WESCO International, Inc. (WCC) Q4 2017 Earnings Report, Transcript and Summary

Good morning. My name is Christine and I will be your conference operator today. At this time, I would like to welcome everyone to the Anixter Fourth Quarter 2017 Results Conference Call. [Operator Instructions] Thank you. Lisa Gregory, Vice President, Investor Relations, you may begin your conference.

Great. Thank you, Christine. Good morning and thank you for joining us today for our fourth quarter 2017 earnings call. This morning, 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 fourth 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 today’s presentation, which are 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 presentation 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.

Thanks, Lisa. Good morning and thank you for joining us for our fourth quarter 2017 earnings call. In this morning’s call, I will provide an overview of our fourth quarter and full year financial results followed by brief comments on our outlook. Bill Galvin will then discuss sales results in greater detail. Finally, Ted will review our financial performance and provide additional thoughts on 2018, including a discussion of the expected impacts of corporate tax reform on our business. After Ted’s comments, we will take your questions. As you saw from this morning’s press release, we delivered fourth quarter 2017 GAAP earnings per diluted share of $0.01 that included the impact of the new tax legislation. On an adjusted basis, diluted earnings per share increased 8% to $1.41. Unless otherwise noted, all of our comparisons refer to the fourth quarter of 2017 versus the fourth quarter of 2016. Both the current quarter and prior year quarter had 62 billing days. Total company sales increased by 6.3% to a fourth quarter record of $2 billion. Adjusting for the favorable impacts of the higher price of copper and currency fluctuations, organic sales increased by 4.2%, which was above the 2.5% and 3.5% range we provided in our outlook for the quarter. On a sequential basis, fourth quarter average daily sales increased by 1.5%, a seasonally strong finish to the year. Sales growth was broad-based with reported growth in all three segments and all thee geographies. We are especially pleased with strong organic growth in our EES and UPS segments and our emerging markets and EMEA regions. Bill will provide more detail on our segment sales results and the trends we are seeing. Turning to the full year, we also delivered growth in all segments and all geographies, including double-digit organic sales growth in both EMEA and emerging markets as we continue to grow globally with our multinational customers. I would like to highlight the particularly strong year in our UPS segment. Recall that we may change this to the leadership and structure of UPS in 2016. These changes yielded significant performance improvement in 2017. Led by Ian Clarke, the team’s accomplishments included growth in both the IOU and public power markets, implementation of a focused supplier growth strategy, numerous new business wins and a robust pipeline of new opportunities. Business grew significantly in excess of the market in each of the last four quarters fueled by the combination of sales to new IOU customer and strong organic growth. Now, I will turn to our outlook for 2018 sales growth. With 4.2% organic growth in the fourth quarter, we delivered full year organic growth on a per day basis at 3.5% which was near the high-end of our initial 2017 outlook range of 1% to 4%. Based on macro indicators, publicly available company disclosures, proprietary industry data and the discussions we have with our suppliers, we believe our 2017 growth rate represented flat to modest share gain across most of our markets. As we enter 2018, we are focused on continued share gains in all segments. Based on recent new project wins and opportunities we are actively pursuing, we have confidence that large projects activity is accelerated. We believe we are well-positioned to succeed in our markets. We continue doing sizable projects in all segments. In addition to the $30 million utility contract with an existing IOU customer we disclosed on our Q3 call, we have also been working the new 5-year integrated supply agreement with an existing large customer in our NSS segment, which we expect we will begin to ship during Q2. We expect this agreement to total over $50 million on an annualized basis. Additionally, we continue to gain traction in fast growing areas of the business such as professional audio/video. And we have intense focus on growing synergistic sales, including selling electrical cable and related products to datacenter customers and security solutions to utility customers. From a macro perspective, economic indicators reflect solid business conditions, we are optimistic that the recent tax reform legislation will be a catalyst for our customers to increase their capital spending, solid secular trends in a favorable economic environment across our business sets up well for the current year. Our initial outlook for full year 2018 organic growth is in the 2% to 5% range. Let me conclude by sharing my perspective on the industry and our competitive position. As we like to remind investors our business model is unique in the industry, our value proposition is based on three primary differentiators that provides sustainable competitive advantage. Our global capabilities, the 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 and complexity of their supply chains in turn reducing risk in the business. Our specialist capabilities are not easily replicated and create a resilient business model. We believe we can extend our leadership position in attractive and growing markets enabling us to deliver sustainable profitable growth over the long-term. This year’s results validates that our model is delivering value to both our customers and suppliers. With that, I will turn the call over to Bill Galvin.

