Bill Galvin - President, Chief Executive Officer Ted Dosch - Executive Vice President, Chief Financial Officer Kevin Burns - Senior Vice President, Investor Relations, Treasurer

Good morning. My name is Jessie, and I will be your conference operator today. At this time I'd like to welcome everyone to the Anixter International Inc., First Quarter 2019 Financial Results Conference Call. [Operator Instructions]. Thank you. Kevin Burns, Senior Vice President, Investor Relations and Treasurer, you may begin your conference.

Thank you, Jessie and welcome to Anixter's First Quarter 2019 Earnings Call. With me to review our financial results are Bill Galvin, President and CEO; and Ted Dosch, Executive Vice President and CFO. Following our prepared remarks, we will take your questions. Today's presentation includes both GAAP and non-GAAP financial results, which are reconciled in our earnings release and accompanying the slide presentation posted on our Investor Relations website. During our comments today we will be referencing these slides. Before we begin I want to remind everyone that we will be making forward-looking statements 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. With that, I will turn the call over to Bill.

Good morning everyone and thank you for joining our first quarter 2019 earnings call. This morning I will begin with an overview of our first quarter financial performance, including sales and gross margin trends. I will then turn the call to Ted to review our financial performance in more detail and provide additional thoughts on our outlook for 2019. As you saw from this morning's release, sales in the quarter increased 7% to $2.1 billion which is the highest first quarter sales in our history. Our strong sales performance included organic growth in all segments, as well as record first quarter sales in both NSS and UPS segments. Adjusting for the favorable impact of the security acquisitions completed in the second quarter of 2018, and the unfavorable impact of lower average copper prices and generally weak foreign currency, organic sales increased by 8%. Sales growth was above our outlook range of 3% to 5% driven by the NSS segment with strong growth in global accounts and security and utility customers in our UPS second. In addition to strong sales growth, we deliver meaningful year-over-year improvement in gross margin for the second consecutive quarter, driven by actions we have implemented across the business. This reflected excellent sales execution and is evidence of the value we continue to provide to our customers. Overall first quarter 2019 GAAP earnings per diluted share was $1.14 and adjusted earnings per diluted share increased 15% from the prior year to $1 33. Let me know review our sales trend by segment beginning with Network & Security Solutions. As shown on the slide six, record NSS quarterly sales of $1.1 billion increased 12%. Unfavorable currency offset the benefit from the acquisitions, resulting in organic growth of 11%. Growth was broad based included in all key strategic sales…

Thanks Bill and good morning everyone. As a reminder, today's earnings release includes non-GAAP measures, which are reconciled to GAAP measures in the financial tables that the company released and are in the appendix of our accompanying slide presentation. We believe the non-GAAP measures we disclosed provide the best representation of our ongoing operational performance. Bill covered our strong sales and gross margin performance, so I will begin with operating expense. Looking at slide 10, first quarter operating expense of $344 million compares to prior year operating expense of $323 million. Excluding the non-GAAP operating expense items detailed on Page 10 of our release, adjusted operating expense increased 7% or $22 million to $336 million. As a percentage of sales, current quarter adjusted operating expense of 15.9% compares to 16% in the prior year. The primary drivers of the increase in adjusted operating expense were $8 million related to the acquired companies, $7 million related to our innovation and business transformation initiatives, as well as volume related costs associated with our 8% sales growth. Adjusted EBITDA increased by $13 million to $97 million due to strong volume in margin improvements in the segments and was partially offset by the investment in innovation and business transformation expenses at corporate. Adjusted EBITDA margin of 4.6% increased 40 basis points from 4.2% in the prior year. With our gross margin action and expense control efforts, we expect modest EBITDA improvement this year with accelerated benefits next year and beyond. As we discussed on our Q4 call, our continued investments in innovation and business transformation with a focus on customer facing technologies will enhance our digital capabilities and enterprise efficiencies. As part of this multiyear initiative, we are also streamlining and standardizing our global business processes as we migrate to a more efficient operating…

Thank you. [Operator Instructions]. Your first question comes from Allison Poliniak with Wells Fargo. Your line is open.

Hi guys, good morning.

Good morning.

Could we go back to EES? I guess the first thing, the OEM weaknesses, you know has that changed your view for the entire year in that segment, and then also just looking at the adjusted EBITDA margin target for ‘19 for that segment, it looks like you brought it down a little bit. Any color on that?

Yeah, I don't think we brought down the estimates of the year, but as it relates to the OEM business Allison, we did and I think the market has seen weakness in that semiconductor space. We also saw it in the industrial space. I think our view is that we are continuing and our pipeline looks better as we go into the second quarter and for the full year. But as we’ve said in the past, the margin in the OEM business is higher than – it is higher than the other businesses in EES therefore impacting the EBITDA results. But again, I think our outlook says that we see that improving throughout the year, but overall the total year outlook is roughly the same.

Yeah, and Allison just to clarify, we did not change our projection for the EBITDA outlook for any of the segments. We still show 6% to 6.5% for EES for the full year compared to 6.2% for last year and keep in mind from a kind of a normal seasonality of our business, our Q1 margin tends to be lower on a consolidated basis for the total company, which is what we saw in EES as well.

Thanks, that's helpful and then on asset, you know nice operating leverage there, you know pretty high. Was that just the volume? Any reason that would come down? Anything unusual driving that EBITDA leverage this quarter?

Well, I mean it's a combination of a few things. Obviously the volume and we get leverage on the volume Allison and of course the mix of the business was also good, very strong content and services business that we've been talking about and we feel like that is just a solid performance by the NSS business.

