WESCO International, Inc. (WCC) Q3 2017 Earnings Report, Transcript and Summary

Good morning. My name is Kirsten, and I will be your conference operator today. At this time, I would like to welcome everyone to the Anixter Third Quarter 2017 Earnings Release Conference Call. [Operator Instructions]. I would now like to turn the call over to Lisa Gregory, Vice President of Investor Relations. Please go ahead.

Great. Thank you, Kirsten. Good morning, and thank you all for joining us for our third quarter 2017 earnings call. Today, Bob Eck, Chief Executive Officer; Bill Galvin, President and Chief Operating Officer; and Ted Dosch, Executive Vice President and Chief Financial Officer, will review our third quarter financial results. Following their remarks, we will open the lines to take your questions. Before we begin, I want to remind everyone that we will be making forward-looking statements in this presentation, which are subject to a number of factors that could cause Anixter's actual results to differ materially from what's 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 our third quarter 2017 earnings call. In today's call, I will provide an overview of our third quarter financial results and trends we are experiencing across each of the businesses. Bill Galvin will then discuss sales results in each of the 3 business segments in greater detail. Finally, Ted will review our financial performance and outlook for the fourth quarter. After Ted's comments, we will take your questions. As you saw from this morning's press release, we delivered third quarter 2017 GAAP earnings per diluted share of $1.11 compared to $1.20 in the year-ago quarter. On an adjusted basis, diluted earnings per share of $1.30 compared to $1.38 in the third quarter of 2016. Unless otherwise noted, all my comparisons refer to the third quarter of 2017 versus the third quarter of 2016. As a reminder, the current quarter and prior period quarter each had 63 billing days. Total company sales increased by 3.1% to a third quarter record of $2 billion. Adjusting for the favorable impacts from the higher price of copper and currency fluctuations, organic sales increased by 1.5%. We estimate that total hurricane and earthquake activity negatively impacted year-over-year sales growth in the quarter by 50 basis points. We experienced unfavorable impacts in NSS and EES due to closed locations and a neutral impact in UPS as hurricane recovery sales were offset by declines in volume with customers who provided mutual aid assistance to the utilities in the affected areas. Adjusting for this impact, revenue growth would have been at the low end of our projected range. On a sequential basis, third quarter sales increased by 0.8%, which was a 0.2% decline on an organic basis. As in the previous 2 quarters, our Utility Power Solutions segment was the biggest driver of growth with a 10.5% increase in sales on an organic basis. In addition to growth with the large new IOU customer we disclosed in the third quarter of 2016, we continue to experience strong growth with our existing IOU and public power customers. Sales growth in the quarter was impacted by the timing of project activity with global accounts in the U.S. in both NSS and EES segments. Outside of the U.S., project spend was strong in both segments. In addition, we experienced a strong quarter in growth initiatives, including security, wireless, professional A/V and with our OEM and utility customers. From a geographical perspective, the current quarter marks the third consecutive quarter we have delivered strong organic growth in our EMEA and Emerging Markets regions, validating our belief that Anixter's specialized distribution model delivers value to our customers and suppliers on a global basis. We are well positioned to continue supporting our U.S.-based and non-U.S.-based multinational customers, managing complex supply chain challenges as their capital investments shift around the world. Now let me provide some perspective on our end markets. Starting with NSS, as we discussed on both our first and second quarter earnings calls, we have seen a reduction in larger capital spending projects, which follows a very strong project year in NSS in 2016. As we indicated on our second quarter call, we expected project activity to strengthen as we move through the second half of the year, more weighted to Q4 and into 2018. Looking at our NSS end markets more broadly and over several quarters, we continue to see low single-digit growth in the datacom market, consistent with the trends we see in nonresidential construction activity. Combined with other data we track, including both industry data and information from our suppliers, we believe we maintained or gained share in the markets we participate in, driven by solid day-to-day business and growth and our strategic initiatives that I previously mentioned. In EES, our project business has been impacted by persistent challenging industrial markets in the U.S. dating back to 2014, starting with weakness in mining, followed by oil and gas. We are beginning to see evidence that our industrial project business is picking up with an increase in bookings and strong pipeline activity. Finally, we continue to experience strong growth in the OEM portion of EES. With growth in all regions of the world, we believe we are gaining market share in a market that has solid underlying trends. On the utility side of the business, macro indicators related to the utility industry, such as housing starts and construction spending in the power industry, indicate that we are gaining significant share in the market. We have now fully ramped our new large IOU customer and continue to grow our business with other IOU and public power customers. In addition, we are very pleased to be participating in new business opportunities that have previously been direct from manufacturer, reflecting the value we can bring to our supplier partners. Finally, we have just been awarded a contract in a competitive bid for additional business with an existing customer estimated at over $30 million in incremental annual business, which should begin to ship by mid-year 2018. Turning to our growth outlook. Through the first 3 quarters of 2017, organic sales growth of 3.2% on a per day basis reflects solid execution of our growth initiatives and flat to modest share gain across most of our markets. As we enter the fourth quarter of 2017, our focus remains on executing our growth initiatives, including our ongoing focus on synergistic sales from the Power Solutions acquisition in all segments. Regarding large project activity, based on our current pipeline and discussions with our customers, we're optimistic that large project investments in the EES segment will improve in the fourth quarter and in 2018, with timing for further improvement in NSS less clear. We expect fourth quarter 2017 organic sales growth on a per day basis in the 2.5% to 3.5% range, and for the full year of 2017, we expect organic sales growth in the 3% to 3.5% range. To conclude, I want to revisit the hurricane and earthquake impacts, this time from a humanitarian perspective. As you know, we have employees, customers and suppliers in many affected communities. In addition to ensuring the safety of our employees, we helped our own and customer employees who were directly impacted by both the hurricanes and earthquake, providing food and shelter in addition to immediate financial assistance to those most impacted. We also distributed meals to utility workers in Florida at a massive staging site in Orlando, supporting crews from all over the country who are part of the hurricane recovery efforts. The support we provided to communities in need is an example of our people-come-first culture. We were pleased to support a number of the communities that were impacted, utilizing our distribution network and access to products to contribute, on a humanitarian level, to the massive recovery efforts across the Southeast, the Gulf region, the Caribbean Islands and Mexico. With that, I will turn the call over to Bill Galvin.

