Good day, and welcome to the WESCO first quarter 2019 earnings conference call and webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. 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.
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. 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 were 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.
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. Then Dave will take you through our first quarter results and 2019 outlook. I'll then conclude with some comments about what we'll cover at our upcoming investor day before we open the call for questions. We started off 2019 with sales and operating margin within our outlook range for the first quarter. Our sales growth rebounded nicely in March and continued into 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 its 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. 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. 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?
Thank you, John. Good morning, everyone. I'll start with an overview beginning on page four. Reported sales in the quarter were down 2%, which was at the lower end of our outlook range of -2%-2%. On an organic basis, sales were up 1% with 3% growth in Canada, flat sales in the U.S. 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. Recall 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. 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 5th. Neither 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%. Higher than the prior year rate of 19.6%. Moving to the diluted EPS walk on page five. 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 repurchase activity.
The SLS acquisition was neutral to both operating profit and EPS in the quarter. Moving to our end market results, beginning on page six. 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. Several 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 the 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 seven. 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 non-residential construction market to continue in 2019. Construction customers remain challenged by a tight skilled labor market and 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 increasing construction job site productivity. Backlog in 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 eight. 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 the 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 nine. 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 currency.
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 are 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. Networking 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 made 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%, believe 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 the 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 a total of nearly two 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 30th 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 return cash to shareholders through share repurchase under our three-year $400 million share buyback authorization. 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%-6%, and operating margin to be 4.5%-4.8%.
At the midpoint, this operating margin is 35 basis points higher than the prior year. 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%-6%, operating margin of 4.3%-4.7%, an effective tax rate of 22%-24%, diluted EPS of $5.10-$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 to 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. Let me turn the call back over to John for some additional remarks before we open the line for questions.
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 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 brand structure, enhanced pricing capabilities, and supplier management efforts. Finally, fourth, organization, talent, and culture. I've always said we're a 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.
We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question is from Deane Dray with RBC Capital Markets. Please go ahead.
Hey, good morning, everybody.
Morning.
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. Maybe if we could start with sizing the impact. You could see it in January and February, organic. Looks like some was recouped in March. How much do you think was recouped in March, and what was the net effect for the quarter, please?
Yeah. Deane, we don't like to talk about that. You know that. Historically, we don't like to point to weather for any impact unless there's a hurricane or something that results in a net positive sales that's an episodic event. With that said, it was a challenging winter, there was some weather impact driven by the severe weather winter and 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. In my time with WESCO, I'd be hard-pressed to remember when we've had actually some winter effects in Canada. I think if you look at the profile of our sales January, February, to March, it clearly impacted late January into February. We saw a nice pickup in March, and that extended into April.
I don't want to size that per se, but we saw the recovery in March. I saw your pre-note, I'll answer that question to give a little better color. When you look at March sales, every end market and every geography grew, nothing was close to zero. All kind of mid-single-digit range. A really nice balanced growth profile in March, Deane. We think we recovered some of the weather impact in Q1, but not all of it. I think the balance of that will be in Q2 because the impact on our operations, just given the mix of our business models, by and large, that demand, it's not perishable. It just kind of moves to the right a bit, right? Mainly project activity and stuff that we had in backlog we couldn't ship because branches were closed.
As they get back running, that gets shipped with a delay. Does that help?
That helps. Exactly. Appreciate that color.
Can you expand more on what's going on in the construction markets 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.
Yeah. I would say overall, at the aggregate level, I think we had a solid quarter in construction. 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. The challenge was the U.S., and it was down 1% organically, roughly flattish. I think we 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.
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 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 it. With SLS being added, as Dave mentioned, offset by increased FX headwinds when we gave the guide. You look at our 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. When you look on a two-year stack basis, this outlook for Q2 represents accelerating momentum clearly in Q2 versus one. Finally, I'd say backlog is strong. It was up 5% sequentially.
The quality of the backlog is excellent, particularly as reflected in billing margins. I think we're well positioned as we start to move through the construction season, Deane.
