WESCO International, Inc. (WCC) Q2 2017 Earnings Report, Transcript and Summary

Good morning. My name is Denise and I will be your conference operator today. At this time, I would like to welcome everyone to the Anixter Second Quarter 2017 Release Earnings Conference Call. 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, Dennis. And good morning everybody, thank you for joining us today for Anixter's second quarter 2017 earnings call. Today, Bob Eck, Chief Executive Officer; Bill Galvin, President and Chief Operating Officer; and Ted Dosch, Executive Vice President and CFO will review and discuss our second 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 on our second quarter 2017 earnings call. I'm delighted to have Bill Galvin join us today as well. As announced in late May Bill was promoted to President and Chief Operating Officer of the company effective July 1st. Bill has been with Anixter for 29 years, most recently running our Global Network & Security Solutions segment. In this morning call, I will provide an overview of our second quarter financial results and share my perspective on trends we are experiencing in the business. I'll then turn the call over to Bill who will update you on sales results in each of the three business segments. Finally Ted will detail our second quarter financial performance and outlook for the third quarter and rest of the year. After Ted's comments we will take your questions. As you saw from this morning's press release, we delivered second quarter GAAP 2017 earnings performance diluted share of $1.18 versus $0.62 in the year ago quarter. On an adjusted basis, we delivered diluted earnings per share of $1.36, a 3% increase compared to $1.32 in the second quarter of 2016. Unless otherwise noted all of my comparisons refer to the second quarter of 2017 versus the second quarter of 2016. And as a reminder the current quarter and prior period quarter each had 64 billing days. Total company sales increased by 2.3% to a second quarter record of $2 billion adjusting for the favorable impact from the higher price of copper and the unfavorable impact of currency fluctuations. Organic sales increased by 2.6% at the high end of our outlook range of 1.5% to 3% and reflecting growth in all regions. On a sequential basis, sales increased by 5.6% higher than the historical seasonality of the business. The biggest driver of growth in the quarter was our Utility Power Solutions segment with a 15.8% increase in sales on an organic basis. In addition to the strong growth, with the large new IOU customer we disclosed in the third quarter of 2016, we also experienced an acceleration in growth with our existing customer base. From a geographic perspective, North America sales increased 1%, driven by UPS offsetting declines in NSS and EES. For the second consecutive quarter, we delivered strong growth in both our EMEA and emerging market geographies, up 8% and 13% respectively on an organic basis. Second quarter results continue to validate our belief that our specialized distribution model continues to deliver value to our customers and suppliers on a global basis. Our model also enables us to follow our customers and their capital spending shifts around the world. Now I want to turn to some other financial highlights and drivers of our second quarter results. Our acquisition integration work continues and we are on track with our EBITDA synergy goals and broader financial targets that we outlined at the time of each acquisition. We continue to have a relentless focus on working capital efficiency, hallmark of our model is our ability to drive strong cash flow throughout the economic cycle, which provides financial flexibility. Due to the impacts of our actions combined with less working capital intensive business we acquired, working capital efficiency has improved significantly over the past several years. Current quarter working capital of 18.5% of sales is a 70 basis point improvement from the year ago quarter and 450 basis points improvement from our 2010 to 2014 average of 23%. As we have said since the time of the Power Solutions acquisition, the capital allocation priority is to return to our strategic leverage target by the end of 2017. We returned our debt-to-capital ratio to our target range in the first quarter of 2017 and we remained on track to return our debt-to-adjusted EBITDA multiple back to our target range in the second half of 2017. Now let me turn to our outlook for growth as we look at the third quarter and second half of 2017. From a macro perspective, our expectation is that the slowing improvement low growth environment will persist. We believe that indicators of business capital investments such as durable goods shipments provide the best directional inside into the spending of our customers and broadly these indicators remain positive. Looking at macro indicators and other available industry data that relate more closely with some of our major end markets, trends are somewhat mix. Starting with our NSS business, published industry surveys indicate that the data com market slowed in Q2, reflecting budget deferrals and is expected to reaccelerate in the third quarter. This is consistent with our experience and outlook. In EES, we will continue to drive synergistic sales from the cross selling of our recently acquired low voltage product portfolio including gear, lighting and transformers. In addition to increasing solution sales to existing Anixter customers, we continue to expand our relationships with new customers and markets as a result of our broader product portfolio. We are also building on our strategic relationships with our new suppliers to provide orders to them around the world. Our synergy strategy delivering growth and access to the market which we believe was relatively flat year-to-date. Finally indicators related to the utility industry such as housing starts give us confidence that we are significantly outperforming the industry as we gain momentum and build a strong utility platform. Turning to our growth outlook, during the first half of 2017 organic sales growth of 3.3% reflect solid execution of our growth initiatives and flat to modest share gain in most of our markets. As we enter the second half of the year our focus remains on executing our growth initiatives, which include our global project business and synergistic sales from the Power Solutions products sets in all segment. Based on improving project activity in our pipeline and discussions with our customers and supported by the economic indicators we track, we remain optimistic that end markets will improve in the second half of 2017. We currently expect third quarter 2017 organic sales growth in the 2% to 4% range. For the full year 2017, we have increased the midpoint of our outlook range by 50 basis points and now expect full year organic sales growth in the 3% to 5% range. Finally, to conclude my remarks, I'd like to offer my perspective on Anixter in light of current discussions regarding the distribution industry. Our model is based on three primary differentiators, which we believe provides sustainable competitive advantage. Our global capabilities, customized and scalable supply chain services we deliver and the technical expertise we provide throughout the process. Value to our customers is our ability to reduce the cost, risk and complexity in the supply chains. We believe our capabilities are unique in the industry make us more resilient in the current market environment and are not easily replicated by any of our competitors. I will now turn the call over to Bill Galvin.

