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Anixter International (NYSE:AXE)

Q1 2013 Earnings Call

April 23, 2013 10:30 am ET

Executives

Lisa Meers

Robert J. Eck - Chief Executive Officer, President and Director

Theodore A. Dosch - Chief Financial Officer and Executive Vice President of Finance

Analysts

Steven Bryant Fox - Cross Research LLC

Shawn M. Harrison - Longbow Research LLC

Ryan Merkel - William Blair & Company L.L.C., Research Division

Flavio S. Campos - Crédit Suisse AG, Research Division

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

Ted Wheeler

Brent D. Rakers - Wunderlich Securities Inc., Research Division

Operator

Good day, and welcome to the Anixter International First Quarter 2013 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Lisa Meers for opening comments and remarks. Please begin when ready, Mrs. Meers.

Lisa Meers

Thank you, Shannon. Good morning, everybody, and thank you for joining us for Anixter's First Quarter 2013 Earnings Teleconference. Today, I'm joined by Bob Eck, President and CEO; and Ted Dosch, EVP and CFO, to discuss our first quarter financial results. After their remarks, we will open the line up to take your questions.

Before we begin, I want to remind everybody that we will be making forward-looking statements in this presentation, which are subject to a number of factors that can 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.

In conjunction with today's earnings announcement, please find the supplemental slide deck that can be accessed on the Investor Relations portion of our website, www.anixter.com/investor, that will further detail the quarter.

Today's earnings announcement includes both GAAP and non-GAAP financial results, the reconciliation of which is further detailed in both our earnings release and in the aforementioned slides posted on our website.

Now I'll turn the call over to Bob.

Robert J. Eck

Good morning, and thank you for joining us for a review of our first quarter 2013 operating and financial results. Today, I will offer my perspective on our business and the current operating environment, update you on each of our reporting segments and discuss why we believe we are well positioned to grow and gain share in each of our end markets. Then, I will turn the call to Ted to detail our financial performance and frame how we are looking at the rest of 2013. After which, we will both take your questions.

Continuation of the challenging economic environment resulted in a relatively soft demand in some areas of our business consistent with our expectations when the quarter began. Based on data from both suppliers and customers, we do not believe that we have lost share or position in any of our segments or geographies. 2.1% year-over-year decline in reported sales would have actually been an increase of about 0.5%, excluding the negative impact of the timing of holidays, combined with the conclusion of a large Security Solutions contract. We achieved record first quarter sales of $518 million in our Wire & Cable segment, including record first quarter sales of $77 million in Europe and $62 million in emerging markets. Notwithstanding the broad economic challenges, our team had a relentless focus on margins, and we've improved operating margins in each segment versus the fourth quarter of 2012.

As Ted will detail, we implemented the aggressive actions we identified in the last quarter's call to restructure our Europe business in a more cost competitive structure. These actions reduced our 2 largest components of operating expense: personnel and facility costs. Finally, we had a deeply sharp focus on our working capital management. We made solid progress on each of our working capital initiatives, helping us to generate over $53 million in cash from operations. Our 2013 outlook is for low single-digit organic sales growth for the year ahead. And based on the activity we saw in this quarter, we believe sales trends in key areas of our business are beginning to improve.

With that as an introduction, let me turn to a discussion of our 3 segments. As you recall, in December 2012, we announced a change in our reporting segments from geographic regions to end markets. We will continue to provide sales results and color but not detailed financial results for our geographic regions. With that, let me offer my perspective on both our successes and challenges in the quarter. Please keep in mind that this quarter was impacted by New Year's falling on a Tuesday and by Good Friday falling in March, the timing of which we estimate negatively impacted sales by 1.6%.

Turning to our segments. Our first quarter Enterprise Cabling and Security Solutions sales of $745 million, which accounted for 50% of total sales, declined 4.3% year-over-year. Year-over-year sales would have been nearly flat if you adjust for the holiday timing and the conclusion of the contract previously mentioned. Considering the overall softness in the enterprise market, we believe this performance is an indication of our continuing strong share position. Once again, we reported record security sales for the quarter.

Looking first at the North American region, let me remind you that we previously noted that we believe the overall data infrastructure market in North America declined in each quarter of 2012 in the high-single to low-double-digit range. Now this market appears to have improved slightly in the first quarter of 2013. First quarter organic ECS sales growth in North America of 1.4% would have reflected an increase of 6%, excluding the same holiday timing and the contract conclusion.