Just one last one for me, if I could. Just with regard to the weather issue, some industrials have talked about the impact of a bigger pull-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 a non-issue for you guys?
No. For us, non-issue. We really didn't see that, and if we had seen any of that, we would've gave that color when we did the Q4 earnings release. Nothing notable for us.
Very helpful. Thank you.
Yep. Thanks.
The next question is from David Manthey with Baird. Please go ahead.
Hey, good morning, everyone.
Morning, Dave.
Yeah. Just quick question on the SLS acquisition. Based on the abbreviated cash flow statement, should we assume the purchase price was $28 million?
That's correct, Dave. We had outlined that we paid approximately $28 million for SLS. That closed on March 5th.
Yep. Okay. In your filings, you typically say that quarters two, three, and four are generally 6%-8% higher than the first quarter. Just so I'm modeling correctly, is that daily sales or is that just overall revenues?
Dave, we provided that 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'd highlight 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. If you take a look at some of the history on that, in 2016, that first quarter to balance of the year was a 4% growth. In 2017, it was 11%. We've had quite a variability over the last several years on that seasonality.
Yep. Okay. That's helpful. Finally on the 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. You're showing, what, 63 days in the third quarter of 2019? 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.
We always look at our selling days as the consistent workdays. It's the same methodology we use, again, we use the calendar quarters, and we're just subtracting out essentially the federal holidays. Again, on a lot of the holidays that some companies may be reporting as not a workday, we're still open for business. We have provided you with those numbers on a consistent methodology from year to year. We saw the one workday delta in Q1. We also had that in our first quarter results, Dave, to your point.
Right. Okay. Perfect. All right. Thanks very much.
Thanks, Dave.
The next question is from Nigel Coe with Wolfe Research. Please go ahead. Mr. Coe, your line is open.
Hey, good morning, guys.
Morning, Nigel.
This is Bhupendra here for Nigel.
Okay.
Yeah, this is Bhupendra here for Nigel. Yep. Okay, I just wanted to get a sense of the-- I know this quarter was a less day than actually the rest of the year in terms of 90-day quarter. Was there any impact from the movement of Easter holiday, like from first quarter to second quarter compared to last year?
Good morning. It's Dave Schulz. We didn't really see an impact from the movement of Easter. Easter was April 1st in 2018. We essentially are open in most of our locations on Good Friday and on Easter Monday. We didn't really see an impact from the Easter holiday and how it was positioned in 2018 versus 2019.
Okay, got it. Thanks for that. 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 into the fourth quarter. Can you just explain why the inventory buildup actually in the first quarter?
Sure. Clearly, as we expect sales to accelerate in the balance of the year, we've begun planning the inventory specifically for some contracts that we were awarded. We are planning to ensure that we are having that inventory on-hand to maintain our customer service metrics. We've 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 have signed, plus the seasonality of the construction cycle. Generally leads to an inventory buildup in the first quarter.
Okay, got it. 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 on that?
Thanks for that question. Very pleased with
Performance in our Canadian business. Geographically, most of the regions grew. We think we're taking share. We have a very strong backlog. We had a very strong backlog entering the year, and the backlog remained strong as we moved through the first quarter as we're positioned entering construction season here in Q2 and Q3. We got numerous growth drivers underneath that too. It's commercial, it's institutional, some broadband growth and expansion. Really pleased overall with our Canadian results. Again, it's broad-based.
Thanks a lot.
Yep.
The next question is from Christopher Glynn with Oppenheimer. Please go ahead.
Thank you. Good morning.
Good morning.
I'm curious about the utility contract you announced here. It sounds like a pretty unique win in terms of scale, particularly sizing it in a five-year timeframe. Curious from your perspective, does that start in at the run rates pretty quickly, and do you see comparable other opportunities out there, or is this as singular as it appears?
