Wesco International Inc (WCC) 2015 Q1 法說會逐字稿

Welcome to the WESCO International Inc. first-quarter 2015 earnings conference call.

(Operator Instructions)

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

Good morning, ladies and gentlemen. Thank you for joining us for WESCO International's conference call to review our first-quarter 2015 financial results. Participating in today's conference call are the following officers -- Mr. John Engel, Chairman, President and Chief Executive Officer; and Mr. Ken Parks, Senior Vice President and Chief Financial Officer.

This conference call includes forward-looking statements and therefore, actual results may differ materially from expectations. For additional information on WESCO International, please refer to the Company's SEC filings, including the risk factors described therein. Finally, the following presentation includes a discussion of certain non-GAAP financial measures. Information required by Regulation G, with respect to such non-GAAP financial measures can be obtained by WESCO's website at wesco.com. Means to access this conference call by webcast was disclosed in the press release and was posted on our corporate website. Replays of this conference call will be archived and available through April 30.

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

Thank you, Dan. Good morning, everyone. We had a challenging start to the year.

Reduced demand in the industrial market, winter weather impacts and foreign-exchange headwinds weighed heavily on our results. While organic sales per workday grew 3%, sales momentum decelerated through the quarter. Solid sales growth in construction, utility and CIG offset a decline in Industrial. As result, profitability was negatively impacted and was down versus prior year. Free cash flow generation was strong, and we further improved our financial leverage in the quarter. Our capital structure's in good shape and our acquisition pipeline remains robust, with an excellent list of opportunities to strengthen our electrical core and further expand our portfolio of products and services this year.

We expect reduced demand in commodity-driven industrial end markets and foreign exchange headwinds to continue. The decline in global oil, gas and other commodity prices present uncertainty for the global economy, but they offer us broader GDP expansion opportunities across our diversified customer base. So far this year, our customers have been reacting to these challenging macroeconomic conditions by reviewing projects in our pipeline. Also slowing down capital and discretionary spending, and cutting costs. We are supporting our customer's request for additional cost savings by providing a full set of One WESCO supply chain solutions.

Our second quarter is off to a slow start. As result, we are taking additional actions to accelerate our One WESCO sales initiative and simplify and streamline our business. These additional mitigating actions include consolidating a series of branches and reducing structural cost, while also adding to our sales force to address underserved territories and customer accounts. Ken will outline the financial impact of these actions in his commentary. Our One WESCO strategy continues to drive our long-term value proposition, particular for customers looking to reduce their supply chain costs.

Industrial, on page 4. The decline in Industrial in the first quarter was driven by our oil and gas, and metals and mining customers. Weather, logistics, the US dollar and oil prices are all weighing on the manufacturing sector. As mentioned previously, our industrial customers have been slowing down capital and discretionary spending and cutting costs. Despite the weak start, the leading indicators in the industrial market remain supportive for this year, while notable customer trends have increased outsourcing, and supplier consolidation remain in place. First-quarter bid and RFP activity levels for Global Accounts and Integrated Supply remains strong and were consistent with the record levels reached in the second half of last year.

Now moving to Construction, on page 5. Despite the challenging winter weather conditions to start the year, we are seeing clear signs of positive construction momentum. Overall sales of construction customers were up 4% in the quarter, driven by 8% growth in the US and 8% growth in Canada, on a local currency basis. This is the fourth quarter in a row of sales growth in Construction. Our backlog is building and provides support for the upcoming construction season. The pace of bidding activity is high, and leading indicators in a non-resi construction market support a continued improvement in activity levels this year.

Now moving to Utility. Our utility business continues to deliver above market sales growth. Sales to our Utility customers grew 7%, continuing the positive trend experienced over the past four years. This marks the 16th consecutive quarter of year-over-year sales growth, driven by new wins and an expanding scope of supply with our existing utility customers. Happy to say that in the first quarter, we were awarded a multi-year contract with an investor-owned utility to provide supply chain management and logistics services for a large transmission line project. This is notable because this is a One WESCO's construction project win with an existing utility-integrated supply customer.

Now shifting to CIG. Sales momentum was positive in the first quarter, with sales being up 4%, marking the seventh consecutive quarter of year-over-year sales growth. Our end-user focused One WESCO value proposition for customers continues to yield results. Of particular note in the quarter was a win in Canada. We were awarded a multi-year contract with a large national wireless carrier to provide data comm products for a system conversion upgrade, with followup MRO products expected.

Now Ken Parks will provide the details on our first-quarter results and the outlook for the balance of the year.

Thank you, John, and good morning.

