Wesco International Inc (WCC) 2015 Q4 法說會逐字稿

Good morning and welcome to Wesco's fourth-quarter and year-end 2015 earnings call.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to MaryAnn Bell. Please go ahead, ma'am.

Thank you and good morning, ladies and gentlemen. Thank you for joining us for Wesco International's conference call to review our fourth-quarter and full-year 2015 financial 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 at Wesco's website at www.Wesco.com.

Means to access this conference call via webcast was disclosed in the press release and was posted on our corporate website. Replays of this conference call will be archived and available for the next seven days. With that, I would now like to turn the call over to John Engel.

Thank you, MaryAnn good morning, everyone. Our fourth-quarter and full-year results were in line with what we had projected on our third-quarter earnings call and reaffirmed in our outlook call last month.

For the quarter, reported sales were down 7%, reflecting our organic sales decline of 8%. This compares to a strong prior-year fourth quarter, which grew 8% organically and 12% in December.

As planned, we continued to tightly manage our costs and streamline our organization to help mitigate the impact on profitability. Free cash flow generation was very strong at more than $100 million in the quarter or more than 200% of net income.

For the full year, sales, operating margin and EPS were down versus prior year but were in line with our expectations. We delivered free cash flow of 125% of net income, our strongest performance in five years, and completed two acquisitions: Hill Country Electric earlier in the year and Needham Electric Supply in November. In addition, we initiated our share repurchase program last year.

During this prolonged economic recovery period, we are taking the required actions to reduce structural costs while strengthening our business. Our One WESCO initiatives are gaining traction with customers and suppliers as they are looking for strong value-creating supply chain partners. Our efforts are centered on providing excellent customer service while delivering value to our customers' operations and supply chains.

We remain clearly focused on executing our One WESCO strategy to deliver above-market sales growth, improved profitability, generate strong free cash flow and increase shareholder value. Our acquisition pipeline remains strong, and we plan to continue to expand our electrical core, add additional product and service categories to our portfolio and expand our customer base. The free cash flow generation capability of our business, coupled with our strong balance sheet, support these continued investments while enabling a return of capital to shareholders.

I look forward to our upcoming annual Investor Day on March 2 in New York, when our management team will provide a comprehensive review of our growth strategies and our plans for 2016 and beyond. Now I will turn the call over to Ken to provide further details on our fourth-quarter and full-year results as well as our financial outlook for 2016. Ken?

Thank you, John and good morning, everyone. Turning to our end markets and starting on page 4 of the webcast with our industrial performance, we experienced a 17% decline in the fourth quarter, driven by our oil and gas, metals and mining and OEM customers. US sales decreased by 11%, and Canada sales were down 22% in local currency.

Direct oil and gas sales were down 25% for the year. Because of this downturn as well as efforts to expand our customer base, direct oil and gas sales are now down to approximately 7% of our total business.

A reduced demand outlook, weak global commodity prices and a strong US dollar in what some are calling an industrial recession continue to weigh on the manufacturing sector. Our customers are seeking our help to respond to these challenges with supply chain process improvements, cost reductions and supplier consolidation. Our global accounts and integrated supply bidding activity levels remain strong and sequentially increased each quarter throughout 2015.

Turning to page 5, construction sales declined 13% in the fourth quarter with the US down 7% and Canada down 9% in local currency. Similar to Q2 and Q3, we saw weakness with contractors serving industrial markets in the US and Canada while sales to commercial construction contractors fared much better. Outside of the industrial sector, we believe the outlook for the nonresidential construction market remains modestly positive and well below its prior peak.

Now moving to page 6, sales to our utility customers were up slightly in Q4, with the US up 4% and Canada down 11% in local currency. We've achieved five consecutive years of sales growth by continuing to secure new wins and expand our scope of supply with our existing customers. As an example, we were recently awarded a contract to provide operating materials for the electrical and water systems of a large public utility.

The utility sector is in a consolidation phase, which is expected to increase demand for larger distributor partners like WESCO who could meet their increasingly complex supply chain needs. We are also well positioned to provide integrated supply solutions and to support our utility customers' movement to renewable energy sources.

Moving to CIG on page 7, sales were down 4% in the fourth quarter, reflecting 7% growth in the US, largely offset by a double-digit decline in Canada. Sales to government customers in the US grew strongly in 2015 after being flat in the prior year. Our customers are focused on energy efficiency and security, and WESCO is well positioned to meet these needs.

We are seeing solid growth in data communications driven by data center construction retrofits and cloud technology projects. For example, we were recently awarded a contract with a global communications provider to supply video communication equipment products.

At our third-quarter earnings call as well as our 2016 outlook call last month, we expected Q4 sales to be down 5% to down 8%. Fourth-quarter consolidated sales came in within that range at down 7%.

Organic sales declined by 8% adjusting for the one extra workday in the quarter, and pricing was flat. Foreign currency translation reduced sales by 4%, the acquisitions of Hill Country and Needham added 3 percentage points to sales, while the additional workday in Q4 added nearly 2 percentage points to the top line.

