Wesco Aircraft Holdings' (WAIR) CEO Dave Castagnola on Q4 2016 Results - Earnings Call Transcript

| About: Wesco Aircraft (WAIR)
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Wesco Aircraft Holdings (NYSE:WAIR) Q4 2016 Earnings Conference Call November 17, 2016 5:00 PM ET

Executives

Jeff Misakian - VP of IR

Dave Castagnola - President and CEO

Rick Weller - EVP and CFO

Analysts

Jason Gursky - Citi

Lou Raffetto - Deutsche Bank

Bill Ledley - Cowen and Company

Sheila Kahyaoglu - Jefferies

Gautam Khanna - Cowen and Company

Myles Walton - Deutsche Bank

Operator

Welcome to the Wesco Aircraft Holdings Fourth Quarter and Fiscal Year 2016 Conference Call. My name is Anna and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I'll now turn the call over to Jeff Misakian. Please go ahead.

Jeff Misakian

Thank you, Anna. Good afternoon, everyone, and thank you for participating in Wesco Aircraft's fiscal 2016 fourth quarter and full-year earnings call and webcast. We've included slides for today's presentation to help illustrate some of the points being made and discussed during the call. These slides can be accessed by visiting our website at www.wescoair.com and clicking on Investor Relations. We are joined today by Dave Castagnola, President and Chief Executive Officer and Rick Weller, Executive Vice President and Chief Financial Officer.

Please turn to Slide 2. As a reminder, today's conference call includes forward-looking statements within the meaning of federal securities regulations. Although the Company believes that such forward-looking statements are reasonable, we cannot assure you that any forward-looking statements will prove to be correct. Forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors, which may cause actual results to differ materially from those anticipated at the time the forward-looking statements are made.

Additional information relating to factors that may cause actual results to differ from our forward-looking statements can be found in the Company's filings with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. Wesco Aircraft undertakes no obligation to update or revise forward-looking statements except as required by law.

Now I would like to turn the call over to Dave Castagnola. Dave?

Dave Castagnola

Thanks, Jeff. Good afternoon everyone. Please turn to Slide 3. Fiscal 2016 has been a year of improvement and transformational change for Wesco as we restructured the company to better reflect our position as a full scale supply chain service provider. These transformational activities have delivered results at a better pace compared to Wesco’s recent history and provide an improving foundation for fiscal 2017, which we’ll cover later in our remarks. Wesco came into fiscal 2016 faced with declining sales, slow sales momentum from our larger customers, high SG&A costs, delivery performance challenges and a supply chain approach reflecting procurement practices that were in line with the smaller more traditional distributor. During 2016, our large customer sales improved faster than we anticipated, where the ad hoc market was softer influenced by major OEM inventory adjustments on certain widebody programs and as evidenced by other distributors slowing down purchases.

At the same time, the impact of currency was greater than we had anticipated, particularly the British pound. Both sales mix and currency affected Wesco’s sales and margin performance relative to our goals in fiscal 2016. We took several actions to address these issues in the fourth quarter, however the pound declined at a much faster rate than in previous periods and while ad hoc sales had improved in the third quarter the final three months of the year were more in line with the first half of fiscal 2016. As we've discussed in previous period, ad hoc sales can fluctuate from one quarter to the next making them challenging to forecast. We also increased investment in the fourth quarter and new business implementations required to support sales growth that Wesco had secured throughout fiscal 2016. Last quarter, we talked about the establishment of an implementation team which has initiated multiple implementations at customer sites around the world. This is on a larger scale compared with past Wesco experience and the team is making good progress.

