those out. We said that would have a carryover impact of $25 million into 2015. And then as we called out in the opening comments, we've taken out another 100 heads in the first quarter of this year. Those will have carry-on impacts above the $25 million and we're continuing to watch discretionary cost, branch footprint and employment levels closely, and as necessary we'll continue to take those out.

David Manthey

And I assume you're using something close to 49 million shares for the remaining three quarters in your guidance now, Ken?

Kenneth Parks

Yes. We specifically said we were assuming somewhere a little bit north of 48 million for the second quarter. We didn't say specifically for the year. But I would say it's probably close to what we called out in the outlook call, which at that point in time we estimated around 49 million shares for 2016. So it's right in that range. It obviously will fluctuate, as we move through the quarters with share price, share repurchase activity related to the convertible debt.

Operator

Our next question will come from Matt Duncan of Stephens.

Matt Duncan

So I want to go back to I think something that Deane was alluding to earlier, the contingency and the guide. If I look at where your sales are tracking so far and sort of the implication for the second quarter is at the midpoint of the guide, down about 2%, the same as the first quarter, the midpoint of the full year guide is down 2.5. So is it safe to assume that at this point we are trending more towards the upper half of the sales guide? And the comparisons are going to get easier in the back half. So it certainly appears as though we're trending in that direction. I just want to make sure we're all thinking about this correctly.

Kenneth Parks

I want to say that, but I also want to be very cautious and say, we just finished the smallest quarter of our year. We're not yet into the strong construction season. So we certainly are sitting within the guide. It's a little bit early for us to call. And I'll have John weigh in as he feels appropriate. It's a little bit early to call and say for the full year I can put it at the high-end of the range of the guide. We're certainly looking at, and that's why we reaffirmed sales within the original outlook range.

John Engel

Absolutely, Ken. I'd second what Ken says. The industrial headwinds continue. The non-residential leading indicators have been volatile, if you just look at them month-by-month over the last six months. And so we are maintaining and reaffirming our range for the year.

Where we fall within that range? We're obviously going to try to do everything we can to maximize our results. We'll be in a much better position, to put a fine point on this, we'll be in a much better position when we get to the next earnings call. We'll have the first half underneath our belt and we'll have a chunk of the construction season that will have been in our actuals. So I think we'll get a much better sense for what the setup is for the second half, Matt.

Matt Duncan

So then, the other thing I want to talk about is the sales trend that we are seeing. So if I heard you correctly, April's up a couple of points in total, down a couple of points organic, obviously Easter is helping. I don't know if you can quantify how much. But my recollection is that April is your toughest comparison of the 2Q and that May and June were down kind of mid single-digits, so that the comps are going to get easier.

So it'd be helpful to understand, one, how much is Easter helping? And then two, sort of as you look forward, John, maybe talk about what the tone of your customer conversations is like these days? Are you seeing your customers get any more cautious, any more optimistic or is it really just more of the same?

Kenneth Parks

So on the first point, let's quantify the Easter piece. Really, it accounts for, I'm going to call it, about a-half-a-day of sales benefit in April. So if you do that just on the day count, it's probably a couple of points of benefit to our numbers.

So as you pointed out, I'll state it again. We're up on a consolidated basis with acquisitions and everything; a couple of points month-to-date, two points month-to-date; down low single-digits, including on an organic basis, including that couple of points benefit from the timing of Easter. So say low-to-mid single-digits adjusting for that on an organic basis down.

Matt Duncan

And then you're going to anniversary Hill Country this quarter, correct?

Kenneth Parks

We will, yes.

John Engel

So I'd say customer commentary is consistent with what we've been hearing. I don't want to deliver a message or send a signal that we're seeing an uptick there in terms of increased positive sentiment. With that said, I think it's all within the construct of that our customers are looking at their supply chain overall, their supply chain relationships.

I did not mention this, yet. I will mention it. Our bid activity level in industrial for global accounts and integrated supply, when you look on a first quarter basis over the last couple of years is that it grew and is at record levels in this lower growth phase that we're in.

So I think that does say that there is a potential for things to start to turn up. But, look, we still have pretty significant declines in industrial overall, right. So hopefully that gives you a little better sense. But overall I would say we're not seeing just a positive uptick yet in sentiment or spend.

Matt Duncan

It does, John. Very helpful. Thank you guys.

Kenneth Parks

Thank you.

Operator

Our next question will come from Josh Pokrzywinski of Buckingham Research.

