WESCO International, Inc. (WCC) Q1 2017 Earnings Report, Transcript and Summary

Good morning. My name is Christine and I will be your conference operator today. At this time, I would like to welcome everyone to the Anixter First Quarter 2017 Earnings Release. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there’ll be a question-and-answer session. [Operator Instructions] Thank you. Lisa Meers, Vice President of Investor Relations, you may begin your conference.

Thank you, Christine. Good morning and thank you for joining us today for Anixter's first quarter 2017 earnings call. This morning, Bob Eck, President and CEO; and Ted Dosch, Executive Vice President and CFO will review and discuss our first quarter financial results. After their remarks, we’ll open the line up to take your questions. Before we begin, I want to remind everyone that we’ll be making forward-looking statements in this presentation, which is subject to a number of factors that could cause Anixter’s actual results to differ materially from what is indicated here. We do not undertake to update these statements and refer you to our SEC filings for more information. Today’s earnings announcement includes both GAAP and non-GAAP financial results, the reconciliation of which is detailed in our earnings release and in the slides posted on our Investor Relations' website. Now, I will turn the call over to Bob.

Good morning and thank you for joining us for today’s earnings call. This morning, I will provide an overview of our first quarter results, discuss our sales performance and provide my perspective on the growth trends in each of our three businesses. I'll then turn the call to Ted to further detail on our first quarter financial performance and provide our second quarter and updated full year 2017 financial outlook. As you saw from this morning's press release, we delivered first quarter 2017 earnings per diluted share of $0.91 versus $0.70 in the prior year quarter. On an adjusted basis, we delivered diluted earnings per share of $1.09, an 18% increase compared to $0.92 in the first quarter of 2016. Unless otherwise noted all of my comparisons refers to the first quarter of 2017 versus the first quarter of 2016. Total company sales increased by 4.4% to a first quarter record of $1.9 billion reflecting broad strength across the business. Adjusting for the favorable impact from the higher price copper and the unfavorable impact of the stronger U.S. dollar, organic sales increased by 4%. Current quarter had 64 billing days, compared to 65 billing days last year. Adjusted for one last billing day in the quarter, organic sales on a per day basis increased by 5.6%, which is within our long-term organic growth target range of 4% to 6%. First quarter of 2017 was our strongest year-over-year growth of the last nine quarters, driven by both organic and synergy initiatives with the backdrop of an uneven global investor economy. Dollar growth of 4% in North America was further bolstered by very strong growth in our EMEA and emerging markets geographies of 19% and 9% perceptively on an organic per day basis. We regularly discussed the value of our differentiated model based on our unique global support capabilities to help our customers reduce costs, lower risks and improve their supply chain. First quarter results are reflective of the value our model continues to deliver to customers. That will further detail and deliver strong first quarter cash flow from our operations of $52 million consistent with capital allocation priority to return to our strategic leverage target. We further reduced our debt-to-capital ratio of 49.9% bringing within our target range of 45% and 50%. I have our second half 2017 goal as we have discussed in the prior calls. I will now discuss sales in the quarter by segment starting with Network & Security Solutions. Network & Security Solutions quarterly sales of $984.9 million increased by 3.8%, reflecting organic sales growth of 5.8% on a per day basis with growth on all three geographies, this quarter marks the 14th consecutive quarter of growth in NSS led by double-digit growth in our EMEA geography. As in recent quarters, we continue to see strong growth with complex global accounts and data centers as well as in our growth initiatives including security, wireless and professional audio video equipment. By regions starting with North America, we delivered sales of $768 million representing 4% organic growth on a per day basis driven by broad-based strength across the business, consistent with what we have experienced in recent quarters. Our EMEA geography delivered $93 million in sales, reflecting organic growth of 21.2% on a per day basis. The strong growth was driven by large multinational customers including global technology and financial services customers with strong performance in Continental Europe and helped by the timing of a few very large projects. Finally, sales of 124 million in our emerging markets business reflected organic growth on a per day basis 7% driven by large project and strength in select countries including Mexico. While the Latin America geography remains challenging, this is our second quarter of improving trends. Our Asia-Pacific business experienced a decrease in sales primarily as a result of a large project in the first quarter of last year. Looking at the security portion of our business, NSS security