Our core backlog decreased 6% from Q3 to Q4. That's in line with the typical seasonal trend and was down 6% from year-end 2014. During the year, the US backlog including acquisitions declined about 3% while the Canada backlog grew 7% on a local currency basis.

Gross margin was 19.5% in the quarter. That's down 70 basis points from the prior year and down 30 basis points sequentially. The gross margin decline versus both the prior quarter and last year was driven by lower rebate accruals as well as business mix. On a sequential basis, we were pleased to deliver stable billing margins in a challenging pricing environment.

SG&A expenses for the fourth quarter were $257 million including the acquisitions of Hill Country and Needham, which added approximately $9 million of incremental SG&A. Excluding the acquisitions, core SG&A decreased by $13 million compared to last year and $4 million sequentially. This reflects our cost reduction actions in the second, third and fourth quarters to eliminate approximately 460 positions and eliminate or consolidate 21 branches including our businesses in Australia and Brazil.

SG&A was also favorably impacted by lower variable sales and composition costs as well as the ongoing discretionary spending controls. Operating margin was 4.8%, down 140 basis points from prior year and 70 basis points sequentially.

WESCO incurred a higher tax rate as well as lower interest expense in the quarter, reflecting the impact of an agreement reached with the US and Canadian taxing authorities regarding royalty and management fees charged by WESCO US to WESCO Canada from 2004 to 2015. This matter had been substantially reserved previously, and the reserve was recorded as accrued interest expense. Excluding the impact of the resolution, the effective tax rate for the fourth quarter was approximately 28% or 80 basis points lower than last year.

Further details are in the appendix on slide 18. The agreement will be in effect through calendar year 2018 and is not expected to materially affect the Company's effective tax rate going forward.

At our Q3 earnings call and our December outlook call, we expected full-year reported sales to be down 4% to down 5%. Full-year reported sales came in in line with that outlook at approximately down 5%, and organic sales were down by approximately 3%.

Foreign exchange reduced sales by 3% for the year while acquisitions added 2% to the top line. Gross margin was 19.9% for the year, down 50 basis points from the prior year, again driven by lower rebate accruals along with business mix.

SG&A expenses for the year were $1.1 billion, including the impact of 2014 and 2015 acquisitions, which added approximately $22 million of incremental SG&A. Excluding those acquisitions, core SG&A decreased by $44 million or 4% compared to last year.

Operating profit of $374 million was $92 million lower or down approximately 20% as the benefits of cost management only partially offset the impact of lower sales and gross margins. Resulting full-year operating margin was 5%. That's equal to our outlook but down 90 basis points from the prior year. The effective tax rate, excluding the impact of the settlement of the tax matter during the fourth quarter, was 28.5%, up 20 basis points from last year and in line with our outlook of approximately 29%.

Moving to page 11, fourth-quarter EPS was $1.03 compared to last year's $1.40. Core operations unfavorably impacted EPS by $0.41, while foreign currency translation primarily in Canada reduced EPS by $0.08. Along with that, tax-related items reduced EPS by an additional $0.04.

A lower fully diluted share count resulting from share repurchases and the impact of the convertible debt increased EPS by $0.11, and acquisitions contributed an additional $0.05. For the full year, EPS of $4.18 was $1 below last year, primarily the result of a $0.95 unfavorable impact from core operations. Unfavorable foreign exchange and tax related items reduced EPS by $0.31 and $0.06 respectively, and the lower fully diluted share count added $0.22 to EPS while acquisitions contributed $0.10.

Free cash flow for the fourth quarter was strong at $102 million or more than 200% of net income. And for the full year, we generated free cash flow of $261 million or 125% of net income, comfortably above our outlook of approximately 100% of net income.

WESCO has historically generated strong free cash flow throughout the entire business cycle, and as a first priority, we redeployed that cash through organic growth and accretive acquisitions to strengthen and profitably grow our business. Second, we worked to maintain a financial leverage ratio of between 2 to 3.5 times EBITDA, and in December of 2014, we announced a $300 million share buyback authorization and utilized $150 million in 2015 to repurchase 2.5 million shares.

Following the completion of the Hill Country and Needham Electric acquisitions in the second and fourth quarters along with our redeployment of cash towards our share repurchase program in the first nine months of the year, our leverage ratio ticked up slightly and ended the year at 3.8 times EBITDA, modestly above our target range and consistent with our comments during our December outlook call. We anticipate that continued solid free cash flow generation will allow us to bring this ratio back within our target range in the near term. Leverage on a debt net of cash basis was 3.4 times EBITDA.

Liquidity, defined as invested cash plus committed borrowing capacity, remains healthy at $546 million at the end of the year. Interest expense in the fourth quarter was $9.9 million versus $20.2 million in the prior year. That includes the $9 million reserve reversal for the tax matter that's reflected in tax expense.