Please turn to Slide 4. The Wesco team tackled these challenges and met or exceeded many of our fiscal 2016 goals. We recorded low-single digit constant currency sales growth, reduced expenses by $32 million, which included $6 million of favorable currency impact and achieved 113% free cash flow conversion. Adjusted EBITDA margin improved 50 basis points in fiscal 2016, the first expansion in margin in many years. We achieved this expansion in spite of a combined negative impact of 30 basis points from currency movements and the investment in new business implementations I just mentioned. SG&A cost reductions primarily delivered the EBITDA margin improvement. The progress made in fiscal 2016 allows us to enter fiscal 2017 with stronger contract sales momentum and improved cost structure and a solid balance sheet. I’ll talk more about our fiscal 2017 outlook at the end of our remarks.

Next, I’ll provide you with an overview of our fourth quarter performance. Please turn to Slide 5. We reported net sales of $367 million, operating income of $40 million and adjusted diluted earnings per share of $0.30 in the fiscal 2016 fourth quarter. Fourth quarter sales increased 2% on a constant currency basis reflecting momentum in long-term contracts. We booked major new business wins, expanded work scope and renewed contracts with existing customers. I'll talk more about sales performance in fiscal 2016 in a moment. We also continued to reduce costs which drove higher operating and net income. Through working capital management and stronger earnings, we generated free cash flow of $48 million which allowed us to make debt repayments of $35 million. We also refinanced long-term debt in October improving our credit profile.

Please turn to Slide 6. Growth in long-term contracts continued to be the primary driver of higher sales in the quarter. Contract sales rose at a mid-single digit pace reflecting increased customer production, new wins and expanded scope. This is partially offset by mid-single digit decline and ad hoc sales. The pace of new wins in expansion was strong last year reflecting recognition of the value in our broad portfolio of hardware and chemical products and supply chain management services as well as an expanding presence in the aftermarket. In fiscal 2016, Wesco’s sales team won new business with large commercial and defense companies and continued the conversion in growth and long-term agreements while also successfully renewing business with other large customers at retention rate in the high 90% range.

New business wins and renewals during the year included major long-term agreements with Triumph, GKN and Gulfstream and in October, we announced multiple contracts with UTC. We also renewed a major chemical management services contract with a large defense OEM and announced in early November a renewed contract to perform chemical management services with SAIC at military depots across North America. The new wins and the scope expansion are expected to generate annual sales that will support Wesco’s improved growth in fiscal 2017. As you know, the timing of this growth depends on several factors, including customer needs, new product lead times, inventory transition balancing, implementation schedules and customer supply chain maturity. In many cases, contracts can take up to a year to implement and two years to fully realize their annual value.

However, it is encouraging to note that we enter fiscal 2017 with sales momentum and expanding pipeline of opportunities. With our MRO customers, increasing content wins this year included multiple agreements to provide products and services with airlines and MRO service providers globally. We continue to grow our MRO sales resources and I’m pleased with the progress we're making.

Please turn to Slide 7. Supply chain management initiatives made good progress this year as we focused actions in line with ordering that supports demand from our larger customer contracts. As a result, we matured delivery management processes with our suppliers. We also have improved supplier delivery performance improving visibility through the use of metrics, order book alignment and prioritization, a daily cadence of interaction, onsite reviews with action plans and capacity assessments.

Wesco advanced the implementation of sales, inventory and operations planning or SIOP aligning ordering practices to forecasted demand and increase the number of long-term agreements with suppliers. We have brought our ordering practices with our partners more in line with those of large aerospace OEMs while improving efficiencies in our material acquisition processes. Our SIOP process aligns our major market channels and long-term forecasts giving us a visibility and control of material receipts and payment disbursements. As a result, we’ve seen improvements in inventory and cash management timing and predictability as the year progressed.

Please turn to Slide 8. We executed operational initiatives, achieving our site and supply goals for the year. Our streamlined network began showing results with delivery performance at our major hubs improving service to our customers. Restructuring actions in the fourth quarter of last year delivered efficiencies and operation expense reductions for Wesco in fiscal 2016 and overall improved our cost structure which was leveraged to provide EBITDA margin improvement. We remain focused on continuous improvement to drive logistics flow and delivery performance. Our SIOP process is helping us drive [standard] [ph] work throughout the network, improve the way we manage customer bin replenishment globally, increase [crossed outflow] [ph] for same-day shipment and establish a more efficient network to manage and leverage the increasing volume in new business.