Our outlook was for first-quarter consolidated sales growth in the range of 5% to 7% over the prior year. First-quarter sales were $1.82 billion, and that's just a slight increase over the prior year. Workday-adjusted organic growth of 3.2% and growth from acquisitions of 1.2% were partially offset by 2.5 points of unfavorable foreign exchange impact, as well as the impact of one less workday. The US and Canadian businesses each grew approximately 4% organically, compared to last year's first quarter. Pricing for the first quarter was neutral. Organic sales growth for workday decelerated as we moved through the quarter, with January up 10%, February was flat, and March declined 2% organically. Sequentially, organic sales for workday declined 7%, due to the decelerating demand.

We continue to closely monitor our oil and gas customers, which represent approximately 10% of our total sales. Approximately 55% to 60% of our oil and gas sales are upstream. Approximately 5% to 10% are midstream. And approximately 30% to 35% are downstream. We estimate that the direct oil and gas sales were down approximately 10% in the first quarter, compared to last year, with upstream the most impacted. We've begun to see some project cancellations in deferrals. However, oil and gas projects make up only about 5% of our total backlog. We expect direct oil and gas sales to be down approximately 20% for the full year, or an overall impact on 2015 sales growth of approximately 2%.

Overall, backlog remains healthy and is up approximately 5% versus year-end 2014. US backlog expanded 5%, while backlog in Canada increased 12%, on a local currency basis. Backlog versus the end of the first quarter last year was down 1% in the US, and up 12% in Canada, again on a local currency basis. As John said, April is off to a slow start, with flat year-over-year organic sales month-to-date, but improved from March, which was down 2% organically. The US is slightly better than March, and Canada's performing slightly weaker, on a local currency basis. The book-to-bill ratio remains positive, with both the US and Canada running about a 1.

Gross margin for the quarter was 20.2%. That's down 50 basis points from the prior year, but was flat sequentially. Gross margin was impacted by lower rebate accruals, business mix, as well as continued competitive market pricing pressures. SG&A expenses for the first quarter were approximately $265 million, compared to $266 million in the prior year. Core SG&A decreased by $5 million compared to last year, primarily due to lower employment levels, which were down 1% from last year, along with variable compensation costs and ongoing discretionary spending controls. Sequentially, first-quarter SG&A increased by approximately $4 million, and that's in line with normal seasonality.

In January, we estimated first-quarter operating margin would be in the range of 5% to 5.2%. Operating profit for the first quarter came in at $87 million, or 4.8% of sales. Operating margin fell short of our outlook, due to lower than anticipated gross margin, but was partially mitigated by additional cost control. The effective tax rate for the quarter, at 29.4%, was in line with our outlook. The year-over-year increase in the rate is due primarily to the mix of profit between the US and Canada, along with the unfavorable movement in the Canadian exchange rate.

Net income for the first quarter was $46.8 million and earnings per share were $0.90. That's compared to $0.97 last year. The EPS contribution from core operations was neutral year-over-year, as the positive impacts of organic growth and cost control were offset by gross margin headwinds. Foreign currency translation, primarily related to Canada, reduced EPS by approximately $0.07 in the quarter, with the higher tax rate having a $0.02 negative impact. The lower share count, partially driven by the repurchase of approximately 300,000 shares during the first quarter, contributed $0.02 to the quarter.

Free cash flow for the first quarter was strong at $85 million or 181% of net income, and our working capital metrics remain solid. WESCO has historically generated strong free cash flow throughout the business cycle. As a first priority, we redeploy cash through organic growth and acquisition investments to strengthen and profitably grow our business. Second, we work to maintain a financial leverage ratio between 2 to 3.5 times EBITDA. In mid December, we announced a $300 million share buyback authorization, and as previously stated, we repurchased approximately 300,000 shares in the first quarter under that program.

During the first quarter, we further reduced our leverage ratio to 2.9 times EBITDA, within our target range, and down from 3 times EBITDA at the end of the year. Leverage on a debt net of cash basis was 2.7 times EBITDA. Liquidity, defined as invested cash plus committed borrowing capacity, was $625 million at the end of the first quarter. That's essentially unchanged from year end, and up approximately $100 million from the prior year. Interest expense in the first quarter was $20.9 million versus $20.7 million in the prior year. Our weighted average borrowing rate for the quarter was sequentially unchanged at 4.1%. We remain comfortable with our relatively equal weighting of fixed and variable rate debt. Capital expenditures were $5 million for the quarter, as we continue to invest in our people, our technology and facilities through both CapEx and operating expenses.