Josh Pokrzywinski

Just to put maybe a bow on the FX discussion. Clearly, the Canadian dollar is helping you out here a little bit. Can you just quantify how much of that move would show up in guidance? Because I know SG&A obviously moves against its higher mix. So just to maybe understand the $0.70 to $0.77 move in its entirety? Just so we don't miss any of the maybe finer points like in SG&A.

Kenneth Parks

When we gave the outlook for 2016, I think we were pretty explicit around assuming kind of a $0.73 to the U.S. dollar rate. We came in at the first quarter and the overall actual exchange rate for the quarter was right at that, almost right on. We are assuming, based upon recent trends and where the exchange rate is today, that the second quarter will be at $0.77 to the U.S. dollar.

That gives us a little bit of benefit at the topline as well as at the operating profit level, but it's not significant and we haven't changed our outlook for the year in any way, because of some specific move in FX. Because as you guys know as well as we do, that can move around quite a bit, especially in the, I'd say, volatile from a dynamic perspective of the underlying industries within the Canadian economy.

So we have a pretty good look for obviously April, May, June, but too early to call. And therefore, I think the simple answer is, haven't really played in a guidance change or an outlook change to our full year, because of currency moves.

Josh Pokrzywinski

And just to revisit a comment that John made during some of the prepared remarks, I think around construction and some of the exposure beyond just contractor sales, but specifically into commercial, institutional markets, kind of what people would traditionally think of as commercial construction.

And I think there was an expectation, and I'll paraphrase, of modest growth this year. And I think between maybe a bit more favorable weather and institutional picking up. A lot of folks who serve that space are a bit more sanguine here coming through the first quarter. Are you guys just trying to say guarded or is there a Canadian element that maybe factors into that a little bit more, and U.S. is doing better? So maybe just help flush out maybe some of the differences there.

John Engel

So we did break out overall construction sales, right, for U.S. and Canada. So you can see that Canada is down a bit more. When you look at it, U.S. was down on a workday adjusted basis 4%, right. That's in our webcast presentation. Canada was down 6%. I think if you were to put those into context, U.S. is somewhat consistent with what we thought. Canada is a bit better. I mean there was a risk that Canada could be significantly worse than down 6%. We did say our outlook for construction as an end-market for us for the year was down low single-digits to potentially up low single-digits. That has not changed.

So we are obviously working very hard where we have good construction capabilities at the local regional level. We're using other capabilities we have to work projects that span multiple locations. We talked a bit about that at the Investor Day. And we are seeing, as I said earlier, kind of a range of results that are down double-digits to up double-digits to plus-or-minus single-digits, depending on what particular local geography you're looking at in the U.S. or Canada.

One thing I did not comment on yet, and I will, because I think it will speak to this. Last three acquisitions, which was really focused on strengthening core electrical, our deep roots in electrical, and they have a heavy construction mix or bias, that being Hill Country, Needham Electric and most recently AED.

Hill Country is up high single-digits sales growth, Q1 versus prior year. And again, they're in the Austin and San Antonio markets. Needham is up double-digits in the quarter versus prior year. Now, again, we didn't have them in our prior year sales, but we know what our sales was obviously, so up double digits.

And AED is up much stronger than Needham. They're off to an absolutely fantastic start. So we feel very good about those three acquisitions that are in core electrical, construction oriented and they represent -- when you look at the mix of construction business for those three, they're non-RESI and they're much more broader based non-RESI and more of the commercial, institutional, not the deep, the long, industrial-oriented contractors, right, that are hitting us in other parts of the business. So hopefully that gives you a little better insight.

Josh Pokrzywinski

Do you guys feel better about the core non-RESI business maybe ex-infrastructure, oil and gas, things like that?

John Engel

Yes. I want to be careful with this because actually when you look at the leading indicators, they're volatile and they're mixed. And so there's a series of data points out there too that would suggest that non-RESI is not going to really inflict up this year and that it could be kind of flattish or down slightly, again, heavily mix-driven.

So I think what happens with -- it will be interesting to see how the year develops, particularly as we get into the construction season, but I think this is where mix matters really. So we're very much focused on the areas where we are seeing the growth and we have the capability to try to execute well there to benefit our business and our sales growth.

But I would say overall non-RESI, it is not in a robust growth mode this year, not by any stretch. Now, residential construction is still healthily in the double-digit growth range and that portends well for non-RESI ultimately and for utility, right, as a second derivative factor down the road, so I think we're going to need another quarter, Josh, to really see how non-RESI is developing for the year.

Josh Pokrzywinski

Great. Thanks for the color, John.

John Engel

Yes.

Kenneth Parks

Thanks, Josh.

Operator

Our next question will come from Robert Barry of Susquehanna..