Yeah, the only thing I would add to that Allison is keep in mind that Q1 of last year was the weakest quarter for NSS and so you will remember it was the last quarter of somewhat flattish growth in that business before it really began to take off in Q2 of last year. So we had a somewhat of a depressed EBITDA margin in Q1 of last. Although that 110 basis points of EBITDA margin improvement this year should continue latter or close to that type of rate of improvement over the course of this year.

Allison, I’d also comment that if you remember last year, it was – the pipeline was slower to come to billings in the first quarter on the global accounts that we saw strengthening and that continues to improve. So we saw really strong performance this year in the first quarter for global accounts, the services business and as we said in the notes, the overall initiatives that we are driving with things like wireless, AD and so on that really performed well.

Great, thank you. That’s helpful.

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

Hi, good morning everybody and congrats on the results.

Thanks Shawn.

If I were to think about, I don't know if legacy is the right term but what I’ll call legacy NSS business related to kind of data center, not res construction etcetera, how did that perform in the first quarter and did your view get more positive on that business as it relates to 2019 in terms of the guidance increase?

Yeah, I think it’s a great question Shawn. I think it performed exceptionally well, and I think the – you know the hyper scale data center business was very strong, the global account activity was very strong. So you know the traditional business was solid obviously with the results, but again I highlight the content and service performance and some of the big programs, as well as a lot of the initiatives in again wireless and so on really performed well. So the data center business was definitely good and if you remember we commented this time last year where that was the part that took a longer time to recover quite frankly.

And just on the large projects, either be it with the Pro AV, the in building wireless or kind of the traditional data center. I know that can be lumpy, but how is the visibility in terms of you know what those projects could look like as the year progresses.

Yeah, as we said in the comments Shawn, it’s a solid. The performance and the bookings and back log pipeline all look solid. So we are confident that we're going to continue to be able to deliver on that through Q2 and you know the visibility looks good.

Okay and then on I guess cost inflation if I think back to last year and your lapping it now this year with transportation, logistics cost, other inflationary measures, where are you at in terms of full price recovery? Did you get there in the first quarter or you would you be there by mid-year?

I wouldn't say we got all the way there Shawn, but I would say that first of all the inflation of that has flattened out. We are not seeing the significant growth that we saw in the first quarter last year, but that continues to be the efforts to move those price increases and inflationary pressures into the market and I can tell you, we still have opportunities to do more of that.

Okay, and then lastly for me just on the UPS strength, how much of that is market versus – I mean in the past two years you’ve been taking a lot of market share, winning new programs, and what was it, seven or eight straight quarters with this type of growth is pretty remarkable.

I think the market’s grown Shawn, but I do think our performance has outperformed the market. So I think we’ve had a lot of good wins across the broad space and if you remember in Canada that was a bit of a headwind for us and that’s performing well now. So I think we've addressed where the weaknesses were, but I do, and I'm very happy with the team's performance to continue to drive wins in that business. You know it ebbs and flows, but I think overall it's performed exceptionally well.

Thanks a lot

Thank you.

There are no further questions at this time. I turn the call back to the presenters for any closing remarks.

Okay, another question just came in. Okay, so Jessie we’ll take that other question that just came in.

Alright, certainly. It’s from David Manthey with Baird. Your line is open.

Hey, good morning guys. I got it in under the wire here. Yeah, it’s good. So a question on the emerging markets. Historically you’ve had some timelines were you get larger projects that have moved in and out of that number. I’m just wondering if there’s anything we need to think about relative to the strength you are seeing right now that we might see as it plays out over the course of this year.

Yeah, a good question David. In the past we've actually had you know – if you remember we had headwinds and everyone did in Brazil and things like that, but this growth is really based on long term programs. So we feel very confident about the ability to continue to repeat that type of base, because these long term programs have been great long term wins for us. So I think that sets up well for that continued performance.

Okay, so maybe as the…I’m sorry Ted, go ahead.

No, I was just going to emphasize one thing to bring clearly, you know because you were asking about projects and whereas we always do have you know projects in the emerging markets. The lion's share of this quarter's growth year-over-year and what we would expect this year is more ongoing program related than just one-time projects.

Okay, so that as the comparison gets more difficult through the year, maybe the growth rate tones down a little bit, but you feel pretty good about the strength you are seeing there?

Yeah, I think that’s fair David. I think that explosive growth rate that we saw will normalize, but still be possible.

Absolutely! So 28% growth, organic growth in the quarter is not sustainable over an extended period of time. But we would expect emerging markets to have a higher growth rate than both EMEA, certainly EMEA which will be weaker, but even higher than North America.

Okay, and then finally could you talk about your leverage or your contribution margins in the emerging markets? I think it may be a bit dated, but I know historically you had you know fairly sizeable under absorption in a lot of those markets and when you saw those kind of good growth it translated very well to high levels of profitability. Is that still the case or is the contribution margin not quite as strong in emerging markets today?

Yeah, your memory is correct there Dave. The contribution margins in the emerging markets is not as high as North America, but if you stop and think about it, you know we've got much, much more critical mass you know in North America. So we get much, much better cost leverage throughout the whole distribution network across the businesses in North America. The emerging markets, we’ve got just off the top of the head probably 30 countries, 30 to 35 countries we are operating in between APAC and CALA. So outside of countries like Mexico, Brazil, Peru, you know Argentina, Australia, most of those other countries across CALA and APAC have – are a much smaller business. So I think the inherent difference is more due to operating cost leverage you know in those businesses as opposed to North America. Having said that though, the operating margins in emerging markets are in between the much higher margins in North America, but still higher than EMEA and I think that's been the case for quite some time and we would expect that to continue to be the case as the that business grows.

Alright, thanks very much guys.

Okay, so that concludes the call for today. If you have additional questions, please don't hesitate to reach out to Kevin. As always, thank you for listening to today's call.

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