I'll now turn to the second quarter and full-year 2015 outlook. We expect second-quarter sales to be flat to down 3% over last year's second quarter, including a Canadian currency exchange rate at $0.79 to the US dollar. We expect operating margin to be approximately 5.3% to 5.5%, and the effective tax rate to be approximately 29% to 30%. Based on the first-quarter results, we are revising our full-year sales growth outlook to a range of down 3% to up 3%, and lowering the operating margin range to 5.8% to 5.9%. We continue to expect an effective tax rate of approximately 29% and the Canadian exchange rate of $0.79 per US dollar. EPS is now expected to be in the range of $5.00 to $5.40 per share, a $0.20 reduction to both ends of the previous outlook range.

The change is primarily result of the softer sales outlook, which includes a slightly weaker direct oil and gas sales look and the impact on supplier volume rebates, partially mitigated by incremental cost reduction actions. These actions include structural cost reductions, consolidation of certain branches, and variable compensation adjustments, depending upon overall full-year financial performance. While still being finalized, we currently estimate these initiatives to total approximately $0.30 of EPS, or $0.10 more than the previously identified mitigating actions. We continue to expect free cash flow to net income of at least 80% for the year.

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

(Operator Instructions)

Deane Dray, RBC Capital Markets.

Thank you. Good morning, everyone

Hello, Deane.

Hey, was hoping to start on the conditions that you saw throughout the quarter. The fact that monthly sequence was decelerating and the exit rate -- and has continued into April. So you are very short cycle here -- not a lot of backlog, but just take us through what visibility you have into the second quarter, the degree of confidence in the sales forecast, in light of that deceleration.

So as we move through the first quarter, as you saw that -- you quoted what we said, the deceleration, January, February to March. What we really -- what we saw, if you think about it from an end market, is truly the industrial portion of our business took the significant step down as we moved through the quarter. And in the month of March was the part of the business that took the most significant step down, so they accelerated the trend, partially offset by some more solid -- I should say consistent performance in the other end markets. The point you made fits within that industrial space, which is a shorter cycle part of our business, and they do move more quickly than some of the others because of the backlog. So as we looked out to the second quarter, where we sit today, which is at about organic growth flat in the month of April, month-to-date, it's categorized pretty much the same way if we think about end markets. It's softer in the industrial space and some stronger growth rates in the other spaces.

Comfort level with the second quarter outlook, I would say that we'll be driven significantly by how we see Industrial start to move. We think the backlog is there to support the construction side of our business. We know the utility programs that are rolling into place -- you know how the utility part of our business works -- but the comfort level would be driven by what that projection looks like and what the actual results look like out of our industrial end market. We have sized the range for the second quarter, anticipating that they continue approximately how they are today.

And the only thing I would add, Deane, is the other factor that will drive Q2 is we'll be entering obviously the construction season. If you look at our results last year, which is more typical seasonality, let me say, we have a step up in growth or sales from April to May to June. Our backlog is often -- it's healthy as we enter the second quarter and book-to-bill is above one

On Construction, where do you stand in expectations regarding some of the industry indicators. We've heard and seen that the Dodge is pointing to high single digits growth, the ABI had another uptick. And so how are you calibrating your construction exposure into what should be looks to be a favorable construction season?

Yes. We're pleased, Deane, with Construction to start the year. When you think about it, I'm not going to say this Q1 winter weather was worse than last year. In some locations, it was much worse, like in the Northeast. In other locations, it was nowhere near as bad as last year, so we are particularly pleased with our construction results in Q1, with 8% in the US and 8% growth organically in Canada.

As I said, the backlog built up nicely and that momentum is starting thus far in April. We're seeing some nice momentum building in Construction. It is what we expected. Our view is that the leading market indicators, which you've cited, set up for continued positive vector to growth in the construction market throughout the balance of this year.

And the other thing that gives us some comfort is we do think we're in the recovery portion of the cycle. We've stated that previously. Clearly see that continuing to occur in Construction, and that's with oil and gas clearly being down, so for those particular construction projects -- and the non-resi total market is still some 20% off the prior peak that was reached back in the first quarter of 2008. And overall electrical shipments -- I don't think we've cite this data frequently -- is still off the prior peak that was reached in the third quarter of 2008. And obviously, that was heavily tied to non-resi peaking as a big driver in where industrial reduction was. So I would say that we share the view with the favorable leading indicators and our businesses have started off nicely in construction.

Thank you

Thank you, Dean

Robert Barry, Susquehanna.

Hello. Good morning, guys. This is [Philip Floran], filling in for Rob today My question is on gross margin. In Q1, the gross margin was down 50 basis points. What is implied in your guidance for the full year, in terms of gross margin? Is it a similar decline?

If you look at the trend -- I'll give you a little bit of background and then answer the question for you. Look at last year. Gross margins declined as we moved through the year, primarily due to the mix of business and the SVR impacts, our supplier volume rebates impact, due to growing business but softer volumes than we had planned as we started 2014. So if you rolled that forward to this year and say, what are we thinking about?