sales of $398.4 million or approximately 40% of segment sales increased 2.2% from the prior year. Adjusting for 1.8 million of unfavorable foreign exchange due to the stronger U.S. dollar, NSS security sales increased 4.3% on a per day organic basis. While we’re pleased with the strong growth in most product categories of our security business, security sales growth was impacted by product mix and price deflation in certain product sets primarily video products. Based on industry data and supported by conversations with our suppliers, we believe we maintain or gain share in both our network infrastructure business and security business. Moving to Electrical & Electronic Solutions, our first quarter sales of $527.4 million increased by 4.2%, adjusting for the favorable impact of higher average copper prices and the unfavorable impact of the stronger U.S. dollar, organic sales increased 2.4% which was 4% on a per day basis. First quarter of 2017 marked the fifth consecutive quarter of an improving year-over-year organic sales per day growth trend as challenging industrial markets slowly recover. By geography, North America sales of $416 million increased 2.8% which was 1.2% on a per day organic basis. We are pleased to see improving trends in our OEM business while U.S. industrial markets remain challenging. Our focus remains on executing our growth initiatives which include increasing synergistic sales of the low voltage products, such as gear, lighting and transformers to our legacy and extra customers and building strategic alignment with core electrical products suppliers. Overall, we believe Anixter maintain or gain share in North America markets. It is well positioned to continue to outperform the market as a broader product offering enhances our competitive position and customer rolling. Turning to EMEA sales of $62.5 million increased 16.6% on an organic period basis, driven by large projects in the Middle East and continued solid trends in UK. Our EES emerging market sales of $48.7 million reflected a 14.1% increase on an organic per day basis, driven primarily by project business in Asia Pacific. Following over two years of industrial and market weakness, we continue to see evidence of slow and uneven recovery in our end markets. From a geographic perspective, North America continues to reflect on certain market conditions. Our industrial landscape remains difficult. We are encouraged by trends in other parts of the business including our OEM customers and continued progress in building our electric, gear and lighting businesses. Stable or improving markets in many of our geographies also helped fuel growth in our EMEA and emerging market geographies. Finally, our Utility Power Solutions segment achieved sales of $383.5 million in the current quarter. This represented a 7.4% increase on an organic per day basis driven largely by synergistic sales to support a new investor-owned utility customer. As we have previously disclosed, we began to build sales with this customer in fourth quarter of 2016, remaining on track to reach a full run rate sales level by mid Q2 with this customer. This quarter was the best quarter of the sales results with UPS since the acquisition of Power Solutions business. In addition to solid growth with our investor-owned utility customers, we also grew with public power customers. However, as we experienced throughout 2016, UPS sales were adversely impacted by challenging markets in Canada. We continue to make progress of the integration of the acquired business reflected in sales growth, expense control and working capital management. While we faced gross margin headwinds in the current quarter, we did maintain our operating margin due to volume leverage and expense control. In summary, we believe we maintain or gain share in all three segments driven by well execution on our synergy and organic initiatives. As we enter the second quarter of 2017, we have strong sales momentum in all three businesses. All we see indications of improvement of the underlying economic environment. The increase in business confidence that began in late 2016 has not yet translated into any measurable increase in customers spending. As we have discussed earlier, we continue to drive synergistic sales from cross-selling of our recently acquired low voltage products portfolio switchgear, lighting and transformers as well as security solutions. In addition to increasing solution sales to existing Anixter customers, we continue to expand our relationships with new customers and market as a result of our broader product portfolio. We are also building on our strategic relationships with our new suppliers to drive geographic expansion. As we look at the second quarter and into the back half of the year, our year-over-year comparisons become more difficult, while we feel very good about the first quarter and the trends in our business. We are still somewhat cautious regarding microenvironment. Reflecting this conservative view of near-term improvement in the environment, we expect second quarter of 2017 organic growth in the 1.5% to 3% range and are increasing the midpoint of our full year outlook range by 100 basis points and now expect full year organic sales growth in the 2% to 5% range. With that, let me turn the call over to Ted for a more detailed analysis of our results and actions on the cost side of the business.