Thanks, Bob, and good morning, everyone. As Bob said, I will go into more details on third quarter sales and end market trends by segment, beginning with Network & Security Solutions. NSS quarterly sales of just over $1 billion decreased by 0.1%. Adjusted for the $6.2 million favorable impact from foreign exchange, NSS organic sales decreased by 0.7%. Excluding the impact of hurricanes and the earthquake in Mexico, organic sales growth was estimated to be flat. On a sequential basis, sales increased 1.9%. Looking at NSS by region. North American sales of $819 million declined 3.5% on an organic basis. Starting with the network infrastructure side of the business, as Bob highlighted, we experienced a reduction in large capital projects with technology and financial service companies, which compared unfavorably to very strong project billing in North America in 2016. Partially offsetting that, we experienced continued growth in our day-to-day business. We also continued to see strength in underlying growth initiatives, including security, wireless and professional audio/video. In our EMEA geography, we delivered $89 million in sales, reflecting organic growth of 5.1%, driven by strong growth in the Middle East. And finally, Emerging Markets sales of $142 million increased 15.2% on an organic basis, driven by large projects in both CALA and Asia Pacific geographies. While still challenging, the Latin America geography overall is stabilizing, and our trends continue to improve. The current quarter marks the fourth consecutive quarter of improving sales trends in Emerging Markets and very strong sequential growth of 11.1% on an organic basis. Looking at the security portion of the business, NSS security sales of $437 million or approximately 42% of segment sales increased 4% from the prior year quarter. Adjusting for $3.3 million of favorable foreign exchange due to stronger U.S. dollar, NSS security sales increased 3.3% on an organic basis. Unit volume remains strong in most product categories of our security business. However, as we indicated in prior calls, security sales growth is negatively impacted by mix and price deflation in certain product sets, primarily video products. We estimate this deflation impact to be approximately 70 basis points on the entire NSS business. As Bob said, we believe we maintained or gained share in NSS in both our network infrastructure and security businesses. With the exception of large project businesses in the U.S., momentum across NSS is strong, with solid growth in security, wireless, professional A/V, our day-to-day business and in our international markets. We are confident we have the right strategy in place and expect our customers to continue to invest in network and security infrastructure, which is supported by our growing project pipeline. We are cautiously optimistic that project activity will increase in Q4 and continue to improve in early 2018. Moving to our Electrical & Electronic Solutions. Our third quarter sales of $555 million increased by 3.7% versus prior year. Adjusted for the $19.6 million favorable impact of higher average copper prices and the $3.3 million favorable impact of the stronger U.S. dollar, organic sales decreased 0.6%. Excluding the impact of hurricanes, organic sales was estimated to be flat. On a sequential basis, sales decreased 1.1%. Looking at EES by region. North American sales of $434 million decreased 4% on an organic basis. On the industrial side of the business, we continue to deliver synergistic sales growth in core electrical products. While construction and industrial project business continues to be challenging, based on our backlog, we are beginning to see signs that the market is improving. Partially offsetting weaker trends on the industrial side, we continue to see very strong growth on the OEM side of the business. We also continue to strengthen our strategic alignment with core electrical product suppliers, helping us to grow sales of gears and control, lighting, transformers and other low-voltage products with both new and legacy Anixter customers. In our EMEA geography, sales of $67 million increased 8.1% on an organic basis, driven by large projects in the Middle East and continued solid trends in the U.K. In our Emerging Markets geography, sales of $54 million increased 21.8% on an organic basis, driven primarily by project business in Asia Pacific. Consistent with our synergy strategy, we are expanding our product portfolio globally, which contributed to strong growth outside North America. Overall, we believe Anixter maintains share in EES on a global basis, driven by strong performance with both existing and new OEM customers, sales of core electrical products and with global customers outside of North America. As in NSS, we believe we have the right strategy in place and are well positioned for continued outperformance as our broader product offering enhances our competitive position and makes us more relevant to our customers. We are encouraged by trends across the EES segment, including evidence of a recovery in our North American project business, continued growth with OEM customers, ongoing progress building our low-voltage business and growth with multinational customers in many geographies around the world. With this backdrop and solid trends in the month of October, we are optimistic that our EES segment will show improved growth in the fourth quarter. Finally, our Utility Power Solutions segment achieved sales of $412 million in the current quarter, resulting in 10.5% growth on an organic basis. As in the first 2 quarters of the year, our recent new investment own utility customer was the largest driver of growth in the quarter. As we previously disclosed, we began building sales of this customer in the fourth quarter of 2016 and reached the full run rate sales level in the second quarter of 2017. We delivered another quarter of strong growth with existing IOU and public power customers in the U.S., partially offset by challenging markets in Canada. Finally, we continue to win new business, most recently being awarded another sizable contract with an existing customer in a competitive bid estimated at over $30 million in incremental annual sales. This 5-year agreement, which is renewable for another 10 years, is indicative of the value that customers are placing