While the data center market is more difficult to track in EMEA, the recessionary pressure in Europe continues, causing that market to continue to decline. Our Emerging Markets region also weakened in the quarter. Our business in Asia, still largely dependent on IT spending by Western multinational companies, declined in the quarter, particularly due to a major nonrepeating project in Sydney we built last year. Latin America also slowed, impacted by declines in Brazil, as well as the Caribbean. It is our view that we gained share in our addressable data infrastructure market in the first quarter, as well as throughout 2012. Given the pent-up demand we believe exists and supported by our current discussions with customers and pipeline activity, we expect that this market should begin to strengthen over the year, more noticeably in the third and fourth quarters.

ECS continues to benefit from strong global trends in security, accounting for approximately 27% of ECS sales in the quarter. Overall, ECS security sales increased by 1% from the prior year period. However, excluding the holiday timing and the contract conclusion I mentioned above, sales would have been 9%. Looking ahead, we have multiple growth initiatives in place that are key to the success of our ECS business, most notably security, multi-tenant data centers, in-building wireless and our digital marketing initiative.

Moving to the Electrical and Electronic Wire and Cable segment, our record first quarter sales of $518 million increased by 7% versus the prior year and represented 35% of total sales. This increase would have been nearly 9%, excluding the holiday timing. Including the Jorvex acquisition, the unfavorable effects of copper and the unfavorable effects of foreign exchange, sales increased by 1.3% versus the prior year.

By region, North America organic sales were flat year-over-year but up nearly 2% excluding the holiday impact. The lower growth rate than we have seen in recent quarters is primarily the result of a decline in our Canadian industrial business, which had strong project activity last year, making the year-over-year comparison more challenging.

Turning to EMEA, our Wire and Cable sales increased by 6% on an organic basis, resulting in record sales of $77 million for that business, collecting strength from our Middle East growth initiatives, along with increasing project volume with large European engineering firms.

Finally, our 140% growth in Emerging Markets delivered record sales and was primarily driven by the strong performance of Jorvex, acquired at the end of the second quarter of last year. On an organic basis, Emerging Markets increased by 7% or approximately 9% excluding the holiday impact. Overall, we continue to experience solid project activity in power generation, industrial, oil and gas and mining sectors. Ongoing global infrastructure investment in each of these areas sets up well for continued sales growth in our Wire and Cable segment. We see strong quoting activity and increased opportunity to leverage our global platform and continue to take share in the sector. Our initiative to expand into industrial automation continued to build momentum with additional products and an expanded vendor base. We plan to expand our focus beyond North America and into other geographies later this year. Organic investments, geographic expansion, solid secular trends, combined with the demand signals we see from our customers, we expect our Wire and Cable segment to continue to perform well through the remainder of 2013.

Turning to OEM Supply. Our first quarter sales of $228 million increased 14% sequentially but declined 12% versus the prior year quarter. Nearly half of the year-over-year decline was caused by a decrease in business with 3 of our larger OEM customers, reflecting the slowdown in heavy truck brokerage year-over-year, which began in mid-2012. As we said on our fourth quarter call, we expect this business to pick up in the second half of 2013, consistent with industry projections. In Europe, sales declined by 10%, reflecting the broad and persistent weakness in the European region. Looking at our OEM Supply trends, we believe that we held our position in the market. Our new contract wins and an active pipeline of new business opportunities should position us well for the remainder of 2013.

Now let me turn to a discussion of gross margin, which was 22.7% in the quarter versus 22.9% in the year-ago quarter and 22.2% in the fourth quarter of 2012. Year-over-year decrease in gross margin was caused by lower gross margin in the company's Wire and Cable and OEM Supply segments, partially offset by higher gross margin in the Enterprise Cabling and Security Solutions segment. Region mix and industrial versus OEM product mix both contributed to softer Wire and Cable gross margin. Gross margin in our ECS segment improved as a result of a greater mix of day-to-day business as opposed to projects. While we do not disclose gross margin by segment, gross margin improved in all segments on a sequential basis.

Let me conclude my comments with my thoughts on what gives me confidence that business conditions will improve as the year progresses. First, in our ECS segment, we saw improved trends over the course of the quarter in North America, Europe and Latin America, resulting in an increase in our sales backlog of approximately 20% since year end. Looking at our Wire and Cable segment, we continue to experience solid growth, both in Europe and Emerging Markets. Daily sales rates grew sequentially each month within the quarter, reflecting improvement in both the OEM and industrial product categories.

