Executives
Daniel A. Brailer - Vice President of Investor Relations & Corporate Affairs
John J. Engel - Chairman, Chief Executive Officer, President and Member of Executive Committee
Kenneth S. Parks - Chief Financial Officer and Vice President
Analysts
Deane M. Dray - Citigroup Inc, Research Division
John Anthony Baliotti - Janney Montgomery Scott LLC, Research Division
Charles Stephen Tusa - JP Morgan Chase & Co, Research Division
Sam Darkatsh - Raymond James & Associates, Inc., Research Division
Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division
Ryan Merkel - William Blair & Company L.L.C., Research Division
Joshua C. Pokrzywinski - MKM Partners LLC, Research Division
Kwame Webb
WESCO International (WCC) Q4 2013 Earnings Call January 30, 2014 11:00 AM ET
Operator
Good day, and welcome to the WESCO International Fourth Quarter and Full Year Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Mr. Dan Brailer. Please go ahead, sir.
Daniel A. Brailer
Good morning, ladies and gentlemen. Thank you for joining us for WESCO International's conference call to review our fourth quarter 2013 financial results. Participating in the earnings conference call this morning are the following officers: Mr. John Engel, Chairman, President and Chief Executive Officer; and Mr. Ken Parks, Senior Vice President and Chief Financial Officer.
In addition to this morning's release of our earnings announcement, an earnings webcast presentation has been produced, which provides a summary of certain financial and end market information to be reviewed in today's commentary by management. We have filed the presentation with the Securities and Exchange Commission and posted it on our corporate website.
During today's call, we will be webcasting selected slides from the presentation to facilitate our review of the results. As John and Ken go through their prepared remarks, they will reference specific page numbers that relate to their comments. To make year-over-year comparisons more meaningful, we have adjusted our results for certain non-recurring items, as shown throughout the webcast presentation. The reconciliation of the adjustments are shown in the appendix of the presentation for today's call, John and Ken will reference the adjusted results.
This conference call includes forward-looking statements and, therefore, actual results may differ materially from expectations. For additional information on WESCO International, please refer to the company's SEC filings, including the risk factors described therein.
Finally, the following presentation includes a discussion of certain non-GAAP financial measures. Information required by Regulation G, with respect to such non-GAAP financial measures, can be obtained via WESCO's website at www.wesco.com. Means to access this conference call via webcast was disclosed in the press release and was posted on our corporate website. The replay of this conference call will be archived and available for 7 days.
I would now like to turn the conference call over to John.
John J. Engel
Thank you, Dan. Good morning, everyone. Our fourth quarter results were consistent with the third quarter, reflecting continued execution in a low-growth economic environment. Sales growth was below our expectations and we're disappointed with these results.
Organic sales grew 1.5% versus prior year, driven by growth in Data Communications and Lighting and continued strength in Utility and CIG. Organic sales per workday varied across the quarter and were up 3.5% in October, were flat in November and were up 1% in December. Adjusting for the impact of Hurricane Sandy in 2012, November organic sales per workday would have been up approximately 2%. Sales remained stable in Canada in the fourth quarter, with sales being up 2% versus prior year for WESCO Canada and, on a positive note, up 8% versus prior year for EECOL, both on a local currency basis.
Operating margins expanded 40 basis points to 5.9%, and that was driven by tighter cost controls. And as a result, operating profit and EPS grew double digits in the fourth quarter.
Gross margins were down 40 basis points versus prior year, driven by a reduction in supplier volume rebates rates and the business mix impact of large Utility and Datacom wins.
Free cash flow generation was a record in the quarter and continued to be directed at debt production, resulting in liquidity over $600 million. Financial leverage is now well within our targeted range.
On a full year basis, we posted record sales, profitability and free cash flow. Our acquisitions are performing well and we delivered on our full year EPS accretion expectations of $1 for EECOL. EPS also reached a record level of $5.02 in 2013, marking the third year in a row of double-digit EPS growth. We're encouraged with the progress of our One WESCO initiative as we invest in our business and manage an active acquisition pipeline.
We are prioritizing our investments in our 8 growth engines and 6 operational excellence initiatives, while maintaining good operating cost discipline. In the first half of last year, we added over 100 personnel into our Global Accounts, Integrated Supply, Utility and Safety businesses, as well as our pricing and supply chain management functions. In the second half, we added another 100 personnel into these areas. These investments position our company for stronger sales execution in 2014.
Our first quarter is off to a slow start with overall month-to-date sales in January down approximately 4% versus prior year. December year-end backlog, we did a record level of 3% versus prior year, and our book-to-bill ratio is tracking above 1.0 at this point in January. Despite the slow start to the year and a challenging winter weather thus far, we expect macroeconomic conditions to show improvement over 2013 with a strengthening recovery in nonresidential construction this year.
Moving to our Industrial results on Page 4. Sales to our Industrial customers were down in the quarter, driven by non-repeating Industrial capital projects in the fourth quarter of 2012, and customers maintaining tight controls on their capital spending. Channel inventory appeared to be imbalanced with current demand and fourth quarter bid activity levels remained strong. Leading indicators in the industrial market: PMI, industrial production, capacity utilization, are supportive for this year, while notable customer trends of an increased outsourcing and supplier consolidation remain in place.
Our Global Accounts and Integrated Supply opportunity pipeline remains strong at over $2.5 billion and is being actively managed. We remain focused on providing a one-stop shop for our customers' supply chain management needs.