in our business model. We are pleased to see our business strategy translate into strong financial results as we continue to build upon our industry-leading utility platform. The combined capabilities of the legacy Anixter business and the Power Solutions business continue to bring value to both our utility customers and suppliers. As a result, we are expanding our business with existing customers, including synergistic sales of security products, winning business with new customers and winning business that had previously been manufactured direct. Let me conclude by sharing my perspective on the industry and our competitive position. While our sales results in the quarter -- in the current quarter, excluding the hurricane and earthquake impact, were at the low end of our outlook range, we believe that we have the right business model for the current environment. As a reminder, our model is based on 3 primary differentiators, which provide sustainable competitive advantage, our global capabilities, the customized and scalable supply chain services we deliver and the technical expertise we provide throughout the process. The value for our customers is our ability to reduce cost and complexity of their supply chain, in turn, reducing risk in the business. Our unique capabilities are not easily replicated and create a resilient business model. Along with that, our leadership position in attractive growing markets will enable us to deliver sustainable, profitable growth over the long term. 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 noncash expenses and other items, provide the best representation of our ongoing operational performance. As Bob highlighted, we reported third quarter 2017 earnings per diluted share of $1.11 compared to $1.20 in the prior year quarter. On an adjusted basis, we reported earnings per diluted share of $1.30, a 6% decrease compared with $1.38 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 intangible amortization and other items, which, combined, had a pretax impact of $9.9 million and an after-tax impact of $6.6 million or $0.19 per diluted share. Prior year quarter results excluded intangible amortization and other items, which, combined, had a pretax impact of $9.9 million and an after-tax impact of $6 million or $0.18 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 my 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. Our record quarterly sales of $2 billion increased 3.1% compared to last year, driven by growth in UPS as well as in our EMEA and Emerging Markets regions in NSS and EES. Adjusted for the $19.9 million favorable impact of higher average copper prices and the $11.1 million favorable impact of currency fluctuation, organic sales increased by 1.5% versus last year. As Bob highlighted, the negative impact of multiple hurricanes and the Mexico earthquake negatively impacted sales by an estimated 50 basis points. Excluding this impact, organic sales growth would have been 2%, at the low end of the outlook range we provided for the quarter. Now I will go into more detail on our results. Third quarter gross margin of 19.7% compares with 20.3% in the year-ago quarter. The year-over-year decline was due to customer, product and segment mix. In addition, vendor rebates and inventory provision both negatively impacted gross margin. As we have commented in past quarters, and it's true again in the third quarter, the areas of weakness in U.S. NSS and U.S. EES are our higher-margin businesses. In both EES and UPS, our fastest growth was with lower-margin customers, while in NSS, our fastest growth was the security business. Keep in mind that our lower-margin businesses, which are the UPS segment and our security business, also have the lowest level of operating expense, making them accretive on an operating basis. The adjusted operating profit margin of our UPS business, as an example, improved by 30 basis points as we continue to improve efficiency in this business while we grow the top line. Operating expense of $316.2 million compares to prior year operating expense of $309.4 million. Excluding the non-GAAP operating expense items I outlined earlier, adjusted operating expense of $306.3 million compares to prior year adjusted operating expense of $299.5 million, an increase of 2.3%. Current quarter adjusted operating expense is 15.2% of sales, a 10 basis point improvement versus the prior year quarter and flat compared to the second quarter of 2017. Looking at the fourth quarter. We expect our adjusted operating expense as a percent of sales to improve by approximately 10 basis points year-over-year, as we saw in the current quarter. However, keep in mind, operating expense dollars will increase both due to incremental volume and the impact of the stronger U.S. dollar on our non-U.S. businesses. Current quarter adjusted EBITDA of $102.7 million compares to adjusted EBITDA of $108.2 million in the third quarter of 2016. The resulting adjusted EBITDA margin of 5.1% of sales compares with 5.5% in the prior year period. By segment, NSS adjusted EBITDA of $72.3 million compares to $79.1 million in the prior year period, a decrease of 8.6%. The corresponding adjusted EBITDA margin of 6.9% compares to 7.5% in the prior year period. The change in margin was due to lower gross margin, reflecting higher growth rates in security and lower vendor rebates than in the prior year period. On a sequential basis, adjusted EBITDA increased by $2.5 million or 3.5%, driven by incremental volume. Adjusted EBITDA margin of 6.9% increased 10 basis points on a sequential basis. EES adjusted EBITDA of $29.7 million or 5.4% of sales compares to the $31.4 million or 5.9% of sales in the third quarter of 2016. The primary cause of lower adjusted EBITDA margin is gross margin pressure caused by customer mix. Versus the second quarter of 2017, adjusted EBITDA compares to $32.8 million or 5.8% of sales. The change versus the second quarter of 2017 reflects lower volume caused by fewer large capital projects. Average copper prices increased $0.73 in the current quarter compared to the prior year. As you know, this 34% impact benefits gross profit dollars but does not impact gross margin percent. The more recent increase in copper prices will have the typical lag before flowing through to our bottom line. Finally, Utility Power Solutions