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WESCO International Inc  (NYSE:WCC)
Q1 2019 Earnings Call
May. 02, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the WESCO First Quarter 2019 Earnings Conference Call and Webcast. All participants will be in listen-only mode. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Will Ruthrauff, Director of Investor Relations. Please go ahead.

Will Ruthrauff -- Director-Investor Relations

Thank you, Ariana. Good morning, ladies and gentlemen. Thank you for joining us for WESCO International's Conference Call to review our first quarter 2019 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 conference call includes forward-looking statements, and therefore, actual results may differ materially from expectations. For additional information on WESCO International, please refer to the company's SEC filings including the risk factors described therein. The following presentation includes a discussion of certain non-GAAP financial measures. Information required by Regulation G of the Exchange Act with respect to such non-GAAP financial measures can be obtained via WESCO's website at wesco.com. Means to access this conference call via webcast was disclosed in the press release and was posted on our corporate website. Replays of this conference call will be archived and available for the next seven days.

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

John Engel -- Chairman, President and Chief Executive Officer

Thank you, Will. Good morning, everyone, and thank you for joining us for today's earnings call. I'll lead off with a few high-level remarks and then Dave will take you through our first quarter results and 2019 outlook. I'll then conclude with some comments about what will cover at our upcoming Investor Day before we open the call for questions.

We started off 2019 with sales and operating margins within our outlook range for the first quarter. Our sales growth rebounded nicely and marching continued in April after a slow start in January and February. Importantly gross margin expanded both sequentially and year-over-year in the first quarter and reached it's highest level since early 2017. Demonstrating the positive impact of our margin improvement initiatives and the effectiveness of passing through price increases from our supplier partners. Backlog increased sequentially and margin in our backlog also increased both sequentially and compared to prior year providing a positive setup for the balance of 2019.

After completing the SLS acquisition in the first quarter and accelerating our share buyback program last year, our financial leverage ratio is stable and well within our control band. Finally, as you saw in our release earlier today we have a constructive outlook for our end markets this year and we are maintaining our full year 2019 outlook for sales operating margin EPS and free cash flow.

With that, I will now turn the call over to Dave to provide further details on our first quarter results as well as our second quarter financial outlook. Dave?

David Schulz -- Chief Financial Officer

Thank you, John. And good morning everyone. I'll start with an overview beginning on Page 4. Reported sales in the quarter were down 2% which was at the lower end of our outlook range of down 2% to up 2%. On an organic basis sales were up 1% with 3% growth in Canada flat sales in the U.S. and 8% growth in our international markets. Pricing provided a favorable impact of approximately 2%. During the quarter we experienced a significant number of branch closures and shipment delays due to winter weather events that impacted our customers operations.

This is primarily reflected in weaker than expected sales results in January and February offset by stronger sales in March. We call that our 2018 our organic sales growth in the first quarter was 9%, 14% and 11% for January, February and March respectively. Billing margins improved in all end markets and geographies on a year-over-year and sequential basis in the first quarter reflecting the positive impact of our margin improvement initiatives. Gross margin was 19.5% in the quarter, up approximately 40 basis points over the prior year and up 10 basis points sequentially. Notably, this is the third quarter in a row of improvements in our gross margins. Gross margins this quarter were impacted negatively by business mix although there was a slight benefit to gross margins from the SLS acquisition that closed on March 5.

Either of these impacts were material to the quarter's results. Supplier volume rebates as a percentage of revenue were consistent with rates in the prior year. SG&A expenses were approximately 2% higher than the prior year or 15.1% of sales primarily reflecting the impact of the SLS acquisition. Excluding the SLS acquisition, SG&A was up approximately 1% primarily due to annual increases in payroll related costs partially offset by continued effective operating expense management and controls. Operating profit in the first quarter was $70.7 million or 3.6% of sales within our outlook range for the quarter. The effective tax rate for the quarter was 21.7% slightly lower than our expected rate of 23% but higher than the prior year rate of 19.6%.

Moving to the diluted EPS walk on Page 5, we reported diluted earnings per share of $0.93 flat with the prior year. This reflected a slight decrease from operations and a higher effective tax rate positively offset by a lower share count. The higher effective tax rate was primarily attributable to the full application of the international provisions of U.S. tax reform. The lower share count reflects approximately $2 million fewer shares due to share repurchased activity. The SLS acquisition was neutral to both operating profit and EPS in the quarter.

Moving to our end-market results beginning on Page 6. Industrial sales were flat versus the prior year and down 2% sequentially. Compared to the prior year sales were flat in both the U.S. and Canada in local currency. On a two year stack basis sales were up 10% marking the fifth consecutive quarter of double-digit sales growth. Overall momentum with industrial customers remains positive. Double of our global account industry verticals grew over the prior year including petrochemical, metals and mining and food processing offset by declines with a number of OEM customers. We continue to expect growth in industrial end-market in 2019. The macroeconomic indicators remain in expansion territory supported by strong production levels and capacity utilization in the U.S. and Canada. Additionally, we see opportunities as customers spend capital to drive productivity.