First of all, we have -- we don't give specific gross margin outlook for any of the future quarters of the year, but we do obviously talk about operating margin. And there's two things for you to think about in that, which is we've sized some incremental cost reduction actions for the second half of the year, which will obviously provide some operating margin lift, as those savings flow through. Those benefits will be more second half loaded than they are first, and if you put those in and back into a gross margin, what you'll see is that the gross margin rate doesn't have expected continuing downtrend, but the rate of variance year-over-year would not be declining like it was in the first quarter because we had tougher compares on gross margins than in the first quarter.

We do think that in the first quarter that much of the decline is due to mix of business, as well as the resizing of the year for growth and related supplier volume rebates. You can pretty much think about that 50 basis points as half due to business mix and half due to re-estimates of volume rebates, in light of a softer demand outlook or softer sales outlook, I should say. And that mix of business is truly where we're not seeing declines in any of our individual businesses in gross margin, but it is the mix of how our businesses are coming together as the different pieces grow.

As a matter of perspective, I'll give you one little last data point on that, which is if you think about it now with the softer Canada and the impact of FX on Canada, that portion of our business has now come down from 25%, 26%, down a few points into the low 20s% and that's -- we've been pretty clear about. That's a more profitable part of our business relatively than the WESCO average overall from a gross margin perspective.

The utility business, which has grown and we've talked about 16 quarters of growth, combined with our WIS business, those tend to be on the lower side of our gross margin average rate. The combina--the WIS and the utility businesses is now bigger than our Canadian business, so that gives you some perspective on how mix is impacting the overall gross margin rates while the individual rates within those businesses are not declining.

Great. That's very helpful.

Okay. All right.

My second question regards oil and gas. Investor Day, you guys mentioned that increasing MRO would partially affect weaker project spend. Is this still something you believe is true and how is it tracking after day? Thank you.

Yes, I think we still believe that that is true and we'll see that dynamic. I mean, with that said, there's no doubt that our customers are taking significant actions, and in the oil and gas portion of our business in particular, they're taking some pretty significant actions around reducing CapEx and discretionary spending, as well as cost-cutting in the form of significant layoffs. And I think you've seen many of these announcements that have been made publicly.

So we still believe that dynamic is the case, but some of these customers are pulling the reins back on discretionary spending as well, which does sweep MRO under that category, right? And you can't pull that back and not spend there forever, so that dynamic that we believe will occur as we move through this is playing out and we think that will continue.

And when we made that statement at Investor Day, I think it's important to think about the timing of this as well. What we said was that in the short term, MRO spend will continue at a stronger rate. We expect MRO-related expenses to continue at a stronger rate, and then the project impact softens up.

You can see that in what we've just said about the quarter versus our full-year outlook for oil and gas and direct sales. The first quarter, we said was down about 10%, which reflects the flat fact that MRO spending has been tighter but is continuing, and what we expect that will drive the 20% full-year reduction is as the price of a barrel of oil stays down, that MRO spending may soften in the second half, as well as the project spend.

Great. Thank you.

You bet. Thank you

Josh Pokrzywinshi, Buckingham Research.

Hey. Good morning, guys

Good morning, Josh.

First on the free cash flow guidance or I guess the conversion guidance of 80%. Can you help us dimension that a little bit? Because at 80%, we're talking low $4.00 in free cash flow per share, so almost $1.00 below where you guys have been in the last couple years. And over the last couple years, obviously had a year in there were you didn't get the benefit of the equal amortization. I'm just surprised, given some of the top-line headwinds that the working capital wouldn't be coming down more and that 80% wouldn't move up.

Yes. Fair question, because you look at the history and you can see that I think over the last five years, we've run on average north of 100% free cash flow to net income. Implied in our sales guidance was a flattish first half, wherever you want to put those numbers. In the up end of our full-year outlook is a 3% top-line sales growth range, which would imply a second half pickup in sales above that.

I'll tell you what you can expect from us is what we always deliver, which is strong, solid cash flow. We keep the 80% guidance out there. That's what we have done consistently, but we consistently try to over deliver that and we will do the same thing this year as we move through the year

Got you. I guess on the implied second half here for the top-line, it looks like there's maybe 150 basis point, 200 basis point acceleration on an organic basis versus first half. You mentioned maybe MRO didn't stay down forever. Maybe CapEx on the more industrial basis has some mean reversion or some of these plus come out. Obviously non-resi is getting better. But I guess when you guys rolled out guidance, what was the primary driver of that second half increase?