adjusted EBITDA of $24.8 million increased 17.7% versus $21.1 million in the third quarter of 2016, driven by very strong volume growth. The corresponding current quarter adjusted EBITDA margin of 6% of sales compares to 5.7% of sales in the prior year quarter. The strong year-over-year EBITDA margin performance reflects the operating leverage potential of this business and resulted in adjusted EBITDA leverage of 1.6x. As I move down the income statement, interest expense of $18.9 million decreased by $900,000 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 fourth quarter of 2017. Foreign exchange and other income of $300,000 were favorable in the quarter. However, based on current foreign exchange rates, we believe that $1.5 million to $2 million would be a reasonable estimate for quarterly expense going forward. Our third quarter 2017 GAAP effective tax rate of 39.7% compares to 38.4%, and our adjusted tax rate from non-GAAP earnings of 38.8% compares to 38.5%, both versus the prior year quarter. The higher non-GAAP tax rate in the third quarter negatively impacted adjusted EPS by $0.04, which includes the catch-up from the first and second quarters. Changes in tax rate are driven primarily by changes in country mix of earnings. We currently estimate a full year 2017 adjusted tax rate of approximately 37.6%. Our diluted share count is estimated to be $34 million -- excuse me, 34 million shares over the balance of 2017. Looking at the year-over-year EPS. If you exclude the estimated $0.05 impact from the hurricanes and earthquake and the $0.04 impact from a higher tax rate, adjusted EPS would have increased $0.01, which is more in line with our top line growth. We generated $110 million in cash from operations year-to-date. The decrease versus prior year-to-date cash flow is due to working capital investment to support growth in the business. As Bob commented, we continue to have a relentless focus on working capital efficiency and further improved working capital to 18.2% of sales in the quarter, a 40 basis point improvement versus prior year. We invested $30.9 million in capital expenditures year-to-date through the third quarter and currently expect to invest $45 million to $50 million for the full quarter -- for the full year. Finally, we continue to estimate cash flow from operations for the full year to be approximately $200 million to $220 million. Consistent with our capital allocation priorities, we continue to use the strong free cash flow that we generated to reduce debt related to the Power Solutions acquisition. Our third quarter 2017 debt-to-capital ratio improved to 46.6%, a 500 basis point improvement from year-end 2016. As you know, we returned to our target range of 45% to 50% in the first quarter. Our debt-to-adjusted EBITDA ratio improved to 3.2x compared to 3.5x at year-end 2016. We now expect to reduce our debt-to-adjusted EBITDA ratio below 3x by early 2018, reflecting the impact of lower second half earnings than previously projected. Our weighted average cost of borrowed capital of 5.4% compares to 4.7% in the prior year quarter. The increase in cost reflects 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 $685.9 million at the end of the quarter. To help with modeling fourth quarter, I will provide our thoughts on hurricane impacts as well as our estimate for the impact of copper and currency on fourth quarter sales. As Bob discussed, recent hurricane and earthquake activity resulted in lost business days in all businesses in the third quarter. We estimate the net sales impact for the quarter was a 50 basis point headwind, including negative impact in NSS and EES and a neutral impact on UPS. While the natural disasters have caused disruption and increased near-term uncertainty, we are optimistic that the rebuilding activity in Florida, Texas, Puerto Rico and other impacted areas will be a benefit to our business in 2018 and possibly longer. Turning to the sales impact of currency. Based on the current value of the U.S. dollar against other currencies, we estimate a fourth quarter benefit of $20 million to $25 million and a full year benefit of $5 million to $10 million on the top line. Based on recent copper prices of approximately $3.10, we estimate a favorable sales impact of $15 million to $20 million for the fourth quarter and $67 million to $72 million for the full year. As a reminder, average copper price was $2.39 in the fourth quarter of 2016 and $2.20 per pound for the full year of 2016. The estimated combined favorable impact of currency and copper on diluted EPS would be $0.06 to $0.08 in the fourth quarter of 2017 and $0.24 to $0.26 per share for the full year. As Bob shared in his remarks, we are estimating fourth quarter 2017 organic growth to be in the 2.5% to 3.5% range, with the fastest growth continuing to come from UPS segment. We now expect full year organic growth to be in the 3% to 3.5% range. Finally, even though UPS will begin to have more difficult comps in the fourth quarter as sales with the new large IOU customer began in the fourth quarter of 2016, we still expect that UPS will continue to deliver the fastest growth of the 3 segments, again, in the fourth quarter. As we move through the fourth quarter, we expect the slow-growth economic environment to persist. While our customers remain optimistic about their businesses and the economy, we continue to experience a lower level of large capital projects in North America in both NSS and EES. Our pipeline activity remains strong, and we are beginning to see an increase in bookings, supporting our optimism that project business will accelerate in Q4 and into 2018. We continue to maintain or gain modest share across our businesses, driven by synergies with our low-voltage products and ongoing organic initiatives, including the global accounts and in security, wireless and professional A/V, where our differentiators enable us to win. We remain focused on driving efficiencies in our cost structure while balancing expense discipline with the necessary investment in our people, systems and supply chain capabilities to support our growing business. We expect these efforts to continue to generate significant free cash flow, supporting a balanced capital allocation strategy that benefits all of our stakeholders. With that, we will now open the call for questions.