Rick will now provide a more detailed discussion on our fourth quarter and fiscal 2016 results and I will follow this with our fiscal 2017 outlook and some closing remarks. Rick?

Rick Weller

Thanks Dave. Please turn to Slide 9. Net sales in the fiscal 2016 fourth quarter of $365.6 million decreased 1% compared to the same period last year. Foreign currency movements had a negative impact of approximately $12 million on fiscal 2016 fourth quarter sales, two times a level we experienced in previous quarters this fiscal year.

Constant currency sales were up 2% compared to the same period last year led by mid-single digit contract growth supporting major commercial and military customers. Growth was similar in hardware and chemicals. Ad hoc sales were down at a mid-single digit rate year-over-year on a constant currency basis. Please turn to Slide 10.

We further reduced SG&A which drove income from operations of 40.3 million and net income of $23.3 million or $0.24 per diluted share in fiscal 2016 fourth quarter. The operating and net income figures compared to an operating loss of $326.2 million and a net loss of $214 million or $2.21 per diluted share in the fourth quarter of fiscal 2015. The loss recorded in last year's fourth quarter was primarily due to several actions taken to position the company for stronger performance, including goodwill impairment of $263.8 million and inventory adjustments of $91.3 million.

For comparison purposes, the remainder of my remarks will focus on results that exclude adjustments and charges were applicable. We have provided a reconciliation of these non-GAAP to GAAP results in the tables that accompany our press release and in the appendix to the earnings call slides. Income from operations of $40.3 million in the fiscal 2016 fourth quarter represents a 39% improvement over exempted operating income of $28.9 million on last year fourth quarter. Operating margin was 11% in the fourth quarter of fiscal 2016 compared to an adjusted operating margin of 7.8 % in the same period last year. SG&A as a percentage of net sales was 15.1% in the fiscal 2016 fourth quarter, 340 basis points lower than last year’s fourth quarter primarily due to a decline in people-related costs, currency and professional fees. SG&A decreased $32.2 million in fiscal 2016, above our target range for the year. Currency movements contributed $5.6 million of the decline. On a constant currency basis, SG&A was $26.6 million lower in fiscal 2016 beating our goal of $25 million to $30 million.

Gross margin was 30 basis points lower in the fiscal 2016 fourth quarter compared to an adjusted gross margin in the same period last year primarily due to a 120 basis point impact currency movement, partially offset by a better product mix of 50 basis points and the inventory adjustments of 40 basis points. Adjusted net income was $29.9 million or $0.30 per diluted share in the fiscal 2016 fourth quarter compared to $26.5 million or $0.27 per diluted share in the same period last year. Adjusted net income reflects the items that drove operating profit in the quarter, offset by the decline in non-recurring items mentioned earlier and a decrease in other income net. Other income declined by $3.4 million, primarily due to a gain of $2.7 million on last year’s fourth quarter, related transactions that were denominated in currencies other than the functional currency of the reporting subsidiaries of primarily the British pound. Transactional currency impact is related to timely differences that arise when net assets are booked and settled primarily receivables and payables.

We substantially hedged our pound exposure to movements in foreign currency in the fiscal 2016 fourth quarter. As a result, there was a minimal transactional currency impact in the quarter. However, currency movements resulted in a debt negative translational impact of approximately $1.7 million in net income. The translational impact results on functional sales and costs, again primarily those in the British pound are translated to US dollars at lower exchange rates. As we mentioned last quarter, Wesco is establishing a new UK legal entity that combines legacy hardware and chemical entities. As a site and supply initiative, this will allow for operational efficiency, leverage and improved customer service across multiple commodities. The appropriate functional currency for the new entity is under review and will be determined prior to its establishment which is expected to occur in the middle of the fiscal 2017.