Shifting to our Construction performance on Page 5. Nonresidential construction markets were challenging again last year, but began to show some improving momentum in the U.S. and Canada in the second half. Leading indicators in the nonresi construction market, ABI and the continuing residential construction recovery, provided generally positive set up for an improvement in activity levels this year.
Sales to Construction customers were flat in the fourth quarter and in the second half versus prior year, marking an improvement from being down 6% in the first half. Solid growth in Lighting, driven by LED and retrofit applications, and continued growth in Data Communications were the catalysts for the second half improvement. Entering 2014, backlog remained strong and is up approximately 3% versus year-end 2012, and is up double digits in the U.S. Bidding activity levels have increased as well on the nonresi construction market despite its challenges remains large with numerous opportunities for new construction and retrofit renovations and upgrades.
Now moving to our Utility performance on Page 6. We are pleased with the strength of our Utility business in delivering ongoing above-market sales growth. Organic sales to our Utility customers grew 11% versus last year, following the double-digit growth we experienced in the first 3 quarters of 2013. The fourth quarter marks the 11th consecutive quarter of year-over-year organic sales growth, driven by new wins and an expanding scope of supply with our existing Utility customers.
Utilities are embracing the efficiencies offered by our Integrated Supply capabilities as they seek to find ways to improve their supply chains. We are providing products and services that extend across the entire Utility power chain from generation through transmission, and then onto the distribution grid for power delivery. We are implementing our new customer wins and renewed a multiyear contract with a public power Utility for an increased scope of supply in the quarter.
We are well positioned to deliver our strong Utility value proposition into what is expected to be a low single-digit growth end market this year.
Now moving to CIG on Page 7. Sales to our CIG customers were up 5% in the fourth quarter and in the second half versus prior year, marking an improvement from being down 6% in the first half. Sales growth was driven by broadband communications and improvements in commercial and institutional, partially offset by declines in government due to budget constraints and sequestration.
Similar to Construction and despite the challenges in the overall CIG market, we continue to secure some nice new wins in the fourth quarter, including a multiyear award to provide Datacom materials to a state in the United States. Approval of the 2014 federal omnibus spending bill provides government agencies with better visibility and should be a positive catalyst for this year.
Now moving to a recap on our acquisitions, which are outlined on Page 8. We completed 4 acquisitions during 2012 and 8 since June of 2010, which have added product and service offerings to our portfolio, expanded our global footprint and improved our overall market position.
RS Electronics, Trydor Industries, Conney Safety and EECOL Electric were completed in 2012, and our efforts last year focused on integrating these companies into WESCO. We recently announced our intent to acquire LaPrairie, a Canadian-based utility distributor with annual sales of approximately $30 million. LaPrairie meets our 4 key acquisition criteria outlined on this page and is expected to contribute approximately $0.03 of EPS accretion in its first full year of operation. We are on track to close LaPrairie shortly and see excellent opportunities to further expand and strengthen our portfolio via acquisitions this year.
In closing, we entered 2014 a bigger, stronger, faster and more global company. As a result of executing our growth strategy over the last 5 years, we have strengthened our business and enhanced our position in the global marketplace.
Consolidation and outsourcing are continuing in our industry, and customers are looking for a one-stop shop to manage their global supply chain needs. Our One WESCO value proposition provides customers with the product and service solutions they need to meet their MRO, OEM and Capital Project requirements. We remain sharply focused on executing our One WESCO initiative this year, while continuing to make investments in our people, our processes and our business.
Now, Ken will provide details of our fourth quarter results and our outlook for 2014. Ken?
Kenneth S. Parks
Thanks, John, and good morning. I'm going to review the results in the context of the outlook we've provided in October during our third quarter earnings call. As Dan indicated, I'm going to be speaking to adjusted results.
At the third quarter earnings call, we expected fourth quarter consolidated sales growth of approximately 14% to 17% and organic sales growth between 2% and 4% year-over-year. Consolidated sales in the quarter were $1.9 billion, an increase of 14.3% year-over-year, and this includes 13.8 points of growth from acquisitions, 1.5 points of organic growth and 1 point of unfavorable foreign exchange impact. Pricing for the fourth quarter was flat.
Sequentially, organic sales declined a little more than 1 point on a workday-adjusted basis, which is consistent with our typical seasonality. As John indicated, monthly organic sales per workday were varied during the quarter, however, December did end up, up 1%. Backlog remains at a healthy level overall. Core backlog was up approximately 3% versus year-end 2012, while U.S. backlog was actually up over 10% during the same time period.
While sales growth continues to be weak overall, the indicators continue to point to an improving U.S. economy.
In October, we estimated that fourth quarter gross margin will be approximately 20.5%. We were disappointed that gross margin came in at 20%, that's 50 basis points short of our outlook and 40 basis points down from the fourth quarter of 2012.
Gross margin for the quarter was impacted primarily by final supplier volume rebate adjustments on the lower-than-expected top line growth. SG&A expenses for the quarter were $249 million, compared to $231 million in the prior-year quarter, and EECOL accounted for all of that growth, while core SG&A expenses were down about $13 million over last year's quarter. Sequentially, Q4 SG&A decreased approximately $7 million. SG&A expense reductions were due to continued effect of cost control, along with variable compensation actions that were taken reflecting weaker-than-planned financial performance in the second half. Core employment levels were up approximately 2% in 2013 compared to the prior year, as we continue to selectively invest in our growth engines and operational excellence initiatives. We've also continued to expand our sales capacity and capability, increasing our core sales personnel to over 3,300 at the end of the year.