Our weighted average borrowing rate for the quarter remained stable at 4.1%. As we enter 2016, we're comfortable with our debt equally balanced between fixed rate and variable rate instruments.

Capital expenditures were $22 million for the year, in line with the prior year. We continue to invest in our people, our technology as well as our facilities through both capital expenditures and operating expenses.

I will now turn to the first-quarter and full-year 2016 outlook. We expect first-quarter sales to be down on a reported basis between 1% to 4%. Note that this quarter has two additional workdays over last year, so adjusted for the additional workdays, sales are expected to be down 4% to 7% on a common workday basis. This includes the impact of the acquisitions completed last year at an average Canadian exchange rate for the quarter of approximately $0.70 to the US dollar.

The first quarter has traditionally been WESCO's lowest operating margin quarter due to seasonally lower sales, typically 5% to 7% lower than any other three quarters, along with a higher rate of compensation expense recognition. We expect this year to be no exception, with an operating margin of approximately 3.8% to 4.1% and with an effective tax rate of approximately 30%.

Month to date, January consolidated sales are approximately 9% lower than the prior year and down approximately 9% organically. This is against a tough compare as we grew 10% organically in January of 2015. The book-to-bill ratio remains positive with both the US and Canada running above 1.0.

We also reaffirm our full-year 2016 outlook that was provided in our December outlook call of sales flat to down 5%, operating margin between 4.8% and 5%, 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 for 2016 of least 90%.

We expect that overcoming a sluggish industrial end market and a devalued Canadian dollar will be our key challenges in 2016. Since we provided our initial outlook, crude oil has dropped from $40 to $30 per barrel, and the Canadian dollar has weakened from $0.73 per US dollar to approximately $0.70 per US dollar.

We are closely monitoring the current market environment and our customer activity levels and are actively planning further cost out initiatives as appropriate in this environment. Now with that, I will open up the call to your questions.

(Operator Instructions)

Deane Dray, RBC Capital Markets.

Thank you. Good morning, everyone.

Good morning, Deane.

Looks like no matter how you describe it, the sluggish industrial, slow macro, oil, Canada, all of this stayed within your expectations for this quarter. So it begs the question -- I listen carefully, I didn't hear anything about stabilizing. Maybe that's too soon.

But John, maybe you can share with us the indicators within WESCO that you're monitoring in probably real-time that gives you a sense of the direction and where there might be stabilizing. I don't know if it is bidding activity, but maybe share for us your dashboard, how you are thinking about this because you did reaffirm the year despite -- it looks like a slow start to January.

Yes. So I will make two comments Deane, and that there's a multitude of things we're looking at on a daily basis. But one that is very important that we look at is just our bid activity levels as measured by request for RFPs -- RFPs we're generating in response to customer requests.

Ken mentioned this in his commentary, as we moved across the year in 2015, each quarter successively grew -- our RFP activity levels, bidding activity levels. And this is for global accounts, integrated supply and the aggregate. Each quarter successively grew, and the year overall was a record level.

Therefore, Q4 was a record level, and I will tell you the Q4 activity levels were markedly above what we experienced in the first part of last year. So that's encouraging to us.

We have had a view that our customers were driving a consolidation of their supply base. Some of that is we are getting exercised. Some of it though, we hope turns into, and is a good leading indicator to the extent we can continue to win opportunities appropriately -- it is a good leading indicator for our ability to take share of the customer spend going forward.

With respect to Canada, I do want to make a comment. This morning, you may have seen that CIBC came out, one of the top five banks, they dropped a GDP forecast for Canada from 1.7% to 1.3%. That's a significant drop this morning.

As you all know, Canada is a resource-based economy, so clearly the impact of global commodity prices in oil, gas, metals, mining impacts the Canadian economy directly. It impacts our customers' demand profiles, and they have been taking some fairly -- very draconian actions on their businesses. It also has an effect of shrinking the tax base, which has an knock on effect in Canada.

With all that said, our Canadian team has had extensive interactions with customers at the end of last year and so far this year throughout the month. We are not ready to call bottom by any stretch of the imagination.

What I will tell you is that some of the -- this is more from a customer perspective. Customers are indicating, and this is in Alberta specifically, that a good portion or the majority of the job losses have already occurred. So we will be watching that closely, and the indicator, Deane, is again our discussions with our customers.

We will be watching that closely to see if we are starting to find that bottom -- our customers, that is, with how they are reacting in their businesses. And our customers believe, now this is a belief, that the second half will be better than the first half. And this is with respect to Canada.

So I think the question is going to be, and we've said this -- when will we bottom? But the most important question will be how long will we bounce along the bottom once we bottom?

We are not ready to say we are bottoming yet, but as indicated by our current sales activity levels in January versus December, they are not getting worse across the Board and in Canada. And encouragingly, our backlog in Canada, as Ken mentioned, was up 7% on a local currency basis last year, end of the year versus where we started the year. So hopefully that gives you a little sense of how we are looking at it.