Our effective tax rate in the fiscal 2016 fourth quarter was reduced by a favorable mix of taxable income across jurisdictions and discrete tax item. We expect our effective tax rate for fiscal 2017 to be in the range of 28% to 30%, primarily due to projected mix of taxable income across jurisdictional and lower discrete tax items. Adjusted EBITDA was $49.6 million or 13. 6% of net sales in the fiscal 2016 fourth quarter this compares with $46 million or 12.4% of net sales in the same quarter last year. Adjusted EBITDA margin also reflects the improvement in operating income and the negative impacts from foreign currency movements that I just described.

Please turn to Slide 11. Sales in North America were down 1% in the fourth quarter primarily due to a decline in ad hoc, partially offset by higher contract sales. Contract sales reflect increased production, new business wins and scope expansion for commercial and defense customers. Operating income in North America was $27 million or 19.2% [ph] of net sales in the fourth quarter. This compares with adjusted operating income of $24 million or 8% of net sales in the same period last year. Operating income and margin were higher primarily due to lower SG&A expense offset by declining gross profit. Gross margin was impacted by a mix of ad hoc and contract sales. SG&A expenses reflect more people related costs and professional fees.

Turn to Slide 12. Sales in the rest of the world segment declined 1% in the fourth quarter but were up approximately 16% on a constant currency basis with decreases in both ad hoc and contract sales. Operating income in the rest of world was $13.2 million in the fourth quarter or 18.8% of net sales compared with adjusted operating income of $4.9 million or 6.9% of net sales in the same period last year. Higher operating income and margin in rest of world primarily reflects an increase in sales volume and mix. Please turn to slide 13. Net inventory increased $12 million in fiscal 2016 primarily to support the increase in new business. However, net inventory was essentially flat in the fourth quarter reflecting improvement in materials management that we mentioned earlier.

Accounts receivable declined $11 million in the fourth quarter due to the timing of the sales and our focus on reducing cost to accounts receivable. Total debt was $842 million at September 30, reflecting repayments of $35 million in the fourth quarter and $111 in fiscal 2016. This brings the level of debt paydown to more than $250 million over the past two fiscal years and we expect to continue paying down debt into fiscal 2017. And in early October, we refinanced our term loan A and revolving credit facilities, well ahead of their maturity dates. The new facilities expire in 2021 with interests tied to the company's leverage ratio. The new facility agreements also removed the interest coverage ratio requirement [indiscernible] of the leverage ratio requirement.

Please turn to Slide 14. Cash from operations was $51 in the fiscal 2016 fourth quarter compared with $57 million in the same period last year. Free cash flow was $48 million, a conversion rate of more than 200% of net income. Free cash flow was $52 million in the fourth quarter of last year. Decreases in operating and free cash flow are primarily due to changes of working capital primarily related to the timing of inventory receipt, and sales and related account receivable.

Now I’ll turn the call back over to Dave for closing remarks. Dave?

Dave Castagnola

Thanks Rick. Please turn to Slide 15. The scope and pace of transformational change is now largely time Wesco. We delivered improved performance across the business and better financial results compared to our recent history. As we enter fiscal 2017, momentum in contract sales is right on track, our cost structure is more in line with the sales opportunity for better leverage, profitability has improved and our financial structure has been strengthened. Fiscal 2016 results provide the basis for stronger fiscal 2017 based on new wins, scope expansion and renewals secured during the year. The timing of sales from the new wins and expansion can be affected by a series of factors as I noted earlier. The pace of implementation will influence the rate of growth during the year. We have considered these factors in our fiscal 2017 outlook. At the same time, we remain focused on margin improvement supported by our maturing material acquisition strategies, while considering the assumed timing of inventory turns for productivity realization.