Thank you, Bob and good morning, everyone. I'm happy to be joining today's call and look forward to working more closely with the investment community. As Bob said, I will go into more detail on the second quarter sales and end market trends by segment, beginning with Network and Security Solutions. NSS's quarterly sales of $1.03 billion decreased by 1.5%. Adjusted for the $7.4 million unfavorable impact from foreign exchange, NSS's organic sales decreased by 0.8% largely due to fewer products in North America this year versus last year. On a sequential basis, sales increased by 4.5%. Looking at NSS's sales performance by region, North American sales of $817 million declined 2.2% on an organic basis. As I just mentioned we had fewer projects in the current quarter and we're cycling through very strong project billings in the second quarter of 2016. Sequential growth in North America was 6.4% evidence of undrawn momentum in the business as strong performance in our day-to-day business partially offset projects that have been deferred until the second half of 2017 and into 2018. As in recent quarters, we continue to see strength in the growth initiatives including complex global accounts and securities, as well as smaller businesses including wireless and professional audio-visual equipment. In our EMEA geography we delivered $87 million in sales, reflecting organic growth of 4.1%. This strong growth was driven by large multi-national customers including global technology and financial service customers and reflected strong growth in Continental Europe. Finally, sales of $126 million in our emerging markets business increased 5.5% on an organic basis, driven by large projects and strength in selective countries including Mexico. While the Latin America geography overall remains challenging, this is our third quarter of improving sales trends. Looking at the security portion of the business, NSS's security sales of $423 million or approximately 41% of segment sales increased 2.1% from the prior year quarter. Adjusting for $2.6 million of unfavorable foreign exchange due to the stronger U.S. dollar, NSS security sales increased 2.7% on an organic basis. Unit volume remained strong in most product categories of our security business. However, as we've indicated in prior calls, security sales growth overall is negatively impacted by mix and price deflation in certain product sets primarily video. Based on industry data and conversations with our suppliers, we believe we maintained or gain share in both our network infrastructure business and security business, driven by significant ongoing investments in network and security infrastructure, we have delivered growth in NSS in 14 of the past 15 quarters. Momentum in the business is solid as evidenced by sequential growth trends and strong day-to-day business. Our large capital project pipeline is growing and we remain optimistic that growth will accelerate in the second half of the year. We expect NSS to return to growth in the third quarter, driven by ongoing strength with global customers, some differed project being released and ongoing growth initiatives including security, wireless and professional A/V. Moving to the Electrical and Electronic Solutions business, our second quarter sales of $561 million increased by 1.1%. Adjusted for the $13.6 million favorable impact of higher average copper prices and the $9 million unfavorable impact of stronger U.S. dollar, organic sales increased 0.3%, which marks the third consecutive quarter of organic sales growth in EES. On a sequential basis, sales increased by 6.4%. By geography, North America sales of $442 million decreased 4.5% on an organic basis. We continue to see growth on the OEM side of the business, offsetting weaker trends in the challenging industrial markets. On the industrial side of the business, we are seeing continued synergistic growth in sales of gear and controls, lighting, transformers and other low voltage products to our legacy Anixter customers. We remained focused on executing our synergistic sales growth initiatives while we continue to strengthen our strategic alignment with core electrical product suppliers. In our EMEA market, year-over-year sales of $64 million increased 12.6% on an organic basis, driven by large projects in the Middle East and continued solid trends in the UK. Emerging market sales of $56 million increased 36.5% on an organic basis, driven primarily by business in Asia Pacific. Consistent with our synergy strategy, we are expanding our product portfolio globally, which contribute to our strong growth outside North America. Overall, we believe Anixter maintain share in EES on a global basis. With strong performance with OEM customers and outside North America. We continue to believe we are well positioned to outperform the market as our broader product offering enhances our competitive position and customer relevance. Looking ahead, we remain encouraged by trends in many parts of our EES segment, including growth in our OEM business, continued progress in building our electrical gear and lighting business and growth with multinational customers in many geographies around the world. Partially offsetting those parts of the business, we continue to experience a slow and uneven recovery in North America industrial project business. Overall, we expect both third quarter and full year organic growth in the EES driven by our revenue synergy initiatives and our OEM and EMEA businesses. Finally, our Utility