[Operator Instructions]. And our first question comes from the line of Steven Fox from Cross Research.

Just first question related to the hurricanes and earthquake. You didn't mention any kind of impact from the UPS segment. Can you just sort of explain whether that's still to come or how these tragedies are affecting that business? And then I had a couple follow-ups.

Okay. So Steve, this is Bob. In the UPS segment, the way the hurricane activity worked is where we have contracted relationships or non-contracted relationships but customer relationships would impact the utilities, we realized the benefit in hurricane rebuild. Importantly, we don't have a contract with the utilities serving Houston, so Houston, which may have suffered, in fact, more damage than Florida from the hurricane, ended up being a nonfactor for us, in fact, a negative factor because while we didn't supply hurricane recovery materials into Houston, we had utilities in kind of a broad geographic area around there that provided mutual aid into Houston, and so they spent less as their crews mobilized and went to Houston. In Florida, we had the effect where we did have customers that we supplied hurricane recovery products to. We also had an impact of utilities from across the Eastern U.S., in fact, including one or more Canadian utilities that provided mutual aid and moved crews down to Florida, so their spending reduced. And it's simply the fact they don't have crews to do work in their local business, so they reduced their spending. So how does that kind of bubble work through the business? We think there's more hurricane recovery spend to come. We think that rolls through the fourth quarter and potentially into 2018. There are some large rebuild projects, particularly in the Caribbean, out to bid. So that -- and those are being bid. They are not won business of ours. So that activity will drag through certainly into 2018, and we should see some spend recovery from the utilities that provided mutual aid catch-up on work, and we'll see that flow through the fourth quarter and into 2018 as well.