Thanks, Bob, and good morning everyone. Today's earnings release includes a schedule which reconciles the GAAP financial results with the non-GAAP results. We believe the non-GAAP measures we disclosed excluding non-cash expenses and other items provide the best representation of our ongoing operational performance. All the following comments this morning including year-over-year and sequential comparisons are based on continuing operations only and on an adjusted earnings basis. As we do each quarter, the presentation has been posted to our website with more detail to explain our results. As Bob highlighted, we reported first quarter 2017 earnings per diluted share of $0.91 and adjusted earnings per diluted share of a $1.09, an 18% increase from prior year adjusted EPS of $0.92. As a reminder each quarter, we exclude intangible amortization, and if applicable acquisition and integration costs from our non-GAAP results. Current quarter results exclude 90 million of intangible amortization which had a net income impact of $6.1 million or $0.18 per diluted share. Prior year quarter excludes $9.7 million of intangible amortization and $2.2 million of acquisition and integration costs, which had a combined net income impact of $7.4 million or $0.22 per diluted share. Now let me review the impact of copper and currency on our results. Following five years of lower copper prices, copper prices moved higher for the second consecutive quarter. On a year-over-year basis, the increase in copper prices increased our sales by an estimated $14.9 million. The stronger U.S. dollar relative to our foreign currency exposure remained a headwind decreasing sales by $8.3 million. Together, copper and currency have favorable impact on earnings of approximately $0.05 per share. As Bob discussed, our record quarterly sales of $1.9 billion increased 4.4% compared to last year driven by growth in all three segments and all three geographies, adjusted for the favorable impact of higher average copper prices and the unfavorable impact of currency fluctuation, organic sales increased by 4% versus last year. On a per day basis, organic sales increased 5.6% which was a 330 basis point improvement from the growth rate in the fourth quarter. First quarter gross margin of 20% compares to 20.4% in both the prior year quarter and the fourth quarter of 2016. Customer and segment mix primarily drove the change in gross margin versus both prior periods. In addition, the current quarter mix of business was more weighted to larger lower margin projects than the prior year quarter of fourth quarter 2016. Operating expense of $310.7 million was 16.4% of sales compares to prior year operating expense of $310.5 million or 17.1% of sales. Excluding the operating interest items I outlined earlier, adjusted operating expense of $301.7 million compares to prior year adjusted operating expense of $298.6 million. Current quarter adjusted operating expense was 15.9% of sales, a 50 basis point improvement from the first quarter of 2016, driven by continued strong expenses discipline combined with sales leverage. Adjusted EBITDA increased 7.5% to $89.5 million or 4.7% of sales. This compares to adjusted EBITDA of $83.3 million or 4.6% of sales in the first quarter of 2016. The 7.5% increase in adjusted EBITDA on a 4.4% increase in sales resulted in adjusted EBITDA leverage of 1.7 times demonstrating the operating leverage potential of business with sales increased. Buy segment, NSS adjusted EBITDA increased 4.3% to $66.6 million from $63.8 million in the prior year period. The corresponding adjusted EBITDA margin of 6.8% reflects a 10 basis point improvement versus first quarter of last year driven by solid sales growth combined with ongoing operating expense discipline. The change versus first quarter 2015 adjusted EBITDA of $81.9 million reflects the typical seasonality of the business. EES adjusted EBITDA increased 19.7% to $30.4 from $25.4 million in the prior year period and compares to $25.6 million in the fourth quarter of 2016. The corresponding current quarter adjusted EBITDA margin of 5.8% increased 80 basis points from 5% in the prior year quarter and 70 basis points from 5.1% in the fourth quarter of 2016, driven by operating leverage, higher costs of prices and ongoing operating expense discipline. Utility Power Solutions adjusted EBITDA was $20.9 million or 5.5% of sales. This compares to $20.1 million or 5.6% of sales in the first quarter 2015 and $19.2 million or 5.5% of sales in the fourth quarter of 2016. The relatively flat margin was primarily driven by customer mix in the U.S. combined with low sales into the Canadian market. As we move down the income statement, interest expense of $18.9 million decreased by $1.2 million year-over-year. The decrease in interest expense as a result strong cash flow being used to pay down outstanding debt. The current level of interest expense is a reasonable estimate for quarterly interest expense for the remainder of 2017. Other income and expense of $200,000 compares to $2.8 million in the prior year quarter, driven primarily by lower FX expense. Assuming current foreign exchange rates, we believe that a range of $2.5 million to $3.5 million would be a reasonable estimate for quarterly expense for the remainder of 2017. Our first quarter 2017 GAAP effective tax rate was 38.1%, which compares to 37.9% in the prior quarter. Our first quarter 2017 adjusted tax rate for non-GAAP earnings was 37.2%, which compares to our first quarter of 2016 adjusted tax rate to non-GAAP earnings of 37.9%, driven primarily by