It really does, John, I appreciate that real-time view. Then just my follow-up question is towards the growth equation for WESCO.

And one of the reassuring points is cash flow, and I've seen WESCO operate well in tough markets and with resilient cash flow. We certainly saw that this quarter.

So when you think about deploying the cash and when you bring the leverage back within your range and you start looking at these M&A opportunities, maybe just rank for us the priorities or maybe it is just in terms of what assets are available. But product line, customers and regions, those three, how do you rank them in terms of how do you want to grow profitably through M&A given what -- how you can deploy your cash?

Yes, Deane, thanks for recognizing the cash flow performance. We really feel good about last year in the quarter, but overall the last year. It's been a hallmark of our Company. We are proud of our folks in terms of how they manage the working capital equation.

And as I mentioned in my opening comments, as a percent of net income, we are at the highest level we've seen since that terrible year when we lost 25% of our top line that we don't want to remember anymore over five years ago. So the fact that we had that type of conversion in a year like last year where we had some decline on our top line, but it was nowhere near the draconian drop we had back in over six years ago, is just an indication of I think the way we run our business. It is a hallmark of the Company, it is one of our key value creation levers.

As we think about it, our cash deployment priorities, we added a share buyback program to that priority set a year ago-plus. We had signaled that -- we had a $300 million buyback authorization.

We had signaled that we would do $100 million a year across the three-year time frame. We did $150 million last year because we do think we are our best investment. So as we think about it, deploying our cash, it will remain investing in our core business, acquisitions and obviously supporting a stock opportunistically with buybacks.

In terms of dividend, it is always a question we look at terms of at some point in the future, what will we do, will we initiate or not. And that something we constantly are evaluating, but that's not something that's in our cash deployment or allocation priorities presently.

With respect to acquisitions, I can say what we are not doing, to answer it crisply. We are not looking at acquisitions in Canada now. We are not looking at acquisitions really fundamentally internationally outside of the US and Canada. The priority is really the US.

With that said, there are some opportunities internationally just south of the US border that are looking attractive to us. We had a terrific business in Mexico, so it ha been an organic play. Although when we did Carlton Bates, we picked up some Mexican capabilities. So we are looking at in the Americas, but the overwhelming priority I would say is the US, geographically.

In terms of end markets and product portfolio and services, I would say look at the acquisitions that we've done by and large since we came out of the downturn. And what you've seen there is what we're looking for going forward.

A case in point, the last three acquisitions, and the last two in particular in 2015, Hill Country and Needham Electric Supply, were construction oriented. It helps strengthen and expand our supplier base with Schneider Electric Square D. And I must say that -- I meant to say, we didn't make this comment in the opening comments, they are off to a terrific start. We're above our committed business case for both, and I think it shows that on the non-resi construction market, even in regions that may be impacted by oil and gas, we are -- we can generate some nice growth.

We didn't own Hill Country on a full-year basis, but if we did, their growth rate was effectively high single digits last year. And Needham Electric Supply we've owned less than a quarter, but their Q4 growth rate effectively was double digits. If we had owned them for the full quarter, just giving you a sense of what the momentum factor is.

I would say that's a little more color than we normally give in an earnings call, but I wanted to go through it because I think acquisitions have been a critical value creation lever. And they will continue to be as we work our fundamental strategy of trying to play a consolidator role to scale matters and distribution. And acquisitions are an important driver for that.

Thank you.

Thanks, Deane.

David Manthey, Robert W. Baird.

Good morning, Dave.

So first off, as I'm looking on slide 4, the second bullet point, you mentioned that the industrial segment has reduced demand outlook. And as it relates to that commentary on the largest segment of your business, is there an offset somewhere?

Or John, you mentioned your customers are more optimistic. Is there an offset to that that leads you to maintain your full-year outlook?

Yes, good question, Dave. That comment on that page is with respect to the overall market.

I think -- now, our customers, with that market backdrop, we do believe we've been driving a consolidation of their supply base, and I think that's indicated in our increasing bid activity levels that I responded to -- to Deane's question. The comment on page 4 that we wanted to give the view of what our customers are facing and what they are saying to us. The implication for us and where we fit in the value chain, is because there's this overall consolidation trend, is more opportunities.

With that said, let me talk about our full-year outlook a bit. I think it is important because we gave an outlook, we had an outlook call in December, which was less than two months ago. And where do we stand now? We are one month, almost one month into the year.

We've got an operating plan developed, it was a rigorous process. Our top line is supported by the best-ever process we have in place around key account planning at the key account rep level, rolled up by branch into each of the businesses.

And so our top line supported by a real bottoms-up plan that we are aggressively going to drive execution against. And our margin is underpinned by a series of pricing and procurement initiatives that we've talked about in the past and will outline more in our Investor Day.

With that said, we are very mindful that the headwinds that we had last year remain in place in terms of market headwinds. And you cited our biggest end market segment, clearly we are facing headwinds there and our customers are.