In our October call, we estimated fourth quarter operating margin would expand to approximately 6%. Operating profit for the fourth quarter was $110.6 million, that's 5.9% of sales, and up 40 basis points from the prior year.
Interest expense in the fourth quarter was $20.6 million versus $11.7 million in the prior year, and that was driven by the EECOL acquisition financing.
Our weighted average borrowing rate for the quarter was 3.9%. We expect the weighted average borrowing rate to tick up slightly in the first quarter of 2014, due to the impact of the high-yield financing that we completed in mid-December.
Net income for the fourth quarter was $67 million, that's up about 23% over the prior year.
For the fourth quarter, earnings per diluted share were $1.26, compared to $1.06 last year, that's an increase of 19%. EECOL contributed approximately $0.25 of EPS accretion, while the core business was a $0.05 drag on EPS, driven by lower gross margins and higher share count, which was partially offset by $13 million of lower SG&A.
For the full year, sales grew to a record of $7.5 billion, with acquisitions contributing 14.6% of that growth, while organic sales were essentially flat. Foreign exchange was a 40-basis-point negative impact on sales and pricing was up approximately 20 basis points for the full year.
Full year gross margin reached 20.6%, expansion of 40 basis points over 2012, and gross profit grew to $1.55 billion. Both gross margin and gross profit reached a record level in 2013. We continue to make progress towards our gross margin target of 22%.
For the full year, SG&A expenses grew $117 million, but declined 30 basis points to 13.7% of sales. All of the growth was a result of acquisitions, while core SG&A declined $16 million as we continue to tightly control costs in the current low-growth environment.
The additional sales, gross margin expansion and cost control generated 20% year-over-year growth in operating profit to $445 million, or 5.9% of sales.
For the full year, interest expense was approximately $86 million, up $41 million due primarily to the EECOL acquisition financing.
For the full year 2013, net income reached $264 million, and that's up 15% over the prior year. Return on invested capital was 10% for the full year. And while ROIC declined in 2013 due to the impact of the EECOL acquisition, we remain committed to our 15% ROIC target over the longer term.
Capital expenditures were $7 million in the fourth quarter and $28 million for the full year. We continue to invest in our people, our technology and facilities through both capital expenditures and operating expenses.
Full year 2013 EPS reached a record level of $5.02, compared to $4.49, which is an increase of 12%. Consistent with our expectations, EECOL delivered approximately $1 of EPS accretion for the full year. However, the core business reduced EPS by $0.47 due to flat sales, 50 basis points of gross margin contraction and $1.6 million incremental diluted shares, all this partially mitigated by $16 million of lower SG&A. WESCO has historically generated strong free cash flow throughout the entire business cycle. And as a first priority, we focus on redeploying cash through organic growth and acquisition initiatives to strengthen and profitably grow our business.
Second, we work to maintain the financial leverage ratio of between 2 to 3.5x EBITDA. Following the acquisition of EECOL, we committed to prioritizing near-term free cash flow to debt reduction, and we've been able to reduce our leverage ratio from over 4x EBITDA at the end of 2012, immediately following the acquisition, to 3.2x EBITDA at year-end this year 2013. Comfortably, inside our target range again.
Debt, net of cash, was 2.7x EBITDA and liquidity, defined as invested cash plus committed borrowing capacity, reached $606 million at the end of the fourth quarter, and that's more than twice the level that we ended 2012 at. Free cash flow for the fourth quarter was $128 million, 191% of net income. And for the full year, we generated record free cash flow of $308 million, or 117% of net income, compared to $265 million, which was 115% of net income in 2012. We had a strong year of working capital management, reducing average working capital intensity by 4 days from 2012. In December and as previously disclosed, we completed $500 million of high-yield financing, achieving a 5 3/8% fixed rate on an 8-year term. The proceeds were used to reduce the variable rate U.S. term loan that we closed last December as a part of the EECOL transaction. We expect the favorable impact of previously disclosed pricing amendments to both our accounts receivable revolver and the U.S. term loan to largely offset the higher interest expense resulted from the high-yield financing.
As a result of the new financing, our fixed-to-floating debt ratio is now approximately 50-50 versus 20-80 at the end of the prior year.
I'll now turn my comments to the full year and first quarter 2014 outlook.
For the full year, it's our expectation that the macro economy will show slow but steady improvements during the year and we're confident that our value proposition and our investment and our growth engines favorably position us to take share and grow faster than the market. At the same time, our M&A program continues to be an important growth engine that supplements our core growth. Given the lack of predictability around acquisition timing, our outlook will now include only announced acquisitions.
For 2014, only LaPrairie falls into that category and, therefore, our outlook.
We expect 2014 sales to grow between 3% and 6% for the full year. We expect gross margin to be approximately 20.9%, which will be approximately 30 basis points higher than 2013. Operating margin is expected to be between 6.1% and 6.3%, that's 20 to 40 basis points of estimated operating margin expansion.
Currency translation is expected to have a negative impact on 2014 results, based upon the weaker Canadian to U.S. dollar conversion. The effective tax rate for the year is expected to be in the range of 26% to 28%. Putting all of these together, we expect our full year diluted earnings per share to be in the range of $5.30 to $5.70.
I'll now turn to the first quarter outlook.
We expect first quarter 2014 sales to be flat to up 3% over last year's first quarter including LaPrairie for the month of February and March. Assuming the current rate environment continues, foreign exchange is expected to negatively impact sales comparisons by approximately 2 points in the quarter.
