Wesco International Inc (WCC) 2018 Q1 法說會逐字稿

Good day, and welcome to the WESCO First Quarter 2018 Earnings Conference Call and Webcast. (Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Mary Ann Bell, Vice President of Investor Relations. Please go ahead.

Good morning, ladies and gentlemen, and thank you, Eugenia. Thank you for joining us for WESCO International's conference call to review our first quarter financial results. Joining me on today's call are John Engel, Chairman, President and CEO; and Dave Schulz, Senior Vice President and Chief Financial Officer.

This call includes forward-looking statements and, therefore, actual results may differ materially from expectations. For additional information on WESCO International, please refer to the company's SEC filings, including the Risk Factors described therein.

The following presentation includes a discussion of certain non-GAAP financial measures. Information required by Regulation G of the Exchange Act with respect to such non-GAAP financial measures can be obtained via WESCO's website at wesco.com.

Means to access this conference call via webcast was disclosed in the press release and was posted on our corporate website. Replays of this conference call will be archived and available for the next 7 days.

With that, I'll turn the call over to John Engel.

Thank you, Mary Ann. Good morning, everyone. Thank you for joining us today to discuss our first quarter results. I'll lead off with a few high-level remarks, and Dave will take you through the details, and we will endeavor to get to all of your questions during the call.

After returning to above-market sales growth in the second half of last year, our top priority is to sustain our top line momentum and drive operating profit growth in 2018. I'm very pleased to say we're off to a good start to start the first quarter.

Sales grew 11% organically, our highest growth rate in 7 years, with all end markets and geographies contributing. Sales growth was consistently strong throughout the quarter, and backlog expanded to another all-time record level.

Over the last several quarters, gross margin has stabilized, with operations representing approximately 2/3 of our revenue, achieving sequential gross margin improvement in the first quarter.

Operating profit and EPS both grew on a double-digit percentage basis versus prior year, reflecting the positive pull-through and operating leverage of our business. Notably, this is the first quarter that we reported operating profit growth since 2014.

Free cash flow generation was also strong, exceeding 100% of net income.

We are seeing continued positive and broad-based momentum in our business. The second quarter is off to a strong start, with low double-digit sales growth in April and a book-to-bill ratio above 1.0. Based on our first quarter results and our positive view of the markets, we have increased our full year expectations for sales and EPS growth, while reaffirming our expectation for operating margin expansion and continued strong free cash flow generation.

We remain laser focused on executing our 2018 plan, that includes continued above-market sales performance, execution of our profitable growth initiatives, investment in our people and processes and maintaining our cost and cash management discipline.

With that, I will now turn the call over to Dave to provide further details on our first quarter results and our updated outlook for 2018. Dave?

Thank you, John, and good morning, everyone. Let's turn to our end markets, beginning on Page 4. Industrial sales were up 10% organically, including 9% growth in U.S. and 17% growth in Canada in local currency. This represents our fifth consecutive quarter of year-over-year improvement. Our positive momentum is driven by broad-based growth across the U.S. and Canada, with both year-over-year and sequential sales growth in many of our industrial end market verticals, including OEM, metals and mining, food processing and others.

Our Global Accounts and Integrated Supply opportunity pipeline and our bidding activity levels remain healthy. During the quarter, we were awarded a multiyear contract to supply electrical MRO materials and support capital projects for a large chemical manufacturer in the U.S. and Canada. With our extensive portfolio of supply chain solutions, WESCO is helping our industrial customers reduce their costs, operate more efficiently and better plan and manage their projects.

Turning to Page 5. We posted a third consecutive quarter of growth in Construction, with sales up 9% organically, including 10% growth in both the U.S. and Canada in local currency. Sales growth, again, was broad-based across the U.S. and Canada, resulting from increased business momentum with nonresidential construction and contractor customers. Sales to both industrial and commercial contractors grew again this quarter. Backlog was up 14% year-over-year and up 4% sequentially, providing a positive setup for the balance of 2018.

We expect continued nonresidential construction growth, supported by investment friendly U.S. federal tax reform and increasing Canadian infrastructure spending along with customer capital investments to drive productivity and support continued growth. This quarter, we were awarded a contract to provide electrical materials and services to a contractor upgrading a nuclear power plant in Canada.

Moving to Page 6. our Utility business posted 18% organic sales growth, including 2 points of growth from storm and wildlife recovery efforts. The U.S. posted 21% growth, which was partially offset by a 6% decrease in Canada in local currency. Again this quarter, we drove above-market growth and gained market share by expanding our relationships with investor-owned utility and public power customers. Over the past 6 years, we've established a track record of success in expanding our scope of products and services, while creating value for our Utility customers.

WESCO is well positioned to benefit from continued construction market growth, higher industrial output, the continuing consolidation trend within the utility industry and the increasing demand for renewable energy. To note, we were awarded a contract in the quarter to provide electrical materials in support of a U.S. wind farm project.