Finally, our OEM Supply segment is tracking as we expected, with this year's sales growth rate being back-half weighted in contrast to last year, which was front-half weighted. This quarter showed a sequential improvement from the previous quarter. And within the quarter, the daily sales run rates also strengthened through the quarter. While it's difficult to predict the timing of when we may see a meaningful increase in sales, we believe we are seeing trends improve that will help our top line. In addition, gross margin improvement initiatives, combined with our relentless focus on cost management and working capital, should help drive better leverage.

Now let me turn the call over to Ted for a detailed analysis of our results.

Theodore A. Dosch

Thanks, Bob, and good morning, everyone. All of my comments this morning relating to year-over-year quarterly comparisons will exclude the Q1 2012 tax benefit from the reversal of deferred income tax valuation allowances and the interest and penalties associated with prior years' tax liabilities. Sequential quarter comparisons will exclude the Q4 2012 impairment, pension related and restructuring charges, and all comparisons only include results from continuing operations.

As Bob discussed, we reported total first quarter sales of $1.5 billion, down 2% compared to a year ago but up approximately 0.5% after adjusting for the timing of holidays and the conclusion of a large contract. After adjusting for the positive impact of the Jorvex acquisition and the dilutive impact of foreign exchange and lower copper prices, organic sales decreased by 3.8%.

Moving down the income statement. We reported operating income of $81 million, a 6% decline; net income of $42.6 million, a 9% decline; and diluted earnings per share of $1.27, a 7% decline. Both this year and last year had 64 billing days in the first quarter. However, due to the timing of holidays in the quarter, we estimate the sales were negatively impacted by approximately 1.6%. We also experienced approximately a 1% unfavorable impact from the conclusion of the previously mentioned contract. We estimate that the holiday timing and the contract negatively impacted earnings per diluted share by $0.025 and $0.015, respectively, for a total impact of $0.04 per share.

The first quarter operating expenses of $257 million decreased by 2% versus the year-ago quarter. Excluding the additional expenses from Jorvex, operating expenses decreased by 4%, consistent with the change in organic sales. As a percent of sales, operating expenses were 17.2%, flat versus a year ago. As compared to the end of the prior year quarter, our headcount decreased 0.3%. However, excluding Jorvex, headcount declined by 2.5%.

While we did not achieve the lift in sales in the first quarter that is necessary to further leverage our expenses, we feel very good overall about our cost management. We're on track to deliver the estimated $20 million of annualized savings from our previously announced restructuring and pension plan changes. In addition, we constantly balance short-term and long-term priorities, and we have committed to making strategic investments in our business.

Moving into one of our current initiatives, we continue to invest in our digital marketing platform, which we believe is a key to maintaining the leadership position in our industry. Launched in August of 2012, we are pleased with our early results. Customers clearly value the online channel, which makes it easier and more convenient for them to do business with Anixter any time from any location. Our digital marketing platform has resulted in a doubling of unique visits per day to the site. Daily RFQs have increased by over 1/3, and we have added more than 500 new customers. Increased functionality, improved user interface and a more compelling customer experience lead us to feel very good about our ability to provide better support and gain share with existing customers, generate new business and enhance our overall margin. Consolidated operating margin of 5.4% compares to 5.7% in the year-ago quarter and to an operating margin of 5.5% in the fourth quarter of 2012.

Looking at our operating margin by segment. ECS operating margin of 4.7% compares to 5.5% in the previous quarter and 4.9% in the year-ago quarter. While margin in North America improved, we continued to experience pricing pressure in our Europe region, as well as a margin decline in our Emerging Markets region as a result of product mix. Wire and Cable operating margin of 8% was flat sequentially and compares to 8.2% in the year-ago quarter, reflecting a mix shift from OEM to industrial products, as Bob detailed in his comments. Finally, OEM Supply operating margin of 2.1% compares to 3.4% in the prior year quarter, which, as you recall, was a record sales quarter for our OEM segment. Sequentially, our OEM Supply segment made steady progress, including a return to profitability in our Europe region, with total segment operating profit of $4.9 million versus an operating loss of $2.7 million in the fourth quarter of 2012.