The opportunity pipeline activity remains strong with our Global Accounts and Integrated Supply customers and bidding activity levels increased in the first quarter. During the quarter we renewed a contract with a U.S. based metals and mining company to support capital projects and provide electrical and MRO materials for five years with estimated total revenues exceeding $250 million. This represents 15% growth per year on average versus our current run rate with this customer.

Turning to Page 7. Sales in the construction end market were up 2% in the quarter reflecting sales that were down 1% in the U.S. and up 8% in Canada in local currency. Sales were down 8% sequentially from the fourth quarter approximately in line with typical seasonality. On a two year stack basis construction sales were up 12% reflecting incremental growth this year on top of more than 9% growth experienced in the prior year. Business momentum improved in March with contractors in both the U.S. and Canada after a slow start in January and February. We expect moderate growth in the uptrend in the nonresidential construction market to continue in 2019. Construction customers remain challenged by a tight skilled labor market in the presence of both inflationary and tariff related price pressures, which have increased costs for certain projects.

Our WESCO project management and construction services solutions target these customer challenges by reducing supply chain complexity and an increasing construction job site productivity. Backlog in current constant currency was down 2% versus the prior year and up 5% sequentially reflecting normal seasonality. March backlog was the second highest ever and billing margins in our backlog are higher on both the sequential and year-over-year basis. As an example of our continued success, this quarter we were awarded a multimillion dollar contract to provide electrical gear and equipment for a hospital upgrade project in Western Canada.

Moving to Page 8. Our utility sales were flat year-over-year with U. S. sales up 3% and Canadian sales down 38% in local currency. The decrease in Canadian utility sales primarily reflects the non-renewal of a contract that was at an unacceptable margin that we discussed last quarter. Negative comparisons in our Canadian utility sales are expected to occur through the third quarter of this year. We continue to expand our scope of services with investor-owned utility, public power and utility contractor customers. WESCO is benefiting from secular trends in utility sector including construction market growth, increased industrial output, grid hardening and reliability projects and higher demand for renewable energy. After seven years of growth in utility, we expect 2019 to be another strong year. Bidding activity levels are high, backlog has grown and we have a robust opportunity pipeline.

This quarter we were awarded a five year contract with estimated total revenues of more than $350 million for a new investor-owned utility customer to provide electrical generation, transmission and distribution materials, lighting and MRO supplies including tools and safety products. We expect to commence operations with this customer in the third quarter.

Finally, turning to commercial institutional and government or CIG on page 9. Sales increased 2% with the U.S. down 5% driven by declines with several end user technology customers but more than offset by Canada which was up 22% in local currently. On a two year stack basis CIG sales were up 11% in the quarter marking the fourth consecutive quarter in which sales increased by double digits on a two year basis. This performance was driven by our strong capabilities in value-added services in LED lighting renovation and retrofit applications as well as fiber-to-the-x deployments, broadband build-outs and network and security solutions. As an example of the continued strength we're seeing in CIG, this quarter we were awarded a multimillion dollar contract to provide lighting materials for an energy savings upgrade at a federal government facility.

Turning to Page 10 free cash flow was $18 million or 43% of net income. Net working capital was a use of cash in the quarter primarily due to an increase in accounts receivable related to the sales increase we experienced late in the quarter. Additionally, we make certain investments in inventory to support our utility alliance customers. We remain on track to generate free cash flow of 90% of net income for the full year. Debt leverage ratio was again 3.0 times trailing 12 months EBITDA well within our target leverage range after completing the acquisition of SLS in the first quarter. Leverage net of cash was 2.8 times EBITDA. As a result of adopting the new lease accounting standard at the beginning of the quarter our balance sheet at the end of the period includes operating lease assets and liabilities of approximately $235 million.

The adoption of the lease accounting standard did not have a material impact on the income statement or the statement of cash flows. We maintained strong liquidity defined as available cash plus committed borrowing capacity of $781 million at the end of the quarter. Our weighted average borrowing rate was 4.6% for the quarter consistent with historical averages. We repaid the remaining $25 million of debt under our term loan facility this quarter and at 68% leave our percentage of fixed rate debt is appropriately balanced between fixed and variable rate instruments. Capital expenditures were $11 million in the quarter reflecting investments in an information technology tools, digital applications and facilities.

During the quarter we purchased the assets of SLS for approximately $28 million and we settled the $100 million accelerated share repurchase transaction entered into last November. We received the total of nearly 2 million shares from this transaction including approximately 0.4 million shares received in the first quarter. Consistent with previous statements, we expect to complete additional share repurchase transactions worth at least $75 million prior to June 30 of this year. With the expected repurchase in the second quarter, we will have completed $200 million of the $400 million share buyback authorization that expires at the end of 2020. 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 two and 3.5 times EBITDA. Third, we returned cash to shareholders through share repurchase under our three year $400 million share buyback authorization.