This ties back to Deane's question earlier, Josh. So you think about the construction momentum that's being built. We're in the recovery portion of the non-residential phase. I didn't addressed this yet, but in particular, we are still seeing nice growth in Utility, nice growth in our communications and security category. So our communications and security category grew low double digits in the quarter, with growth in both data communications, broadband communications and IP security. Lighting remains a category that we are seeing growth in.

When you begin to look at construction and different product categories that I think we're set up for some improvements as we move through the year. We expect Utility to continue to perform strongly above market as we move through the year. Industrial, I think is the wild card, and so those customers -- and that's where we have -- it's the biggest demand market we serve.

We have more end user direct relationships and they can move much faster, in terms of addressing reductions and small projects and discretionary spending, which is what we've felt and are feeling. For the CIG end market, I'll make note that we felt that was solid results in the first quarter and government after being flat last year, government grew mid-single digits in the first quarter and we think that we can maintain some relatively solid growth in that as we move through the year

Okay. So I guess just to paraphrase, maybe the stuff that's bad doesn't get a lot worse, and those areas where you're seeing momentum, CIG, Utility and Construction, continue with this pace.

Yes. You guys, you asked a question and talked about guidance, and obviously we think about that with all the best information that we have as we're putting it together, but you can see that as we range the year, you take the midpoint of our guidance. Really the midpoint is a flat year on the top line. We do believe there's still a 3% upside scenario or we wouldn't have it out there. A 3% growth scenario, and John pointed out all the reasons why.

If Industrials moved negatively on us quickly, it could be down a couple points. But what we do think is that the midpoint of the guidance looks like more of a flattish year, as we move through the second half.

Got you. Thank you, guys.

You bet

Christopher Glynn, Oppenheimer.

Thank you. Good morning. Hey Kenneth, I was wondering how much of the decline in the Canada gross margin that you described is based on the FX impact on some of your US sourced product

Not so much on US sourced product. It's based purely on the translation impact of their results to our P&L. Canada primarily sources Canada product for Canadian sales. We don't have a lot of cross-border transactions. So it is primarily the translation impact of their results, and you know what those rates have done over the last 18 months or so.

And Chris, think about our major supplier partnerships. So Eaton, Schneider Electric, now with EECOL, Philips, ABB Thomas & Betts and the like. These, they all have Canadian-based operations, factories in Canada. But when you look at that -- if you were to look at the distribution of our product categories in the supply base that provides them, it's overwhelmingly a Canadian supply chain that serves the Canadian market.

Okay. And so this might be a wider revenue guidance range then I've seen you have in the past, and is that mainly reflecting that at this particular juncture in time, there's a binary kind of industrial MRO outlook?

Quite frankly, this thing moved on us extraordinarily quickly. We started the year with really good strength, having January up 10%, building off the momentum we had built from Q2 to Q3, to Q4 last year. February flattened out to no growth, but as we looked at that, we had some particular and acute weather issues for certain. For example, in our Eastern part of our US business, we had 75 branches that were closed at least a day.

And so, we had some issues in February and that West Coast ports strike impacted not so much us and our supply chain -- you know, minimally -- but some of our customers' operations. We felt effects in February. We fully expected a spring back in March, particularly because of the way the weather season started to improve. And it was different than last year, because out West for the US and Canada, it was unseasonably warm versus last year, and in the East, it was unseasonably cold and got a lot more precipitation.

March surprised us. I don't know how else to say it, but absolutely surprised us. As we moved middle of the month, in latter part of the month, we expected the acceleration. We did not get it, which we typically get in March. Thus far in April, as Ken mentioned in his commentary, it's a bit better than March, but it hasn't really sprung back yet. So I think that's really the basis of -- we're factoring in what we've felt thus far, through 3.5 months in that outlook.

Okay. Thank you for that color. Lastly, the guidance does imply an unusually steep second half margin ramp. Clearly a more second half weighted earnings than usual. I think the past couple years, you have been pretty active on cost initiatives. Are we simply to read here that the magnitude and scope of the cost initiatives right now -- apologize if I forget -- if you quantified it literally, but it's just a different scale.

Yes. It's a different scale and it's a different level of actions. We are always cost focused. We called out last year discretionary cost controls and that bucket of expenses. There's a lot of things we can make decisions on pretty quickly and drive some reduction there. Those have continued into this year, as we've had the soft start to the year.

What's really going to drive the operating margin list in the second half, which you noted is indicated to be stronger obviously than the first, are what John mentioned and then I outlined as cost actions around structural cost takeout, branch consolidations. We cite that at about $0.30 per share EPS impact on the year, and that will be more second half weighted, those savings, because it takes more action to get those into place.

Okay. Thank you for that.

You bet. Thank you.