Thank you, Bob and good morning everyone. Beginning with the network and security solutions business, NSS quarterly sales of just over $1 million increased by 1%, adjusted for $11.6 million favorable impact of foreign exchange, NSS organic sales reflect modest growth and our security business offset modest decline in the network infrastructure reflecting a low with project spend in the market. Sequentially, sales increased by 0.3% on an organic basis. Looking at NSS by region, North American sales of $809 million declined 1.7% on an organic basis. We continued to experience a lower level of large capital projects in the market. However, strength in the day-to-day business and mid-sized project activity help us to close the gap. As we discussed in our Q2 and Q3 earnings calls, project billings were very strong in North America in 2016. Projects are beginning to move from our pipeline into our backlog giving us confidence that sales growth will accelerate as we move through 2018. Our EMEA geography delivered $93 million in sales which was a decline of 2.7% on an organic basis reflecting a lower level of projects and some fluctuations in project timing in the current year. For the full year we had an organic growth of 6.2% in our EMEA business, driven by strong growth in the Middle East and Continental Europe. Finally, emerging markets sales of $149 million increased 11.9% on an organic basis, driven by large projects in both our CALA and Asia Pacific geographies. While still challenging the Latin America geography overall is stabilizing and our trends continued to improve. The current quarter marks the fifth consecutive quarter of improving sales trends in Latin America. Looking at the security portion of the business, NSS security sales of $421 million or approximately 40% of segment sales increased 1.5% from prior year quarter. Adjusting for $5.3 million of favorable foreign exchange, NSS security sales increased 0.2% on an organic basis. Unit volume remained strong in most product categories of our security business. However, as we have indicated in prior calls, security sales growth primarily video-related products continues to be negatively impacted by mix and price deflation in certain product sets, primarily video cameras. Turning to market share, we believe we maintained market share globally in both our network infrastructure and security businesses. With the exception of large project business in the U.S., momentum across NSS is strong driven by growth in our day-to-day business as well as in professional audio, video and our international markets. Globally, our backlog is up 7% year-over-year at the end of January. To summarize following 2 years of higher investment and data infrastructure that was a pause in 2017 as customers have brought new capacity and recalibrated future investments. Encouraged by recent public announcements by large technology companies, regarding planned investment, we are optimistic that our customers will continue to invest in their network and security infrastructure. Moving to Electrical & Electronic Solutions, our fourth quarter sales of $582 million increased 14.7% versus prior year. Adjusted for the $16.4 million favorable impact of higher average copper prices and the $8.8 million favorable impact of organic sales of currency impact, organic sales increased 9.8%. In contrast to normal seasonality, sequential sales increased by a strong 4.8%. Looking at EES by region, North American sales of $452 million increased 7.1% on an organic basis. We continue to experience strong growth on the OEM side of the business and with sales of low-voltage electrical products. As we anticipated in the fourth quarter, we experienced healthy growth on the industrial side of the business as well increasing our confidence that the recent recovery in the industrial market will be sustainable. In our EMEA geography, sales of $71 million increased 23.5% on an organic basis driven by large projects in the Middle East and Europe. In our emerging markets geography, sales of $58 million increased 17% on an organic basis driven primarily by project business in Asia-Pacific. Consistent with our synergy strategy, we experienced our product portfolio globally, which contribute to our strong growth outside North America. We continued to strengthen our strategic alignment with electrical product suppliers, helping us grow sales of gear and controls, lighting, transformers and other low-voltage products with both new and legacy Anixter customers. As we have said previously, our broader product offering enhances our competitive position, increases our relevance to our customers and give us the opportunity to increase our share of wallet. Overall, based on the discussions with suppliers and industry data, we believe our EES business gained share on a global basis driven by recovering industrial project