the change in the country mix of earnings. We currently estimate the full year 2017 adjusted tax rate of 37.2%. Our diluted share count is estimated to be 34 million shares over the balance of 2017. We generated $51.5 million in cash flow from operations in the first quarter typically a quarter where we consume cash. This cash flow was particularly strong given the acceleration in sales growth in the quarter and considering significant working capital improvements in the acquired business over previous year. We continue to have a relentless focus on working capital efficiency as evidenced by our 210 basis points improvement in working capital as a percent of sale to 18.9% for the quarter. We invested $8.6 million in capital expenditures in the first quarter and currently expect to invest $40 million to $50 million for the full year. Finally, we are increasing our estimate of cash flow from operations for full year to approximately $200 million to $220 million. For the quarter, our debt-to-capital ratio improved to 49.9% of 170 basis points improvement from year end 2016. As Bob mentioned in his overview remarks, we were pleased to return to our target range of 45% to 50% and expect to remain near this marks, if not lower as the year progresses. Our debt-to-adjusted EBITDA ratio improved to 3.3 compared to 3.5 at year end, and we remain on track to return our target range of 2.5 to 3 by the end of the year. Consistent with our capital allocation priorities, we continue to use the strong free cash flow we generate to reduce debt related to Power Solutions acquisition. Our weighted average cost of borrowed capital of 5.2% compares to 4.7% in prior year quarter. The increase in cost reflects the repayments of lower cost borrowers. Our liquidity position remains strong with total available liquidity under revolving lines of credits and secured accounts receivable in inventory facilities of $571.4 million at the end of the quarter. As we look at our second quarter outlook in the NSS segments, we expect the positive momentum in the business to continue driven by broad-based strength including projects with global customers, our security business, current momentum in our EMEA and emerging markets geographies our day-to-day business and our growth initiatives. In our ESS segment, we expect full-year organic growth driven by our revenue synergy initiatives related to the low voltage portion of the business and growth in our OEM in EMEA businesses. While we believe the U.S. industrial markets have likely stabilized, the recovery in our industrial customer project business remains low. Our utility segment faces some of the same challenges as our ESS segment from a market growth perspective; however, we expect solid sales growth to continue. As we have discussed in previous earnings calls, we expect sales growth from one large new utility customer to add $100 million to UPS full year sales run rate. With shipments to this customer beginning in late 2016 and our expectation to be at a full run rate by mid Q2, we estimate an incremental sales impact for 2017 of approximately $80 million. As you think about the second quarter and full year 2017, I would like to update our framework to modeling currency and copper based on current rates. Based on the current value of the U.S. dollar with other currencies, we currently estimate our second quarter 2017 sales headwind of $20 million to $25 million and a full-year sales headwind of $35 million to $45 million. Based on recent copper basis of approximately £2.55, we estimate the favorable impact of copper price on sales will be in the $8 million to $10 million range in the second quarter and in the $40 million to $45 million range for the full year. For reference, average copper price of $2.13 in the second quarter of 2016 and $2.20 for full year 2016. The estimated combined favorable impact of currency and copper on diluted EPS would be in the range of $0.02 to $0.04 for the second quarter of 2017 and $0.12 to $0.15 per share for the full year. To summarize our outlook for the second quarter of 2017, we are estimating organic growth to be in the 1.5 to 3% range which reflects more of our typical sequential growth from the first quarter to the second quarter of the year. Keep in mind that in the second quarter of 2016, we were beginning to experience significant improvements in both our NSS and ESS segments resulting in quarterly sequential growth of over 10% in average daily sales rates, much higher than normal seasonal patterns. The improvement in day to day business combined with large project shipments in the second quarter of 2016 makes for a much more challenging comparative period for us in Q2 than what we had in Q1. However, we remain optimistic in our full year outlook of plus 2% to plus 5% organic sales growth. While we continue to drive efficiencies in our cost structure our second quarter operating expense will include ongoing investment in our people, systems and supply chain capabilities to support our growing business in addition to the incremental variable expense to support the volume growth. From a profitability perspective we have a relentless focus on delivering operating leverage and are benefiting from the restructuring actions taken in 2016 to align our cost structure with both our repositioned business and the slow growth economy. Together we expect these efforts to continue to result in significant free cash flow generation supporting a balanced capital allocation strategy that benefits all our stakeholders. With that, we will now open the call for questions.