To move further down the income statement, interest expense of $13.6 million compares to $12.1 million in the year-ago quarter. The increase of $1.5 million was caused by the $2.5 million of incremental interest related to the $350 million senior notes offering completed in April of 2012, partially offset by a half a quarter of interest expense savings resulting from the redemption of convertible notes that matured in February of this year. Going forward, interest expense is projected to drop to approximately $11.5 million per quarter.

Foreign exchange and other expense in the current quarter of $1.9 million decreased by $1.2 million from the year-ago quarter, primarily due to lower expense related to foreign exchange. Effective tax rate in the current quarter was 35% versus a rate of 35.8% in the year-ago quarter. For the year, we are expecting our tax rate to approximate 35% depending upon the global disbursement of income.

We were pleased to generate over $53 million in cash from operations in the quarter compared to $65 million of cash used in operations in the year-ago quarter. This $118 million favorable difference is attributable to our strong focus on working capital management, combined with a sequential drop in sales from Q4 of 2012.

One hallmark of our business model is our ability to generate significant cash flow in times of slower growth, and this quarter is a good example of that. Working capital levels stood at 24.2% of sales at the end of the first quarter compared to 24.4% for the year-ago quarter. We believe we have opportunities to further improve our working capital efficiency as the year progresses.

Finally, we invested $9 million in capital expenditures in the first quarter versus $10 million in the year-ago quarter. For the year, we expect to invest approximately $40 million to $45 million for capital projects.

At the end of the first quarter, our debt-to-total-capital ratio of 47% compared to 50% at the end of 2012, with a weighted average cost of borrowed capital of 5.8% compared to 5.5% in the prior year quarter. Our current leverage ratio is near the mid-point of our long-range target 45% to 50% debt to capital, and we expect our leverage ratio to move to the lower end of the range as the year progresses.

Currently, our liquidity position remains excellent, with $333 million of availability under bank revolving credit lines, $220 million of outstanding borrowings under our $300 million accounts receivable securitizations facility. Available liquidity was over $400 million at the end of the first quarter.

Looking at our capital allocation priorities, we have a disciplined and prudent approach to how we allocate capital, balancing our 4 priorities, including supporting organic growth in the business; maintaining a strong balance sheet that provides us financial flexibility, especially in an environment where market dynamics can shift quickly; pursuing strategic and financially attractive acquisitions; and opportunistically returning cash to shareholders.

As Bob said, looking ahead to the remaining 3 quarters of this year, our expectation for sales growth is only slightly lower than what we described on our last call. Based on recent demand trends we see in the market, we would expect to deliver organic revenue growth for the year in the low single-digit range, which we believe should drive mid-single-digit incremental operating profit leverage. Keep in mind, our organic revenue growth excludes not just acquisitions, but also currency and copper. As you know, both currency and copper unfavorably impacted revenue growth in the first quarter. At current copper pricing, we would expect the unfavorable impact of copper to be even greater through the balance of the year.

Assuming the continuation of the current low growth environment for the foreseeable future, we will maintain the discipline necessary to improve our gross margin, grow our cost structure at a slower pace than we grow the top line and focus on working capital improvements. We are pleased with the improved profitability we experienced in both our Wire and Cable and OEM segments in the Europe region, a testament to the aggressive restructuring actions we took in 2012.

Let me conclude by emphasizing that we believe the long-term secular drivers of each of our 3 end markets remain strong. The challenges we face are more related to timing and the broader economy than any structural change in the markets we serve. We have managed through a prolonged period of weakness in our data center business but have increased confidence that the market is improving and will strengthen over the course of the year. We also believe we offer an unmatched value proposition to our customers with a truly global offering, including highly customized solutions and a technical sales team that we believe is unequaled in the market, enabling us to bring solutions to our customers that reduce complexity, risk and ultimately cost associated with their supply chains. We have in place the right platform for global growth and remain confident in our strategy to gain market share, to extend our product and service offerings and to expand our end market and global presence.

We will now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we will take Steven Fox with Cross Research.

Steven Bryant Fox - Cross Research LLC

A couple of questions for me. First of all, just digging in a little bit more into the Enterprise side. Bob, just in the quarter completed, maybe you could talk a little bit about how much was driven by local area networks versus data centers? And within data centers, what was the driver? And then how do you expect Europe to play out in this recovery as the year goes on? And then second question, just on copper, is it possible to look at the full year impact on copper, given at current copper prices, what would that do to overall revenue growth?