Robert Barry

So I did just want to clarify what is driving that moderation in the decline in the gross margin. It sounds like the pricing component is kind of stable, so other things at play there?

Kenneth Parks

You know, we've been working on, for a long time, a bunch of initiatives around ensuring that we're pricing appropriately, that we're optimizing how we can get the price into the marketplace. We've been doing a lot of sales force training, both inside and outside sales force training about the selling process. All the initiatives that we've been working on since, I would say, the beginning of 2014, we put the global sales and marketing leader in place. And the story has been the same which has been, you know, it's going to come in bits and pieces over a period of time.

We are extremely pleased, to be very honest, about the fact that after we had seen sequential quarters of deterioration in growths and there had been some at billing margin level, for the last couple of quarters we begun to see stabilization and the uptick on the billing margin side from Q4 to Q1, which as we talked about earlier has really no seasonal variable to it. Just really reflects the hard work and heavy lifting that the overall organization has been doing for multiple quarters leading up to this. So the pieces of it very hard to define but the measurement of it, you can see it in the numbers.

Robert Barry

Yes. I ask because it really stepped up -- I mean, it was pretty consistently down last each quarter last year about 50 bps, so it looks like there was some sort of step change and I don't know maybe Canada improving is helping too.

John Engel

Well, Canada helps a little bit, Rob, clearly. But when we did the mix analysis, there's no meaningful contribution for mix changes, Q4 to Q1 sequential. And so it would be nice for us -- we would love to be able to say, look, these two things, we can trace it and it's having this effect.

It's actually many, many dozens of things. And it's tedious work. And as Ken said it earlier, I couldn't -- Ken, say it better, it's down in a single basis point level, right? This is a very tedious business, right, where single basis points matter. And we try to give it the insight on that in the Investor Day. So we're working a number of things. Again, it was our top priority to improve our execution. Our execution on two fronts this year, margins and organic sales growth, and so I think we're starting to get some traction.

Robert Barry

Yes. Got you. Good to see it.

John Engel

Yes.

Robert Barry

Just to also follow up on the earlier question about contingency. Maybe it was Deane's question. It sounded like, you said there was more there now, where's that coming from?

Kenneth Parks

Well, very simply put, what I was saying is that we haven't had anything that came at us that ate away at our contingency. Our performance in the first quarter, we believe it -- well you see it, fell right within the outlook of where we set it, so therefore just by definition, without working math, our contingency kind of sits where it was.

Robert Barry

Got you. I mean, I assume if you mark to market now currency is maybe building in a little and you also have the AED acquisition in there too, right?

Kenneth Parks

Correct. Yes.

Robert Barry

And just one quick follow-up. There was an earlier reference to the comps monthly getting easier through the quarter. Is that correct? I just wanted to confirm that?

Kenneth Parks

For the second quarter, that is correct.

Robert Barry

Got you. Okay.

Kenneth Parks

And then --

Robert Barry

I'm sorry?

Kenneth Parks

No, I was just going to say that those numbers are not -- the monthly numbers are not shown in the current quarter's charts. But if you look back at the second quarter of last year we had in the organic growth chart each one of the month movements in organic growth. So if those aren't top of mind, you can grab them pretty quickly.

Operator

Our next question will come from Ryan Merkel of William Blair.

Ryan Merkel

So I want to talk about lighting. Have you seen any slowdown in trends there? And then second part, what percent of your sales are LED, would you say, at this point?

John Engel

So lighting for us overall on an all-in basis was down a bit, down a very small amount quarter-to-quarter here, Q1-to-Q1. And this is where you've got to get underneath it and really look at mix effect. And so we're seeing sales declines are being driven in our business by the lamp portion of lighting. And we have a legacy lamp business that goes back a long time, right? And we're teamed with one of the world's top three, as one of their largest distributors in North America, so that's providing some sales declines.

But on the fixtures and ballast side and LED overall, we're seeing nice growth. Lighting is a growth engine. We're very much focused on getting lighting growth. And it's our expectation that as we begin to see our initiatives hit, that we will see stronger lighting performance as we move forward.

In terms of overall mix, we're just north of the 50%, of our sales now are LED and LED-related. And it's a surprising number. You'd expect it to be roughly that when you look at some of our major supplier partners. But I think speaking for all of us in the value chain, this has been an industry that hasn't moved historically, let's just say, it's moved at glacial speed historically. This has been a rapid transformation to solid state lighting. So we're still very bullish on lighting over the mid-to-long-term, have some excellent capabilities. And we expect it to be a growth engine for us as we move forward.