business, increased sales of low-voltage electrical products and ongoing growth with OEM customers and global customers outside of North America. With the healthier industrial project market and ongoing growth of our low-voltage and OEM businesses, the current backdrop sets up well for continued growth in EES. Finally, our Utility Power Solutions segment achieved sales of $381 million in the current quarter, resulting in 9% organic growth. As Bob highlighted, we delivered strong growth across the UPS business driven by both new and existing IOU and public power customers. We continued to compete and win sizable incremental awards in our IOU business. As we disclosed on our third quarter earnings call, we will begin shipping a new award with an existing customer that we estimate at over $30 million in incremental annual business beginning in the second quarter. This 5-year agreement, which is renewable for an additional 10 years, is indicative of the value customers are placing on our business model. Our focused supplier strategy continues to contribute to improve profitability in the UPS business, while at the same time supporting our partners and they drive to meet their growth goals. Importantly, we believe we have created a platform to further expand this business, opportunities including selling a broader set of solutions, including security to existing customers, winning businesses with new customer and winning business that had previously been manufacturing to revenue. Turning to market share, macro indicators related to utility industry indicate that we are gaining significant share in the market. As we focus on our outlook for the utility business in 2018, we are optimistic that we will see continued strong growth for the year, although we expect higher growth to be weighted in the second, third and fourth quarters. The first quarter of 2017 had more favorable weather for utility activity versus the very cold temperatures in January this year. Finally, as part of the mutual aid recovery, the industry has said significant numbers of support crews to help to build the rebuilding effort in Puerto Rico, which may negatively impact spending levels with some customers during the first and second quarters. As a final note across all segments, we continued to execute our synergy strategy. In addition to cross-selling security solutions, wired cable and low voltage products including gears, lighting and transformers we have successfully expanded our relationships with both customers and supplier partners. We continue to closely monitor synergy progress and exiting 2017 ahead of revenue and EBITDA synergy goals. 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. Before we move into the details, I want to remind you that today’s earnings release includes non-GAAP measures, which are reconciled to GAAP measures in the financial tables that accompany our release. We believe the non-GAAP we disclosed, which exclude non-cash expenses and other items provides the best representation of our ongoing operational performance. Each quarter we exclude intangible amortization and if applicable acquisition and integration costs from our non-GAAP results. I will begin with a summary of these expense items. Fourth quarter 2017 results include amortization and impairments of intangible assets and acquisition and integration costs which combined had a $16.2 million pre-tax and an $11.8 million after-tax impact. Additionally, net income includes $35.6 million of tax expense related to the recently passed tax legislation, which I will discuss in broader detail later in my remarks. Combined, the net income impact of these items was $47.4 million or $1.40 per diluted share. Prior year results included amortization of intangible assets and acquisition and integration costs, which combined had a pre-tax impact of $9.8 million and a net income impact of $7.6 million or $0.22 per diluted share. Excluding the impact of the above items, fourth quarter 2017 adjusted earnings per diluted share increased 8% to $1.41 compared to $1.31 in the year ago quarter. 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, our record quarterly sales increased 6.3% to $2 billion driven by growth in all segments and all geographies, adjusted for the $16.8 million favorable impact of higher average copper prices and the $22.5 million favorable impact of currency fluctuation, organic sales increased by 4.2% versus last year above our outlook range for the quarter which was 2.5% to 3.5%. Turning to gross margin, our fourth quarter margin of 19.8% compares with 20.4% in the year ago quarter. The year-over-year decline was due primarily to customer product mix combined with the impact of lower vendor rebates and competitive pressures. Similar to recent quarters, our fastest growth was with lower margin customers and in lower margin product. And in addition, this