Robert J. Eck

Thanks, Steve. I'll take the first part, and then I'll turn it over to Ted to take the copper piece of your question. So on the Enterprise growth that we experienced in North America, Steve, as we've said in the past, it's kind of hard for us to specifically call out data centers in a mathematical way because of how the business flows through. So it doesn't always directly flow through an end user. Sometimes, it's through a contractor. In fact, most often, through a contractor. And we lose some visibility then when we're tracking revenues to where exactly that came from. But I'll tell you, the pipeline and the things closing in the pipeline are generally more data center related than LAN related. The LAN activity gets driven more by -- in fact, I think the right proxy for LAN activity is looking at things like ABI to say how much new construction and remodel activity is taking place, and that would drive that LAN activity. So what we're seeing is more data center driven than anything else. And on the Europe piece, I think Europe is going to be challenging. Frankly, the macros aren't great. We are seeing some interesting opportunities come out of the Middle East in the Enterprise part of our business for data, as well as security. And we do have a pipeline that's beginning to shape up a bit in Europe as well. Backlog is improving a bit over the quarter, through the course of the quarter in Europe. So we're not horribly pessimistic on it. But frankly, there's a pretty significant macroeconomic drag in Europe that I think lasts for a while.

Theodore A. Dosch

Yes, Steve, and the second part of your question related to copper. Let me first remind you and everyone that as we try to estimate the impact of copper on our top line and bottom line, we really look about 30% of our Wire and Cable business that we feel is more directly impacted by the swings of market pricing in copper or about 10% of our global revenue. And certainly of late, we've seen some very significant drops in copper market pricing, with some uncertainties out there over inventory levels that are out there. So it's hard to get a feel for how much of that price is really impacted by true demand or usage. But as we look at the changing copper price, kind of a rough estimate that you could use would be that for every $0.10 swing in copper price, that would have approximately a $3 million impact on our top line. And then if you assume about a 20% gross margin on that would be -- would help you see what the earnings impact. For example, as we disclosed here in our organic sales calculation, the first quarter experienced a little less than $0.20 change in copper price year-over-year, and we reported a $5.5 million impact to the revenue line. So we don't speculate on where we think that price is going to go. But with a very significant drop in a very short period of time between the Q1 average of $3.60 and the current market price of $3.10 or $3.12, if levels were to continue at the current pace, then that's why I said we would have a much more significant impact in future quarters, again, remembering that there is a bit of a lag due to the levels of inventory that we carry and how that flows through to the P&L.

Steven Bryant Fox - Cross Research LLC

No, that's very helpful. And just one real quick follow-up. On the contract that you're calling out, I'm just trying to understand why it's unusual in terms of being a callout versus some of the other business you do. Is it in terms of the scale of it or the type of services you provided that were unusual to the core business? Can you just be a little bit more clear on that?

Robert J. Eck

It's absolutely due to scale. That's why we called it out. If you look -- if you think back to the comments I made earlier about security growth, we said we had 1% security growth reported, but 9% if you eliminate the effect of that contract. So that's why we called out the contract. In fact, I think it's interesting that we grew through the loss of the contract or the end of the contract. And I think importantly as well, there will be opportunities to bid for a follow-on contract related to that same customer. So I guess, we hope we'll be successful in that bidding process to regain some or all of that volume as well as we go through the balance of the year.

Operator

And next, we will go to Shawn Harrison with Longbow Research.

Shawn M. Harrison - Longbow Research LLC

Sorry if this is duplicative, but just really trying to clarify, I guess, the lower organic growth guidance. Is it that you don't expect the full acceleration, the high -- potentially high single-digit organic growth in the back half of the year? Or is it just more of that you will see that but you've kind of dampened the expectations here short term?

Robert J. Eck

Shawn, I think it's more of a math equation. What we called out in the past was low to mid-single-digit organic growth for the full year. Now with what we reported for the organic decline in the first quarter, if you run the math, it's pretty hard to get above low single-digit growth when you get to the end of the year.

Shawn M. Harrison - Longbow Research LLC

Okay. And then, Ted, just to be clear on this, you've baked in some commodity price decline into the expectation. But if copper doesn't bounce back, that low single-digit organic growth would -- I guess, the growth for the year would be further at risk.

Theodore A. Dosch

No, Shawn, because our definition of organic excludes the impact of copper.

Shawn M. Harrison - Longbow Research LLC

Sorry, that was a misstatement. Just all-in growth would be at risk, though?