Finally, turning to Commercial, Institutional and Government, or CIG, on Page 7. We delivered 9% organic growth in the quarter, with the U.S. up 3% and Canada up 5% in local currency, along with strong growth in international. Our technical expertise and supply chain solutions continue to drive growth with our technology customers who rely on WESCO for their data center, broadband and cloud technology projects. We expect continued growth in LED lighting solutions, including retrofits, along with fiber-to-the-x deployments, broadband build-outs and cyber and physical security for critical infrastructure protection.

Government sales are strong and include infrastructure activity. For example, we were awarded a contract during the quarter to provide electrical materials to upgrade a public water treatment facility in the United States.

Moving to Page 8. Our outlook for the first quarter sales growth was between 6% and 9%. Actual reported sales for the quarter were up more than 12%, consisting of organic sales growth of 11% and favorable foreign exchange. As John said at the outset, growth was broad-based, with all end markets and geographies posting high single-digit or double-digit year-over-year increases in the quarter. This included 10% organic growth in the U.S. and in Canada and 24% in international.

Pricing, again, provided a favorable impact of 2%. Gross margin was 19.1% in the first quarter, down 60 basis points versus the prior year and down 10 basis points sequentially. Over half of the year-over-year gross margin decline was driven by 2 factors that had no impact on EBIT margin. First, a significant increase in international sales, primarily capital projects, which generally carry lower gross margins but deliver comparable EBIT margin in each respective geography. Second, to align with the company's cost recognition policies, we reclassified labor costs associated with certain of our Integrated Supply services from operating expense to cost of goods sold which reduced gross margin by about 15 basis points.

We will continue this classification in future quarters. Excluding the impact of the Integrated Supply reclassification, our gross margin percentage increased sequentially.

SG&A expenses were $291 million in the quarter, up 9% from last year and up 2% sequentially. Versus prior year, the increase reflects higher volume-related costs, along with variable compensation expense, including a planned restoration of incentive compensation. Sequentially, the increase reflects the typical seasonal increase in benefit costs.

Operating margin was 3.7%, above the midpoint of our outlook range of 3.5% to 3.8%, down 10 basis points from last year and 40 basis points sequentially. Operating expenses in our outlook originally included an estimated $2 million charge related to the foreign currency remeasurement of a financial instrument that occurred at the beginning of 2018. This charge was higher than expected at approximately $3 million and due to a change in accounting policy, was recorded as a component of net interest and other expense.

Our reported results reflect favorable operating leverage for the quarter, which was reduced by the planned costs of restoring variable compensation compared to the prior year. Adjusting the base period for this expense, we achieved a pull-through of incremental gross profit to EBIT of more than 40% in Q1.

The effective tax rate for the quarter was 19.6%. This was below the 22% estimate we made shortly after the passage of the Tax Credit and Jobs Act.

Moving to the diluted EPS walk on Page 9. We reported diluted earnings per share of $0.93, an increase of $0.17 versus the prior year. This increase reflects favorable operating results, a lower tax rate and a lower share count along with net favorable foreign exchange. At the core operations line, favorable operating leverage was partially offset by the restoration of variable compensation, as we foreshadowed in our outlook.

Turning to Page 10. Free cash flow was $45 million, or 105% of net income, despite higher sales driving increased accounts receivable. Our debt leverage ratio is 3.5x trailing 12-month EBITDA, within our target leverage range. Leverage net of cash was 3.1x EBITDA.

As outlined in the appendix to the webcast deck, financial leverage includes the impact of adopting the recent accounting standard for net periodic benefit costs. This had a relatively minor impact over the trailing 12 months on leverage.

We maintain strong liquidity, defined as available cash plus committed borrowing capacity, of $813 million at the end of the quarter. This is an increase of $19 million compared to year-end.

Interest and other expense was $20 million in the quarter, including a foreign exchange loss of $3 million from the financial instrument remeasurement, partially offset by the adoption of new pension accounting rules. Our weighted average borrowing rate was 4.4% for the quarter, consistent with historical averages. We believe our debt is appropriately balanced between fixed-rate and variable-rate instruments.

Capital expenditures were $8 million in the quarter. WESCO has a history of generating strong free cash flow throughout the entire business cycle, and we expect this to continue. Our capital allocation priorities remain consistent. The first priority is to invest cash in organic growth initiatives and accretive acquisitions to strengthen and profitably grow our business. Second, we target a financial leverage ratio of between 2 and 3.5x EBITDA. Third, we return cash to shareholders through share repurchase under our 3-year $300 million share-buyback authorization.

We continue to evaluate options to repatriate cash held in foreign jurisdictions. We expect that our use of any repatriated cash will be consistent with our existing capital allocation priorities.

Now let's turn to our outlook for the second quarter and full year 2018 on Slide 11. For the second quarter, we are projecting sales growth to be in the range of 7% to 10% and operating margin of 4.2% to 4.5%. As we have previously discussed, we expect that the second quarter EBIT comparison versus prior year will be unfavorably impacted by lower variable compensation expense in the base period. We are expecting an effective tax rate of approximately 21% in the quarter.