Now let's turn to our outlook for the second quarter and full year on Slide 11. For the second quarter, we are projecting sales growth to be in the range of 3% to 6% and operating margin to be 4.5% to 4.8%. At the midpoint, this operating margin is 35 basis points higher than the prior year. However, you may recall that the prior year operating margin was negatively impacted by a bad debt charge of $2.5 million for a specific Canadian customer, which reduced operating margin by approximately 15 basis points. We are expecting an effective tax rate of 23% in the second quarter consistent with the balance of the year. For the full year, our outlook is unchanged from the estimates we provided in January.

We expect sales growth of 3% to 6%, operating margin of 4. 3% to 4.7%, an effective tax rate of 22% to 24%, diluted EPS of $5.10 to $5.70 and free cash flow of approximately 90% of net income. This outlook now incorporates the SLS acquisition which was not included previously. We expect SLS to add less than a point of sales growth in 2019. Compared with the prior outlook, the benefit of SLS is expected to be offset by additional foreign currency headwinds. We are holding the operating margin and EPS outlook range as SLS is expected to be neutral to profit in 2019 as we previously stated when we announced the acquisition.

With that, let me turn the call back over to John for some additional remarks before we open the line for questions.

John Engel -- Chairman, President and Chief Executive Officer

Thank you, Dave. I wanted to briefly preview some of the initiatives that we're looking forward to discuss with you at our upcoming 2019 Investor Day in June. As we look to the future, changes are accelerating in our business and up and down the overall B2B value chain. We will share with you our strategic initiatives to meet current and future needs of our customers take share in the market and drive value creation for our shareholders. These initiatives include advanced digital capabilities, digitizing our business models and processes while expanding our B2B e-commerce solutions for our customers. That's the first step, that's the first initiative we will outline for you.

Secondly, commercial excellence. That's leveraging our big data to improve execution in all phases of the customer experience. Third, operational excellence initiatives. They're all focused on optimizing our operations and overall supply chain through our distribution center network and branch structure, enhance pricing capabilities and supplier management efforts. Finally, and fourth, organization talent and culture. And I've always said we're people business that's the foundation of our company. We'll be building on our lean continuous improvement culture and investing in our employees and in communities through increased training and development, sustainability endeavors and social initiatives.

With that, I'd like to open up the call for questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions) The first question is from Dray Deane with RBC Capital Markets. Please go ahead.

Dray Deane -- RBC Capital Markets. -- Analyst

Hey, good morning, everybody.

John Engel -- Chairman, President and Chief Executive Officer

Good morning.

Dray Deane -- RBC Capital Markets. -- Analyst

Hey, I know you don't like to blame external forces like the weather but it did impact a number of distributors and other industrials this quarter. So maybe if you could start with sizing the impact you could see it in January and February organic. Looks like some was recouped in March but how much do you think was recouped in March and what was the net effect for the quarter please?

John Engel -- Chairman, President and Chief Executive Officer

Yeah, I mean Deane we always -- we don't like to talk about that, you know that. That's not historically we don't like to point the weather for any impact unless there is a hurricane or something that results in a net positive sales, that's an episodic event. With that said, there was a challenging winter and there was some weather impact driven by the severe weather winter in the polar vortex. In the first quarter, it affected a number of our U.S. branch operations and customer operations for that matter as well as Canada. My time with WESCO that would be hard-pressed to remember when we've had actually some winter effects in Canada. And I think if you look at the profile of our sales January, February and March it clearly impacted late January in the February we saw a nice pick up in March and that's extended into April. So I don't want to size that per se. But we saw the recovery in March.

I saw your prenote so I'll answer that question to give a little better color. When you look at March sales every end market and every geography grew and nothing was close to zero. So all kind of mid -- mid-single digit range. So a really nice balanced growth profile in March Deane. And we think we recovered some of the weather impact in Q1 but not all of it. So I think the balance of that will be in Q2. Because the impact on our operations just given the mix of our business our business models by and large that demand it's not perishable, it just kind of moves to the right a bit, right. It mainly project activity and stuff that we had in backlog we couldn't shift because branches are closed as they get back running that get shipped with the delay. Does that help?

Dray Deane -- RBC Capital Markets. -- Analyst

Yes, that helps exactly. So I appreciate that color. And just in terms of your verticals can you expand more on what's going on in the construction market that you touch down U.S. by 1%. Could you calibrate us on bid activity, project size and maybe some color within the verticals in construction? Thanks.

John Engel -- Chairman, President and Chief Executive Officer

Yeah. I would say overall and at the aggregate level I think we had a solid quarter in construction. But to your point if you kind of double-click underneath that we had really solid growth. I'd even call it strong growth in Canada at an 8% organic we think that's obviously well in advance of the market. International grew it's a much smaller portion but that grew double digits in construction in the quarter. So the challenge was the U.S. and it was down 1% organically roughly flattish. I think we had clearly had some of that weather impact which was more notable in the U.S.