Power Solution segment achieved sales of $410 million in the current quarter. This represents a 15.8% increased on an organic basis with about half of this growth driven by our recent new investor own utility customer. As we have previously disclosed, we begin to build sales with this customer in the fourth quarter of 2016 and reached the full run rate sales level in the current quarter. In addition, we also delivered strong growth with existing IOU and public power customers. Partially offsetting this growth, UPS sales continue to be adversely impacted by challenging markets in Canada. This quarter marks the best quarterly sales results in UPS, since we acquired the Power Solution business as the strategies we have implemented and are beginning to translate into profitable growth. Based on our discussions with our suppliers and macro data points such as housing starts, we believe we've gained share in both IOU and public power markets. Further, we believe our growth with IOU customers excluding our new contract win also outperform the market. Looking ahead, we expect that UPS will deliver the fastest growth of the three businesses again in the third quarter as well as for the full year. 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, Bill, and good morning, everyone. Today's earnings release includes a schedule which reconciles our GAAP financial results with non-GAAP results. We believe the non-GAAP measures we disclosed which exclude non-cash expenses and other items provide the best representation of ongoing operational performance. As Bob highlighted, we reported second quarter 2017 earnings per diluted share of a $1.18 compared to $0.62 in the prior year quarter. On an adjusted basis we reported earnings per diluted share of $1.36, a 3% increase compared to $1.32 in the prior year quarter. As a reminder, each quarter we exclude intangible amortization and if applicable acquisition and integration costs and other expense from our non-GAAP results. Current quarter results exclude $9 million of intangible amortization, which had a net income impact of $6.1 million or $0.18 per diluted share. Prior year quarter results, excluded intangible amortization and other items, which combined had a pre-tax impact of $33.7 million and an after tax impact of $23.4 million or $0.70 per diluted share. These items are detailed in our press release financial tables and in the slide presentation that accompanies today's call. All of the following comments this morning including year-over-year and sequential comparisons are based on continuing operations only and on an adjusted earnings basis. Turning to sales, record quarterly sales of $2 billion increased 2.3% compared to last year driven by growth in our EES and UPS segment, and in all three regions. Adjusted for the $13.8 million favorable impact of higher average copper prices and the $8.2 million unfavorable impact of currency fluctuations, organic sales increased by 2.6% versus last year. Now I'll go into more details on our results. Second quarter gross margin of 19.8% compared with 20.1% in the prior year quarter, due primarily to the fastest growth in the quarter coming from our UPS segment, which has the lowest gross margin. Keep in mind that the UPS segment also has a much lower level of operating expense, which resulted in the adjusted operating profit of our UPS business improved by 90 basis points. The current quarter gross margin percent is a reasonable estimate for trends going forward into the second half of 2017. Operating expenses of $313 million compares to prior year operating expenses of $336.7 million. Excluding the operating expense items I outlined earlier, adjusted operating expense of $304 million compares to prior year adjusted operating expense of $303 million, an increase of only three tenths of 1%. Current quarter adjusted operating expense of 15.2% of sales, a 30 basis points improvement from the second quarter of 2016, driven by our focus on expense discipline combined with sales leverage. On a sequential basis, current quarter adjusted operating expenses compares to $301.7 million or 15.9% of sales in the first quarter of 2017. The 70 basis point improvement in the operating expense ratio was primarily driven by the operating leverage. Current quarter adjusted EBITDA of $103.2 million compares to adjusted EBITDA of $101.8 million in the second quarter of 2016. The current quarter adjusted EBITDA margin of 5.2% of sales was flat with the prior period. By segment, NSS's adjusted EBITDA of $59.8 million compares to $75.7 million in the prior year period, a decrease of 7.8%. The corresponding adjusted EBITDA margin of 6.8% compares to 7.2% of the prior year period. The change in margin was due to lower volume combined with the impact of price deflation in specific product categories such as video surveillance combines with a mix shift. On a sequential basis, the increase in adjusted EBITDA versus first quarter of '17 adjusted EBITDA of $66.6 million was driven by operating profit leverage. Adjusted EBITDA margin of 6.8% was flat sequentially as increased volume was offset by investment in the business. EES adjusted EBITDA of $32.8 million increased 1.4% versus $32.3 million in the second quarter of 2016 and 7.4% increase versus $30.4 million in the first quarter of 2017. The corresponding current quarter adjusted EBITDA margin of 5.8% is flat versus both prior quarters. Utility Power Solutions' adjusted EBITDA of $25.9 million increased 34.1% versus $19.3 million