Theodore A. Dosch

Correct, correct.

Shawn M. Harrison - Longbow Research LLC

Okay. And then I guess on the project activity that you're seeing, within that, I mean, are you getting kind of a grayer degree of clarification of these projects will hit at this certain time frame or is it still kind of a little bit uncertain in terms of when they may actually hit? So I guess if you're seeing more certainty, that's a positive sign for the back half.

Robert J. Eck

Yes, I think the answer is we're seeing more certainty than we had 3 months ago when we did the fourth quarter call, so we're viewing that as positive.

Operator

And next, we will go to Ryan Merkel with William Blair.

Ryan Merkel - William Blair & Company L.L.C., Research Division

So starting with the outlook for the low single-digit organic growth for the year driving the mid-single-digit incremental margins, I just want to be clear, are you saying that if you achieve low single-digit organic sales, you're going to have year-over-year operating margin expansion?

Robert J. Eck

Correct.

Ryan Merkel - William Blair & Company L.L.C., Research Division

Correct, that's what I thought. Okay. And then, secondly, you mentioned trends in Canada were a little softer. I realize that comparisons are really difficult. But what do you think is the underlying driver of why demand is weaker there? Is there anything that you can point to? Is it Canadian economy slowing? Is it project-specific? Just a little more color there would be helpful.

Robert J. Eck

Yes, my sense, Ryan, isn't that it's weaker as much as it's not growing, accelerating at the rate it had over the last couple of years. So we've got a little bit of a tough comp because of some project activity in the first quarter last year we had in Wire and Cable in Canada. But I don't think it's in a decline at all. I think it's just not accelerating at the rate it had.

Ryan Merkel - William Blair & Company L.L.C., Research Division

Okay. So...go ahead.

Theodore A. Dosch

I'm sorry, Ryan. I was just going to add to that. The other thing that tends to make the Canada Wire and Cable business a little lumpier than our U.S. business is in the U.S., remember, we have about 30% or more of the business is OEM, where we're feeding those smaller wire that goes into wiring harnesses, et cetera. Canada really has a very small component of that business, which means their business is impacted more by these larger projects, which do tend to be somewhat lumpy. And last year's first quarter was very strong with some large project activity.

Ryan Merkel - William Blair & Company L.L.C., Research Division

Okay. So no reason to be overly concerned about Canada at this point?

Robert J. Eck

No.

Ryan Merkel - William Blair & Company L.L.C., Research Division

Okay. And then you continue to see good strength in the natural resources segment. There's been a lot of headlines you've probably seen about declining mine adjustment and we've got falling oil prices. Could this be a risk or is the quoting activity still pretty good and give you confidence that this end market is going to hold up?

Robert J. Eck

Yes, I still feel pretty good about the mining segment and oil and gas. In fact, we're seeing a fair amount of activity in the more oil-centric and gas-centric parts of the globe, so that's not slowing down. Mining, actually, what we're seeing is continued project bidding activity in Latin America, Canada. I think there's been a lot of headlines about the mining activity in Australia and Asia, and we tend to be a small participant in the mining activity there due to the small size. If you remember, we organically started our Wire and Cable business in Asia Pacific really just a year or so ago, so we're a much smaller player. That doesn't affect us as much as it affects the broad mining industry. So I'm not pessimistic about what's happening in energy or mining. I don’t think that's going to be a negative for us as we go through the year.

Ryan Merkel - William Blair & Company L.L.C., Research Division

Okay, that's a good clarification. And then last question, I guess I agree, it looks like you're taking share in the North American Enterprise business. Is there anything specific that you think is driving that?

Robert J. Eck

No. Ryan, I think it's our value proposition. I think the ability to come out with -- meet with customers, make technical recommendations, understand the applications, as well as the specifications of the products that go into the applications, how you help customers have a higher performing network, I think all of that plays into it, along with helping manage supply chain. So I just think that whole thing resonates well with customers.

Operator

And next, we will go to Hamzah Mazari with Credit Suisse.

Flavio S. Campos - Crédit Suisse AG, Research Division

This is Flavio, I'm in for Hamzah. I just wanted to touch a little bit on the OEM Supply side of the business. I mean, we saw it flow back to profitability this quarter, but still have lower margins quarter-on-quarter. How much of that is just operating leverage, and how much of that is benefit from restructuring? And if you guys could give a little of an outlook and if there's anything from your customers talking about production plans, that would be very helpful.