Great. That's helpful. And then separately from that, you highlighted a better backlog for, I guess, the large project industrial work. But I think you've talked about that in the past. Is there anything, in particular, with this backlog now that makes you think you're finally starting to see a recovery? Or is it just -- you're just reading from the general orders on the book and the schedules are still to be set?

Yes. So Steve, this activity is new won projects, so our backlog in EES is building based on new won projects. We talked in the past about a pipeline that looked like there would be activity. But I think as we've talked about from time to time on calls, pipelines mature at various rates depending on what customers actually decide to do. In this case, that pipeline is turning -- has turned into project activity. We have won projects with purchase orders in-house, orders placed on suppliers, and that's what gives us confidence that we'll see a turnaround in EES as we get into the fourth quarter here.

Great. And then my last question just on the sale synergies that you realized. Is there any way to summarize how much that's helping organic growth on a year-over-year basis based on the initiatives you've had success with this past quarter?

Yes. Synergies across the business, which would include Tri-Ed as our third -- we just anniversary-ed third year after the acquisition in Power Solutions, 2 years out after the acquisition, equate to about 0.5% of sales, just pure synergies from those 2 acquisitions.

And the question comes from the line of Shawn Harrison from Longbow Research.

On the EES business, it's been a while since I asked about the size of the OEM business and maybe what constitutes that business now. But if you could give us an update on just the composition of that business as a percentage of EES or any way you could size it, that'd be great.

Yes. Shawn, as you know, we talk about the EES business, really, in 2 major parts, the OEM that you asked about and then the construction and industrial piece. That construction and industrial piece, remember, from our legacy Anixter business was more industrial. And with the low-voltage business from Power Solutions, now we've added a larger component on the construction side of that. So what I can tell you is now the construction and industrial is a much larger business than the OEM piece. But as we have been saying for a good 5, maybe 6 quarters now, the OEM portion of that business has been growing at a much faster rate because of much fewer large capital projects on that construction and industrial side.

And the composition of what makes up the OEM business, I know, was kind of a little bit of everything a few years ago. But has that changed at all? Or is there any -- I'm trying to think of the single few drivers of that business.

For clarity, what we're talking about is selling primarily in the smaller side, electronic, wired cable into OEM manufacturers, whether we're selling direct to the end user or, oftentimes, to a wire assembly cable house that then goes into that OEM's products. We're selling into a pretty diverse group of OEMs, and probably no single customer vertical that dominates that OEM business. There's a large part of that business that's south of the border, where we're selling into [indiscernible]. A high percentage of those, as you might guess, are still U.S.-based or U.S. manufacturers in that territory. But we're doing a much better job of growing that OEM business outside of North America and had been almost predominantly North America a few short years ago and now where the business is becoming much more important to us outside North America.

And I'll add a little more color, Shawn. If you look around the world, in Europe, for example, we have some significant defense and ship-building and ship repair business in the OEM segment as well. If you think of the cable assembly houses or wire harness houses that we sell to, they're mostly smaller businesses scattered literally all around the world. Those wire harnesses show up in everything from things like trucks, heavy equipment to anything -- anything, basically, that has an electronic signal or power distribution in the product has a wire harness somewhere inside of it. Quite often, those wire harnesses are subcontracted by the final OEM to a harness shop, a specialty shop that manufactures them. The other big element of small customers would be panel houses. So panel houses are also subcontractors. We build, basically, electrical control panels, electronic control panels that also go into some kind of a finished product, whether it's an automation project for a factory or a panel that's on like a gas compressor skid that goes into the natural gas operations, all that kind of stuff, wide range of products from lead hookup wire through heat shrink connectors, buttons and actuators, some automation-related components going to that as well. And sometimes, products like breakers go into the panel products as well. So a wide range of electrical and electronic stuff.