in the second quarter of 2016 and increased 23.7% versus the $20.9 million in the first quarter of 2017, driven by strong volume growth and operating leverage. The corresponding current quarter adjusted EBITDA margin of 6.3% of sales compares to 5.4% of sales in the prior year quarter and 5.5% of sales in the first quarter of 2017. The strong EBITDA margin performance reflects the operating leverage potential of this business and resulted in adjusted EBITDA leverage of 2.2 times. As we move down the income statement, interest expense of $17.9 million decreased by $1.9 million year-over-year. As we continue to use strong cash flow to pay down outstanding debt. The current level of interest expense is a reasonable estimate for quarterly interest expense for the remainder of the year. Other income expense of $1 million was lower than the normal due to currency volatility, assuming current foreign exchange rates we believe that $2 million would be a reasonable estimate for quarterly expense for the remainder of 2017. Our second quarter 2017 GAAP effective tax rate of 37.2% compares to 42.4% and our adjusted tax rate for non-GAAP earnings of 36.6% compares to 36.7% both versus the prior year quarter. Changes in tax rate are driven primarily by changes in the country mix of earnings. We currently estimate a full year 2017 adjusted tax rate of about 37%. Our diluted share count is estimated to be approximately 34 million shares over the balance of the year. We generated $137.1 million in cash from operations year-to-date, driven by ongoing working capital improvements in all three segments versus the prior year. Second quarter working capital was 18.5% of sales and as Bob commented, we continue to have a relentless focus on working capital efficiency and delivered a 70 basis points improvement in working capital versus prior year. We invested $20.8 million in capital expenditures for the first half and currently expect to invest $45 million to $50 million for the full year. Finally we continue to estimate cash flow from operations for the full year will be approximately $200 million to $220 million. Our second quarter 2017 debt-to-capital ratio improved to 48.8%, a 280 basis point improvement from year end 2016. As Bob mentioned in his overview remarks, we returned to our target range of 45% to 50% in the first quarter and expect our debt-to-capital ratio to continue to improve over the remainder of the year. Our debt-to-adjusted EBITDA ratio improved to 3.3 times compared to 3.5 times at year end, and we remain on track to return to our target range of 2.5 to 3 times 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 5.1% compares to 4.7% from the prior year quarter, primarily due to the repayment of lower cost borrowings. Finally our liquidity position remains strong with total available liquidity under revolving lines of credit and secured accounts receivable and inventory facilities of $610.8 million at the end of the quarter. As Bob shared in his remarks we are estimating third quarter 2017 organic growth to be in the 2% to 4% range for the third quarter and for the full year we're increasing the midpoint of our outlook for organic sales growth by 50 basis points and now expect full year organic growth in the 3% to 5% range. We expect the impact of both copper and currency to lessen somewhat however in the back half of the year. Based on the current value of the U.S. dollar against other currencies, we do not expect any measurable impact on third quarter sales. For the full year we continue to expect FX to be a headwind to sales estimated to be in the $5 million to $10 million range. Based on recently copper prices of approximately $2.70 per pound, we estimate a favorable sales impact of $10 million to $15 million for the third quarter and $45 million to $50 million for the full year. For reference average copper price of $2.16 in the third quarter of 2016 and $2.20 for the full year of 2016. The estimated combined favorable impact of currency and copper on diluted EPS would be $0.02 to $0.04 in the third quarter of 2017 and approximately $0.10 to $0.15 for the full year. As you have heard from both Bob and Bill, as we move into the second half of the year we expect the slow growth and gradually improving economic environment to persist and overall our customers remain optimistic about their businesses and the general economy. While we experienced some project deferrals in the second quarter, we are seeing an increase in pipeline activity which gives us more optimism regarding our outlook for the second half of the year. In addition to market growth, we believe we will continue to gain modest share across our businesses driven by synergies, ongoing organic initiatives such as with global accounts and in emerging opportunities for Anixter such as wireless and professional audio-visual where our differentiators enable us to be successful. To conclude, we continue to believe that our leadership position in attractively growing market will enable us to deliver sustainable long-term top-line growth. We continue to drive efficiencies in our cost structure, while balancing expense discipline with necessary investment in our people, systems and supply chain capabilities to support our growing business. Together we expect these efforts to continue to result in significant free cash flow generation supporting the balanced capital allocation strategy, which benefits all of our stakeholders. With that, we will now open the call for questions.