Thank you. [Operator Instructions] Your first question comes from the line of Shawn Harrison from Longbow Research. Your line is open.

Digging into I guess two segments within UPS. What would have been maybe core organic ex some of the new project ramps because I'm just trying to figure out how much of that, which was a heck of a number that you put up in terms of organic growth, was just the winds ramping versus the market getting a little bit better? And then secondarily within kind of the network side of the ESS, if you're seeing particularly domestically but anywhere just any slowing in the project activity given the solid back or the solid tailwind you had for a few quarters now?

Yes. Shawn, let me comment on UPS and then Bob can jump in on NSS. In regards to UPS, obviously, this new customer did contribute a significant amount to that organic growth rate in the quarter. We're getting a target for what we're expecting for sales to be on an estimated basis, but as we said they were ramping in the quarter. So excluding that customer impact, we're looking at about 2% organic growth for UPS. But keep in mind in Q1 of 2016 we still had a significant amount of revenue associated with the customer contract that expire at the end of 2015. So excluding that one customer impact from 2016, the organic growth for the rest of the business was more like 3%.

Shawn, could you repeat the second half of the question again?

Yes. So, Bob you had, if I look at EMEA or even North America in the non-security portion of NSS, you had a lot of scale, tremendous growth either mid-to high-single-digits, double-digits in the case of EMEA. Just wondering if you’re seeing any slowing in the case the project activity that’s driven such robust growth?

I don’t think we're seeing so much of slowing in the case of the project activity. It certainly large projects have timing issues around them and that is no different and what we have seen. I think when we talk particularly about Q2 having a little more subdued outlook for a full year outlook. As Ted said, it really relates to the rapid growth we had from Q1 to Q2 last year. And I think that’s probably our biggest area of conservatism as we saw very significant growth across NSS. And we think hurdling those kind of actual numbers predict percentages from prior year, but hurdling those actual numbers would be a bit of challenge. But frankly, the pipeline is still very full with projects, as we've said for a long time, our capabilities to support global accounts has been a real plus for us and that continues to be a strong area that we’re seeing across the business.

Okay. And then lastly, if I may. Ted, you've cited increased investments in SG&A. Do you have a dollar target for SG&A, if we're looking at 2% to 5% organic guidance for the year that we should model?