In the first quarter, we expect gross margin to be in the range of 20.8% and 21%, and operating margin to be approximately 5.3% to 5.5%. Canadian currency translation is expected to have a slightly larger impact on profit comparisons due to the relatively higher profitability of our Canadian business. Consistent with the full year, the first quarter effective tax rate is expected to be in the range of 26% and 28%.
With that, we will now open up the conference call for your questions.
Question-and-Answer Session
Operator
[Operator Instructions] Now our first question comes from Deane Dray of Citi Research.
Deane M. Dray - Citigroup Inc, Research Division
I was hoping we -- you could expand on the comment about the conditions you're seeing so far in January, the down 4%, because your guidance for the quarter's flat to up 3%, so how significant is this slow start? How much would you attribute to the weather? And maybe, size the FX hit that you're assuming as well.
John J. Engel
I'll start out with the weather, January start weather impacts, et cetera. Ken, maybe you can talk about the FX. Yes, we're down approximately 4%. We're seeing a broad-based impact on our business due to weather. It's showing up in our kind of our stock business as opposed to DS. And when you think about it, in winter conditions, if it's -- if the ground is freezing, DS orders are lined up to ship from a supplier. They pretty much ship the balance of that construction project if it's delayed due to weather, that ultimately is serviced on via stock or special order type materials that are not DS impacted. And so we're not through the whole month yet, we got a couple of days left. But this is with 2, 3 days left. We'll see where we end up with. We're down approximately 4%. If you look underneath that, Utility is still growing in the month. Datacom is growing in the month. Our OEM electronics business is growing in the month, the old Carlton-Bates, AA Electric, RS Electronics, those combined together, the electronic-based distribution, which is an indication that, that part of the business is performing okay. And EECOL Canada, on our Canadian dollar basis, is up a bit as well so far. But we're definitely seeing the weather impact. And I would say that they're more substantial in January than we had expected. And they're more substantial in January then we saw in the latter part of Q4. Although we did see a little bit of weather impact as we moved through the fourth quarter, particularly in Canada. And I know it's a long answer. Maybe I'll just give -- put a spotlight on that. EECOL had a record sales month in October. November saw some quite a bit and finished flat. It was very cold -- and this is Western Canadian provinces, and day-to-day business kind of slowed down and ground to a halt. December was up a bit versus prior year. But the backlog heading into 2014 for EECOL business was stronger than it was heading into 2014. So I think we've seen this weather impact. I mean, it is our belief that, that's not perishable demand that it impacts construction. It's just a timing factor. And that there'll be some recovery as the weather improves, as we move through the first quarter and enter the spring season.
Kenneth S. Parks
So on FX. I'd size it for you this way. It's obviously hard to kind of predict what will happen to the rates in the next couple of months. But you've certainly seen, over the last years, we have the Canadian currency consistently weaken each quarter-by-quarter against the U.S. dollar. So if you think about our relative share of Canadian revenue, it's about 25% as we disclosed of our total WESCO revenues. And the first quarter of 2013, the rate was pretty much at parity, moved down through the year. And when you look at it in the first quarter, it's down beyond how you average, 8% to 10% year-over-year. And if you apply that 25% of revenue rate against it, you can see how I'd size that a couple of points on the top line. It's important to note, and I highlighted in the first quarter outlook, we consistently have talked about the fact that our Canadian business is relatively more profitable than the WESCO average overall. Therefore, the FX impact on the bottom line would be slightly bigger than the impact on the top line.
Deane M. Dray - Citigroup Inc, Research Division
Ken, just so we're clear. What is the exchange rate that you're assuming in the first quarter for the Canadian dollar?
Kenneth S. Parks
We're pretty much assuming it's a couple of pennies above where it's ending today because the way it's averaged down so far. We don't really forecast rates today, like I said, through the end of quarter, but what we do is say it's trended down this much, this month and we'll just carry that kind of to size the outlook.
Deane M. Dray - Citigroup Inc, Research Division
Okay. And then just a second question, on the bridge for the guidance, the lower guidance, and this is the guidance that you said back in August. One of the changes right towards the end is, that I heard you cite, was the fact you're not including any assumed unannounced acquisitions. And I check that from the investor data, there was 2 or 3 percentage points of your sales growth that was assumed. Just low -- and that's fine. I mean most companies don't assume unannounced deals either. But flow that through to the EPS side and that will help bridge for us the change.
Kenneth S. Parks
Sure. Sure. So if you think about -- what we said in August was an outlook range for 2014 of $5.70 a share to $6.10 a share. And what we just told you was essentially $0.40 lower on either end of that range. At the time we were with you in August, our outlook for 2013 was $5.15 to $5.35 for 2013 full year. So pick a midpoint, $5.25, we ended up close to $5. You can kind of say that's the first kind of level of anticipated reduction between what we told you in August and what we look at in 2014. The second, I would say, would be the FX impact, which has certainly changed even more to the negative since August. And what I would say, as you, again, kind of go through the math there, look at where the rates was in August versus where we're kind of sitting today. Again, not necessarily projecting 4 quarters but looking at a relative change since August. You can easily get to $0.05 from that itself. And then the remainder of it, I would say, is the absence of the acquisitions in the outlook. We have announced and intend to close quickly on the LaPrairie acquisition. We've told you that is about $0.03 a share to the current year. But we had a larger kind of placeholder in our guidance as we started in August. And I would say pulling that out is the remainder of the variance. Hopefully, that kind of gives you the 3 pieces of the bridge.