Ryan Merkel

So just a follow-up, do you expect lighting will actually grow year-over-year in the next couple of quarters based upon backlog and what you're hearing from customers?

John Engel

I think it's going to really depend on -- there's two pieces that will determine that. Number one, does non-RESI begin to really -- do we get the growth out of non-RESI in the new projects? And number two, what's the success of our $led retrofit renovation upgrade business which is a top initiative for us. So we're very focused on working with our existing customers and driving led renovation. So I think our results through the balance of the year are going to be a function of our ability to execute as well as what does the overall construction market do?

Operator

Our next question will come from Shannon O'Callaghan of UBS.

Shannon O'Callaghan

Hey, just on Canada coming in a little better, maybe just a little more of your thoughts around Canada and what is getting better and should we be encouraged or should we still be very cautious? Maybe just a little bit more of what you mean there.

John Engel

Yes. Good question. And actually I had expected probably a few more questions on Canada. But this will give me an opportunity to give you a little deeper insight.

We're encouraged with how we're performing in Canada. And I think this speaks to at the highest level when you have a very strong market position. It's a long-standing and strong market position, are able to really provide a complete solution to customers, that you can find ways to provide other value, particularly when their businesses are challenged. And they even look for more from you, even though their spend levels may be going down, we want to get an increasing percentage of their spend level.

And so when you look at the whole strategy of EECOL and you put WESCO and EECOL combined, I think we're clearing seeing that we're performing better than market on a combined sense and its working. So we feel pretty good about that relative -- we've been cautious and we have had concerns and we're trying to drive execution. But the reality is when you look at what's hitting the Canadian economy, there's a high risk that there could be significant downturn.

Now, if you look at the overall Canadian GDP is actually -- recent estimates have ticked up. So the Canadian economy is absolutely still bifurcated between the oil-producing provinces out West, the prairies, and the oil-consuming provinces in other parts of the country. Again, our performance is very greatly, as you go across the country and the prairies were down double digits, more in WESCO and a little less so in EECOL, but nevertheless down double digits.

That's a big, strong business for us, again, given driven by oil and gas and even mining to some degree. And then with BC we're seeing very nice double digit growth. You get into Manitoba and Ontario, and the Atlantic region we're seeing nice growth. So it is at least at that level we're seeing it kind of unfold and manifest itself on where we knew we had challenges, we are. Where we thought we would get some growth, we are.

I will just give you this view in terms of -- and it should be interesting to see what happens. There was clearly a new majority government that was elected at the end of last year. It's a liberal majority government. It was elected in October. When you look at the new government budget, it includes well over $100 billion over the next decade focused on infrastructure projects. First focused on public transit, and then water and waste water and housing infrastructure.

And so to the extent that the new government embarks upon this investment, that will benefit us. There is no doubt about it. Because you look at this mix of our business and the strength of our customer relationships there, that will benefit us. Now, with that said, they ran on a platform of raising taxes but obviously the ability to get that tax revenue is impacted in the oil producing provinces in a major way. So there's some other challenges there, but I think it will be interesting to see how that manifests itself. Now, that increased government spending, we don't really see it benefiting us this year. But I think it does portend potentially as a nice driver or tailwind starting in 2017.

So, Shannon, is that -- any other questions?

Shannon O'Callaghan

That's really helpful. One last one from me. Just in terms of this view of kind of assessing whether to do additional restructuring as you move through the year, I guess what would you have to see to make that decision? Are there certain areas that you are concerned about that you are watching to decide whether to do more restructuring?

John Engel

So I would echo what Ken said. I think that we've got great disciplines around managing our cost structuring. And so let's just first state and restate, please, that the way we manage and keep tight control over our costs and controllable cost that will continue, right? It's the hallmark of the company.

You know in terms of incremental restructuring, and another major leg down, we've been working at this for a number of years. We feel really good about what we have in place now quite frankly, in terms of the organization, the design, the operational footprint. With that said, as Ken alluded to, there are some incremental branches and there are some other DC consolidations we're looking at and expansions, fine.

But in terms of another leg down, we'd have to see a meaningful leg down on a top line and/or margin compression beyond what our outlook framework is. And that is not what we're seeing right now, right, but we have to see that occur for us to say, all right, we've got to go through a whole another wave of major restructuring. We're not seeing that right now so that's not our plan.

Operator

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. John Engel for any closing remarks.

End of Q&A

John Engel

Thank you all again for joining us today. We appreciate it. I think there's just one or two left in the queue and I know Mary Ann and we have a call set up this afternoon, so we'll be able to make sure we follow up with all of you. Thanks again for your time and thanks for your continued support. Have a great day.

Operator

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

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