Yes. When I think about the operating expense increased, I’m referring to beyond this obvious variable expense to support the volume growth. I think we should expect to a few million dollars of investments in primarily headcount, as we support to some of our growth initiatives that we have talked about professional A/V, some additional technical expertise in our lighting and gear area, and few areas like that as well as some systems investment in some major platforms that we’re rolling out including our digital marketing continuing.

Your next question comes from the line of Allison Poliniak from Wells Fargo. Your line is open.

Just going back to utilities [Indiscernible] that account about 2% to 3%. I know that segment can be a little lumpy. Is that a good proxy for us to go by for the balance of the year just sort of underlying core?

Well, I think two things keep in mind. We’ll continue to ramp up a little bit more in Q2 with this new customer because we weren't fully ramped up in Q1. Secondly, as I mentioned, we had a major customer that contract expired at the end of 2015 who's still shipping in 2016, so we won't anniversary against that. But I think the real key as you mentioned is also lumpiness of it Allison is the protected project spent across the industry. So, I think that low to mid on that 2% to 3% organic growth minus the impact to this customers kind of a reasonable number.

Great. And then just on the adjusted EBITDA margin there flat sequentially, you talked about customer mix. Is that customer that larger account ramps up should -- that intensify a little bit more in that pressure on that adjusted EBITDA because of the mix?

Actually, it should work the other way because the expenses built and to support the customer so as volume ramps up, we actually should get some EBITDA leverage. So, we should see some improvement as we mature that program.

Okay, perfect. And then just last, industrial, you seem to be a little bit more cautious than the others that are out there, which I think is fair to assume at least digits. But I mean, is there anything you're seeing are hearing from your customers that indicate you might get a little bit more volatility in that business before we get a consistent trend?

Allison, I don't think it's -- we'll see more volatility. I think it's that -- it's that a fairly low growth flattish short of environment, and we just don’t -- we don’t see a downtick but we just don’t see a big uptick coming based on a conversation we're having with customers. So, I think we're being just a little more cautious. We think some of the stuff we are hearing from others maybe a little ahead where the market does -- the real market is just close to the stock market.

Your next question comes from line of Steven Fox from Cross Research. Your line is open.

Good morning. I just had a few questions. First of all in terms of the new full year organic sales growth guidance, Bob, I was wondering if you could you sort of give us a sense the extra 100 basis points of growth? How much of that would you attribute to end market versus your own initiatives taking hold? And then I have a couple of follow ups.

Well, that’s kind of the tough call. I’ll compensate 50'50. I think clearly our own initiatives particularly are synergy initiatives in the Electrical & Electronic Solutions business are driving a lot of our upside there. Having said that, the OEM part of that business is performing quite well and our customers are performing well in the sense of their sales are up. So, there is a mix there, so that one skews more to our initiatives. I would say NSS right now may skew more to the markets than our initiatives. UPS, I think we pretty well covered in the last question in terms of big account versus kind of run rate beneath it.

Yes, okay, that’s very helpful actually. And then secondly, this morning Corning discussed a pretty tight supply environment for fiber and all of the products that go around the fiber cable. I know you don’t sell necessarily into some of their big customers, but is that at all impacting your ability to by to your data center customers? Is it may be helping you little bit because they rely on you more to get tougher to get products? Can you just sort of give us your view on how that’s impacting you?

Yes, I think those comments are probably more specific to the carrier market, the wireless backhaul and the fiber of the home market. We are not seeing constraint in the fiber market, fiber availability for the enterprise base.

Okay, that’s helpful. And then just lastly on the security business, so I know you mentioned some price deflation, it sounds like hurt the organic sales growth. But I was on the impression that this business should generally perform in line to better than the overall networking market. Is that still your view? Is there some sort of end of market trends that are going on besides price deflation that holding you back? Just maybe a quick update on your outlook for security in particular for next few quarters.