For the full year, we are raising our sales and EPS outlook. We now expect sales growth in a range of 5% to 8% and diluted EPS in the range of $4.50 to $5. At this early point in the year, we are reaffirming our outlook for the operating margin of 4.2% to 4.6% and an effective tax rate of 21% to 23%.

Note that certain impacts resulting from the Tax Cut and Job Act of 2017 remain subject to further guidance from the IRS. Discrete items, including adjustments to the provisional estimates booked in 2017 to comply with the TCJA could ultimately cause our effective tax rate to differ from this expectation. We are also reaffirming our expectation of generating free cash flow of more than 90% of net income.

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

(Operator Instructions) The first question is from Deane Dray with RBC Capital Markets.

Maybe, we can start with the headline number that really jumps out is the organic revenue growth of 11%, that's really impressive no matter how you slice it. And I want to talk about and have you flesh out mix in the quarter, because what I'm driving at is to see why and what expectations should be around pull-through? And Dave said, hey, without the variable comp, that would've been closer to 40%. But mix in the quarter, I'm going to start, maybe start with Utility, because I don't know if I've ever seen a 17% organic up in Utility, I [know,] that's lower margin. But just take us through the specifics in the quarter on mix that we should know about.

Great question, Deane. Let me start where kind of you started with your question. We're very, very pleased with the momentum we're generating in our end markets. We feel that this is the third quarter in a row of very strong top line growth and returning to the top line growth was our top priority last year. And in this year, it was absolutely critical that we maintain very strong top line momentum, which we clearly have done in the first quarter and begin to get back to posting the operating profit growth year-over-year. So this is the first quarter, as I mentioned in my comments, since 2014 we posted EBIT dollar growth. We do have pull-through on -- without adjusting in the first quarter. And so we have begun. It's good to see that. I think, when you look at -- to your mix comment, when you look at 2 pieces of the business that really had outsized growth -- again, I think we had terrific growth across-the-board, because all end markets, all geographies grew. And I think, as we see others post, this will compare very favorably to others [and versus] markets. So with that said, even within our results, the 2 numbers that really stick out in terms of tremendous outsized growth is our Utility end market to your point as well as international. Both of those carry lower gross margins. We are relatively agnostic at the EBIT line, but I think all in, I think that's a major factor, in addition to the other factors that Dave mentioned. So I think, the -- the results that we posted in Utility, they're clear in Q1, we actually had very strong results last year too. Remember, we were lapping $100 million contract that we've -- renewal that we walked away from at the end of 2016. So at the end of 2016, so we had to lap that $100 million last year, and we now -- and now that's not in our comparables, and so now you're seeing very strong top line momentum.

Got it. And that's real helpful on the mix. And since we are talking about the stronger top line, maybe my follow-up question is to have you expand on the drivers and you clicked through them, and they're familiar, but we'd like to hear how WESCO is leveraging these, so you said nonres, you said tax reform, better growth in Canada and this CapEx demand that you're seeing from customers -- customers willing to commit CapEx here. So what would you highlight out of those drivers?

Yes, I would say, the industrial recovery after a few tough years, but clearly in '15, '16, '17, Industrial started to recover, it's progressing nicely. And so when you look at our Industrial end market, Deane, this is the fifth quarter in a row of positive organic sales growth, and that comes on the heels of 8 quarters of declines that we had. So we feel that these are really solid results. U.S. at 9%, Canada at 17%, the large majority of our global accounts verticals grew. And so it's balanced and strong growth. Bidding activity levels are very strong, and I'll tell you that we are beginning to see customers releasing small projects, call them small- to medium-sized [planned] projects for improvements and upgrades. So that's very encouraging. We're not hearing a lot of evidence yet of increased CapEx tied to tax reform. We actually think that's still a future upside as we move through 2018 and into 2019. We've heard the beginnings of that with respect to some of the tech companies, citing that as a reason for stepping up their project activity or capital. But we've not heard it in a broad-based sense yet. So I think I would start with Industrial, recovery is progressing, but our momentum against the market, we think, is stronger. Construction, we're really pleased with. We've got another -- posted another all-time record backlog. This is the fifth quarter of backlog growth. That comes on the heels of 10 quarters of declines in a row. So again, the momentum vector is really strong, strong bid activity levels. The overwhelming majority of our regions grew for construction, both in U.S. and Canada. Again this quarter, both Commercial and Industrial contractors grew in -- underneath, if you [double-click inside] construction. So the forward-looking indicators on construction from our perspective are stabilized at supportive levels. And I think we're going to begin to see again this increased willingness to invest as the Industrial recovery continues, along with CapEx-friendly tax reform. So particularly pleased with construction. And finally the -- I'll cap it by saying both U.S. and Canada grew 10% in the quarter. So having both grow double digits, we think is notable. We had already talked about Utility. I think it's really strong outsized growth. And CIG was also solid growth. I mean, and [double-clicking] under that a little bit, we're seeing very good bid activity levels. And the Government business -- part of our business was up strongly double digits in the quarter. I'll tell you that we're seeing an increase in federal projects due to the current budget approval, and we expect that the federal fiscal year-end spend this year to begin maybe a bit earlier and be strong through the end of the year. So major IT and critical infrastructure projects that have been in the pipeline are beginning to get awarded and get implemented, so that's also encouraging. So I think when you look across that -- hopefully, I've touched upon kind of the major drivers. I didn't talk about all the sales growth initiatives we've been working on. We will outline those in our Investor Day, but we worked real hard on that the last couple of years when we had declining sales. That was the driver behind our return to growth last year, and I think we are building momentum on that now.