When you look at across the various end market verticals and even the geographic regions over half of our regions in the U.S. grew in construction in the quarter. So but where we did have the impact it kind of does sync up with kind of the slower start in January and February. I would say we're -- I'm still very optimistic and confident of how construction should unfold for the year. Our framework for low to mid-single-digit growth for the year is still intact. You see that we reaffirmed our guide for the full year maintained that you know, well, that's our last being additive as Dave mentioned offset by increased FX headwinds when we gave the guide.

And you look at our outline guidance, top-line guidance for Q2 as we move into construction season it represents a nice performance versus what will be a very challenging comparable, right in Q2 last year. So when you look on a two year stack basis this outlook for Q2 represents accelerating momentum clearly in Q2 versus Q1. Finally, I'd say backlog is strong, is up 5% sequentially and the quality of the backlog is excellent particularly is reflected in billing margins. So I think we're well positioned as we start to move through the construction season Deane.

Dray Deane -- RBC Capital Markets. -- Analyst

And just one last one from me if I could. Just with regard to the weather issue some industrials have talked about the impact of a bigger pool in out of first quarter into the fourth quarter might that have been at play at all in your weaker January or February or was that not an issue for you guys?

John Engel -- Chairman, President and Chief Executive Officer

For us not an issue. We really didn't see that. And if we had seen some any of that we would have gave that color when we did the Q4 earnings release that was -- nothing notable for us.

Dray Deane -- RBC Capital Markets. -- Analyst

Very helpful. Thank you.

John Engel -- Chairman, President and Chief Executive Officer

Yeah, thanks.

Operator

Your next question is from David Manthey with Baird. Please go ahead.

David Manthey -- Baird -- Analyst

Hey, good morning, everyone.

John Engel -- Chairman, President and Chief Executive Officer

Good morning, Dave.

David Manthey -- Baird -- Analyst

Yeah, so just quick question on the SLS acquisition based on the abbreviated cash flow statement, should we assume the purchase price was 28 million bucks?

David Schulz -- Chief Financial Officer

That's correct Dave. So we had outlined that. We paid approximately $28 million for SLS that closed on March 5.

David Manthey -- Baird -- Analyst

Yes, OK. And then in your filings you typically say that quarters two, three and four are generally 6% to 8% higher than the first quarter. Just so I'm modeling correctly is that daily sales or is that just over revenues?

David Schulz -- Chief Financial Officer

Dave we provided that as to provide our investors with a view of our seasonality and we also highlight that that varies considerably from business cycle to business cycle. That's on a reported sales basis as it's in our 10-K on a GAAP basis. One of the things that I had highlighted is I'm sure that you guys have done the math and you're seeing that we do have a substantial step up in the balance of the year to hit the midpoint of our guidance for 2019. But if you take a look at some of the history on that the -- in 2016 that first quarter to balance of the year was 4% growth, in '17 it was 11%. So we've had quite a variability over the last several years on that seasonality.

David Manthey -- Baird -- Analyst

Yes, OK that's helpful. And then finally on the days -- selling days per quarter, most of the other companies that we cover are saying that they lost a day in the first quarter but they're picking up a selling day in the third quarter. But you're showing what, 63 days in the third quarter of '19. Is there just as a rule of thumb, is there a methodology you use in terms of the selling days that would lead to that conclusion? I'm just trying to square that.

John Engel -- Chairman, President and Chief Executive Officer

We always look at our selling days as the consistent workdays. It's the same methodology be use. And again, we use the calendar quarters and we're just subtracting out the essentially the federal holidays. And again, on a lot of the holidays that some companies maybe reporting as not a workday, we're still open for business. So we have provided you that those numbers on a consistent methodology from year-to-year.

David Schulz -- Chief Financial Officer

So we saw that the one workday delta (ph) in Q1 we also had that in our first quarter results Dave to your point.

David Manthey -- Baird -- Analyst

Right, OK. Perfect, all right, thanks very much.

David Schulz -- Chief Financial Officer

Thanks Dave.

Operator

Your next question is from Nigel Coe with Wolfe Research. Please go ahead. Mr. Coe, your line is open.

Bhupender Bohra -- Wolfe Research -- Analyst

Hey, good morning guys.

John Engel -- Chairman, President and Chief Executive Officer

Good morning Nigel.

Bhupender Bohra -- Wolfe Research -- Analyst

Yeah, this is Bhupender here for Nigel. Okay, so I just wanted to get a sense of the -- I know this quarter was like a less day than actually the rest of the year in terms of 90 days quarter. Was there any impact from the movement of Easter holiday like from the first quarter to second quarter compared to last year?