In addition, we will remain focused on cost management. Cash management in fiscal 2017 will continue to be in line with the expected improvement in inventory receipts and disbursements provided by our SIOP processes. This will enable us to continue our focus on reducing debt levels and then begin to consider additional capital allocation strategies in fiscal 2018. Please turn to Slide 16. With these factors in mind, we are targeting a fiscal 2017 constant currency sales growth of 3% to 5%, adjusted diluted earnings per share in the range of $1.15 to $1.20, and free cash flow conversion in the range of 90% to 95% of net income. Again, it’s important to point out that we based our sales outlook on business secured in fiscal 2016 and that our estimate is on a constant currency basis. Considering the time needed to implement new business and scope expansion, we expect greater sales increases in the second half of fiscal 2017.

Also, we expect the first quarter of fiscal 2017 to be lower sequentially due to fewer working days around the holidays consistent with our experience in fiscal 2016. Our adjusted diluted earnings per share range assumes that we improve gross margins to growth and cost efficiency. And that we manage our SG&A cost base. Our SG&A cost assumptions balance ongoing leverage with an improved cost structure with investments to support new business and incentives that reflect stronger performance at fiscal 2017. Our outlook also reflects the higher effective tax rate that Rick mentioned earlier. Free cash flows as assumed include inventory investment to support growth in the business, offset by efficiencies provided through working capital management. We also have provided a fiscal 2017 outlook on certain modernly items which you will find on slide 17.

I'll now turn the call over to Jeff to direct the Q&A period. Jeff?

Jeff Misakian

Thank you, Dave. With that, we will open up the call to your questions. We ask that you limit your questions to one initially to allow everyone a chance to participate and we appreciate your assistance with this process.

Anna, may we have the first question please.

Question-and-Answer Session

Operator

And we have a question from Jason Gursky from Citi. Please go ahead.

Jason Gursky

Hey, good afternoon, everyone. I was wondering if you could just dive a little bit more into the details on the revenue assumptions for 2017 and whether you could compare and contrast the expectations for North America versus rest of world and some of the assumptions that you have around ad-hoc in your contract business and maybe just provide a little bit of color on each of those items would be helpful?

Dave Castagnola

Yeah. I’ll provide an overview and then have Rick give you the North America, rest of the world view. So for ad-hoc, we see ad-hoc essentially flat going into 2017 and we've taken that into account in our planning. Based on our experience of the market in 2016, we’re not expecting any major disruption or pinch points in the near term. In terms of the contract business, that will be really the revenue momentum for 2017 and the pace of our implementations is really going to set the mid to higher end of our growth ranges. That’s the way we've guided.

Rick, can you talk about between the North America and the rest of the world.

Rick Weller

Sure. Just to build on what Dave said that lion’s share of this, of the growth that we’re seeing here is the business that we won in 2016, large and strategic accounts, these are really our global customers, some of them were referenced by Dave in his comments. They really are [participating][ph] in the European arena and North America. So I think our growth will be pretty well balanced between the regions and also balanced across both hardware and chemicals in terms of relative size and order of magnitude of that growth and where we think we would see it.

Jason Gursky

Okay. That's great. And then just really quickly on the cash conversion for next year decelerating from what you did this year, is there anything kind of one-off in nature that's going on next year that we should be aware of?

Rick Weller

Jason, the only thing I would say about that is that the nature of where our growth is emanating and coming from relative to strategic customer accounts requires us to be able to ramp up inventory to be able to support that and so you saw that both in the later part of 2016 and you’ll see that into 2017.

Operator

Our next question is from Myles Walton from Deutsche Bank. Please go ahead.

Lou Raffetto

Good morning or good afternoon, good evening. This is Lou Raffetto on for Myles. Just a quick question and maybe I missed it on the call earlier. What do you guys called out as the network rationalization, what exactly I guess, is it and any additional color on that one?

Dave Castagnola

Yeah. Hi, Myles. This is Dave. what we're referring to is last year in the fourth quarter we announced a major restructuring that talked about also as part of our integration a reduction of 13 to 16 sites, and what I was referring to in my comment is we’ve completed that activity. Part of it was based on our growth that we mentioned some investment that we made in Q4 for the growth. We've actually chosen to keep, I think, three open, because what happened was we actually grew, we won work in fiscal 2016 that really changed our mind and we want to make sure that retained our footprint there. So I was really referring to the action we took before and concluding that action

Operator

Our next question is from Gautam Khanna from Cowen and Company. Please go ahead.