The next question is from Matt Duncan with Stephens.

So the stock is down interestingly on -- otherwise, I think, very strong report from you guys. And my guess is that the one thing people are probably hyperfocused and maybe too focused on is gross margin. So I wanted to give you an opportunity to talk a little bit more about what the other factors were that led to the year-over-year decline in gross margin, and how we should think about that line on a go-forward basis, especially as we get to the back half of the year, because at that point you've lapped the return of incentive comp, I would think the pull-through ought to be back at 50% plus. Your annual earnings guidance seems to imply that. So can you give us a little comfort around that year-over-year drop in gross margin, you did say it was up sequentially ex the accounting change, so it seems to have bottomed and started turning around. But just give us a little more detail there if you could.

So thanks for the question, Matt. We figured there would be some questions on gross margin, clearly. So let me make a few comments first, then I'm going to hand it to Dave to expand on that. I think I'm going to start first by looking at gross margin on a sequential basis. I think it's important to understand that, because again, as you move through the year, our portfolio has evolved too as we've worked our growth initiatives. I believe you first have to start expanding sequentially before you can get back to year-over-year expansion. That's just how the math works, right? If you're not improving sequentially, you're never going to improve year-over-year. So if you think about how last year went, we started at a 19.7%. We stepped down materially from Q1 to Q2. And in Q2, 3, 4 , we were in the 19.2% , 19.3% range, depending on which quarter you're looking at. Relatively stable. We ended last year at a 19.2% in Q4. We come into Q1, we're at a 19.1%. We thought it was important to really give you -- give all of you a sense of what's happening underneath the covers there, so to speak. So if you peel underneath that, yes, we had this one accounting adjustment in terms of it. If you were to make that change, gross margins did improve overall sequentially slightly, but it's a positive trend. What's I think even more important is 2/3 of our revenues, that part of the business had improving gross margin sequentially. So I will tell you, we're beginning, in Q1, we're beginning to have the ability to do a more effective job of pushing these pricing increases through. Obviously, the price increases are always notable in the first quarter. As we move into the second quarter, they're going to be more notable than typical because of, I think, obviously, the tariffs that are in place and quite frankly, suppliers and ourselves taking advantage of that because as the input costs rise, we're going to work that through the value chain. So there would be some time lag on that effect. But overall, I would say, what's most relevant and what we're -- feel very good about is the sequential improvement coming out of the fourth quarter into the first quarter, which sets us up well as we move through the year. Dave -- I'll hand it to Dave to provide a little further detail on the year-over-year.

Thanks, John, so clearly we've identified a couple of key issues that had impacted the gross margins year-over-year. We talked about the international business and the heavy sales growth year-over-year. Recall that in Q1 of 2017, our international sales had actually declined year-over-year. So we're starting from a much different base here in 2018. The other factor is that a lot of our international growth is coming from the capital projects, which again do have an impact on the gross margin, primarily because of the shipment type. And as we talked earlier on the call from one of the questions, we had great growth in our Utility business. Again, we have the same issue, where year-over-year, that high teens growth on Utility does have an impact on our gross margin line. One of the things that we're clearly focused on is getting that gross margin recovery. We're very much focused on ensuring that we're passing through those price increases from our suppliers. We did not do a great job of that in 2017. We are beginning to see that turn. And we're optimistic that we'll be able to do a better job going forward.

Okay. Very helpful. And my follow-up actually, kind of sticking with price cost and just price in general. Where are you, Dave, on the ability to pass through price increases? Are you able to do that in lockstep? Obviously, typically in inflationary environments, we see distributors get some gross margin expansion out of inflation. So if you could talk about that? And then secondly, my recollection is that you guys typically don't include price in your revenue guide. Is that still the case in your updated annual revenue guidance?

I'll answer that question first. We have not updated the guide based on pricing. So we have not done that historically. We have not included that in our 2018 outlook. And going back to where I think we are in terms of recovering those price increases from suppliers. In the first quarter, we did a good job of that. I don't think we got extra margin improvement by going above and beyond the supplier increases. But again, we've not fully recovered the erosion that we experienced in 2017.

The next question is from Christopher Glynn with Oppenheimer.