Theodore A. Dosch

Yes, Flavio, the single biggest driver in that year-over-year profitability for the OEM Supply segment is absolutely volume and its impact on our cost leverage. With the type of the drop that we had year-over-year, double digits, like that, even with our restructuring actions, which did result in cost takeout in that part of our business, especially in Europe, it still wasn't enough to offset the negative leverage from the lower volume. Keep in mind that last year for the first 5 months, we had an extremely strong level of production activity within the heavy truck business, which represents about 40% of our North American volume and almost 20% of our global volume in that segment. We are comparing against much higher volume levels there in the year-ago quarter. That's partly why I think it's a very appropriate and interesting comparison to look at the sequential performance, Q4 to Q1, where we saw this 14% improvement increase in volume, as well as significant improvement in profitability, including Europe fasteners being profitable, which was not the case last year. So I think that bodes very well for us as the volumes continue to build over the course of this year. Based on publicly available information with some industry-type data across various of the key OEM customer verticals that we serve, including heavy truck, we would expect that volume to continue to build over the course of this year, which will give us opportunity to further leverage the cost structure initiatives that we have taken.

Robert J. Eck

I think that's further supported as we talked about in our prepared comments by the increasing daily sales rate we saw as we came through the quarter.

Flavio S. Campos - Crédit Suisse AG, Research Division

That's great. That's very helpful. And just a quick second question on cap allocation. Given the positive impact of Jorvex on sales that you guys have had, how you guys are thinking about M&A and if there's a pipeline and where is your focus on cap allocation right now?

Robert J. Eck

Well, I'll talk about M&A. Our focus on capital allocation has been consistent for a long time, and Ted or I will get to that at the end. But we would like to do more acquisitions. I think developing the right acquisitions takes time. And as we've said before, we're very focused on the physical security market, the industrial automation market. We're focused on the sort of share take in our growth markets like the Emerging Markets for any one of our 3 segments. So I guess that, in a nutshell, is how we're thinking about M&A. And capital allocation, we've always said we're going to maintain our debt within that 45% to 50% threshold roughly. That continues to be important to us. Investing and growing the business is the next criteria for use of capital. And Ted talked about our digital marketing initiatives. Some of that shows up as capital, some shows up as operating expense. But that's a decision we made even in spite of the tough markets to invest in the business, and we're seeing very good returns on that. M&A is next and then returning capital to shareholders. I think we've been consistent with that for a long time, and that continues to be how we look at it.

Operator

Next, we will go to Dave Manthey with Robert W. Baird.

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

First off, you might have just touched on this, the comment you made about average daily sales improving sequentially each month through the quarter. Was that -- that was just related to the Electrical and Electronic Wire and Cable segment or was that overall? And was that year-over-year or just dollars as you went through the quarter?

Robert J. Eck

Dave, what I was talking about was actually the OEM Supply segment, and it was dollars sequentially in the quarter. Year-over-year, we were still down versus prior year Q1.

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

Okay. So that was OEM and dollars. Would that be seasonally what you'd expect in that segment?

Robert J. Eck

No, that's not seasonality. That's -- frankly, I think it's bouncing off the bottom.

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

Yes, okay. And in terms of the $20 million cost program, you mentioned it's on track. Could you tell us approximately what you think you got from that, what percentage of that $20 million in the first quarter and when will you have that at the full run rate? Is that by year end?

Theodore A. Dosch

Dave, we achieved, I think in this quarter, in line exactly with our expectations. A little over $4 million in this quarter, we'll be at that $5 million run rate in Q2. So we will be at kind of an annualized savings rate of about $5 million a quarter starting this quarter, Q2.

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

Okay, great. And then finally, you typically talk about projects in general for the company, ranging from a low of 10% to a high of 20%, depending on where we are in the cycle. Could you talk about where you think we are today approximately? And as you look forward here through the year and even beyond that, how do you see that progressing?

Robert J. Eck

I think, Dave, we've probably overused that broad guideline on projects. If you actually peel it apart by segments, it looks a little different. The Enterprise business tends to be a little more project oriented, Wire and Cable tends to be a little less. I would say that Wire and Cable today is at sort of a normal mix between projects and day-to-day business. The Enterprise business is still more day-to-day oriented than project oriented, so it definitely has upward opportunity in project activity as we see that data business come back.

Operator

And next, we go to Ted Wheeler with Buckingham Research.