Bill Ledley

Hi. This is Bill Ledley on tonight for Gautam. Thanks for getting me in. I had a question for you on aftermarket sales. What were they as a percent of sales in fiscal ’16 and what do you think they will be in fiscal ‘17. And if you can just talk about pricing trends on the long-term contracts, are they getting tougher. Are you seeing de-stocking from any of the OEMs, you call that out on a quarter [inaudible] continues into fiscal ’17 at all?

Rick Weller

Yeah. Bill, this is Rick. I’ll take the first one about the aftermarket and as we’ve kind of talked about that it is a small growth [concern] [ph] for Wesco, but still a relatively small percentage of it is [inaudible] revenue, kind of 7% to 8% or so of the total revenue for Wesco, and I think over time the size of the opportunity for growth and the focus we have on that will allow us to be able to continue to expand, but [inaudible] relatively small base and it is relatively a larger part of the served market for Wesco.

Dave Castagnola

And Bill, I’ll address the second question relative to pricing. I think, let me answer it a little bit broader. For a JIT, LTA business, which is the long-term contract business we're talking about, that represents about 75% of our business and that is an area of our business that's growing at the mid-single digit pace that we talked about in ’16 and it’s also the basis for what is leveraging our growth into 2017. Our customers there really look at us, evaluate our -- us on a number of total value proposition. We provide not only price, because we get aggregate demand and provide them better price than they get on their own. But we also carry the inventory and in other words, we act as their inventory were on replenishment systems.

So we improve their working capital and their cash management which comes into play as they assess us and in many cases in particular, with our chemical management system, we reduced scrap. So with the working capital improvement, scrap reduction, the pricing that we can get from our partners [inaudible] leverage for them and then the fact that we manage that supply chain form so they don't have to resource that SG&A, all of those factors come into play from our customers when they're evaluating us. So it's not purely a price gain.

On the ad-hoc market side, it really depends on the urgency of the need. It depends on the number of the quotes that are going out, price tends to come into play a little bit more on the ad-hoc side. And again, we don't chase price relative to that market. So those are really the two areas of how we're evaluated going into the marketplace.

Bill Ledley

Okay. That's great. And if I can just sneak in another one, assumptions for SG&A as a percent of sales, this year it ticked down nicely, but that includes of course the FX, any sense of where you think that goes next year?

Rick Weller

Yeah. Bill, [inaudible] 2017, in 2016, we got a sizable benefit and a step down functional way with restructuring and some of the benefits of [sector][ ph]supply consolidation. We’ve got some kind of continuing efficiency benefit going into 2017, but in relative terms, I think the contribution of SG&A leverage to the overall EBITDA margin [inaudible] will be proportionally less. The other thing I would kind of say is that it’s not so much rule making and growth with facilities of site supply, resources on the ground for direct labor and even in funding incentive plans, I mean, it’s just based on a good year [inaudible] going to make the SG&A have a little bit of lift that [inaudible] the efficiency I just mentioned to look to offset.

Operator

[Operator Instructions] And we have a question from Sheila Kahyaoglu from Jefferies. Please go ahead.

Sheila Kahyaoglu

Hi, good afternoon. Thanks for taking my question. I guess, is there a metric that you could talk about, whether it's your order book or your backlog or however you think is best to measure it. The difference in visibility today as you look out to ’17 versus a year ago. If you could talk about, maybe, I don't know metric you would look at?