So, I think the organic days adjusted growth was around 4%, so when you look at total NSS that’s a little bit slower than the network infrastructure structure growth. And I think the two can go back and forth a little bit although we see more growth in the infrastructure, network infrastructure part more recently. I think what's happening that business is we're still skewed based on our history more towards video and the Internet Protocol based video products are seeing some price decline that to us honestly not shocking. Frankly, we've been expecting that for a number of years because if you think about it, the technology in the cameras hasn't changed dramatically in recent years particularly the average IP camera. So much like any IP device, the average selling price tends to decline over time, our units of the camera sales were actually up, actually up pretty significantly. The other thing that's happening in mix for us is that as we're selling more units, we're also selling more I would say low-end less sophisticated products and that's primarily through the legacy triad kind of channel. And then that volume bulks up, it takes the average selling price down as well. So, we're seeing a little bit of price pressure in the market, a little bit of mix shift, but I think overall we're still very confident that we're going to get good growth out of security market.

Your final question comes from the line of Jeffrey Kessler from Imperial Capital. Your line is open.

Thank you. Can you talk a little bit about the margin mix that we should be seeing, if you got, you receive the number of larger project awards, going forward, if we're going to be seeing more, if you're going to be getting -- becoming more successful with some of these awards into both the utility side and perhaps the enterprise and the data side. Is there going to be some volatility in the margin mix realizing that obviously this all positively affects operating margins? Are gross margins going to be a little bit impacted by you begin to get more successful with larger projects?

So, Jeff I think larger projects and better economies have always been a big feature of our business and generally larger projects are lower gross margin, but not always depending on supply chain service mix that's included with the project. But broadly if we say there'll be a little bit of pressure on gross margin, we get a lot of leverage on operating margin. So I think as you said, it'll be good for top line and it'll be good for operating profit and EBITDA. There may be a little compression in gross margin in the middle. The other point I would make on those large projects is, they are less working capital intensive. The lower margin big projects are less working capital intensive and that can be related to the industry the project that’s in or program because the programs we can manage the demand forecast in a way that we maintain less inventory and typically can manage our AP days and AR days a little more closely together. So that reduces that. And some of the other big projects that come particularly in the EES business, there's a little more direction of content and so the margin may be lower, we still get leverage and EBITDA lend, but we also get a lot of working capital improvement because there's so little working capital in those direct ship projects. So from a return on capital standpoint, they're actually very positive for us.

One other question that is, in the security area, you mentioned that there's been large volume increases in terms of unit volume increases worldwide in terms of video sales, but there's been significant price pressure coming out of various sectors of the world. The question is, what are you going to do in terms of either, one, adding new services such as consultancy and helping the video side out a little bit to try to make it, not so much of commodity or going to other adding other areas distribution in security to offset some of the price pressure that you’ve seen on the individual quarter-on-quarter commodities in video?

So, Jeff, let me take that couple in a couple of pieces. First, we would not be likely to add services that would directly touch an end user. I think as you know our channel model or security products that we sell virtually exclusively through security integrators and installers and we expect continue that. So, the services we would offer would be primarily supply chain maybe some technology and then in fact certainly some technology and design support that would be to that integrator as opposed to the end user. So, in the sense of those services, we offer today I don’t see that stay in significantly. What we intend to change is the mix where we pull through more of the infrastructure products with that security sales, so more cabling, more power supply, certainly more VMS software, more storage. And as you know, storage is moving more to server platforms which we have good partnerships align for that. So, it's selling the complete solutions as opposed just the camera as if we just sell. And then in addition what we know is a lot of those security integrated customers have branched out into professional A/V and we’re absolutely carrying a professional A/V products that into those customers which gives us some borrowing leverage sort of fixed sales based covering that customer in that access. So, those are number of strategy that we think we’ll continue to add growth as well as profitability to that part of the business for us.

The next question comes from the line of David Manthey from Baird. Your line is open.