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 the heels of the last seven years through 2018, where we dramatically expanded our utility business, have an industry-leading value proposition, have been taking share consistently. I think it's pretty clear what we've done. 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% before utility in the quarter. I'll remind you, last quarter, we mentioned we had three major renewals worth triple digit millions a year and two new wins in the fourth quarter. To your point, this new win is also very sizable.
The way we were able to get that win, I won't talk about. Obviously, it's business that we are capturing that others have had, right? 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. I'm bullish on utility, our team, the value prop, and I think despite what on the optics of it looks like a slow start, particularly because of the Canada decline. We got another couple of quarters of that till we comp that for Canada. All in, I think it's going to be a very strong year for utility, Chris.
Okay. Then, I had a question on the SG&A kind of expected run rates for the year relative to the first quarter level $297.
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. Again, with people cost being the primary driver of our operating costs, we do have merit increases that are impacted for Q2 and beyond. Those are the two factors that will increase the run rate versus what you've seen in Q1. Again, that's all incorporated in how we position the outlook for operating margin for the year.
Got it. Thank you.
As a reminder, if you have a question, please press star then one. The next question is from Robert Barry with Buckingham. Please go ahead.
Hey, guys. Good morning.
Morning.
You mentioned that April was up a low single. I'm not sure if that's one, two, or three, but just curious the thought setting the 2Q range at three to six, with April at or below the low end of that range.
Sure. Robert, it's Dave Schulz. 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. Again, if you take a look at 2018, April is our toughest comp in the second quarter of 2018. 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 for the 3%-6%.
Got it. 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 2019.
We've seen continued progression on our gross margins. We highlighted that in our prepared remarks. 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 margin expansion are incorporated in our operating margin guide for 2019.
Got it. Just lastly for me, I think the pull-through in 2Q is guided below 50%. I think you might have had 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.
Sure. 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. Again, SLS is going to have a substantial gross margin rate relative to the balance of the business, but as we've mentioned, it's basically neutral on operating profit. That's going to put a drag on our pull-through numbers on a reported basis.
That's always true when we do an acquisition, because it'll be in our current year reported results and not in prior year periods until we lap that after four quarters. As we've done over the years, as we've closed acquisitions, we'll report that with and without the acquisition, to be clear. 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, we're driving the strong pull-through, Robert.
Got it. Great. Thank you.
Yep.
The next question is from Steve Barger with KeyBanc Capital Markets. Please go ahead.
Good morning, guys. This is Ryan Mills on for Steve.
Hi, Ryan.
Morning.
Yeah. It's been a focus showcasing the value proposition that WESCO provides through all its services, and there's 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. I'm curious, is there a strategic plan in place or an update on how WESCO plans to get better compensated for the level of service that you provide?
Yeah. Stay tuned. I think the reason I wanted to kind of start to preview 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. We'll also spotlight some recent success stories where we think we're getting much better traction with 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. Stay tuned. We look forward to that discussion with all of you. Hopefully, you can attend, and it'll be a great event.
Sounds good. Then can you maybe talk about the difference in growth rates from your results and your closest public peer who reported organic sales of 8% and then 8% in their utility segment compared to your results?
Yeah. Normally, I 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 a core wire and cable business, and they've got a utility business. I think we've already explained utility on what our unique comparable is as we walked away from a competitor. That'll give you a good sense on utility. When you look at our communications and security category, 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 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 over time, 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. 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 have relatively solid results in that. Very understandable, and that's the composition.
Okay. John, you've been optimistic on the LED opportunity for quite some time. You completed the SLS acquisition in March. My question is, what's your growth expectation this year for that business as well as WESCO's legacy lighting business?
Yeah. 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 bought Aelux, that's performing exceptionally well, and the SLS acquisition, which we think we got at an attractive price. By the way, 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's intact, and the execution/integration is well underway.
We're very pleased. The fact that we went out and acquired that should also speak to what we think the opportunity is. As I mentioned last quarter, before we closed it, that it really is a talent acquisition play, and 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 lamp business, believe it or not. We're not 100% LED. That business has got attractive margins, but it's declining at double-digit rates, roughly 15-plus % declines every quarter. We'll ride that as long as we can, and obviously, as that business moves forward, we try to convert that to LED. We'll ride that. That's kind of the end of the S curve for those product categories.