John J. Engel
And, Deane, let me follow-on. We've been doing Annual Investor Days in the August timeframe since we started them 4 or 5 years ago. And, yes, we've gotten feedback on the timing of that and such. We've discussed this is as a team and we're going to make a change in 2014. Because, I think, in retrospect, the August Investor Day had good attendance. It's been a terrific meeting the last 4-plus years. But we're out a bit early versus everyone else. And so we're going to go to a more traditional schedule in 2014, where we have a conference call with the entire investor community, analyst community, in the December timeframe to give the outlook for 2015. So we'll do that in December of this year for 2015. And then we'll follow that with a full-blown Investor Day, similar to what we've done in the past, in the first quarter. Probably the latter part of the first quarter of 2015 we've not locked down the scheduling on that yet. So I just -- I did want to relay that we've looked at that as part of the process, too. And that's a change we're going to make going forward.
Operator
Our next question comes from John Baliotti of Janney Capital Markets.
John Anthony Baliotti - Janney Montgomery Scott LLC, Research Division
John, I was wondering, could you -- any color you're getting from your customers in terms of whether it's the shorter cycle demand or the longer cycle demand, as you went through the quarter? But as they're -- as you're talking to them about 2014, is there a difference -- different behavior that you expect in -- now that we've started the year?
John J. Engel
No. Clearly, we're disappointed with the fourth quarter, John. We came in below our outlook -- sales outlook guidance. But when you kind of deconstruct the pieces, Industrial is the one that kind of jumped out, I know, to all of you and to us as well. Some tighter spending on CapEx and MRO spending as we've kind of moved through the first quarter. We looked at last -- looked at 2012, we had some real nice Petrochem projects, and that was true in the earlier part of 2012 as well. So a little tougher comp. When you look at us sequentially for Industrial, it was down 0.9%, Q4 versus Q3. So that gives you a little sense of kind of momentum back there on Industrial. As I said, I think, as we move into this first part of this quarter, our backlog held up, we burned a little bit of backlog in Q4, typical in every fourth quarter, but it was still at a record level when we ended, we were at 3% up overall, year end '13 versus '12. And U.S. portion of the backlog, U.S. portion of the backlog was up double digits. And our book-to-bill ratio consistently through January thus far has been nicely above 1.0. So our bookings rate higher than our sales rates. So I'm not seeing a real shift in customer behavior in the industrial market per se. And I'm not -- we're not seeing a fundamental shift in customer-driven behavior that's impacting our sales on Construction or Utility or even the parts of CIG for that matter. I think it's just a slow start and that we're working hard to kind of drive the execution. So...
John Anthony Baliotti - Janney Montgomery Scott LLC, Research Division
Do you feel, to follow on that, when we had your Investor Day, we visited one of your Utility customers. There was a lot of, seems like, points and catalysts for why they have used you more extensively than the past. Is it fair to assume that the longer cycle, the more project-related business you have more of an immediate ability to consolidate competition there, whether it's between Construction, Utility and maybe, even to a degree, the CIG area?
John J. Engel
Yes. I mean, the project-oriented business is more episodic, and so -- but when you're looking at building a bigger, stronger relationship, whether it's a Global Accounts relationship, an Integrated Supply relationship or one that what we call these big utility alliance agreements, which is, in essence, is like a Global Accounts model. That's up -- it's a longer sales cycle, right? And so that's where it's really important to work the pipeline and work it consistently over time. I think we feel really, really good about our results in the Utility business, particularly when you calibrate it against the economic backdrop and the end market of Utility and look at what power demand did in 2013, and what Utility spending was in aggregate. And so I think, it's really a great example of our One WESCO approach where we really knitted together branches, we're providing complete service value position to these utilities. And I think, as we move into 2014, our view of the utility market is similar to what it was a quarter ago, the distribution portion of the power chain will be up very low single-digit growth, 2% plus or minus, transmission is down probably a little bit, but we're more biased to the both ends of the power chain, right, generation and distribution. But I think that our value proposition is really resonating well with customers. And we do see some potential for increasing investment with utilities and distribution, automation and demand response, along with gas plants. And I think that has upside as we move forward when you look at just the impact of shale gas development as a growth driver over the mid to long term, I think, in the U.S. and Canada for that matter.
Operator
Our next question comes from Steve Tusa of JPMorgan.
Charles Stephen Tusa - JP Morgan Chase & Co, Research Division
So the -- I guess, just kind of digging into the Industrial business a little bit. One of your suppliers put up pretty good U.S. results on the automation side, they were up double digit. I know you guys include Canada in there. Could you maybe just talk about what you saw geographically on the automation side? I'm just trying to kind of reconcile those 2 things.
John J. Engel
Yes. Yes, Steve, thanks. I think you're probably referring to Rockwell. We are -- Rockwell has an interesting model of how they go to market through distribution, it's called a limited distribution model. And they have territories that they outline in North America -- U.S. and North America. They call those APRs. So they're authorized territories. And in the United States, there is only a single distributor for every territory in the U.S., other than Chicago and Minneapolis. Parts of Chicago, parts of Minneapolis have 2 distributors in a particular APR geographic region. So we don't have a meaningful relationship with Rockwell in Canada. Our relationship is predominantly in the U.S. And so when you look at the relationship of Rockwell through us as a distributor, and our approved APR, our geographies, which range -- they include Minneapolis, Chicago and the upper Midwest. And then we have some territories down in the Southeast United States. Our results are consistent with theirs. They are, by definition, because all Rockwell sales go through distribution in those geographies.