Dave Castagnola

Yeah. Hi, Sheila. This is Dave. A couple of things. I think we don't really talk about the total value of the renewals or the longer term backlog and we haven't really talked about the total values of our win. You could see that the latter is the secured wins that will fuel our growth next year, into fiscal ’17. If you contrast fiscal ’16 with fiscal ’17, it's really about the momentum in the business as I mentioned in my comments coming in to fiscal ’16, Wesco coming off a significant sales decline in 2015 with little to no momentum in contract sales wins. And had some ad-hoc momentum in the final four months of that year. So we looked at coming into this year to bridge the ad-hoc sales where we recovered on the contract side and what played out as we recovered quite well and now have gained significant momentum on the contract side, which is the basis of our business. So the big difference going into this year versus last year is that our plan is really based on secured JIT LTA type business, which is the bulk of what we do.

Sheila Kahyaoglu

Okay. And then I guess you mentioned some second half waiting and the timing of implementation. Is that just when the supplier might place an order or can you clarify what implementation really means?

Dave Castagnola

Yeah. It’s all those things and so let me start at a macro level and then work my way down. At a macro level, I think the chemical management implementations go a little bit faster and are a little bit less complex than hardware implementations. Hardware implementations have a lot of factors. You mentioned a couple and I mentioned in my comments whether if it's a brand new market and brand new products, there's lead times involved. If it's a customer that we are expanding market share into. Sometimes, we have to work through depletion of their inventory as we bring ours in line and others where we already have a position and we’re growing, we can leverage that inventory and demand. So there's a lot of different factors involved in the front end. So that's why we've resourced an implementation team and we are managing by implementation, by site, by customer, each one of these unique implementation to ensure that we hit all the milestones accordingly.

Sheila Kahyaoglu

Okay. That's very helpful. And then last question, if I could sneak it in, in terms of Q4 in international, rest of world sales. Organic sales were up significantly. Can you point to maybe one or two customers that are driving some of that strength?

Rick Weller

It was really multiple customers. Obviously, big OEMs and tier manufacturers in Europe and it was really across both chemicals and hardware. So the good thing is, it’s very balanced and very focused. The other thing I would mention too is that unlike North America, they actually got quite a bit of help from ad-hoc. So there was quite a bit of transference and quite a bit of ad-hoc buying activity in Europe, those markedly different than we thought in North America. So both of those really drove the growth.

Operator

And we have another question from Gautam Khanna from Cowen and Company.

Gautam Khanna

Thanks, guys. Just had one quick follow-up. In regards to the de-stocking comment in Q4, can you perhaps size or maybe talk about the potential risk to the revenue guidance as Boeing takes down the rates on the 777.

Dave Castagnola

So, yeah, I think, what we -- and my comment there was really manufacturers have been talking about OEM inventory adjustments and we've seen and mentioned other distributors de-stocking, we certainly haven't. We are not seeing any really demand reduction associated with the rates associated with the wide bodies. Again, those are happening to our customers because of our position and balance with our customers and also with our market, 40% military, 60% commercial. We’re really balanced in and as I’ve said in a number of earnings calls, when we provide our product in, it goes on essentially all platforms with our customers. So we have a real good buffer against their perturbations.

In other words, if they have a sensitive program on decline and they have a ramping up production program and a start-up program, we balance out. That said, because of the nature of our business, we feel their production lines real time, because we're on an MRS replenishment system. So unlike a large tier 1, where we have constant large LRU product deliveries, we're on a daily cadence base. So we get a bit of oscillation, but over time, it's relatively simple and we buffer out explains relative to unique platforms in the market.

Rick Weller

May I add one point to that, which is that build rates really don't influence chemical consumption and chemical management Service the same way it does hardware. So that's just another element of what they were saying kind of diversification in reliance on specific platform build rates.

Dave Castagnola

And I think the final point on that really is what we're experiencing here in ’16 going in to ’17 is a significant momentum with new wins and scope expansion. So if there is any perturbations in a particular segment of the market, we’re growing that with our customers by adding new product lines, expanding scope and/or winning new business.

Gautam Khanna

That's great. If I could just follow-up on the chemical sales point, embedded within the guidance of 3% to 5% is, are chemicals still outpacing the growth of hardware?