Ryan Merkle, William Blair.

Thank you. First question on April, something you could clarify for me. Did you say April sales are flat on a total basis? And then, what are the components?

They are flat organically, on a total basis. And we didn't break it down by end market. That information obviously clarifies as we move through the quarter, but what we've said, the trends that we saw towards the end of the first quarter seem to be continuing into April. Now on a geographic basis, we stated that the US is performing a little bit better in April versus where they were in March, and Canada is a little bit softer than where it was in March.

Okay. Am I right to think that the construction market really picked up in the second half of March and into April? Could you provide any kind of numbers to help us there?

I would say nothing that is of value at pointing out. Construction, as John pointed out, moved fairly consistently through the quarter.

Lastly, are you seeing any impact in the key energy states, as it relates to construction yet?

No. Let's say it this way. There are customers in the US that serve the energy market that are also taking significant action, similar to customers in Canada out in the western provinces. Those actions are asking their suppliers and those in their supply chain for other cost savings, pulling back on CapEx, deferring and delaying projects, reducing discretionary spending and executing layoffs. I'm sure you've seen some of the headlines in the energy states in the US where at least where the public announcements have occurred thus far. We're talking in the double digits of tens of thousands of layoffs that's already been announced in a number of the different energy states in aggregate.

So those actions are clearly occurring, but keep in mind that -- and I think I mentioned this the last call or maybe the last two calls -- when you think about in general -- I'll give you a rough order of magnitude -- when you think about investment related to wells and mines, so oil, gas and then metal mining, that's roughly 20% of the total non-residential spend, and that's going to be down significantly this year. There's no doubt about it.

And we've given you the outlook for our business because our business then factors in project versus MRO, the discussion we had earlier, our business models. But when you look at the true spin all in that portion of the non-resi market. I mean there's estimates out there that range 20%, 25%, 30% down for the year, and these are forecast.

The remaining 80% of the non-resi spend includes some segments that are growing, commercial and healthcare, and education. I think you've got a very broad and diverse non-residential construction base. Commercial constructions improving and that net, net, you integrate all that and you look at our results in the first quarter, and this is what I commented in response to Deane's question. We had solid results in the US in construction? All win.

But just to be clear, you're not seeing that hit in non-resi yet?

We have seen with many of our oil and gas, and metals and mining customers, irrespective of geography, we have seen reduced spending as impacting our sales momentum. Again, we've seen it in Canada. We've seen it in the US. We've seen it outside the US and Canada.

Okay. Great. Thank you.

All right. Thank you.

David Manthey, Robert W. Baird.

Hello, guys. Can you hear me?

Yes, Dave. Hello.

Thanks a lot. Just thinking about the gross margin. I know you said you don't give guidance, but with the industrial segment, assuming it's going to continue to decline as a percentage of the mix, given the strength you're seeing in Construction, Utility. Even if it does recover slightly, is there any reason to believe that gross margin shouldn't be flattish or maybe even lower as you move through the year because of that mix, or are there other countervailing forces?

I think that's a fair assumption. We talked about over the last couple years a lot of the initiatives that we're doing internally. And at the highest level, you can kind of assume that those initiatives are driving some improvement, and the mix of business is offsetting that

Okay. If I run through the GPM, say 20% even going forward, the guidance for the second quarter seems to imply about $290 million in SG&A, including D&A, and something like $280 million in each of the next two quarters. I guess would jive with what you said, regarding the $20 million or $0.30 after tax of benefit you expect to see from those actions.

The question I have on that is, assuming that $20 million or $0.30 is just repeating 2015, not a run rate, it seems like a big number. If you're looking at $40 million, isn't that 3% or something of your OpEx? It just seems like a sizable number. Just wondered if you could give us an idea of how sweeping these actions are actually.

So we kind of defined it across, if you want to call it two or three items: structural cost takeout and cost consolidation of branches. Those will obviously have an ongoing impact as we move into later years, because we're looking at locations. You followed the business for while. At the beginning of 2014, we structured the US under a common leader and in doing so, we took some of our legacy industrial and construction footprint and it's commonly owned by leaders that also produce their own data comp footprint.

We are now a year plus past that. We have the opportunity to look at that footprint, where it might overlap and consolidate some branches. It's not the majority of our branches. We are not talking about that level of restructuring, but what we're looking at is in certain jurisdictions where we have the multiple footprint commonizing. That will have carry-over impact. That's a piece of that. That's a piece of the cost reduction actions that we've talked about.

Structural cost takeout, we always take the opportunity, and we're doing the right now again, to look at across the business and all functions in all places. Are there positions that we need to take a look at and say, so they exist? Do they exist in another location? Do we need them where they are? Those will have carry-over impacts.