Charles Stephen Tusa - JP Morgan Chase & Co, Research Division
Right. Right. Okay, that's really helpful. So your view on kind of U.S. automation is still reasonably positive. And the growth there are kind of -- is consistent with what you talked about kind of heading into the first quarter here.
John J. Engel
Yes. Our views are unchanged on automation. I think it's -- that's had nice up side, it's a nice growth driver, and so, yes, I concur. The only other comment I'll make is another one of our suppliers has reported, as well, since you raised it. I think you're only referring to Rockwell, but I'll at least mention. Hubbell had their results out. And look, we look at this very -- in a detailed fashion. Remember, supplier sales are, essentially, we compare that to our purchases, because our purchases are their sales. And Hubbell's organic sales growth, I think, was roughly 3%, 3.5% in that range and -- for the fourth quarter versus prior year. We got a very nice long-standing, broad and diverse relationship with Hubbell, as we do with Rockwell, both are terrific companies, terrific supplier partners of WESCO. And our purchases, year-over-year, for Hubbell are very much in line with their sales. And I won't give exact numbers but very, very interesting. But not that what we do with every supplier. And they give us, we share data as well. But -- so we triangulate, obviously, consistently to make sure that we're supporting our suppliers appropriately. A measure for us is we would like to be growing with that supplier. [indiscernible] as the rate than the rest of their channel partners. If we are, we think we're -- that means we're doing a better job for them and we're creating more differential value for them in terms of demand creation and fulfillment. So...
Operator
Our next question comes from Sam Darkatsh of Raymond James.
Sam Darkatsh - Raymond James & Associates, Inc., Research Division
A couple questions. First, Ken, regarding the backlog. I'm trying to reconcile it. Overall backlog up 3%, U.S. up double digits. I think you mentioned or John might have mentioned that EECOL backlog was up. So how do you get to the plus 3? Does that suggest that the core Canadian business backlog was down dramatically or how do I get to that 3% number?
John J. Engel
I mean, what's left in -- it's in Canada and other international, which is very project-driven episodic. So, yes.
Sam Darkatsh - Raymond James & Associates, Inc., Research Division
So there are core Canadian...
John J. Engel
And let me just say, that EECOL backlog is -- they're effective backlog number as a percentage of their sales is relatively small because that's a very project-driven [ph] model. So U.S. is up, Canada -- core Canada is down. In the U.S., Datacom, in particular, is up very strongly. And that's how you get to the number. So we -- year-to-year, Canada, WESCO Canada, year end to year end, had a drop in backlog, yes.
Kenneth S. Parks
And if you remember the way it built up last year, Canadian backlog really built up and we talked about kind of record levels of backlog in Canada. So we ended last year very strong with WESCO legacy Canada solid. And it has burned down backlog this year on the softer booking rates. So you read it exactly right.
Sam Darkatsh - Raymond James & Associates, Inc., Research Division
Okay. So then, in your guidance, when you did the walk, Ken, which was very helpful, by the way, from the prior guidance to today, I guess the suggestion is that you haven't really changed any of your incremental growth expectations for 2014 from August until today. You're just using the different baseline and the FX. Mike, the fact that the Canadian backlog is weakening, why wouldn't you be a little bit more conservative than I'd assume some additional deterioration in the Canadian markets then for '14?
Kenneth S. Parks
I guess I would answer it this way, and it's a good point. It gives me the opportunity to highlight. On the top line in August, excluding acquisition, we talked about 4 to 6 points of overall growth. With this guidance, we have held the top end of that because we believe that's still in the range. We did take the low end down to 3%. So we did soften it up the low end a little bit based upon a little bit of softer potential outlook for 2014.
John J. Engel
And then to be clear, Sam, our backlog in Canada was down on a Canadian dollar basis, year end to year end, and then, yes, the FX impact is -- yes, that caused a little bigger impact, obviously.
Sam Darkatsh - Raymond James & Associates, Inc., Research Division
My final question, Ken. What's your nonresi construction for domestic assumption, inherent within your expectations for '14?
Kenneth S. Parks
I mean, we're probably all looking at the same indicators. And it depends on which verticals we play in. But we're in the nonresi buildings, as well as the nonbuildings. It's low to mid-single digits.
Operator
Our next question comes from Noelle Dilts of Stifel.
Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division
I just wanted to start off, first, taking into EECOL a little bit more. It looked like in the third quarter you got about $0.33 of accretion off of $243 million in revenue, this quarter $0.25 off of $251 million. So it looks like there was maybe some sequential margin compression. Could you kind of just discuss what you're seeing there? And if that's the case, what the drivers were?
Kenneth S. Parks
Sure. It's really less operational. So in the sense of if you're thinking about margins on the sales going through the business, it's really tied to them closing out the year on a -- while a very good volume, a very good performance, a softer sales performance in 2013, than effectively they have been anticipating on an SBR basis. So the SBR number gets adjusted at the end of the year in their case. And that was really the margin pressure from Q3 to Q4.
Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division
Okay. So it's the SBR impact a little bit disproportionally weighted to EECOL?
Kenneth S. Parks
Correct.
Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division
Okay. And I think this is stretching it a little bit, but I don't know -- you hit your dollar accretion target for 2013. Any thoughts on what your -- are you going to set a new target for 2014? Or could you just talk about, specifically, your expectations for EECOL as you move into this year?