Just wondering on the 2/3 of revenue that expanded gross margin, clarification if that was sequentially or year-over-year. And corollary, what exactly is the segregation of the 2/3? Is that short cycle versus long cycle? Or something else?

It's sequentially. And we've got a lot of diversity across our business, Chris. We're not going to go into that in detail. [We're 1] segment reporting. We're just trying to give some color in terms of the reported number. The reported number was down 10 basis points sequentially. If you adjust for the change that we made, as Dave mentioned, it'd be up slightly sequentially. When you [double-click] under that, over 2/3 of our revenues are ticking up sequentially. It's meant -- we're trying to give some color to indicate that we're beginning to -- you had time lag effect, we've talked about as we moved through 2017. We're now starting to see that ability kick into gross margins. It has begun.

Okay, great. And then just wondering, what actual price realization was in the quarter? Sorry, if I missed it? And if bids on projects or if customers are moving away from price first and more to service and other value props?

So what we said was the impact of price in the quarter was 2%, so -- in Q1, similar to Q4. That was the same number in Q4. And I'll tell you, I think that both ourselves, I know our competitors are working in conjunction with our collective supplier-partners, we're really working to get price worked through the value chain, particularly on project bids. So I think there is a recognition now by customers, particularly given the tariff announcements and all the press that's been around "core inflation beginning to tick up." That's going to be good for the whole value chain and particularly distributors. There was always a time lag effect, but I do sense that there's more understanding and willingness to accept the price increases as we work them through. Obviously, if we've got an existing contract, this was a question earlier. It was Matt's question, that was I was alluding to. So we got existing contracts. Based on that contract structure, we have opportunity to update pricing over time, depends on that particular contract, for the project business, if competitively bid, we are taking advantage of our value proposition, differentiators we have, and we are using current pricing, real-time pricing and trying to get appropriate margin on top of that as a starting point for these bid efforts, so I think it's really important to understand that. In general though, I would say, that -- as I said earlier, we see the beginning of this working its way through.

Okay. And, obviously, great job on market share. Just wondering if you've seen kind of the full scope of taking price increases from suppliers yet? Or if that kind of yet lags like maybe your future price increases may?

Yes, I think I understand the question. If I don't, you can come back with another one. But in Q1, I would say that the number of price increases and the range of price increases were what we see typically in the first quarter and in this part of the cycle. Price increases in general range from 1% to 5%, and then the number of those were about consistent with what we've seen historically. There's always going to be selected categories that are at 6% or 7% or 8%. When you look at -- when we're looking at Q2 right now, I would say the number of price increases have stepped up, and we anticipated that would be the case because of the announcements around tariffs and such. Tariffs directly affect some -- a number of our suppliers products and we'll work those together. But also, I think, just tariffs being pushed -- being announced and pushed through the value chain give us all an opportunity to begin to also work price through as inflation ticks up. So I would characterize Q2 as having -- versus normal history -- more -- a larger number of price increases but roughly within the range that we've been seeing. It's more of a quantity increase than a range increase, other than selective products that are directly impacted or indirectly impacted to a major degree by tariffs. Again, this is expected as we kind of run through Q1 once those announcements are made.

The next question is from Chris Belfiore with UBS.

So I just wanted to kind of go back on little bit on the margin side. So last call you guys talked about kind of margin headwind sliding in the second half of the year. And at these growth rates, you guys are going to see really strong fall-through rate getting better and you're getting price. So I just kind of -- if there's any color you can provide on why margin should kind of hold steady on the operating margin side for the year as you are getting what appears to be a better kind of fall-through rate.

It's Dave Schulz. So to make sure I understand your question is, given how we've provided an outlook for an increase on the top line, why are we holding the margin steady in the outlook. So we provided you with an outlook for the year, that's unchanged on operating margin percent, 4.2% to 4.6%. Again, we highlighted in the prepared remarks that we think it's still little early. From our perspective, we were in line with the outlook we provided for Q1. And we think it's too early in the year to make any substantial change to the operating margin outlook, despite the fact that we have taken the top line up.

The only thing I would add to that, is -- and as Dave reinforced in his comments earlier, and this was a key point that we made when we gave our outlook for 2018. And that is the first half versus second half relative to the reinstatement on variable compensation. We pulled those levers in the first half of last year, so there is that -- that does impact the year-over-year comparables in the first half, whereas the second half, the variable compensation would kick back in. Even despite that in the first quarter, we did return to profit growth and positive operating profit pull-through. Again, we have not been in that situation since 2014. So when you take that in conjunction with the sequential trends, we feel very good about the start of this year.

Great. That's helpful. And then just on Canada, the momentum there continues to be really strong. I just kind of wonder like just get a little bit of color there in terms of, like, what are the main end market drivers there, and like what kind of profitability profile does that business have versus like the company average?