[Operator Instructions] Your first question comes from Shawn Harrison with Longbow Research. Your line is open.

Good morning everybody.

Good morning, Shawn.

Just wanted to I guess delve into the legacy enterprise networks business a little bit more. I know you said it was up sequentially by a nice amount. But maybe you could just delve into what are seeing exactly maybe in the projects right now that give you confidence. And was this just basic commercial construction projects or was this hyper scale and any rationale on why they are pushed out into the second half of the year even into 2018 I believe was the comment.

Yes, Shawn this is Bill. Yes, I think in the previous earnings call Bob mentioned that we've seen some delay in the large capital projects. The midmarket was fairly strong, and that remained strong for the first and second quarter but we're seeing the larger capital spend delayed. But still in the pipe we still expect it to come in the second half of 2017 into 2018. So not unpredicted, but certainly something that we are seeing continue to strengthen in the second half.

Yes I think Shawn I will add a little color. I think the hyper scale activity is not a question of changes in capital spend, there is always timing issue. The large complex projects they happen literally all around the world that can certainly impact timing. We think the enterprise market specifically was fairly slow in the quarter. We validated that through conversations with suppliers as well as non-competing customers who play in the same markets. So we're pretty comfortable that we didn't miss anything in the quarter and what we expect for the second half is pretty consistent with what others are seeing in the market.

Okay. And then on the EPS business, heck of a job this quarter. If you look at over the next let's say 12 to 18 months, you had a big share of win coming into this year. Are you seeing other opportunities given the success you had and outgrowing the market to take additional share and if that's possible is it similar to the size of program you want coming into the years maybe you could just size the opportunities if there are any out there?

Yes, Shawn one the most encouraging parts of the growth here in the quarter as we said was the fact that that new contract win only accounted for a little less than half of that growth. So it really reinforces our ability to drive organic growth in the rest of the IOU and public power space. Having said that the contract won was with one of the top two investor and utilities in the country. So there are just aren't many out there in that kind of size range. But yes, we continue to see opportunities to both grow existing customers and as partly by their growth, but also partly by us expanding our product sets with them, as well as gain some share in some of the white space especially in the public power area, which has a shorter sales cycle and there is a lot more players, but smaller opportunities in that space.

Okay, thank you.

The other thing I would just add to that, it was extremely strong quarter for us. We wouldn't expect to see quite that level of growth in subsequent quarters probably a little less in Q3. And then will be much less in Q4 as we begin to ramp against a quarter where we had a partial quarter of activity with that new customer in Q4.

That's helpful. Thank you.

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

Good morning, couple of questions for me, first off I just want to clarify at least relative my model it seems like UPS was better than you would have thought, coming into the quarter and the other two business segments are a little weaker. But even with a contract being as expected. I just want to make sure that is right or maybe my perception is off a little bit and then I have a couple follow-up.

So I think part right, we did say when we were on the last call that we were going to have some tough comps in Q2 particularly in NSS. So the performance of NSS is really not a surprise for us. UPS was a little stronger than we might have expected. If anything we were probably to be honest a little disappointed in EES, particularly the industrial and construction business in North America, which was softer than we expected. But again as we said before, pretty strong activity in terms of pipeline and bidding in that business and we expect that to turn around in the second half.

Okay. And then in terms of the NSS project business specifically, I mean, it seems to me and I know you guys are pretty technology agnostic that fiber's sort of gaining in terms of print [ph] position. And I was curious if that is at all impacting how you're booking business or how you may book it in the future or any other trends you may be seeing in terms of high end cables versus fiber would be helpful.