And then on the kind of the non-security networks business that you're seeing kind of the delays in projects. Remember, last quarter, there was some large data center maybe hyper-scale projects that affected the year-over-year compare, but it seems to have broadened out this quarter. And so is it new buildings and kind of rip-outs and repairs and replace that you're also seeing the delays? Or is it more to the data center dynamic? I know you said visibility into when it turns is a bit masked, and I'm just wondering, is it -- if you have any reasons on why it's kind of a bit unclear at this point in time on when it rebounds.

Shawn, it's Bill. So I'll tell you that we've seen strength, especially in the U.S. market, in, that mid-market, mid-project side. The difference between this year and last year is in large capital spend with large global customers, including data center. So tough comps from 2016, but again, the growth -- there's growth in the U.S. market more in that mid-market, mid-project level. We just haven't seen that big capital spend in the NSS business. So we expect that to improve, but right now, that's what we've seen up to this point.

And if I remember last quarter, I think quoting was very high, but you're obviously waiting as they turn in billing. Has the quoting dynamic changed at all? Is there still a lot of interest on new quoting?

Yes. I think what we said is that the second half of the year would improve, with more in the fourth quarter, and that was for both EES and NSS. And that, in fact, is the case. So Bob already mentioned that we're very positive on the EES side of the business. The NSS piece, we're cautiously optimistic. We've seen strength building in the bookings, but the timing on that is something that we're watching closely.

Yes, Shawn, just maybe one more point there. I'd have to look back at our announcement, but I think the quoting activity pickup we were talking about was in the EES segment, not in the NSS segment.

Okay. And then lastly, just on the EES copper dynamic. Is it because of the delays in project activity that it's maybe a little bit slower to flow through? I know it's always difficult on passing through commodity price inflation and how that works. Or is it something else?

Yes. I think you hit the nail on the head. It's kind of the typical lag effect that is somewhat exacerbated by slow demand on these large capital projects. And it's the large capital projects that tend to have the higher copper content product. And so that's where we would typically get the bigger, more positive impact of this type of price increase.

And our next question comes from the line of Luke Junk from Baird.

First question is within NSS and EES. Just wondering how sustainable the EMEA and Emerging Markets strength that we're seeing in the businesses, especially as comps normalize going into next year. It seems like a lot of the growth here is project-based. Am I hearing that right?

Yes. I would tell you that the strength in EMEA as well as in Emerging Markets looks to be consistent and will continue. There's a lot of spend going on in the Middle East. If you remember, a year ago was a little lethargic. It's coming back. We think there's continued strength in that market. And the project pipeline looks good. I would tell you that we're feeling -- again, 4 straight quarters of growth in our CALA business after a tough time in Brazil 2 years ago. We're feeling like that's going to continue. So I would tell you we expect it to be positive in the next several quarters.

Yes. I would just add to that, especially on the CALA side. We have said before that CALA is about 2/3 of that Emerging Markets business, so those growth rates are off of a fairly depressed level of business because of the macro across CALA and especially Brazil, which was a large market for us.

Great. And then switching over to the UPS business. Just wondering if there's any major contracts we should be aware of in, say, the next 12 to 18 months either coming up for renewal, where there might be an opportunity to expand the scope of the business, or potentially will be subject to some kind of competitive bidding situation. And also, just curious if there's any offsets to this $30 million incremental when you guys highlighted today, if there's any asset elsewhere in the portfolio or if that's a $30 million kind of net win, if you will.

Yes. Look, this is Bob. The $30 million is a net win. There are no offsets. We haven't lost any contracts. We don't have -- we have one renewal that's in process right now. Other than that, we actually, over the course of the last couple of quarters, have been able to sign multiyear renewals on several contracts that were coming up for renewal or rebid. So I would say our exposure to losing substantial amounts of business is very low at the moment. There are a couple other large bids pending that we are participating in and certainly, along with other organizations participating in those. So we'll see how that all unfolds as we move through 2018.