quarter we saw more large direct ship projects. Looking ahead, the current quarter gross margin of 19.8% is a reasonable estimate for gross margin going forward subject to business mix and potential vendor price increases. Operating expense of $318 million compares to prior year operating expense of $306.1 million. Excluding the non-GAAP operating expense items I outlined earlier, adjusted operating expense of $301.8 million compares to prior year adjusted operating expense of $296.3 million, which is an increase of 1.8%, reflecting ongoing expense discipline balance with targeted investments in the business. Current quarter adjusted operating expense was 15% of sales, a 60 basis point improvement versus the prior year quarter and a 20 basis point improvement compared to the third quarter of 2017. Looking to 2018, we expect our adjusted operating expense dollars to increase 3% to 4% on a year-over-year basis driven by increased volume and typical annual inflation we experienced in the business. We have opportunities for operating expense improvement due to initiatives such as our supply chain network design optimization work. Keep in mind those we have discussed on previous calls that this multi-year project will first optimize inventory by location and reduce freight costs with longer term savings in facility events. Current quarter adjusted EBITDA increased 6.3% to $180.1 million. The resulting adjusted EBITDA margin of 5.4% is flat with the prior year period. By segment, NSS adjusted EBITDA of $79.4 million compares to $81.9 million in the prior year period, a decrease of 3%. The corresponding adjusted EBITDA margin of 7.6% compared to 7.9% in the prior year period was the change due primarily to lower volume, the continued deflation in video camera pricing and lower vendor rebates. On a sequential basis adjusted EBITDA increased by $7.1 million, driven by strong operating expense leverage. Adjusted EBITDA margin of 7.6% increased 70 basis points on a sequential basis. Finally, as you saw in our release in addition to amortization of intangible assets and acquisition and integration costs that we typically exclude current quarter NSS results exclude $5.7 million impairment charge of an intangible asset related to the repositioning of a trade name that we acquired in 2014. This is a result of the realignment of our integrated security business across the previously separate Anixter, Tri-Ed, and CLARK businesses. EES adjusted EBITDA increased 29% to $33 million, resulting in an adjusted EBITDA margin of 5.7% of sales. The 60 basis point improvement from prior year was driven by higher volume and operating expense leverage partially offset by lower gross margin reflecting competitive pressures of our markets. This strong year-over-year EBITDA margin performance reflects the operating leverage potential of this business and resulted in adjusted EBITDA leverage of 2x. On a sequential basis, EES adjusted EBITDA increased 11.1% which corresponds to a 30 basis point improvement in margin. Fourth quarter average copper price increased $0.71 to $3.10 per pound which was 30% higher than the fourth quarter of 2016. As you know higher copper prices benefit gross profit dollars with no impact on gross margin percent. Copper prices continue to be a tailwind for EES and as in recent quarters there is a lag before the benefit flows through to the bottom line. Finally, Utility Power Solutions’ adjusted EBITDA increased 6.8% to $20.5 million, driven by volume growth. The corresponding adjusted EBITDA margin of 5.4% of sales compares to 5.5% of sales in the prior year quarter reflecting lower gross margin driven by customer and product mix. As Bob highlighted we made significant progress in our UPS businesses here which was reflected in the financial results. Full year adjusted EBITDA increased over 15% to $92 million driving adjusted EBITDA leverage of 1.5x for the full year. Moving down the income statement, interest expense of $19 million was flat year-over-year. The current level is a reasonable estimate for quarterly interest expense for each of the quarters of 2018. Foreign exchange and other income of $100,000 was favorable in the quarter. Based on current foreign exchange rates, we believe that $1.5 million is a reasonable estimate for quarterly expense going forward. Turning to taxes, our fourth quarter U.S. GAAP effective tax rate of 99.4% compares to 37.2% in the fourth quarter of 2016. The rate difference is primarily due to the impact of recent tax legislation. As I highlighted in my earlier comments, the current quarter includes $35.6 million expense related to this recently enacted legislation. This is comprised of a $50 million transition tax on deferred foreign income, which is payable over 8 years reduced by $14.4 million deferred tax benefit resulting from the reduction of our net deferred tax liability due