Yes and this is Bill, I think that Steven, the long haul fiber business as you've seen in plenty of press has been a lot of investment going into the single mode long haul fiber, which is a different market than what we would consider for the data center markets and what not. So…

Right, I am sorry, I should just clarify I meant within the data center that seems like 5%.

Yes, so we think the fiber content in the data center is continuing to grow. So the question is where is that money being spent, is it in the hyper scale, is it in the multi-tenant data center or is it in the end user investment, which is still the largest part of the market. So we feel like we have both segments covered and we will capture whatever trend is happening in those markets, which we again will see more project activity in the second half of this year.

Steve, and maybe I'll pick up with your comment about category cables. And we certainly see copper, as Bill just said, becoming a much, much smaller part of the data center. We would however point to a couple of other technologies that are being deployed that we think maintain the life of particularly high end category cable. One is wireless, and if you think of DAS, there was traditional coax DAS we are seeing a lot more structured cabling DAS for flexibility which supports high end category cables. The other market that we see evolving A/V. And then finally lighting, if you think of POE powered LED lighting in the future, that's a very early market right now, but that will be connected probably with categories say cable.

Great, that's helpful. And then just one other thing on that not to be a dead horse, but as these things happen and the product mix within what you're shipping changes, do you see where that - does that at all impact your own gross margins or do you think even from a relative profitability standpoint you should prove agnostic?

Steve I think it's relatively unchanged, I don't think the shift between copper and fiber will affect gross margin that much.

Great, thank you so much.

You next question comes from David Manthey with Baird. Your line is open.

Thank you, good morning everyone. So first off on slide 19, when you talk about the business trend being up flat or down versus the prior quarter, are you referring to the year-to-year growth rate in the third quarter versus the second quarter, as I want to understand the definition there?

Yes we always on this particular chart use this to speak to the sequential trends in the business. So for example there showing an up arrow, a green arrow for NSS North America is consistent with both Bob and Bill's comments that we would expect some larger project billings into the third and fourth quarter. So we would expect to see that growth rate improve from where it was in Q2. The yellow or kind of horizontal arrow in both EMEA and emerging markets in NSS is indicative of expecting to see the strong growth that we're currently experience in those markets continue. So that's how you should read that.

Okay. So just to be clear, when you are talking about growth Bill, if growth is X is the second quarter you would expect it to be greater than X in the third quarter, is that what you are saying or we are talking dollar here?

We are talk - again this is sequential. So I think that as an average daily sales. So we don't get caught up in the little bit of a confusion from the first quarter call, Q2 NSS and EES showed much slower growth year-over-year in Q2, but yes sequentially grew we were comparing against an extremely difficult comp last year where NSS and EES both grew over 10% sequentially from Q1 to Q2. So, this is really to give a trend an indication up to sequential trends we expect to see in the business, which would say average daily sales should improve in North America Q2 to Q3.

Got it, okay. All right. And Ted, did you say when you're referring to the UPS revenues of about $410 million did you say that's a reasonable level to expect in the second half or along the same line we need to just seasonally adjust that up in the third quarter and down in the fourth quarter similar to trends we saw in '16?

Yes, what I said is that we would not expect to continue to see a 15 plus percent year-over-year growth rate in that business. It will continue to be in all likelihood the fastest growing of our three segments in both Q3 and full year. That Q3 number will be less than the 15, but the absolute dollar number should still be in that same range in Q3. But Q4, Dave as you know the business, there is seasonality, so there will be a lot less project spend. So we'll see the absolute number drop in Q4. But still should expect to see single-digit growth year-over-year in Q4 in UPS.

Got it. And then just final question here, are there any differences in the number of days per quarter in 2018 versus 2017?

I don't have that off the top of my head, I'll comment on that before the call is over here. I'm sorry, we do have that in the presentation. So for everybody's reference, days are the same '17 versus '16 for the balance for the year and in 2018 they are identical every quarter of the year '18 versus '17.

Okay, thank you very much.

Thanks, Dave.

Next question comes from Jeffrey Kessler with Imperial Capital. Your line is open.

Thank you for taking my questions. In the UPS business, given that it has the lowest margins currently, in the pipeline what you were looking at, are there ways of improving the margin? Will it always be below the margins - will it always be below the margins of EES and NSS or are there thing that are going on in the utility business, some value preposition marketing that can create a higher value for what you are installing there or what you are providing to your customers?