But we are going to drive aggressively to try to take customer share and to get an increasing share of their spend levels. Even if that spend level is down, work the margin initiative.

I think we've shown that we keep a good control on cost and we did that throughout 2015. And if we need to, we will begin to execute further cost takeout plans this year.

Okay, thanks, John. And I know you discussed this before, but can you reiterate how you distinguish between industrial and construction segment sales? Is it simply whether or not you are selling via contractor?

And the reason is, I'm just trying to understand your construction segment, which seems like it's rolled over harder than the broader market. I'm trying to understand what is in there.

Yes, so we have -- we have to be consistent over time. So the way that we have done it by and large is in industrial, it is our direct end user customers that are not utility government institutions like healthcare and the like. It is all those direct end user customers.

It is specialty industrial contractors if they are pure play industrial or that we can categorize as a true completely industrial contractor. Or sometimes just some integrators that are clearly focused only on that end-user customer base. It includes -- and the demand is -- the products is MRO, some capital projects that we do direct as well as OEM direct material value-added families and the like.

When you look at construction, by and large it is a contractor base. It ranges from the big global EPC firms to national contractors down into the regional and local contractors. It includes electrical contractors, general contractors, it includes specialty data comm contractors, it includes system integrators and the like.

Utility is the direct utility end user customers, the IOUs, the public power customers where we serve them direct. But also that does include dedicated specialty utility contractors that are completely lined up to that end market segment.

And CIG is commercial institutional, governmental. It is the same approach as industrial and utility, it is those direct end user customers that are in CIG plus if they're specialty contractors or integrators lined up to those segments.

Great. That's perfect. Thanks a lot, John.

Thank you.

Robert Barry, Susquehanna Financial Group.

Good morning guys. It is Filippo Falorni on the call for Rob.

First question, just going back to January, you mentioned down 9% sales month-to-date. If you can give some color on the different end markets, and in particular, how is oil and gas sales tracking versus the negative 25% in 4Q?

So give you a little bit of color on that. As far as on the oil and gas piece of it, on a daily basis, we really don't have visibility as to what those specific customers are doing.

We track it by our businesses and not necessarily have the ability underneath that to see customer trends on a daily basis. We will see those as we start to close out the month.

On US versus Canada, what I would tell you is that Canada is down a bit more on a local currency basis than the US, but both pieces are down year-over-year. So we've continued to see that trend, and that's what we've seen so far.

Okay. That's very helpful. Then regarding -- going back to 4Q, in December, did you see any material impact from customers' shutdowns, or was it more in line with what you expected?

We spend a lot of time talking about -- on the third-quarter call as well as by the time we got to the December outlook call. We certainly on each year end have a certain amount of customer shutdowns as they actually prepare for the end of the year.

We had anticipated maybe slightly more than what we had seen in the prior year, but there was a lot of discussion around broader industrial shutdowns driving the business. We did not see a significant step up in industrial customer shutdowns affecting our business. We pick we had a little bit, but it wasn't to any means to the degree that maybe had been feared, and it was in line with what we talked about in Q3 -- our Q3 earnings call as well as our outlook call.

Okay, great. Thanks so much guys.

Thank you.

Matt Duncan, Stephens Inc.

Good morning guys.

Good morning Matt.

First question just on the revenue guidance, can you remind us how much that assumes your oil and gas sales are down this year?

We didn't give a -- like we did last year when we moved into 2015, we started to size that direct sales segment, and we had not done that before. And we gave you the guidance that got it to approximately 30% down for the year and ended up at around a little bit north of 25%, but within that range.

We didn't do that with 2016 because a lot of -- to use a phrase, a lot of the air has already come out of that piece of the business. It's moved from around 10% of our direct sales to 7%.

One of the reasons that we didn't give specific guidance on it is it's probably got a bit of a step down continuing in the direct piece. The harder piece to measure is the ongoing impact on an indirect basis.

So what we've tried to do is capture that through, as John talked about in his earlier discussion with Deane to the question, we tried to build that based upon what we are seeing our broader customer base doing, not just based upon what oil and gas direct sales are doing. We have not sized it in the same manner as we sized it for 2015.

Okay. So let me dig in a little there.

You are seeing upstream CapEx budgets this year that are down on the same order of magnitude or in some cases more than they were last year. So if that happens, is that going to be an irritant to the guidance, or do you think that you can still get to the range in that energy environment?

I would say based upon the range of our top-line sales growth, we have attempted to build where we are running today within that range. Now again, oil prices have moved significantly.

We need to assess how that affects 2016 CapEx versus does it push things that were already into 2017 further out. It is too early for us to really call that. We are watching all the indicators, and we are talking to our customers to see what that means.

But we have said, Matt, and we've said this as we move through the second half of 2015 that our customers and particularly oil and gas customers, specifically with respect to them, that the projects that were in the pipeline beyond a certain point, they were continuing to execute. But the front-end activity in terms of starting new projects, a lot of that got deferred, pushed out, so it's building this bathtub. That's part of the challenge, and as they've done these significant layoffs, it obviously is impacting also the engineering portion of their business.