Yes. So we have stated, and it has remained the case even through, I will say, through all phases of the economic cycle, i.e., even when oil prices collapsed a few years ago. And remember, back then, we had an exchange rate at effectively parity. Today, the exchange rate, I think, is $0.79, U.S. to Canadian exchange rate. But even through all phases of the economic cycle, our operating margins in Canada are higher than the U.S., and we have materially higher market share position in our addressable end markets in Canada than the U.S. So I think there's -- and again, it's classic kind of distribution leverage that we have. So I would make that point first. Secondly, we're very pleased with -- remember what happened in 2017. We returned to growth in Canada first before the U.S. And I was very clear, as we wrapped up 2017, that we're very proud of our Canadian team and the results we posted last year. And I said there were 2 contributing factors. One was the market ended up being stronger than we had anticipated entering 2017. Secondly, our execution, the impact of our initiatives, the quality of our team executing was -- just was excellent. So those 2 factors drove the outsized growth in Canada. That's continued in the first quarter. I mean, the markets are behaving like we thought, but our team is performing. That's the important point, I'm making a distinction. Markets, they're healthy, they're fine. But our team is performing very strongly at the start of the year, and if you [double-click] under that and take a look up by geography, the overwhelming majority of our geographic regions are growing in the first quarter in both WESCO and EECOL. So it's strong and balanced growth. So we feel good about Canada. Thanks for that question.

The next question is from Robert Barry with Susquehanna.

Can you comment on how the billing margin tracked in the quarter?

It's Dave Schulz. So we're not going to break out the specifics of the billing margin. I would tell you that it was roughly in line with the gross margin sequentially that we saw versus Q4.

Got it. I mean any line of sight at this point to that becoming neutral, especially given you're getting the price?

In terms of the price, I think, again, we're very pleased with the sequential improvement that we're seeing across the company. Well, John mentioned, we've got about 2/3 of our operations are showing sequential billing margin improvement, driving that gross margin sequentially. So that's where we are, very much focused on continuing to see that improvement, a lot of that will be dependent upon our focus on driving through the inflation that we're receiving from our suppliers.

Got it. And given we've seen a few quarters now of very good growth, can you just comment on the extent which the supplier volume rebates are helping the margin?

Well, you probably saw, from 2017, our supplier volume rebates were in line with the historical range that we provided. I would tell you that we continue to work. Obviously, it's 2018 now. That means we have new programs for supplier volume rebate. We did not call that out as an impact to our gross margins.

I mean, when should we begin to expect that or when might we -- just given the growth has been so good?

Again, I think that from a rate perspective, given the programs, it's too early in the year for us to really provide any emphasis on that impact for the full year. It's still too early in the year for us to be able to provide that.

The next question is from Ryan Cieslak with Northcoast Research.

I just wanted to go back really quick to the gross margins, and I guess I want to make sure I understand what you're saying, John, as it relates to maybe some of the moving pieces going forward. I think, typically the gross margin moves lower from the first quarter, but it sounds like you certainly had some mixed impact that this quarter -- that maybe goes away a little bit and then the price/cost dynamics are getting better. Is the assumption that you can sort of maintain a 19.1%or around there going forward on a sequential basis? Or should we be modeling typical sequential declines in gross margin for the balance of the year?

Yes. So -- how you described what you heard us say was accurate, and the first part of your summary, and we're not guiding the gross margins. We do guide the operating margins. And as I said, the top priority for us was return to getting back to profit growth and positive pull-through in 2018. Our outlook for the year did have that explicitly incorporated into our guidance, right? When you look at our op margins that we targeted for 2018, which we've reaffirmed in this call, that were given to you in December, it is returning to operating profit growth and positive pull-through. We are working -- believe me, working and the entire organization is lined up on this, to try to improve margins on every transaction every day. We actually have something we call the 3 Es. I don't think I've shared it with you. Every employee, every transaction, every day, we are working to improve margins. So it is a top priority for us. And we are not, we do not have in our mindset that we're going to continue to see sequential gross margins declines. In fact, we've seen the opposite now as we've outlined in Q4 to Q1. And I think we have begun. So this is very important to us. What's most important, overall, is getting the operating profit growth and the operating profit pull-through, I've been very clear about that. Obviously, gross margin is one key component to that. But it's one component. Managing our costs, having the cost management and productivity improvement, getting the strong sales growth are the other components, so we're working all of those in conjunction. One final point I'd make, we do have a new U.S. leader, I shared a bit of his profile on the last call. He joined us in January. I couldn't be more pleased with the impact he's having and the entire U.S. leadership team, quite frankly, in terms of how, on 2 accounts, number one, the sales growth has stepped up significantly. So take a look at our U.S., the start of the year for the U.S. And remember, Canada started earlier last year versus U.S. in returning to sales growth. Look at the results of the U.S. in the first quarter. We feel very good about that. Secondly, really working the margins and starting to see the sequential, as I said, margin improvement, and continuing to tightly manage costs. So that spoke to a really strong start to the year in the U.S. that I couldn't be more pleased about and it's the impact of the entire leadership team in the U.S. led by our new leader, Juan Picon.