to the tax rate change. On an adjusted basis, our fourth quarter effective tax rate of 38.5% compares to 35.1% in Q4 of 2016. Looking at the full year, our 2017 non-GAAP effective tax rate of 37.8% compares to 37.0% in 2016, with the difference due primarily to country mix of earnings. Finally, as a result of the recent tax reform legislation, we currently estimate a full year 2018 adjusted tax rate in the 20.5% to 29.5% range. Please see the effective tax rate projection slide in our accompanying presentation. Our diluted share count of 34 million shares, which should increase slightly over the course of 2018. We generated $184 million in cash from operations in 2017. The lower level of cash flow was primarily due to working capital investments to support the higher fourth quarter volume. We remain intently focused on working capital efficiency and further improve that efficiency to 18.4% of sales in the quarter, which was up 40 basis points improvement versus prior year. We currently expect to generate cash flow from operations of $180 million to $200 million in 2018. We invested $41.1 million in capital expenditures in 2017, compared to $32.6 million in 2016 and currently expect to invest $60 million to $70 million in CapEx in 2018. Consistent with our capital allocation priorities, we continue to use strong free cash flow we generated to reduce debt related to the Power Solutions acquisition. Our fourth quarter 2017, debt to capital ratio improved to 46.1%, a 550 basis point improvement from year end 2016. As you know, we returned to our target range of 45% to 50% in the first quarter of 2017. Our debt to adjusted EBITDA ratio also improved 3.1x compared to 3.5x at year end 2016. We still expect to reduce our debt to adjusted EBITDA ratio below 3x in the first half of 2018. As we achieve our target capital structure, we expect to resume our historical capital allocation framework. Our priorities remain; first, funding organic growth, secondly, pursuing inorganic opportunities that address specific product or geographic gaps and finally, returning value to shareholders through either share repurchases or dividends. While we have indicated that we believe, we have the right platform in place with no need for another large transformative acquisition, we do have a very active pipeline of smaller opportunities that appear very promising to us. Our weighted average cost of borrowed capital of 5.6% compares to 5.1% in the prior year quarter. The increase in costs reflects the repayment of lower cost borrowings, including the remaining balance of our Canadian term loan. Finally, our liquidity position remained strong with total available liquidity under revolving lines of credit and secured accounts receivable and inventory facilities of $667 million at the end of the quarter. Turning to our outlook for sales growth, as Bob indicated, we are estimating full year organic growth to be in the 2% to 5% range. Based on current trends in the business, we are estimating first quarter 2018 organic growth to be in the 2% to 3% range with the fastest growth coming from the EES segment. To help with your modeling I will provide our estimates for the impact of copper and currency on first quarter and full year 2018 sales. Based on recent copper prices of approximately $3.20 per pound, we estimate a favorable sales impact of $10 million to $15 million for the first quarter and $30 million to $40 million for full year. As a reminder, average copper price was $2.65 per pound in the first quarter of 2017 and $2.80 per pound for the full year 2017. Based on the current value of the U.S. dollar against other currencies, we estimate the first quarter benefit of $10 million to $15 million of sales volume. At current rate, we would have the favorable impact in the first half of the year and potentially a negative impact in the second half of the year resulting in a full year benefit to sales of $10 million to $15 million. To conclude as we move into 2018, the global economic backdrop is favorable with recent tax reform legislation, a potential catalyst for our customers to increase their capital expenditures. As we look at our businesses, our NSS pipeline activity is improving and we are beginning to see an increase in bookings giving us confidence that project business will accelerate as we move through the year. In EES following several years of challenging industrial markets, we are beginning to see an acceleration of project activity. Finally, we are optimistic that solid trends in our utility business will persist. We remain relentlessly focused on driving efficiencies across the organization, constantly balancing expense discipline with investment in our people, systems and supply chain capabilities just for the 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 stake holders. With that we will now open the call for questions.