Thank you. So question on the UPS business, it sounds like this quarter you had a 100 basis point headwind from this expired contract but that will close up next quarter. And you said without that in the mix the kind of base growth would have been about 300, let's say 3 percentage points. If we do the math on the fully rolling out the contract, it’s something like 600 or 700 basis points of growth from that. So I’m just -- I’m try to peace all this together and understand, looks like you’ll be talking high-single-digit maybe low-double-digit in UPS in the second quarter through the year-end and with that being 20% of sales, that’s 2 percentage points of overall growth rate there. So I’m just -- first of all just trying to understand, is that math sound correct to you? And I’ll move on to the second question/

David, you’re a little high on that. As I said in my comments, we would anticipate the incremental revenue from this customer for the full year to be approximately $80 million. Remember, we started shipping them a little bit in Q4 of last year, we didn't have a full quarter in Q1, and we would expect to be fully ramped up by about the middle of Q2, so 80 million will be slightly over 1% on a total company basis and about 5% on UPS segment basis for the full year.

Okay. But run rate on a per quarter basis from there would be about 25 million?

The run rate in Q3 and Q4 will be 25 million. In Q2, it will be a little less than half.

Got it. Okay that makes sense. And the as it relates to the momentum you are seeing across your three segments, I understand that the arrow as you're showing in the slide refer to sequential trends, but with those all sort of being flat to higher across the Board. You are guiding to 1.5% to 3% organic growth year-to-year versus the 5.6% organic growth you saw this quarter. So, I am wondering if you recalibrate and think about on a year-to-year growth rate basis. What segment of your business you expect to decelerate from first quarter to second quarter? It sounds like you are seeing pretty good momentum. I am just wondering, is there some kind of channel selling utility? Or was there these projects rolling off? Why we would expect that rate to be lower?

Yes, I think the answer is that in NSS and ESS, we had very significant way above traditional seasonality between Q1 and Q2 last year. So that makes the comp tougher going into Q2 for this year. So while we say the trend is favorable, because we are such dramatic growth last year then I mean year-over-year basis, we won't be able to achieve the same kind of growth we achieved in the first quarter of our prior year.

Yes Dave, let me just add to that and you can get a little cut up in the numbers when we start talking about the variance to a variance. All three segments, we would expect to see an increase Q1 to Q2 in average daily sales. So -- but we won’t see the same kind of sequential increase to Bob's point that we saw from Q4 to Q1. And a good example of that would be in EMEA, which we looked in the NSS and ESS with the combining 19% increase. We are not going to have a 19% increase for the rest of the year there for all the reasons that we talked about. But that’s why we see on this charts, sequentially we show it is yellow or stable as opposed to increasing sequentially from Q1.

Okay. Yes and not to get too tight up there and maybe we can take this outline, but when I look at that year-to-year comparison, if you look at the growth rates, the year-to-year growth rates you experienced in the second quarter of '16, it doesn’t seem like those comparisons are that difficult. Your overall organic growth was down I think 2.2% versus kind of flat in the first quarter '16, so I am -- if you look at the comparison, it's easier, but regarding to a year-to-year growth rate that decelerate, so I am just -- again I know some of this is conservatism, but I am just trying to get my head around which segments we might expect to growth rate decelerate the most?

Yes, so Dave, also keep in mind last year Q2 had one less day in Q1. So, if you look at the sequential average daily sales, whole company was up over 9%, a lot of it called a 7.5% reported was over 9% on an average daily sales basis, but we showed very strong improvement in each of the businesses last year Q1 to Q2. Now this year, we are comparing two quarters at the same number of days both Q1 and Q2 of this year and Q2 of last year will both have 64 days, so it's a little cleaner from that perspective and as I said, we still expect to see significant sequential growth. But because of the strength last year, the year-over-year growth will be less than what our sequential growth is Q1 to Q2.

Okay, that concludes today's call. Thank you for all your questions and for listening to today's call. If you have additional questions, please do not hesitate to reach out to Ted or Lisa, and as always thank you for your interest in Anixter.

Thank you ladies and gentlemen. This concludes today's conference call. You may now disconnect.