So Jeff I will start and Bill or Ted may jump in if they have some color to add. We think the utility business from a gross margin standpoint will continue to be our lowest gross margin business. From an operating margin standpoint, as you saw in this quarter very good improvement in operating margin, and that's contributing to the total operating margin of the company. That's because in these programs we get really good leverage as the spending accelerates. There is - you think about more of the cost is fixed. And so as we accelerate sales that gives us a lot of leverage in that business and I will also point out that the working capital in that business as a percent of sales is lower than the other two business. So it provides really strong return on tangible capital.

Yeah, the only thing I would add to that Jeff is just reinforce the point about the difference between gross margin and operating expense. All three of our businesses have somewhat different profiles and even within the business, segments of the business has different profiles, like our security business versus network infrastructure and NSS. So the UPS business already has an operating profit margin higher than EES, gross margin lower but operating profit margin higher. So we believe we can continue to improve on the operating margin of all three of our businesses as we grow the top line, continue to drive operating expense leverage et cetera. But gross margin performance will vary depending on mix of the segment, mix of the customers and product mix but we are really focused on driving that operating profit leverage and operating profit margin improvement in each other.

You mentioned pressure in NSS on the margin from the drop - in fact the race to the bottom we call [ph] in video pricing. It appears that some of the video manufacturers who are - who have higher end equipment have stabilized in terms of their pricing as the market begins to discern between what's low end video at the home and small business and what's high end video needed by larger infrastructure projects, where they are not probably going to use cheaper product. Are you beginning to see any type of - if you want to call it evening out in the margin on the bigger projects that you are looking at, in security with NSS because of video beginning to perhaps hit bottom in terms of margin.

Hey, Jeff. Good question. Anixter services all parts of the market from the high end global complex customers down to local markets. So the issue becomes more in mix, right. The units are growing but the mix in the lower end of the market is dropping the margin. When you look at the higher end of the market, we do see stabilization of margins in that, especially as you drive more value around the solutions. Right, so I think we are seeing what's a typical market that's maturing, becoming much more stable in the future here. So I agree with your point. I think it will stabilize as we go forward here.

Okay, one other question about NSS, you do talk about where you believe fiber will play a role inside the datacenter and where new types of where CAD 6A [ph], and other areas are there - are you seeing any trends where certain types of cable look like they are going to be able to take back share inside the datacenter, are they things going on in the datacenter that we should be looking at over the course of the next two to three years where cable is actually going to be taking share?

I will take this one Jeff. If you think back to my answer to Steve Fox's question about category cables versus fiber, we don't think category cables replace fiber in the datacenter in the future. We don't think that changes that, that chip [ph] of sales. We think the opportunity for copper category cables are in areas like wireless and POE lighting.

Okay, thank you very much.

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

Just going back to ESS, it doesn't sound like you expect the industrial side of our business to return to growth in the back half for this year. I mean am I misreading and based on our optimism and some the macro indicators when would you think that would return to growth for you?

Allison maybe we were confusing in how we talked about the businesses. We do think the industrial construction part of the EES business will grow in the second half of the year. We are seeing - I think I commented that we are seeing maybe an answer to one of the questions, pipeline growth and accelerating bidding activity on the projects so we are positive about that for the second half.

Perfect, I misread you on it. And then NSS, it's your return to project there as well in the back half, would I expect that mix sort of to reverse for you where you get some EBITDA margin expansion there?

Yes, so I think the infrastructure market will grow as the project business picks up in the second half.

And that will create [indiscernible] for us on the operating margin in that business.

Okay, perfect. Thank you.

Thanks Allison.

Your next question comes from Josh Pokrzywinski with Wolfe Research. Your line is open.

Can you hear me?

Go ahead Josh.

Go ahead Josh.

Yeah just a couple of quick questions. I guess first on the, the way guidance plays out on the top line for the second half, it looks like growth needs to accelerate a little bit in the fourth quarter. I guess comps are tougher across the business. You maybe square that up with what you're seeing in the project pipeline. Is it just a little too fine of a point on maybe trying to extrapolate 3Q versus 4Q. And how should we think about that cadence, I guess particularly in NSS and EES given the comp and customer ramp UPS is a little bit more obvious.