Thank you. [Operator Instructions] Your first question comes from the line of Luke Junk from Baird. Your line is open.

Good morning.

Good morning Luke.

Just bigger picture question on project activity first, just curious what’s you would say the normal mix of project business today is in NSS and EES, I guess the old rule of thumb is always thought was about 20% of revenues in a normal economy, curious does that still hold and I guess the things I would be thinking about would be one whether the NSS business has changed at all on the longer term basis given the rise of the cloud hyper skill datacenters, things of that nature. And then also on the wake of Tri-Ed and the Power Solutions acquisitions how those have impacted project mix as well?

So Luke, this is Bob. I will start and then I will turn it over to Bill. I think we have been moving off of an old model that honestly goes back probably 10 years where we used to say it was 80-20 and we have been saying the mix is a little more skewed towards projects than we used to say in the past, so we do think projects have a bigger impact on the business overall. It is a little different between EES and NSS. EES tends to be a little more project heavy in the industrial component, however that’s offset by the OEM part of the business which is programs that are contracted and consist revenue flow. So it’s also fair to say that Tri-Ed acquisition changed some of that mix. The Power Solutions acquisition did not materially change that mix. I will now let Bill give you an outlook on how project – how we think the project business is unfolding.

Yes. So we – the strength certainly last year within the mid-market, so what we would consider small to mid-size projects as well as the day-to-day flow. But as I mentioned in the comments, we are seeing significant strength building in NSS where project business going forward up 7% year-over-year. So although the natural mix of projects the day-to-day flow is going to say the same. We are just starting to see more activity now long-term for project buildings. So that’s why we were more encouraged by the outlook for NSS.

Yes. Look if I can just clarify one number Bill throughout, the 7% year-over-year is in reference to the level of NSS backlog at the end of January year-over-year as an indicator of continued improvement in that overall business.

Okay, that’s helpful. And then second, question on the margins side for you Bob, coming out of market downturn in the EES segment here, can you just speak to the current competitive dynamics in the context of rising copper prices, I know in past upturns you have talked about the idea of market clearing price of copper and just curious how the market clearing price of copper today is changing relative to what you are seeing in prices, are you seeing any sort of lag out there?

No, I think the lag is the same as it’s always been. We have said that from the market to clear on copper, because we aren’t selling copper, we are selling cable that copper is a component of. You have to flush through inventory and distribution, finished goods inventory and the manufacturers and with inventory and the manufacturers before you fully adjust. That works in kind of gradually. Having said that, there is variation by product set and so that’s why copper is a little bit difficult to estimate without knowing what the product mix is going to be. When we give you an outlook like Ted on copper we are assuming a consistent mix. If the mix shifts say to more instrumentation cable the copper impact reduces. If it shifted to more building wire, the copper impact would increase. So we are saying if we have pretty consistent mix that’s the impact we should see. And frankly how quickly, copper clears the market is also a function of products set. So building wire market tends to be copper sensitive on a day-to-day basis. Building wire is a still small percentage of our total mix, because commercial construction and residential is a very small percent of the mix of our EES business versus industrial. So I don’t think we would see any material change right now on how quickly we would expect copper to clear through our pricing.

Okay, helpful. Thank you very much.

Our next question comes from the line of Shawn Harrison from Longbow Research. Your line is open.

Hi, good morning.

Good morning, Shawn.

On the 2% to 5% organic growth for the year, I don’t want to put words in your mouth, but it appears that EES could be at or above maybe the high end and kind of the other segments and then maybe the middle part of the range, but maybe if you could bifurcate or I guess trifurcate that growth rate in between the different divisions as we think about 2018?

Yes. Great question Shawn, as I said in my comments, we believe that EES with the outlook and what we know right now would have the highest growth of the three segments this year followed by UPS and then third by NSS. So within NSS, having a relatively flat year last year having low single-digit growth there including the impacts of the pricing pressures in video cameras and some of the things like that we discussed, we think we will have volume growth much higher than that in NSS and still be able to deliver growth in that say 3% range or so in NSS as well. But I think you are right that the different segments will perform a little bit differently and part of that will come as a basis of the strength of the prior year comps that they will be comparing to like in the case of UPS, which has had a fabulous year this year with double digit growth for the full year and we will have little more difficult comps than the other two segments.

And then two follow-ups if I may kind of side into the NSS dynamic, how long does it typically take to get from backlog into actual billings. And then wanted to follow-up just on the $50 million win for the life of being in probably the decade of occurring you guys, I can’t remember at least such an announcement, but it’s obviously a big multi-year $50 million win is big news, so if you maybe talk about backlog and the billings and then also are there more these type of programs, this integrates supply chain solution available within NSS that you could come out over the next 12 months to 18 months?

,:

That’s helpful. Thanks Bob. I will jump back in the queue.

Your next question comes from the line of Jeff Kessler from Imperial Capital. Your line is open.

Thank you. With regard to the large contracts that you announced from UPS, is this the type of – is this the first of the large contracts that we have seen here, meaning is this the type of branding that can be done to if you get into this contract far enough that it can be used for other large as a reference point for other large contracts if you are going to indeed employ various parts of Anixter into that utility?

Yes. Jeff, let me clarify to start with. You said the large contract we announced in UPS, we didn’t announce one in UPS this quarter.

I mean I am sorry I misspoke.

Alright. So are you referring to the UPS contract we announced last quarter or the NSS contract that Bob just spoke now.

I am talking about the UPS contract you announced last quarter?