John J. Engel
Yes. Well, first, let me say we're thrilled with EECOL. I mean, the cultural integration, the president of the business when we acquired it has retired, that was all part of the plan. And the Chief Operating Officer has assumed the overall leadership role for EECOL Canada. And he reports to Harald Henze, our overall Canadian leader. And we -- the leader of EECOL South America, terrific leader, reports as well -- reporting to the Les Kebler. I think it's gone very, very well and we're thrilled with the first year under the, for the WESCO family. And the way I think about it, Noelle, is this way: when we closed that acquisition a year ago in December, in December 2012, we had a certain outlook for the Canadian market, and that was the basis upon which we articulated the dollar EPS accretion for EECOL in the first year of operation. And at the end of the day, the Canadian market in 2013 was much more challenging and softer than our outlook a year ago. And we started out okay. You'll recall in the first quarter of last year, WESCO Canada grew 4%, EECOL grew 5% in Q1. But in Q2, going forward, in Q2, we had that late and rainy spring with record flooding in Alberta. And Q3, we started seeing CapEx delays, clearly, and stopped moving out a bit. And Q4, CapEx management, tight management delays and then the beginning of the weather impacts. And so we're very pleased, overall, to deliver that, given that backdrop. Our outlook for the Canadian market is still bullish, mid to long term, given it's a natural resource-based economy. And I think there's an ongoing debate on railroad versus pipeline, to transport oil from the oil sands, that will get ultimately get resolved. But clearly, demand continues for Canada's heavy crude by U.S. Gulf Coast refiners. And so our view of Canada, mid to long term, has not changed, even given that it's a little bit tougher market in 2013. Our expectation is that 2014 is no worse than 2013 in terms of end market. And we're hopeful, as we move through the year, that it gets a bit better. But that's our basis for 2014. And consistent with what we've done with every acquisition, when we get into year 2, it becomes part of our core operations. We don't breakout and shine a spotlight on it.
Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division
Okay. Second quick question. John, you referenced the Datacom backlog being up strong. If you could talk about maybe how much that's up? Touch on the trends in that market. If you're seeing some acceleration in the base market or whether you think you're getting some share?
John J. Engel
Well, we grew. I don't think I mentioned the growth number yet. So let me start there. Our sales were up 5% in the fourth quarter versus prior year for Datacom. You'll recall, in the third quarter, they were up 8% and that was -- so we basically grew nicely in the second half. And we have not grown since Q2 of 2012 in Datacom. And the Datacom sales growth was balanced, it was in the U.S., it was in Canada and rest of world. So we won some international business as well. Backlog for Datacom finished up very strong double digits. I'll just say approaching in the 20% kind of range. So we entered the year very nicely. And I mentioned, in response to Deane's question earlier, the Datacom is now at the gate in January and growing still. So I think we like what we're seeing. Part of the Datacom business is our IP physical security business. And that was up very strong double digits for full year 2013 after being up very strong double digits in 2012. David Bemoras put a spotlight on our capabilities there in the Investor Day, you'll recall. So I will tell you, I think the quarter was better not just for WESCO, we feel good about our results, but even for the market in Q4. Our suppliers said this, as they experienced an uptick in year-end project purchases, certain categories, however, remained under pressure. I think, particularly, copper cable becomes under pressure versus other competing products. So hopefully, that gives you a little color. Maybe one other data point is that I still think the overall Datacom market will be a bit challenging, it will be tied to IT spending. It's very price-competitive. But I think we got a real winning One WESCO solution, and we're starting to see the results in Datacom. I alluded to that, from an analogy standpoint, in our Investor Day of what we've done in Utility over the past 4-plus years. And it's translating into very strong results. And that One WESCO approach to Datacom, we're taking that same approach and we've had a few recent very nice wins. So hopefully, that helps, Noelle.
Operator
Our next question comes from Ryan Merkel of William Blair.
Ryan Merkel - William Blair & Company L.L.C., Research Division
A question on gross margin, to start. Your guidance assumes a pickup in the first quarter and also for the year from where we ended in the fourth quarter. Can you just walk through some of the factors that are driving that?
Kenneth S. Parks
Yes. There's really just one major factor and that is SBR. As we finished out this year, we obviously had a flat organic sales growth rate or, essentially, no sales. And as we move into 2014, as you know, we're looking at 3% to 6% growth. We estimate SBR for the year when we accrue it incredibly and that really accounts for the step up.
Ryan Merkel - William Blair & Company L.L.C., Research Division
Okay, figured. And then I guess a follow-up question then. What does your guidance assume about price inflation? And then maybe you could talk about the competitive dynamics, if anything's changed there.
Kenneth S. Parks
Yes. As far as the guidance, specifically, we assume really no change in pricing.
Ryan Merkel - William Blair & Company L.L.C., Research Division
Okay. And then competitive dynamics? Has anything changed in this quarter versus...
John J. Engel
Yes. It's fourth quarter was tops. I mean, look at our pricing versus -- and look at some of our investor peer, other distributors, they're pricing impacts. And so it's tough, Ryan. And this quarter, no change. I mean, we're seeing, basically, an extension of the conditions that exist into the fourth quarter, relative to pricing occurring, so far, in Q1.
Operator
Our next question comes from Josh Pokrzywinski of MKM Partners.
Joshua C. Pokrzywinski - MKM Partners LLC, Research Division
So just taking a look at the full year outlook. And I appreciate some of the drivers that are allowing you to keep the underlying assumptions the same to what [indiscernible] notwithstanding. But comp seems like they're as easy as they're going to get in the first quarter. And okay, I get that there's weather impact right now that's holding down January. But you still have a bit of a hole to dig up just to get to the guidance range. I guess, what -- where is the visibility coming from, that we get this pick up 2Q to 4Q? And maybe beyond that, that there's good marginal leverage on it. Particularly in this 0 price environment.