David Schulz -- Chief Financial Officer

Good morning, it's Dave Schulz. We didn't really see an impact from the movement of Easter. Easter was April 1 in 2018. We essentially are open in most of our locations on Good Friday and on Easter Monday, so we didn't really see an impact from the Easter holiday and how it was positioned in 2018 versus 2019.

Bhupender Bohra -- Wolfe Research -- Analyst

Okay, got it. Thanks for that. And just was looking at your balance sheet actually, the inventory pickup in 1Q versus fourth quarter you did actually talk about -- you didn't see any kind of pull-through demand or pull-through end of the fourth quarter. So can you just explain why the inventory buildup actually in the first quarter?

David Schulz -- Chief Financial Officer

Sure. Clearly, as we expect sales to accelerate in the balance of the year we begun planning the inventory specifically for some contracts that we were awarded. And so we are planning to ensure that we are having that inventory on hand to maintain our customer service metrics and so we begun building that inventory in the first quarter. We typically see that throughout our history. We're generally a combination of the contracts that we assigned plus the seasonality of the construction cycle. General leased an inventory buildup in the first quarter.

Bhupender Bohra -- Wolfe Research -- Analyst

Okay, got it. And lastly, just wanted to focus on one of the comments you made last quarter about within your construction Canada business. I think we talked about some market share gains over there. And I see like plus eight number here in the quarter. Can you just expand on that, how that's coming along, did we see any progress in that?

John Engel -- Chairman, President and Chief Executive Officer

Yes, very -- thanks for that question. Yeah, very pleased with the performance in our Canadian business. Geographically most of the regions grew. We think we're taking share. We've a very strong backlog. We've a very strong backlog entering the year and the backlog remain strong as we kind of move through the first quarter as we're positioned to entering construction season here in Q2 and Q3. So we got numerous growth drivers underneath that too. It's commercial, it's institutional, some broadband growth and expansion. So we're really pleased overall with our Canadian results and again it's broad-based.

Bhupender Bohra -- Wolfe Research -- Analyst

Okay, thanks a lot.

John Engel -- Chairman, President and Chief Executive Officer

Yeah.

Operator

The next question is from Christopher Glynn with Oppenheimer. Please go ahead.

Christopher Glynn -- Oppenheimer -- Analyst

Thank you, good morning. I'm curious about the utility contract, you know, it's there it sounds like a pretty unique win in terms of scale particularly sizing in a five year time frame. So curious from your perspective does that start in at the run rate is pretty quickly and do you see comparable other opportunities out there or is this a singular as it appears?

John Engel -- Chairman, President and Chief Executive Officer

Yeah, you heard the commentary when Dave took you through to the end markets and I want to amplify that a bit. I expect 2019 to be a very strong year on top -- on the heels of the last seven years through 2018 where we dramatically expanded our utility business as a leading -- industry leading value proposition have been taking share consistently. I think it's pretty clear what we've talked about what the issue was in Canada and our margin discipline remains intact. When you look at the U.S. business grew 3% you know, (inaudible) utility in the quarter.

But I'll remind you last quarter we mentioned we had three major renewals was triple digit millions a year and two new wins in the fourth quarter. And then to your point this new win is also very sizable. And it really -- the way we're able to get that win and I won't talk about you know, obviously it's business that we are capturing that others have had, right. So the ability to get that win is really the result of our whole value proposition. And what we're doing with large IOU and public power customers across the U.S. and Canada. So I'm bullish on utility, our team, the value prop and I think despite what on the optics of it looks like a shift slow start particularly because of the Canada decline. And we got another couple of quarters to that so we comp that for Canada but all then I think it's going to be a very strong year for utility Chris.

Christopher Glynn -- Oppenheimer -- Analyst

Okay. And then a question on a SG&A kind of expected run rates for the year relative to the first quarter level 297?

John Engel -- Chairman, President and Chief Executive Officer

Chris, you should expect to see an increase in the SG&A dollars as we go through the balance of the year primarily because of the acquisition of SLS. We will also have our typical second quarter increase due to merit so again with people cost being primary driver of our operating costs we do have merit increases that are impacted for Q2 and beyond. And so those are the two factors that will increase the run rate versus what you've seen in Q1. But again that's all incorporated in how we position the outlook for operating margin for the year.

Christopher Glynn -- Oppenheimer -- Analyst

Got it, thank you.

Operator

(Operator Instructions). The next question is from Robert Barry with Buckingham. Please go ahead.

Robert Barry -- Buckingham. -- Analyst

Hey, guys. Good morning.

David Schulz -- Chief Financial Officer

Good morning.

Robert Barry -- Buckingham. -- Analyst

So you mentioned that April was up a low single, I'm not sure if that's one, two or three. But just curious the thoughts setting the 2Q range at three to six with April at or below the low end of that range?