Okay. So on the heels of a little over a year ago announcing a very large contract win which was a complete win market share take that we talked at the time of being over $100 million incremental revenue, we now anniversary that and have actually exceeded those initial estimates for that customer would drive. So I think good evidence of the capabilities that we were able to bring to bear in the value we brought to that customer. The more recent one that we announced last quarter is smaller in scale, but similar and that we won the business entirely based on our supply chain capabilities. And we are able to take business there that had previously been served by distribution and are working with that customer on potentially taking some additional business that had been manufactured direct. So we…

What I am trying to find out is what is in your supply chain capabilities or some of them what I talked when I refer to multiplicity of services coming out of that, so what is in those supply chain capabilities that are you are being used to get these contracts and is how replicable is this – repeatable is this in the same type of negotiation with other types of large entities?

Jeff this is Bill Galvin. So it’s similar to the large project that Bob mentioned on NSS. So the fact that we are going in and getting involved in the customer’s complex supply chain, working capital models, all the things that they are trying to do to reduce cost of their own infrastructure, that model is absolutely something that is replicable across multiple customers, multiple geographies, multiple segments. So, it’s something we have been talking about as one of the core pillars of the company that being able to take what works, which is supporting customer’s working capital needs and complexities around supply chain that we can take over that for them and they can show great efficiencies by doing that. So it is absolutely something that is scalable.

Okay. Finally, you have talked about in the couple of your divisions, lower vendor rebates, is this something that we are going to be seeing over the course of the year continue or has – or was this a function more or less of what happened in just that specific quarter? I realized that even in the case of video and in the case of video there is a problem out there with pricing still being low, but I am wondering if we are – it’s affecting other areas of the companies as well?

Yes, Jeff. Our reference to the lower vendor rebates, which impacted obviously the global consolidated numbers, was primarily driven from NSS with the difference being a 2016 that ended more positively with more year end volume growth than anticipated. So, we were able to achieve higher levels of vendor rebates in 2016. So for calendar year 2016, we had probably what would be a disproportion amount of that rebate in Q4, whereas this year the trend was just the opposite with a little weaker business in Q4 meant that we had some softness in those vendor rebates. So, on an annual basis in NSS, I would say there wasn’t significant difference in vendor rebates, but we accrued additional amounts in Q4 ’16 a little lower amounts in 2017. So, the year-over-year comparison in the quarter was a little more significant, but I don’t believe you should read into that any change from a commercial standpoint for the overall business going forward.

Okay. So essentially, if I can read you right here, there has been some equilibrium is getting back into the middle here?

Yes, I guess you can use that word. We don’t think it was out of equilibrium so to speak it was more just the timing of how the rebates were quarter-by-quarter.

Okay, great. Thank you very much.

Thanks.

Thanks, Jeff.

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

Hi, good morning, guys.

Good morning, Josh.

Good morning, Josh.

I hopped on a bit late here. So I apologize if you answered the question or went over in your prepared remarks, but with CapEx deductibility now, I heard some of the comments around the NSS backlog being up 7%. It sounds like though the tone in Hamburg what’s going on is more small project than a large project. I guess maybe it takes time for things to get off the ground, but our customers coming to you wanting to talk about things that are bigger, do you have something like a front log that you can speak to – to maybe give us a sense on how that’s maybe filtered through or those conversations have changed and tax reform went through?

Yes, specific to let’s talk about the EES and NSS segments, as we have said the project activity in larger projects in EES has been strengthening. So, we expect that to continue strong in Q4 coming into Q1, we expect that to continue. The NSS business has been the one where we felt the much less big large capital expenditure projects. However, as we said we are starting to see that activity free up as consumption now has really started to take this phase that was built out. So, we anticipate the project business to get stronger throughout the year in 2018 probably seeing us build in second, third quarter and on. Did that answer your question, Josh?

Would you characterize any of that as having a necessary linkage to tax reform or is that just what the economy is getting better and this is the natural extension of that conversation?

Yes, I think Josh our best view of the market is that the combination of the two, but the connection to tax reform at this point in time is probably more anecdotal than something we could actually quantify. We certainly think it will help incentivize some additional capital spend, but I think we would be hard pressed like I said to put a number on. The other thing as Bill said I think this will primarily help in NSS EES space when it comes to the UPS space regulated utilities according to the new legislation cannot benefit by the accelerated depreciation. So, I would say in general we may not see the legislation directly driving increased CapEx in that segment of our business.