Yes. The only thing I would add to that, Luke, is, as we've said before, this business is definitely a much longer sales cycle than our other businesses. So with hundreds of utility customers with contracts, even though these are all multiyear contracts that range anywhere between 3 to 5 and a few even 10-year deals, we're always in some stage of RFP and negotiating contract extensions with some customers. So we wouldn't typically comment on those that are kind of ongoing. We're always dealing with that. We call out one this quarter because of, one, the size of it and the fact that it's a competitive takeaway, which further reinforces the value of the model and the expertise we were able to bring combining that Power Solutions business with our legacy Anixter capabilities.

And our last question today comes from the line of Saliq Khan from Imperial Capital.

The question was, if you take a look at the growth that you are seeing in Emerging Markets, what programs do you have in place to help you drive the new markets, new customer segments, so you can better leverage the channel partnerships that you have in place and, particularly, as you look into 2018?

Yes, it's a great question. I think that the programs for us are stated as part of our global strategy. So adding A/V, security and other global products or solutions to that market specifically play well in that market as you get in the complexity of operating in the Latin America market. There's a lot of risk. There's a lot of supply chain complexity. So for us, we're attaching the ability to add all of that spend to customers and how they're managing that across an EMEA-wide network with, again, a lot of risk and a lot of complexity. So we feel very positive about the model we have in place and how customers are receiving that model. And a lot of this, from a profile standpoint, is with bigger, much more stable customers. And I think it's important to note that the risk profile has improved because we're mostly aligned with very large, very stable companies.

Yes. And I would just add to that as a point of emphasis. Some of how we are getting at your question is a direct result of these acquisitions. So take UPS for an example. We have already begun conversations with a couple utilities who are current customers in the U.S. with even larger foreign parent companies and started a dialogue with them about a potential partnership in EMEA. Likewise, on the low-voltage side of that acquisition, where we'd already begun working with some of the key suppliers there to extend those product categories into Mexico and elsewhere in CALA. So I think to Bill's earlier point about our global footprint and global capability being one of our key differentiators, it's a way for us to grow into some of these international markets with relatively small fixed-cost investment because of the infrastructure that we currently have in these countries.

And then can you also comment on maybe some of the distribution changes that you're having to make to be able to better adjust to the longer sales cycle with some of those large customers that you mentioned?

So I don't know that we've had to make changes in how we operate due to longer sales cycles. If you think about our business, and this has been true for a number of years, we've had very large customers with complex supply chain programs for a long time that have required us to engage in very long, complex sales cycles. So that's not new for us. The way we organize the sales organization is to have salespeople who are much more focused on sort of mid-market customers and opportunities, in the case of Tri-Ed, more small customers opportunities, walk-in customers. And then we have salespeople who are targeted at large multinational customers and, in the case of UPS, large investor-owned utilities. And those large, complex customers have been with us for decades. We've had that as a part of our profile. So we haven't really had to adjust how we organize the sales force. Over time, we'll talk more and more about supply chain and how we leverage the global footprint as one organization and certainly, e-commerce capabilities very broadly. Direct integration with customers come into that as well. So we really haven't had to change our organization structure or our go-to-market approach to accommodate it. It's something that's been a key part of our business for a long time.

And I would add to that, that the infrastructure already in place gains leverage as we drive more volume. So as you look for those efficiencies, we're able to go in and help customers leverage that infrastructure to get better working capital models for themselves.

Great. And just one more on my end, guys. If you take a look at the security segment, the video products that you mentioned earlier, are you finding that the adverse impact of the video price deflation to the product mix, is that temporary? Or could we expect that longer term?

Yes. I would tell you that -- And Ted can comment further on the actual numbers, but I would tell you that the impact is slowing down. So like any market, you're going to have that typical cycle of growth, volume and then price decline as you gain efficiencies in the market and products -- new products come on in market and new competitors. I would tell you, the decline of that price -- the slowdown of the price deflation is evident.

Yes, I would agree with that. And so what we're seeing there is -- for example, when we said in our numbers that security grew 4% in a revenue basis, our video camera business, as an example, in units, grew much, much more than that. And it's partially offset by pricing and then partially offset by the mix you were referring to. So I think what we're seeing is, as Bill said, kind of a natural evolution of that product category as manufacturers continue to deliver greater functionality at lower cost.

And we have no further questions at this time. I'll turn the call back over to our presenters.

That concludes today's call. Thank you all for your questions and for listening to the 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.

This concludes today's conference call. Thank you for your participation. You may now disconnect.