David Schulz -- Chief Financial Officer

Sure. So Robert, it's Dave Schulz. So again, if you take a look at our growth rates from the prior year, you begin to see the growth rates in 2018 decelerate in the base period. And so again on a -- if you take a look at 2018, April is our toughest comp in the second quarter of 2018. And so again, we've taken that into account along with obviously the feedback we've gotten from customers, some of the new contract wins that we've gotten and that's what's informed our guidance of the 3% to 6%.

Robert Barry -- Buckingham. -- Analyst

Got it. Got it. And nice start here on gross margin. Just curious your thoughts maybe not at this level year-over-year, but whether you think that can continue to kind of track up year-over-year as we continue here throughout '19?

John Engel -- Chairman, President and Chief Executive Officer

We've seen continued progression on our gross margins. We highlighted that in our prepared remarks. And obviously as you take a look back to where we were at the beginning of 2018, we're very pleased with the progress we've made with our gross margin initiatives. We continue to focus on our gross margin initiatives and we do expect to get incremental value from them. Again, we don't provide the specific outlook on gross margins. But again the expectations for continued effort to drive margin and the margin expansion are incorporated in our operating margin guides for 2019.

Robert Barry -- Buckingham. -- Analyst

Got it. Got it. Just lastly from me, I think the pull-through in 2Q is guided below 50. I think you might have some kind of merit timing there. But if you could just remind us what's driving that and do you still expect it to be 50 or better in the back half? Thank you.

David Schulz -- Chief Financial Officer

Let me just address. Because we have the SLS acquisition that's going to put pressure on our ability to generate the full 50% pull-through for the full year. When we take a look at our core business excluding SLS, we still expect to hit approximately 50% on the pull-through. But again SLS is going to have a substantial gross margin rate relative to the balance of the business but as we mentioned it's basically neutral on operating profit. So that's going to put a drag on our pull-through numbers on a reported basis.

John Engel -- Chairman, President and Chief Executive Officer

But that's always true when we do an acquisition because it will be in our current year reported results and not in prior year periods until we lap that after four quarters. And as we've done over the years, as we've closed acquisitions, we'll report that with and without the acquisition to be clear. But it's kind of simple math. When you're adding in that business and you don't have it in prior year, it does just put a drag on the reported pull-through at a consolidated level. We're still focused on ensuring that the core business separate from the acquisition right, we're driving the strong pull-through Robert.

Robert Barry -- Buckingham. -- Analyst

Got it. Got it. Great, thank you.

John Engel -- Chairman, President and Chief Executive Officer

Yeah.

Operator

Your next question is from Steve Barger with KeyBanc Capital Markets. Please go ahead.

Ryan Mills -- Keybanc Capital Markets -- Analyst

Good morning, guys. This is Ryan Mills on for Steve.

John Engel -- Chairman, President and Chief Executive Officer

Hi, Ryan.

David Schulz -- Chief Financial Officer

Good morning.

Ryan Mills -- Keybanc Capital Markets -- Analyst

Yeah, so it's been a focus showcasing the value proposition that WESCO provides to all it services and there is no doubt that the value is there. And it sounds like you're going to talk about some next level offerings at your Investor Day. But I'm curious is there a strategy plan in place or an update on how WESCO plans to get better compensated for the level of service that you provide?

John Engel -- Chairman, President and Chief Executive Officer

Yeah, stay tuned. So I think the reason I wanted to put kind of the preview of what we're going to be talking about at Investor Day is you'll see an expansion of our broad array of supply chain solutions. We think services is a differentiator and we'll also spotlight some recent success stories where we think we're getting much better traction with that. Those offerings in our portfolio of solutions and we're getting better paid for them in a more attractive way as well as some additional new initiatives as I've kind of highlighted. So stay tuned. We look forward to that discussion with all of you. Hopefully, you can attend and it will be a great event.

Ryan Mills -- Keybanc Capital Markets -- Analyst

Sounds good. And then can you maybe talk about the difference in growth rates from your results and your closest public peer reported organic sales at 8% and then 8% in their utility segment compared to your results?

John Engel -- Chairman, President and Chief Executive Officer

Yeah, no, we don't comment about competitors. But since you have a focused question I'll address that. When you look at their business it's really three components. They've got kind of a communications and security datacom driven business. They've got core wire and cable business and they got utility business. I think we've already explained utility on what the unique -- what our unique comparable is as we walked away from competitors. So that gives you -- that'll give you a good sense on utility. And when you look at our communications and security category so I'm glad you raised this question.

Our communications and security category which is one of our six major product and services categories that was up high single digits growth in Q1 versus prior year and all of our geographic regions grew U.S. Canada and international. When we profile our results we typically talk about them by geography and by end market. And we provide a pie chart on the product categories overtime, which we keep updated on a rolling quarterly basis. Really nice performance, I'm very pleased with the performance in communications and security all in at high single-digit growth as I said organically in Q1. So I think all in we feel good about kind of the side-by-side comparisons. The wire and cable business is a much smaller percentage of our portfolio than that competitor has and that's their core. And they had relatively solid results in that. So very understandable and that's the composition.