Yes, so Josh just to clarify to get to our target range for the full year. We would expect growth to accelerate somewhat from where it is in Q2. But remember, we're building off of extremely strong growth rate in Q1. We're actually we were little over 4% organic growth, over 5.5% organic growth on days' adjusted basis in Q1. So that leaves us currently of about 4% year-to-date in the first half on a days' adjusted basis. So if we were continue with that rate we'd be right in the middle of our range for the full year. So the clarification is we definitely expect the second half to grow at a faster rate than Q2, but not necessarily significantly different than the first half.

But does the fourth quarter accelerate from the third quarter, the way you guys have conceptualized the framework. Again, I know you're not trying this, okay.

No. And part of that goes back to my previous UPS comments. We won't see the same level of growth in UPS in Q4 like we are reflecting in Q2 and Q3.

And I guess just the final question. What you guys seeing on price. I know the video deflation is kind of a well warn path at this point you talked about it for a couple of quarters. But price just in other places of the portfolio, generally getting better we're hearing inflation pickup in other niches. How would you say that is still flowing through your system?

No, Josh, I think this is Bob. I think the way to think about price is fairly stable across most of our market and product sets. Certainly there is copper inflation year-over-year, which impacts some of the copper sensitive electrical cables and electronic cables. But otherwise so that's one side video deflation one side and pricing is fairly stable.

Yes maybe Josh, just to add a point of clarification. So the overall impact of that price deflation. In general with our business model inflations are framed. So we do a pretty good job of managing the gross margin and maintaining it even when we have price pressure like with - for copper cable and security cameras, et cetera. Having said that though, that does translate into a lower gross margin dollars on those products where we have the deflation. Lower gross margin dollars on a major product category like copper data cabling and security cameras does tend to be dilutive to the consolidated gross margin of our overall business, even though we're maintaining the gross margin percentage on those specific categories. So that's a little bit of what's also been reflected in our consolidated gross margin performance.

Right understood. All right, thank you.

Your next question comes from Ted Wheeler with Wheeler Capital [ph]. Your line is open.

Yes, hi good morning all. Couple of questions on NSS if I could, what is the data center mix in that segment now and is it changing meaningfully? And I guess same question with respect to just the overall project mix. I know historically you it had ranges, kind of wonder where it right now.

Yeah, so Ted, from a big picture standpoint out of that NSS business remember approximately 40% is security, the other 60% is data center. The horizontal land all the products to go between the data center and the workstation. And then smaller but faster growing components of that are things like wireless and A/V. So out of that 60% that we somewhat more generically referred to as kind of the network infrastructure probably less than half of that is actual data center. And then obviously within that component of data center are the various aspects of enterprise, multi-tenant data center, hyperscale, et cetera.

Is that less than 50% of the 60% pretty steady number in the last year or two and do you expected it to stay that way?

As a percent of mix, but it moves around, right. So we have a quarter like the quarter we just finished where the data center project business was down. We expect to have a quarter coming up where the project data center mix will improve.

Okay. So it's not a trend issue it's just noise…

Yes it's just lumpy.

Yes, its fluctuations, particularly in enterprise CapEx, but also timing in the hyper scale CapEx.

Okay. And I guess it's a duplicate to the question about projects?

Yes.

Okay. And I guess one other question you touched on the video pricing deflation are there other elements within security where pricing is drifting down or falling or is the non-video part of it not changing meaningfully in price?

So, I would say that attachment products to the video like accessories is also part of that, but we kind of lump that together as part of the solution. So, that's the way I would think about it in general, it's mix and then it's price, right. So, and we said before we expect that that deceleration to slow down.

Another way to think of it Ted is it's the electronics, the electronics that has the price defilation. So it's the cameras, it's monitors, it's DVRs, it's no different than us going and buying that stuff at best buy or whatever on the consumer side, it's those category of products that by nature tend to have more price defilation.

Well, that's been true for years and years I would think. So, it sounds like this is a little bit different maybe I'm missing something. Electronic prices have been falling since last steady was around?

That's exactly right, Ted and as we've been talking about this for multiple years now that we were seeing softening pricing on a per unit basis in that market and it is what it is. And I think we've pretty effectively managed our way through it by attaching different products, higher value and having a more efficient sales model around it.

The other thing to just keep in mind though Ted as well is these the pricing pressures outside of - in the cameras and these other areas of electronics becomes more pronounced as analog continues to evolve more to digital. So, when digital was smaller percentage of the total, those other types of electronic accessories weren't as higher percentage of the overall business.

Got it, thank you so much.

That concludes the question-and-answer session for today's call. So, thank you all for your questions and listening in. 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.

This concludes today's conference call. You may now disconnect.