Rick Weller

They’re pretty well balanced in to 2017. So, a lot of our strategic kind of wins are coming as a result of expansion taking on new slate and cross selling chemicals into hardware segment, vice versa. So it really is pretty balanced.

Operator

And we have a question from Myles Walton from Deutsche Bank. Please go ahead.

Myles Walton

Hey, guys. Just wanted to follow-up on the EBITDA margin expansion, so I noticed up 50 bps, and you said there was 30 bps of headwind from FX and then I think a little bit more from investments, what are you thinking about for 2017?

Rick Weller

Yeah. Myles, I think going into 2017, it’s going to really align up pretty well with the EPS guidance. So same kind of relative range of earnings, because based on the share count, as you got the little bit of pull on based on the tax rate, but that would kind of give an indication about what, even on margin expansion, what we, just as a function, what we’re guiding in terms of earnings per share.

Operator

And we have a question from Jason Gursky from Citi. Please go ahead.

Jason Gursky

Hey, guys. Just a quick follow-up and maybe try to wrap up and bring together a couple of prior questions. One was about visibility and how far out you guys feel you can see with your customers and the 777 question. We know the 777 rates are coming down next year and it looks like there could be further pressure on that rate as we move out into the fourth quarter of ’17 and into ’18. So the question is, have you already, if you feel like, what's in your guidance today already reflects the decline that we’re going to see in the 777 here in 2017 because you suggested that you're getting your revenues in real time premier customers. I’m just wondering what kind of build plans and how far out are they showing to you their needs as we move here into calendar ‘17. And I just want to confirm the 777 is fully baked here, because it is coming down?

Dave Castagnola

Yeah. Thanks, Jason. Yeah. We take that into account with all other customers we get visibility from them as far out as they have from their customers and they’ve provided to us. We've gotten much more rigorous in our ability to plan here at Wesco. We've got basically customer-by-customer, program-by-program and we can look at where we've got momentum. Where there is momentum growth, where there's momentum decline and we've done our best to plan that into fiscal year ’17 and taken that into account and then from that, we've layered in the new business wins. So we've been, we believe, very thoughtful about that and then we've also again based on the leverage for growth, been very thoughtful about how we’ve taken to account the timing of the implementations to get that done. So we think we've got everything we know planned for.

Jason Gursky

Okay. Were there any 10% customers either in the quarter or for the year for you guys?

Rick Weller

No.

Dave Castagnola

Don’t have any good as that big. Yeah.

Jason Gursky

Okay. And then the last one here would be just maybe a few comments about what you view to be the biggest risks and the biggest opportunity through 2017. If we were to come at the end of the year and you beat your guidance, weathered it out and then if you were to miss it, why do you think it might have happen?

Dave Castagnola

Yeah. I think on the opportunity side, it’s just really about the execution and pace of the implementations. So obviously West Coast has never had this level of sales success and this volume of new product implementation. So we're excited about that. And how well that comes in as we’ve predicted, there's a lot of variables involved. So I’d like to get a few quarters under our belt about seeing that materialize and I feel really good about that. I think the only risk associated with this is just macro risk that the whole market has and we would react accordingly to those. I think one of the benefits Wesco has that I see is that our model, our service actually provides a reduction of cost. So there's an opportunity to be opportunistic if in fact there was a macro then in the market where some of our customers would be looking to reduce costs. We can pour on a lot of that. So if you can contrast this year to last year, last year was really depending on the ad-hoc market developing and growing and the ad-hoc market and it leads off for the reasons we talked about. This year, we have the work. It's secured and it's just really about how well we've tried to plan that implementation.

Operator

And we have no further questions at this time. I would like to turn the call over to Jeff Misakian for closing remarks.

Jeff Misakian

Okay. Great. Thanks, Anna. On behalf of everyone in Wesco Aircraft, I’d like to thank you for your participation today. We appreciate your interest in Wesco and look forward to speaking with you all again really soon. That’s and have a great evening.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.

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