Ryan Mills -- Keybanc Capital Markets -- Analyst

Okay. And then John you've been optimistic on the LED opportunity for quite some time. You completed the SLS acquisition in March. So my question is what's your growth expectation this year for that business as well as WESCO's legacy lighting business?

John Engel -- Chairman, President and Chief Executive Officer

Yeah, so again still very optimistic and bullish on the opportunity in lighting. We'll talk more about this in Investor Day too because I think that where we sit in the value chain and with our turnkey all in solutions for retrofit renovation and upgrade we're more than just a new construction driven lighting business as I've talked about over the last couple of years. When we brought a Lux Lumagen (ph) that's performing exceptionally well; and the SLS acquisition, which we think we got at an attractive price. And by the way that's off to -- they're off to a terrific start. That management team I think is excited about the prospects of really executing with the additional capabilities that we bring to the table because again this is a priority category and growth opportunity for us.

And all the management team is intact and we're -- the execution/integration is well under way we're very pleased. So and the fact that we went out and acquired that should also speak to what we think the opportunity is. And as I mentioned last quarter before we closed it that it really is a talent acquisition play. We picked up some terrific talent in terms of lighting, domain expertise, application expertise that's going to serve us exceptionally well. In our core legacy lighting business, we still have a legacy land business believe it or not. So we are not 100% LED and that business has got attractive margins but it's declining at double digit rates roughly 15 plus percent declines every quarter.

We'll ride that as long as we can. And obviously we tried to -- as that our business moves forward we try to convert that to LED. But we'll ride that, you know, that's kind of the end of the S curve for those product categories. Our LED mix is growing at a much faster rate. And so in our overall lighting category we still get those legacy sales but it's the LED portion of the business is growing at a much more attractive rate and then again it's not just new construction it's retrofit renovation and upgrades. And we'll talk more about this in Investor Day too I think and bring that to life a bit. We've used numbers on the order of $300 billion plus kind of addressable market installed days out there that's not -- that's addressable with vis-a-vis LED turnkey solutions. So an outstanding market opportunity that toward the annual construction market opportunity for lighting.

Ryan Mills -- Keybanc Capital Markets -- Analyst

Okay. Now if I could squeeze that one more and just because I didn't see it in just press release or hear it in your prepared remarks. You had about one month of SLS in your first quarter results, was there any impact to the gross margin or EBIT margin from that business?

David Schulz -- Chief Financial Officer

Steve, so we provided you with the details on sales. So a small benefit on the sales line from an overall perspective it was neutral. And so we do expect for the full year SLS will be neutral to operating profit. And again, we mentioned in our previous call that what is attractive about the SLS business it's the services business, it does have a higher gross margin rate relative to the balance of our business. In Q1 specifically there was a slight benefit but we also saw an offset from the mix of our businesses on our core basis, which basically offset each other.

Ryan Mills -- Keybanc Capital Markets -- Analyst

All right, thank you for taking my questions.

David Schulz -- Chief Financial Officer

Sure.

Operator

The next question is from Patrick Edelmann with JPMorgan. Please go ahead.

Patrick Edelmann -- JPMorgan -- Analyst

Hi, guys, thanks for taking my question. Maybe one quick one to start. In the first quarter on the gross margin front, was there anything unusual impacting the results there maybe just a little bit better than we thought.

David Schulz -- Chief Financial Officer

Patrick, there was nothing unusual in the first quarter for the gross margin. Again, I think that this is our continued progress against pushing through the supplier price increases and the organic margin initiatives that we've been implementing.

Patrick Edelmann -- JPMorgan -- Analyst

Understood. And then another quick one, just the -- did you guys give this earlier I jumped on a little bit late -- what's the profile of that SLS business from like a gross margin and an operating margin perspective. I think you said, it's a kind of rich gross margin I heard you say that?

John Engel -- Chairman, President and Chief Executive Officer

That's correct. We've not provided any specifics. But we have mentioned that it does have a higher gross margin rate than the balance of the WESCO business. But again, it's a services business so it also has a much higher SG&A percentage of sales. That's why it's profit neutral for us in the first year of ownership. Again, this is a carve out from a corporate parent and so we do anticipate not only having a significant amounts of effort but also cost to integrate the SLS business into WESCO.

Patrick Edelmann -- JPMorgan -- Analyst

Got it. And staffing because this is a step up. I guess, you're going to see an increased SG&A from that business in the second quarter. And if I kind of run the math it seems like gross margins are going to be down a little bit from the first quarter just backing into it. And I think that's normal seasonality but I just wanted to kind of run that by you the sequential progression.

David Schulz -- Chief Financial Officer

You see normal seasonality on our SG&A. So usually with because of merit increases that take effect in the second quarter we do see increases in SG&A. Again, but as a percentage of sales, we're expecting our SG&A percentage of sales to come down in the balance of the year. Primarily as we get leverage and we continue to focus on cost management within our operating overhead groups.