So there's no doubt that there's this bathtub effect that has been created relative to capital spending. And it will take oil prices rising to a sufficient level and staying there before -- our view, before customers have the confidence to start to reinitiate and build up CapEx again. Our activities now are very much focused on supporting them on the smaller projects. There's some upgrades, also the MRO supplies keeping our facilities running.

We want to take a greater share of their lower spend level, and I think we are seeing that effect clearly as we went through the second half of last year. That's what, as Ken mentioned, that's the framework and the backdrop on how we've looked at 2016.

Okay, very helpful color. And last thing for me just on the combination of looking at SG&A expenses and operating margin guidance.

You guys have obviously been very active in cutting out some SG&A cost. I think you did a very good job in the fourth quarter.

How should we expect that to progress, Ken, quarter-to-quarter as we move into the first half of this year? And you talked earlier about you will get more aggressive on cost cuts if necessary. So how are you tailoring that expense line quarter-to-quarter?

As I look at the operating margin guidance, you are starting the year let's say around 4%, the guide for the year is up closer to 5%. And I know normally that first quarter is lower. Do we need to assume that there is some recovery that begins on the top line in the back half of the year to get to that operating margin guidance range? Or is this really just a function of you managing this SG&A expense line to get to that number if you don't see that recovery in the back half?

Yes, so consistent again with maybe how we talked about it in the outlook call. What we did say is we thought that the second half of 2016 we anticipate to be slightly stronger than the first half of 2016, partially due to the compare impact that we've already talked about a little bit on the first quarter. I want to be cautious around that and say we are not anticipating a quote-unquote recovery in the second half by any means. But we do think that the top line will be a bit stronger and the compares will be better in the second half than they are in the first.

Now drop down to the SG&A line, you made a point that's absolutely correct, which is the first quarter of the year is our lowest margin quarter on a consistent basis. This year, that will be a consistent story.

That will be driven by the fact that we are looking at a softer top line that will be one of our -- we anticipate to be our softest year-over-year compares, as well as the fact that as we move into a year, we obviously reinstate accruals. We have more compensation cost because you're early in the year on the payroll-related costs that go along with salaries.

So I would say as we move past that point, what you will see is, as we talked about, we have a pipeline of things. And we are building the organization and the activities around -- here's what the top line looks like. If that moves around, we need to actively manage that SG&A cost line to take things out. We think it will be a bit better in the second half, but we have plans in place to take out cost, close and consolidate additional branches, look at headcount in certain locations depending upon where those top-line numbers move.

And the final point I will make, as John alluded to this, the way that we built our plan, we have a very detailed planning process from the branch level up. So we don't have to just look at the top line and say -- well, is the top line where we need it to be overall and what do we do?

We actually have some incrementally better intelligence each of the last few years to say -- okay, I can look at this branch or this location and say, if you are not performing against plan, what we do within your branch location? That's the level of detail that we are working the SG&A line.

Okay. Very helpful, thank you, Ken.

Thanks, Matt.

Shannon O'Callaghan, UBS.

Good morning guys.

Good morning, Shannon.

On the utility piece, the US continues to look pretty solid there. You mentioned renewables growth on the slide there. Are you seeing the nature of utilities spending change at all, and do you see any prospects for acceleration there?

Great question. We feel terrific about our utility value proposition capabilities in that business. As you know, we've grown 19 quarters in a row now. We think we are taking share.

And what's driving our growth and utility growth hasn't been -- the market growth has not been strong, clearly in the D of T&D. So I will tell you overall outlook on the industry for our utility customers is it still a muted outlook for load growth -- electrical load growth, clearly.

And there's pressure for cost reductions and productivity improvements that our utilities are driving. And major infrastructure investments, the timing of those are really subject to both regional and national policy initiatives. So that's the backdrop.

With that said, housing starts, investments in LED lighting, renewables, storm hardening initiatives and the like are positive factors for future growth. You integrate that all, and here's our view of the market in 2016, and we addressed this in our outlook call a bit in December.

We think the overall outlook is flattish to up low single digits. We do think that differentially distributional will be a bit brighter than transmission in 2016 where it was the opposite in 2015.

Our bid activity levels are strong. We are still getting nice growth in new customers and expanding with our customers. And in terms of your specific renewable question, and we don't talk about this a lot, but we've had a solar initiative the last two years.

In 2014, we had very strong growth, very, very strong double-digit growth. In 2015, we had another year of strong double-digit growth.

I will tell you when you look at the mix of that growth, we are seeing some utility scale solar now as part of our solar growth that we are capturing and delivering against. I think, and you look at the investment tax credits that were extended that will -- and production tax credits that will support both solar and wind.

So with that said, we don't see a big tick up in market growth. I will end on that point because fundamentally for our electric utilities, it is about electrical demand, and it is a muted outlook for load growth.