John J. Engel
Well, I think your -- the setup of your question is very good because we don't quite have January done, but once January is done, we've got 1/3 of the quarter done. And so I think now you see the basis for what Ken articulated, our 0 to 3% growth in Q1. We do understand how our business traditionally performs. January to February to March inside Q1, and there's typically a very significant step up in sales as a move through the first quarter. And it's our expectation that, barring unforeseen weather conditions that continue to extend through the quarter, that we should start to see that pick up. And then we understand what the seasonality of our business is, Josh, as we move through Q-on-Q -- from a Q1 through a Q2, through to a Q3, et cetera. So that's the basis of it. And we've got good traction in our Utility business, in our Datacom business. I didn't mentioned Lighting, I probably should have mentioned Lighting. Lighting grew 5% in the quarter and it grown in the third quarter as well. And so we've had very nice momentum in Lighting. What I think is important to understand with our Lighting business is we have a full Lighting solution capability that includes traditional lamps, replacement lamps for existing sockets. But then it also includes fixtures, balance, controls for new applications, whether it's a LED retrofit or tied with some new construction, or an upgrade project. If you look inside the fourth quarter, our fix -- everything other than lamps was up double digits. Back to the comment I made earlier, we look at suppliers. Acuity, one of our supplier partners, terrific company, had terrific results in terms of Lighting growth in the fourth quarter. A nice double-digit growth. We had nice double-digit growth, lamps aside. With lamps, it was 5% growth. So it gives you a little sense on that. And for the full year, we grew nicely, 6%, for Lighting on the fixtures side. So we're seeing a nice pickup in momentum in Lighting side. It's a long answer to your question, Josh, but I think we've got a very clear view of how Q1 should behave. Barring a typical return of normal weather as we move through the quarter or that's -- let's say assuming, not barring, assuming a return of difficult weather. And we know what kind of linearity of our business is. We do have a better sense now for EECOL's seasonality now there's been 1 year under our belt. And as we talked to our EECOL leaders, they've given us good sense of what was traditional versus nontraditional, given how last year unfolded so factored that in.
Kenneth S. Parks
And I would just add one thing to it. You talked about the comps are probably the easiest or best with Q1. But also keep in mind, as you watch what happened with the margin rates in 2013. It's actually the reverse of that. That's the hardest comp. And as we move through the year with the sales softening, that actually had pressure on the margins as we move through. So that is not the easiest comp, but just factor that in to how you look at Q1 as well.
Joshua C. Pokrzywinski - MKM Partners LLC, Research Division
Okay. I guess a follow-up on that, though. It does seem like if you look over the past few years, the gap between the 1Q margin and where you ended up for the full year seemed like it was sub-50 basis points. And what was arguably a better pricing environment than where we're at today. And now, we're working closer to 80 basis points. So I guess, I'm wondering, again, in this low price environment, if there's something holding back the mix in 1Q to where it's a much bigger leap the normal you're able to see.
Kenneth S. Parks
Yes. I don't think that plays into it at all. I don't see a mix differential. Maybe we can even take it off-line and kind of work through the mechanics a little bit.
John J. Engel
I think we have -- I know we are running a bit out of time. We still have a few in the queue. I think we'll take one more and then we'll -- Dan and Ken and I will, obviously -- I think, Dan, you've got a full set of call schedule that we'll be available to follow-up.
Operator
Next question comes from Kwame Webb of Morningstar.
Kwame Webb
At the August Investor Day, you talked about a 22% long-term gross margin goal. If you could maybe comment on how much of that goal is going to be accomplished through further scale such as EECOL. That clearly added about 100 basis points versus further improvements and procurement and leaning out that process.
John J. Engel
Sure. And thanks for the question. We look at 2 major drivers to our gross margin improvement. And I'll put it in 2 categories: one is our base business; two is the acquisitions that we're doing. If you look at the 8 acquisitions that we've done since June of 2010, they were -- they had -- they were accretive and helped our operating margins and many of them, in fact, helped gross margin, not all but many of them helped gross margins as well. So acquisitions is a leverage. We buy other categories or strength an existing category. If we strengthen an existing product category, it gives us benefit, it translates into better pricing power and margins. If we're adding new categories, by and large, we're looking at attractive categories that provide attractive margins, like our Conney Safety business that we added back in July, 1.5 years ago, which is a terrific Industrial MRO and Supplies business. On the base business, Kwame, Stephen also recalled the Investor Day and laid out all the various initiatives that we're aggressively trying to execute to improve for core margins. Core being that the base business without acquisitions. There's a series of pricing actions and initiatives. There's a series of sourcing and supply chain and purchasing actions and initiatives. And all of those are being executed with teams, driving on execution. And we work very hard at that. Now that's into a backdrop of what's a dynamic pricing environment. The dynamic pricing environment is a challenging environment. But, hopefully, I've given you a little bit of a framework in terms of how we're going after fundamental margin expansion. For gross margins, right? The 2 contributors. The other lever for our margin expansion is our operating cost leverage. And when we get nice growth at the 6%, 7%, 8% kind of organic growth range, we have tremendous operating profit pull-through because of our kind of very cost-efficient SG&A structure and the way that we've managed that over time. So those 2, combined, are what form the recipe of our operating margin expansion.
So let me make a few wrap up comments. Thank you for your time today and your continued support. I'll end on this note: we remain sharply focused on executing our One WESCO initiative this year, while continuing to make investments in our people, our processes and our business. Thanks. Have a great day.
Operator
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your line.
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