The third part of what I outlined for you was variable cost, variable compensation adjustments related to full-year results. Those won't necessarily carry over and have benefits to next year, because the results should anticipate to be at a higher level as we see the economic cycle and the benefits of some of the cost reductions that we've implemented this year carry over. So a lot of words to say that you described it exactly right, which is the lift in the second half and the rate that you're estimating for OpEx is driven significantly by the savings from the cost reduction actions.

We'll defined those, and those take a while to define rollout, get implemented. Some will be implemented earlier, some will be implemented later in the year. As we get closer to 2016 and start to talk about 2016, we'll give you guidance around the carry over impact of those benefits, but it is clear that some of those will have carry over benefit.

Got it. All right. Thank you much.

Thank you, Dave.

Matt Duncan, Stephens Inc.

Hello, guys.

Hello, Matt.

Ken, kind of sticking on the same topic, are there going to be some one-time expenses in the second quarter, tied to some of the branch closures and other things? It looks like the SG&A cost would have to be down in the back half of the year for the Q2 level, which marries up with what you're saying, but are there any one-time expenses flowing through the Q2 here?

There may be a little bit. But I wouldn't think about that as a really large number. We're a lot of locations around a lot of geographic footprint. We don't have big, heavily capitalized investments that we have to look at as we move things around. There could be a little bit of a negative or a cost in the second quarter, but it's not going to be sizable.

Okay, and then a couple questions on the guidance. The first one, just on the revenue side, are you guys starting to factor in some negative effect from this secondhand energy exposure? You have your customers' energy exposure and the resulting decline in their businesses that flows through to you. Have you encapsulated that in this new revenue guide? And then secondly, on the sales force additions, is there anything in the guidance for their potential impact to help sales growth this year? How should we think about the addition of those folks, helping out next year?

Let me hit your first question first. Let me give a little insight underneath Industrial for Q1, and so I would -- I will tell you, we have seen impact in other industrial verticals beyond oil and gas, and metals and mining in the first quarter. I think you'll recall that, we've shown you before. We take -- if you take Global Accounts, we have 14 different segments we cluster all our global accounts into. Over half of those global accounts, over half of those global accounts segments declined in the first quarter. One of them is oil and gas. A second one is metals and mining. So over half declined.

That just gives you a sense that I think what we're seeing again with Industrial is somewhat similar to what we've been doing our business, where we ratching down discretionary spending. They can move very quickly. We're seeing it happened fast.

It's impacting not just the discretionary and MRO, but it's impacting small capital projects as well. We're seeing that, and we've factored that in. The big wild card is, as Ken mentioned, how does Industrial really perform as we move through the balance of Q2 and through the middle parts of the year and the latter part of the year.

Relative to the sales force additions -- make a few comments on this. First of all, we don't have any of the benefits expressly factored into our outlook for the full year. None. To the extent we get traction, that represents upside. Okay? First point.

Second point is, and I will because again, it's in an earnings calls, so I won't take too much time with this, but we're in year two of this major organization redesign. We never had a global sales and marketing leader until January of 2014.

In our Investor Day in early March, David Bemoras laid out a number of the actions that are initiatives that are underway under his leadership, consistent with our new work structure. New end market forces sales teams; precision selling, where we do account segmentation; new product category organizations; value creation selling and trading for our sales folks; this checkerboard and the execution; One WESCO, et cetra, et cetra.

We have always had in our plans this next action, which is to now go in and specifically try to attack and realize, and capture the traped potential that is with certain customers and with certain local geographies. And again, because we have never had one overall leader, we weren't building platform elements in our front end. Thus far, over the last 15 months, this is a new action now that start to say, okay, we're rebalancing shared sales territories, adding additional outside sales folks.

We're also going to be addressing those that may be have not been performing up to our expectations, and that's not an area we've attacked expressively before. And that will result in essentially better coverage with our front end, and we're targeting, unlocking and capturing a trapped potential. I want to give a little color on that, the detailed plans on that, and you can imagine, we got a large sales force. It's all under development and it will progress at different rates, depending on what business you're in, what one part of the geography, but this is the next step of this new front end organization, while continuing to do the other actions that David laid out. And again, as I said earlier, it's not expressly factored in any upside from that.

Okay. Thank you, John.

Matt, let me give you one data point on the guidance piece of this to your first question that may help you think about how we're thinking about it. So we had said our top-line growth guidance at Investor Day was 0% to 3% for the year. And within that, direct oil and gas, we said would be down 10% to 15%. Let's just call it 15%. So what's moved?