The way -- that's been our view of the market, I think with our value proposition and how we are engaging our customers in our One WESCO strategy, we've been able to take more share in a market that has not been growing quite -- growing strongly.

Okay, that's really helpful. Then in terms of non-res outside of the industrial piece of being -- continued being solid, people are worried about everything these days. Are you seeing any cracks in the outlook for continued solid commercial growth in terms of construction?

Yes. I wouldn't say cracks. For us, and Ken mentioned this in his commentary -- and what we saw in Q4 was similar to what we saw in Q3, quite frankly -- that outside of the industrial oriented contractors or let's say contractors that have a mix of business, industrial, commercial construction and the like, on the non-industrial driven portions of their business, we are seeing some nice growth.

And I cited what we saw with the Hill Country acquisition as a case in point. That acquisition was done middle of last year. It's Austin and San Antonio. You'd think there would be knock on effects of what's happened across the oil patch, yet we drove very nice growth.

So I do think that we've got a solid backlog. We are seeing good bid activity levels, specifically in health care, and lighting, data comm, security.

But as we think about non-res outside of industrial, I would tell you where we think there should be -- and it's a modest outlook for growth. It is modest outlook for growth. I would think it will be in these segments: healthcare, education, office and some commercial construction in 2016.

That's our current view, but it is a modest outlook for growth. Because I think it is muted growth Company. And the only good news is that the residential construction recovery is still continuing, and that ultimately portends better growth downstream for non-resi.

That is great, thanks a lot.

Yes, thank you.

Christopher Glynn, Oppenheimer.

Good morning. Over time, your share gain, it comes and goes. Naturally you have strong years and then maybe a year off. But noting that you've talked about bid activities at record levels, do you see a positive trend or wave of share gains coming on in the context of your broader multi-year ebbs and flows?

That's our plan, Chris, but the market is tough. The challenge is it is a very -- overall it is a low-growth economic recovery, and there's low inflation. So it is the combinatorial effect of those two.

So how do we take share? We've got to get a bigger piece of the customer spend, which isn't in many cases going. And in some cases, that customer spend may be shrinking dramatically.

But they are -- by and large, all our customers are looking at consolidating their supply base where we are much better positioned and there is only a handful of us with the scale, the scope, the geographic footprint and a business process to be able to manage our customer relationship across multiple locations. There's only a handful of us positioned to take advantage of that supply chain consolidation trend.

Clearly that's our internal plan, that's how we are driving the Company and our teams this year. But there's some stiff headwinds.

Okay. Do you see it generally as more formative or more firmly shaped versus six or 12 months ago?

Good, excellent question. I would say that I think the new sales and marketing organization we put in place, as well -- which included new product categories, sales segment leaders.

We hired a new supply-chain leader who now owns ops and supply chain as well as the refined and streamlined organization structure in the businesses, the P&Ls, which was further streamlined in Q4. I think it puts us in the best position we've been in since I've been with the Company to drive even better execution.

Ken alluded to this, and I would actually like to amplify this point. When he talked about the level of precision planning and the degree of granularity, the level that we went to in this last process and developing our 2016 plan. So we cannot control the end market, we cannot control the headwinds, the level of the headwinds, where they are coming from, but we are trying to focus on what we can control, which is our execution.

I do feel better than I ever have -- I've been with the Company 11 years now -- in terms of our ability to execute relative to what is being thrown in our direction. But that's what we are committed to, and we are off and running and executing now. We'll see how the year develops.

Sounds good, thanks. My follow-up pertains to that market dynamic that is a little bit beyond what you can control at times.

The gross margin continues to lean probably towards a little bit of negative variance versus your expectations. So wondering if that is maybe the most challenging lever to manage through to the 2016 guidance plan out?

Yes. I pointed this out as we were talking about margins in both the quarter and the year. But one thing that is extremely important and we feel good about is that our billing margin has remained stable for the last couple of quarters and we have not seen any sequential declines there.

The hard part of the management within the gross margin line is really driven by the top line, and that's what happens with our supplier volume rebates. As we closed out the year with a year that was down organically 3% and in the quarter around 8%, then we obviously have to reassess those and true them up.

The good news of the story, even with business mix, billing margins seem to have stabilized. And now as John talks about with top-line growth, we will start to generate the other key part of our gross margin dynamic, which is SBR, stabilization and expansion, which is exactly what we want. That should come both through the top-line growth as well as we continue as we talked about over the last couple of years, expanding and improving our preferred supplier arrangements with our preferred suppliers.

Thanks, Ken and John.

Thank you.

Ryan Merkel, William Blair.

Thanks, just sticking with gross margin, remind me is the outlook for 2016, does that assume gross margin as flat?

We did not give a specific guidance on that line, but we did talk about the fact that we thought that we weren't expecting a significant amount of accretion. And I think a question came through in either Q3 or Q4 or the outlook call in December, and we said it is probably a reasonable assumption to build around a stabilized gross margin level.