Okay. Great. Then for my follow-up on the top line trends, is there anything with regard to the international utility growth here in the quarter that we should be thinking of that as maybe onetime in nature as it relates to project activity? Or are those growth rates sustainable for the balance of the year? And then, can you give any sort of color on maybe how you're updating or thinking about your core end markets here, I know you guys typically give an annual guide. I'm assuming those have gone up now, and just some color around that would be helpful.

You know what, great point, and we probably should have made that very clear, because we did update the overall outlook for sales guidance and growth rate for the full year. We actually -- we have it by end market, I'll share that with you now, excellent question. We probably should have included that in the materials. But here we go. When we originally guided 2018 for Industrial end market, our largest end market, we said, it would be low single digits to mid-single-digit growth. Based on our new revised outlook that has been increased, we are saying mid-single-digit growth. For Construction, we said -- flat to mid-single digits was our original guide that we gave you in December, now we're saying mid-single digits. For Utility, we actually had flat to low single digits, now we are seeing low single digit to mid-single digit. And CIG, we had low single digit to mid-single digit, and we're keeping that the same. We said previously, our original December outlook, 1% to 5% was the range of end market growth. We have at least a point -- approximately a point of outperformance. And foreign exchange will be slightly favorable. That gave us 3% to 6% growth rate in '18 versus '17, our original guide we gave you in December. We're now saying, it's 5% to 8%, of which the end markets are 3% to 6%. We're now saying our market outperformance is 1% to 2%. We've upped it from approximately 1 to 1 to 2 points -- percentage points, again, foreign exchange is slightly favorable. So great. Thanks for the question. Maybe I'll give you the other cut, geography. Part of our original guide, in December, we said, U.S. was low single digits to mid-single digits growth end market. Now we are saying U.S. is mid-single digit. Canada, including FX, we said was flat to low single digits, now we're saying low single digits to mid-single digit. And internationally, we actually had it flat. So we had that flat as a guide coming into the year. We had a really exceptionally strong start on international and Utility to your point. Now we're saying still for the year, international low single digits. That can be a lumpy business, because of what Dave mentioned, the lumpiness of, I'll call it, larger capital projects.

Right, and we provided that color during the outlook call in December that the international business, we were projecting it to be flat for 2018, because we did have a large number of projects in 2017 that we did not expect would continue. Clearly, in Q1, we did see a lot of capital projects that, that's what really drove that double-digit growth in our internationals business.

The next question is from Steve Barger with KeyBanc Capital Markets.

This is Ryan Mills on for Steve. Yes, I just wanted to dive a little bit more on the outlook. Using the guidance for 2Q and the full year, if my math is right, you're implying roughly high teen to low 20% incremental contribution margins for the back half on a low single-digit sales growth, which is really impressive and nice to see. But looking back in growth periods for WESCO, I don't recall a time that you put up a incremental contribution margin of that magnitude. Can you give some color on what's giving you that confidence? Or is it just the timing of when you start to reap the benefits of your internal initiatives and variable comp rolling over?

It's Dave Schulz. So we've talked about the variable compensation provides -- muddies the water quite a bit. And as you think about the incrementals on the front half versus the back half, we don't have this issue in the back half of 2017. And from our perspective, that's where you're going to see that uptick in the pull-through relative to what we posted here in Q1.

Okay. And then you guys are finally back in your targeted leverage range, which is nice to see. So I want to talk a little bit about the M&A pipeline. I know WESCO's M&A strategy is focused on expanding the core electrical business and service capabilities. But with the low-margin profiles of your private competition, I mean do you start to switch your strategy to acquisitions that are more margin-accretive and perhaps outside of your core business?

So I would say our strategy and strategic priorities for M&A remain unchanged there, even though on average, the entire electrical distributor base has operating margins that are significantly lower than WESCO by triple-digit basis points to your point. There are still some very well-run electrical distributors that have operating margins that are equal to or even higher than WESCO's, given where they're focused, where they're geographically playing and what they do. So I think strategy one is still strengthening core electrical. Strategy two is to look at horizontal verticals and continuing to add those capabilities to the businesses that we can take to our customers through our Global Accounts and Integrated Supply business models. No change on that front.

Okay. And then one more if I may. Going back to the guide, implied back half sales growth, low single digits, appears a little light, maybe, given the trends we've been seeing in the growth in your backlog. So John, can you maybe talk about the puts-and-takes around that and maybe talk about where you think we're at in the cycle right now?