Patrick Edelmann -- JPMorgan -- Analyst

Got it. And then one other one maybe a couple if there is time. Can you provide any color of what you're seeing in the Englewood, the ESCO business with respect to industrial automation and from core machine tools just how did it grow in the first quarter and what are you hearing from your OEM customers for the balance of the year. We've seen here some others reporting software like auto related results just curious what you're seeing from Englewood and ESCO?

John Engel -- Chairman, President and Chief Executive Officer

Yeah, so when we talked about our industrial end market results and some declines with select number of OEM customers that also -- it was across the U.S. primarily in different locations depending on where those customers were and that would include our industrial automation offerings. Had some -- with certain customers had some challenging declines with sales. In terms of the business, the value proposition it's a very important part of the portfolio and does represent a terrific -- higher gross margin, higher operating margin business with a terrific array of end user customers as well as system integrators.

So it's -- and it's a business I think when we look out in the future despite any I'll call it near-term choppy headwinds, the growth potential is significant over the mid- to long-term driven by IoT the expanding what will be the expanding IoT applications across the entire industrial setting. So it's a critical part of our portfolio and increasingly a critical part of our portfolio coupled with our data communications business. You think about those two in conjunction as well as with electrical, industrial automation control the electrical plus the datacom and security -- IP security you wrap all those together and we've got the makings of a really terrific solution for an increasing array of IoT applications.

Patrick Edelmann -- JPMorgan -- Analyst

Yeah, makes a ton of sense. And you mentioned choppy, I mean is that what's your visibility on the rest of the year there I guess it was down in the quarter. Did you expect it to kind of improve through the years or there is going to be tough year for that?

John Engel -- Chairman, President and Chief Executive Officer

Yeah, no, all right, look. I mean, some of that choppiness is customer operations as well as our branches where they're physically located. Again, I hate to go back to weather, but you look at where we are positioned we definitely had some impacts with the polar vortex in upper Midwest, Midwest portions of the U.S. and so the customer operations. So you look what are guided for Q2, you look at what are guided for full year. And specifically for industrial we're still expecting low- to mid-single-digit growth full year basis for industrial. And I think it's going to be a solid year for industrial when we're all said and done for 2019.

Patrick Edelmann -- JPMorgan -- Analyst

Okay, makes sense. And then lastly, if I have time for one more just in oil and gas perspective, any color on what you're seeing in those markets in the U.S. market specifically upstream versus downstream that those dynamics, curious --.

John Engel -- Chairman, President and Chief Executive Officer

We've got -- we had some growth in the oil and gas in the quarter both U.S. and Canada low single digit growth, upper low single digit to mid-single digit growth. So it's a bit of a lower growth rate than what we saw throughout 2018. Oil and gas now is about 7% of WESCO's sales and the peak of oil and gas for WESCO. Back in 2014, I'll take you all the way back to 2014, it was 10% of our sales. So even after last two years with strong double-digit growth in oil and gas after being down double digits in 2015 and 2016. 2017, 2018 up double digits. Q1 starts kind of low to mid-single-digit growth both U.S. and Canada. With respect to the upstream versus downstream there is still a lot of cost pressure in upstream. And I think our outlook is that's kind of more flattish.

We have some specific opportunities that are customer specific and driven but that I'm giving you more of a kind of a market view of that. For downstream, the trend clearly is up in petrochem and particularly LNG in the outlook -- my outlook is very positive. And I think LNG in particular represents a really nice growth opportunity in the U.S. and especially in Canada.

Patrick Edelmann -- JPMorgan -- Analyst

Makes sense. Thanks a lot. Good luck guys with the rest of the year.

John Engel -- Chairman, President and Chief Executive Officer

Thank you. So with that, I think we've cleared our queue of questions. So I'm going to bring this to a wrap.

Thank you for your time this morning. Brian Begg and Will are available to take your questions. And we look forward to seeing many of you at one of our investor marketing events. There are a number of those in the coming weeks. And obviously we have our Investor Day on June 13 in New York and hope you'll be able to join us. So thank you for your time again and your interest in WESCO. Have a great day.

Operator

Ladies and gentlemen, the conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 53 minutes

Call participants:

Will Ruthrauff -- Director-Investor Relations

John Engel -- Chairman, President and Chief Executive Officer

David Schulz -- Chief Financial Officer

Dray Deane -- RBC Capital Markets -- Analyst

David Manthey -- Baird -- Analyst

Bhupender Bohra -- Wolfe Research -- Analyst

Christopher Glynn -- Oppenheimer -- Analyst

Robert Barry -- Buckingham -- Analyst

Ryan Mills -- Keybanc Capital Markets -- Analyst

Patrick Edelmann -- JPMorgan -- Analyst

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