And to get to that stabilized level, you are going to have to have initiatives offsetting mix and potentially greater price competition and maybe lower rebates, is that correct?

Lower rebates from existing structures of programs, but better programs will be a partial offset as well.

Right. Okay, then my other question, do you guys have a third-party forecast for industrial CapEx that you use to frame your guidance, or do you have an estimate in mind? Because I'm thinking that could be a big source of downside for the complex this year, so just curious what you are thinking.

We don't have one we would cite again. I think we've already seen that, Ryan, throughout 2015. Our customers absolutely put the clamps on CapEx in the industrial.

So again, we are very broad and diverse. We sell to over 50% of Fortune 500 customers. I think some the best competitive intelligence we have is those real-time daily activity levels and based on the relationship with the customer insight into their specific plans as it affects us, whether it is CapEx, MRO spending or OEM.

So is that to say that you think 2016 will normalize there? And you referenced increase bidding activity is maybe a leading indicator for your business. Or am I reading that wrong? Do you still think CapEx broadly will be down for industrials in 2016?

I think CapEx is going to be tremendously challenged for industrials in 2016. And I think in our discussions with our customers, they are going to need to be confident, the CFOs in particular, of our industrial customers, the companies that we serve. They need to be very confident that their outlook for the demand environment needs to be improved for them to be willing to stabilize, stop cutting CapEx and increasing CapEx.

That's a general statement, it varies dramatically by vertical and then by customer in that vertical. And again, that's where we are -- we've got a tremendous diversity across our industrial customer base that ranges from automotive to food processing, oil and gas and technology customers. And we have 15 different vertical segments that we've shared with all of you before in terms of how we categorize the various -- all our industrial customers.

It is hard -- you cannot put one overall descriptor across that except to say CapEx was clearly getting cut across the industrial base in 2015. Some are calling it -- we're in an industrial recession? And for 2016, I think it remains very challenging.

We've said the headwinds we've had in 2015 we think continue in 2016 in a consistent manner. And we said this at our investor outlook call last month -- to the extent that our assumptions prove to be overly conservative, we would be working to capture the upside.

Right. Okay, very helpful, thank you.

Thank you.

Steve Tusa, JPMorgan.

Hey, guys, I guess I have a minute to say good morning. It is 11:59.

Morning.

Pricing, what was pricing in the quarter? And then what do you expect it to be going forward for 2016 top-line impact?

Pricing in the quarter was essentially flat, consistent with I think every quarter this year, the last three quarters of this year. We don't -- again, this is an area we don't give a specific outlook for, but what I would tell you is when we give our outlook, we essentially think pricing is going to look like it looks like today.

So we are not anticipating any positive pricing impact. And fortunately in the mix of what we do, we have not seen overall net negative pricing impact. So, 2016 probably looks like 2015 in our models.

Okay. That just one last question, just bigger picture.

The stock over the last -- seems like the last 18 months to two years, this has been successive cuts on the earnings front. It seems like you guys are just chasing the forward earnings curve down consistently and never quite get to that reset point on that.

Even like when you guys gave your guidance, you said things had stabilized in the fourth quarter and then December gets worse. You were saying that January is bad, but you should -- it is a tough comp, so you should see some recovery in the first quarter.

You mentioned using a CIBC economist as an indicator. Is there something in the planning process here that needs to change? And is there something I'm missing as far as perhaps collateral damage to morale or something in basing out this number?

I just think your stock is cheap, there's a lot of people that are probably interested, but it seems like every quarter we come away with more incremental cuts. So just curious as to the philosophy on guidance and when we can get that full reset in there, acknowledging that it's tough in this environment.

I guess the first thing I would say is I don't think we cut anything today or I don't think we cut anything in our December outlook call. We did say certain parts of what was going on within the lines were stabilizing in the quarter.

But we said in the third quarter as well as in the outlook call in December that sales would be down 5% to 8%. That's exactly where we ended up. We gave a range for the year, and I understand that was not the same numbers that we started the year at, but we gave a set of numbers for the year that we have not moved since the third quarter and we are not moving the full-year again.

We obviously are talking about processes that continue to get deeper and stronger, not just in our business plan and not just in our operations, branch-level planning process but in our sales planning process. And those are starting to cross and correlate with each other each time that we do them a little bit better.

I think there's ongoing improvements. I don't think anything is broken, and we are -- we haven't -- we are not cutting anything right now.

Okay. So you think this is as close to a based-out number as -- or is it more fair and balanced here?

I think it is fair and balanced, and it is our best estimate.

Okay. Great. Thanks a lot, best of luck.

Thank you.

Thank you. This concludes our question-and-answer session. I would like to turn the call back over to Management for any closing comments.

Thank you again everyone for your time today and your continued support. We are focusing on what we can control as we've discussed through today's call.

And we do look forward to seeing you shortly not too far away at our Investor Day on March 2. With that said, have a great day.

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