So I think that what I'd point you to is we had a big step-up in sales growth in the second half last year. I mean, we were basically on a full second half basis, we were right around double-digit growth, right? So I mean -- so that's the comparable that we're going to be dealing with. I think, given the very strong start we've had in Q1, we've provided an appropriate guide for Q2, and we've taken the year up which is against what we have done historically. You don't see us a changing a full year outlook after the first quarter. You don't. We changed our full year outlook and increased it on both sales and EPS to reflect the strong sales growth in Q1 and the outlook we have for Q2. As we move through the year, we'll be better informed on exactly the shape of the second half. But I think, look again, I could not state it any stronger. We're off to a terrific start. We had another all-time record level of backlog that we've achieved in the first quarter, and the momentum is strong and broad-based. It's all end markets and all geographies, so terrific start to the year. As we move through the year, we'll be better informed on how that momentum carries into the second half, but we feel very confident about the revised and raised guide we've just provided.

The next question is from Steve Tusa with JP Morgan.

Just digging a little bit more into Utility. I mean, we were at the T&D show in Denver last week and didn't seem like things were that great. Everybody was kind of talking about a low single-digit market. So maybe how are you -- I know there's obviously some share gain in there probably, but it's still a pretty huge number. Can you maybe, you've already talked about it a bit, but delve into a little more of what's -- what do you think is going on in there?

I appreciate the question, let me click underneath that a bit, because I didn't I haven't really drilled into Utility yet in this call. Great question. We feel really good about the results. I think it is -- continue to be a function of our scope expansion with our current customers, call it the, the One WESCO strategy, plus adding new customers. We feel really good about our Utility team. If you break it down, we grew very strong double digits with investor-owned utilities in the quarter. Obviously, because overall, we grew double digits. But public power also had very strong growth. So I mean, I guess, the important point there is it isn't just being driven by 1 or 2 customers. It's strong, balanced growth of both IOUs and public power. Our bidding activity levels and pipeline remain very strong in Utility in general, and also including, I will call it, the Utility contractor and EPC space. So that pipeline -- so this would include projects that extend across the distribution grid, but also T&D and substation projects, and we do have a very attractive set of capability in our utility business that focuses selectively on some pieces of transmission, but clearly substation through the distribution grid of T&D. That opportunity pipelines are very strongly double digits as well. So I -- look, I guess I'd cap it off to you by saying, we've established a pretty strong track record with our Utility value proposition. We feel very confident that we've been taking share for many years running now. And Q1 is another great example. Last year, we actually felt terrific about our Utility team and results we posted, they were [masked] by $100 million contract we walked away from. If you adjust for that, we actually were posting the double-digit growth in Utility, and we had that in our webcast documents. It didn't get a lot of focus, because the reported number was dealing with that comparable.

Right. Okay. And what types of, like, any types of products going through there that are kind of unique? I mean, is that the distributed energy, dynamic and solar, anything like that? I -- again, just like looking Hubbell's results. They sell a lot of kind of knicks and knacks, the smaller ticket type of items. And there they again were kind of low to mid-single. So any kind of flavor for how the projects are different than they have been in the past?

No, no, no. So let's -- we enjoy a terrific set of partnership with, I'll call it, the world-leading -- the world's leading global manufacturers in the Utility space. It includes Hubbell. It includes Cooper Utility. It's part of Eaton. It includes ABB, It includes MacLean Power Systems and others. So I would say the core utility portfolio is not like it's new categories of products. We do have services we wrap around this, which is our differentiator. So we are expanding scope and adding new customers. Now back to renewables, it is utility-grade renewable project -- utility scale, not grade, utility-scale renewable project. That would be -- that would show up in our Utility segment. Other renewables growth, example, solar. Solar was up strongly double digits for us. It's not that large -- we never disclose the exact size of our total solar projects, it's not that large, but it was up double-digits and has been growing very strongly at a double-digit rate. That can show up in our Construction or Contractor segment, depending on if it's not utility-grade or utility-scale solar, if it's commercial or for some other application. Does that make sense? But since you touched upon this, I wanted to at least focus on renewables. We are seeing a nice thrust of renewable growth. It shows up in more so in Construction than Utility. And I think, overall, in terms of the market, our outlook is positive. Housing starts still are growing, LED investments are increasing, renewables growth is still occurring. There's still storm-hardening initiative. Different governmental, tax reform efforts are supportive still of the industry, and then you couple with that the broadband build-out, which isn't directly Utility, these are the positive factors that give us an optimistic outlook for Utility, particularly given our value proposition.

Well, that wraps it. We're able to get through the entire queue today, so that was great. Thank you for your time this morning. Mary Ann will be around to take your questions.

I'd like to quickly cover a few other things before we conclude.

First, going forward, our earnings call will be about a week later to better align with our SEC filing date. Secondly, beginning next week, Mary Ann is going to be moving to a part-time support role for WESCO, we're not letting her go. And Brian Begg, our Treasurer, many of you have gotten to know Brian over the years, will be adding Investor Relations to his responsibilities. We'll also be adding resources to help work with Brian and the IR team to help support our IR activities with you. As always, we value your questions and your continued support and then finally, on this note, we look forward to seeing you at one of our several conferences we plan to attend in the second quarter, which includes EPG, Stifel Cross Insights Conference in Boston and the UBS Industrials Conference in New York.

Thank you. Thanks a lot. Have a great day.

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.