Our LED mix is growing at a much faster rate. In our overall lighting category, we still get those legacy sales, but it's the LED portion of the business that's growing at a much more attractive rate. Again, it's not just new construction, it's retrofit, renovation, and upgrades. 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 base out there that's addressable with vis-a-vis LED turnkey solutions. An outstanding market opportunity that dwarfs the annual construction market opportunity for lighting.
If I could squeeze one more in, just because I didn't see it in the press release or here 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?
Steve, we provided you with the details on sales. It was a small benefit on the sales line.
From an overall perspective, it was neutral. We do expect for the full year, SLS will be neutral to operating profit. Again, we mentioned on our previous call that what is attractive about the SLS business, it's a 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, we also saw an offset from the mix of our businesses on our core basis, which basically offset each other.
All right. Thank you for taking my questions.
Sure.
The next question is from Patrick Baumann with JPMorgan. Please go ahead.
Hey, 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? They were just a little bit better than we thought.
Patrick, there was nothing unusual in the first quarter for the gross margin. 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.
Understood. Another quick one, 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 or an operating margin perspective? I think you said it's a kind of rich gross margin, I heard you say that?
That's correct. We've not provided any specifics, we have mentioned that it does have a higher gross margin rate than the balance of the WESCO business. It's a services business, 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. This is a carve-out from a corporate parent, we do anticipate not only having a significant amount of effort, but also cost to integrate the SLS business into WESCO.
Got it. I'm just asking because the step-up, I guess you're going to see increased SG&A from that business in the second quarter. If I run the math, it seems like gross margins are going to be down a little bit from the first quarter, just backing into it. I think that's normal seasonally, but I just wanted to kind of run that by you, the sequential progression.
We do see normal seasonality on our SG&A. Usually, because of merit increases that take effect in the second quarter, we do see increases in SG&A. 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.
Got it. One other one, or maybe a couple if I have time. Can you provide any color on what you're seeing in the EESCO, the EESCO 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 some others reporting softer, like auto-related results. Just curious what you're seeing from EESCO EESCO.
When we talked about our industrial end market results and some declines with a select number of OEM customers, it was across the U.S. primarily in different locations, depending on where those customers were, and that would include our industrial automation offerings. 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 kind of higher gross margin, higher operating margin business with a terrific array of end user customers as well as system integrators. It's a business, I think, when we look out into 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, what will be the expanding IoT applications across the entire industrial setting.
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 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.
Yeah, makes ton of sense. You mentioned choppy. What's your visibility on the rest of the year there? I guess it was down in the quarter. Do you expect it to kind of improve for the year? Or is it going to be tough for-
Yeah, no, our outlook, 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 the upper Midwest portions of the U.S., and so did customer operations. You look at what our guide is for Q2, you look at what our guide is for the full year, and specifically for industrial, we're still expecting low to mid-single digit growth full year basis for industrial. I think it's going to be a solid year for industrial when we're all said and done for 2019.
Okay, makes sense. Lastly, if I have time for one more, just from an oil and gas perspective, any color on what you're seeing in those markets, in the U.S. market specifically?
Yeah.
Upstream versus downstream.
Yep.
Those dynamics. Curious.
Yeah, we had some growth in oil and gas in the quarter, both U.S. and Canada. Low single digit growth, upper low single digit to mid-single digit growth. It's at 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. Even after the last two years were 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 upstream versus downstream, there's 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 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 and my outlook is very positive. I think LNG in particular represents a really nice growth opportunity in the U.S. and especially in Canada.
Makes sense. Thanks a lot. Good luck, guys, with the rest of the year.
Thank you. 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 13th in New York and hope you'll be able to join us. Thank you for your time, again, and your interest in WESCO. Have a great day.
Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.