Got it. That’s fair. So to the extent that some of these deductibility issues become more of a driver that could be incremental to what you are seeing today I think it seems like a fair assumption?

Yes, I think it’s too early to say, but yes, we believe as I said based on more of the color commentary that it should be supportive of higher levels of spend, but I don’t think we should get out ahead of it.

That’s fair. And then I guess I don’t recall the last time this might have come up in the deck or in the press release, but you did call out some competitive pressures on the margin side. I see that coincident with some project activity starting to pickup in an environment where more of the mix starts to shift that way and as you just said maybe you get some added gaps on the fire with tax reform down the road. Do you see some of that margin competition flaring up, particularly now with all your competitors as well probably have a bit of an umbrella with lower tax rate themselves to try to price through?

Yes, I don’t think we certainly experience yet nor do we anticipate that the tax legislation in other words maybe putting more dollars in corporation’s pockets due to the lower rate being something that will contribute to margin pressure through pricing.

Yes. I think it’s probably important we don’t believe that competitors will compete away the tax benefit and largely if you look at how management tends to get compensated, it’s of operating income, not after tax. And clearly in the field, it’s of gross profit and contribution margin in our organization and we know that’s pretty consistent across other organizations. So, taxes don’t really benefit management at all and so it’s not a sudden windfall to incentive comp and that I think will drive the same kind of pricing maybe the comparative pressure we think is just coming from frankly a softer project environment for a long time people get hung where they want to go grab some volume and so that creates a little more tension around some of the activity that’s out there. As the activity spikes up frankly some of that competitive pressure if anything may abate, but I think Ted’s comments about margin or probably the right way to look at it, we think the margin point we are at exiting Q4 is the right way to look at margin going forward, we don’t see that being competed away because of the tax change.

Got it. That’s helpful. And then just maybe sneak one more in there, again I don’t know if this came up during the prepared remarks, but datacenter activity within NSS, how does that look, obviously I know there were chunk of different end markets in there, but anything you would like to share on that particularly in the U.S. how those were trending?

Yes, Josh. As we have said, the datacenter projects were slower in 2017 and we have seen previews. I think that we are starting to see large companies talking about investments globally on infrastructure. So, we expect that to be a more of a tailwind in ‘18 as the year goes on and we have visibility into large U.S. multinationals making investments into this year and further on.

And when Bill says infrastructure you mean data infrastructure not sort of generic economic infrastructure.

Got it. Perfect, thanks for the color guys.

Your final question comes from the line of Brian [indiscernible] from Morningstar. Your line is open.

Hey, guys. Good morning.

Good morning.

So, your working capital management has been pretty impressive running in the low 18% as a percent of sales versus I think your long-term goal is less than 20%. So, can you just remind us what kind of initiative you have been successful in the near-term? And then if you see any opportunity for further improvement going forward?

Yes, sure, Brian. Keep in mind that, that goal of working capital as a percent of sales to be less than 20% was a goal that we have set in the fourth quarter of 2015 on the heels of the Power Solutions acquisition. And one of the things that we knew was that as we integrated that business into ours that we did have significant opportunities for working capital improvement partially through process, partially through incentivizing with the right goals, for the right groups of people etcetera. And so what we realized over, I would say 2016 was I will say the low hanging fruits coming off the heels of that acquisition. However, in addition to that across all three of our segments, we have continued to drive a variety of initiatives across each of the buckets of working capital, including some things like supply chain financing initiatives, some inventory management process changes and system enhancements to help us better optimize each of the buckets of inventory between safety stock and in-transit and so forth. So I guess to second part of your question, we believe that where we are today first off is sustainable, but yes, we do believe there is opportunity for further improvement going forward. I would not suggest that it’s going to be another 200 basis points like going from 2018, but I think over the course of 2018 and ‘19, you will see us continue to make further improvement in the level of working capital.

Alright. Perfect. Thank you.

That concludes today’s call. If you have additional questions, please do not hesitate to reach out to Ted or Lisa. And as always, thank you for listening to us today.

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