Our outlook for FX hasn't moved a lot, right. It's still running around the same rate for Canadian FX. We did take up our impact for direct oil and gas a little bit. Not significantly, but to the 20% range. That's about another half a point negative impact on sales growth. I'm giving you that background, so you can size how we're thinking about indirect impacts

Ken, the widening of the range is essentially allowing for that indirect impact.

Absolutely. That's pulling those pieces together. If you model it out and think about it, we are obviously indicating that we're pulling in some more of the potential indirect impacts into the broader range.

Got it. That's helpful. Thank you, guys.

Thank you, Matt.

Noelle Dilts, Stifel.

Hello, guys. Thank you.

Hello, Noelle.

Good morning. Just wanted to go back to the rest of world segment. I know it's not huge, but I was hoping you could maybe just give us a little bit more detail on a country level and some of the drivers of the softness that you saw in the quarter.

Yes. Thank you for that question, Noelle. We haven't talked about this probably in some time. When you think about our international business, it is outside US and Canada. So it's Mexico. It is South America, because of the EECOL South American acquisition. It's kind of Middle East, and it's also Asia. We really don't disclose at a country level, but I'll give you some sense.

The business internationally is driven by Global Accounts, Integrated Supply and Capital Projects, fundamentally. And so that's where we see the challenges in global mining, which specifically impacts South America. We're in Chile and Peru, and Ecuador, as a result of our EECOL South American acquisition. Global mining, global oil and gas, and obviously, we have foreign exchange impact there as well, which we laid out in the webcast presentation. We're feeling those challenges.

Upstream project activity is being negatively impacted. Funded projects seem to be continuing so far, but there's slowdowns early on in the engineering and fee part of the process. Some new projects are being delayed and canceled. So is not a large part of your business, as you said, but clearly we're feeling the impacts of these global commodity-based markets that are slowing down.

With some of our integrated supply business, we are getting some growth, because that's a little bit more diverse. So we do have the integrated supply business models that extends to certain customers in certain countries, but by and large, the international business is driven by these mining, oil, gas, capital projects and global accounts. Does that help?

It does. Thank you.

Noelle, one [thing] I want to point out. It gives me opportunity to point out one thing we've added to the webcast, which runs to your question. In the backup, we're showing you the pieces of the calculation of organic sales growth. The international business, while we showed on the chart the organic, please keep in mind that we are and you can see it disclosed -- we talk a lot about Canadian exchange rate and this part of the business. Rest of the world is a lot smaller, but with the strengthening US dollar globally, it does pull in significant FX impact into our overall number, relative to its own business. And so just gave me the opportunity to point out that we're making one more disclosure back there for you.

Great. Thank you, Ken. My second question is -- I don't want to beat a dead horse here, with the cost reductions -- but in my view, there's no question you've done a very good job of just containing cost really over the past year. So this move into more footprint consolidation seem to be like a little bit more of a shift toward structural takeout and permanent cost takeout. Is there any way you could talk about maybe the actions you've taken over the past year and discuss how much of that you think is a little bit more temporary in nature versus permanent?

Yes. Very good question. It will run to a lot of the comments that we've made already on this, which is over the last year, I think that collectively the organization has done a very good and disciplined effort at managing cost, probably more in the discretionary control space, but we have done selective workforce type actions, not large numbers, that are driven out of what we talk about a lot, LEAN initiatives. As we look in the functional groups, in the operational groups, as we embed LEAN activities more and more in the business, it gives us the opportunity to look at positions and number of people and groups and kind of manage that.

So it's been a mix of both structural things, as well as short-term things, but to your point, I would say some of the things in the last year or so it's probably more weighted to the discretionary controls as opposed to structural. You're exactly right. You hear the commentary exactly the way that we mean it. Which is we're moving into a phase now where we're having the opportunity because of the reorganization that we did at the beginning of 2014 to look at our footprint and make some decisions around these groups of locations can be managed, operated, co-located, housed together, and it's not about underperformance of those branches.

We may be looking at things where we're optimizing performance or improving performance of already well-run businesses just because we're going to take the benefit of geographic proximity, shift from the past some more that are more discretionary. Now were taking some more structural cost that will carry to the future. We'll size that more as we move through the plans, but that's exactly what's happening, the way you described it

Okay, and sorry if I missed this, but did you mention how much this incremental $0.30 of savings is going to cost?

No, we did not, but I would anticipate. We did say that it doesn't have a big upfront cost to it. I think it will have some cost to it, but think about the $0.30 itself as close to being net.

Okay, great. Thank you.

I think we've got of time. Thank you for that -- those questions, Noelle. I think we do have a few more folks in the queue. Dan is obviously available, and I know his schedule is filling up, and so let's bring the call to a close. I'd like to thank you for your time today and your continued support. Have a good day.

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