Ted Wheeler

I wanted to just circle back a little bit on the restructuring. If I recall, you're treating that a little bit separately from the incremental margin. So that as we look at the incremental margin, the restructuring benefit will be incremental to that. Is that still the case?

Theodore A. Dosch

That's correct. And just to clarify my last comment, that $5 million savings is the combination of restructuring and the pension plan changes.

Operator

[Operator Instructions] And next, we go to Brent Rakers with Wunderlich Securities.

Brent D. Rakers - Wunderlich Securities Inc., Research Division

I'm going to, I guess, ask another follow-up to the restructuring question as well. If you could maybe help us split some of -- there were 2 parts, there was the restructuring and then there was the pension expense benefits. If I'm calculating this right, the pension expense benefits would have been $1.5 million in the quarter year-over-year. Does that mean that the restructuring benefit, based on your numbers, was about $2.5 million?

Theodore A. Dosch

Yes, a little over $2.5 million. Yes, Brent, what we said was that out of the $20 million, about 1/3 of it would be pension savings and 2/3 of it would be restructuring savings. The pension savings will flow pretty evenly each quarter of the year. The restructuring savings is where we'll get a little bit of a bump from Q1 to Q2 as more of these actions are implemented. The other thing, just to remind you, as we said last year when we announced this, is of that restructuring savings, the majority of this will flow through Europe, which you would hope or expect as a result of our actions to kind of rightsize our cost structure there and help to improve the profitability of that region.

Brent D. Rakers - Wunderlich Securities Inc., Research Division

And Ted, that's great. Maybe just for clarification on the pension cost, though. In the 10-Q filing today, it was $4.2 million in Q1. Does that assume that, that is going to be roughly $4 million to $4.5 million a quarter going forward?

Theodore A. Dosch

Yes, that pension expense should be relatively flat each quarter of this year.

Brent D. Rakers - Wunderlich Securities Inc., Research Division

Okay. And I'm sorry, just a point of clarification on that, though, that because the pension expense was so significantly higher in Q2 and Q3 of last year, doesn’t that entail significantly higher restructuring benefits as you get into Q2 and Q3 on a comp issue then?

Theodore A. Dosch

No. Just for simplicity, Brent, I was trying to give you an average for the quarter, not to make it a little too complex. What you're referring to is in last year Q2, our pension expense was higher than normal because we had to make an adjustment to the investment return, the return on assets from the pension plan. And in Q2, we had to do a little bit of catch-up, which meant there was about $900,000 of cost in Q2 in catch-up for Q1. So in my comments a moment ago, I was just kind of normalizing that as far as an average amount of pension expense per quarter.

Brent D. Rakers - Wunderlich Securities Inc., Research Division

Okay. Okay, great. And then, Bob, I think you talked earlier about backlog now versus, I think, you were talking about the start of the year being up 20%. Could you give us a flavor maybe as to what year-over-year backlog would be right now?

Robert J. Eck

Honestly, I don't have the year-over-year backlog in front of me. I think what I was commenting on was trends from the end of last year. And I think importantly, we're seeing a lot of that growth in the Enterprise Cabling and Security business, which is the one that we've been waiting to see the lift in backlog showing that the project activity was picking up.

Brent D. Rakers - Wunderlich Securities Inc., Research Division

Okay. And then just final question, again, back on the OEM Supply business. With North America and Europe, I think, sequentially improving from Q4 to Q1, is that concentration -- is that heavy truck customer demand improving? Is that new customer wins? Or is that core industrial production improving sequentially?

Robert J. Eck

It's actually all of the above, to be honest with you. We've had some new contracts come online that contributed. We've had some pickup in luxury autos in Europe. We've had a little bit of an uptick in engines, in heavy trucks, in drivetrains. So it's been pretty broad based.

Operator

It appears there are no further questions in the queue. I would like to turn the conference over to Mrs. Meers for closing remarks.

Robert J. Eck

I'll make the closing remarks. We believe our differentiated platform positions us well to drive margin expansion. Companies are under pressure to take costs out of their supply chain, minimize inventory on-hand and manage complex projects, all operating with an increasingly global footprint. Our value proposition is based largely on 3 capabilities, which together take risk and cost out of our customers' business: our global capabilities and consistent operational discipline, quality and ability to work face-to-face with customers across multiple geographies and transact business in local currency and language; our technical support, which entails providing product recommendations, developing solutions for specific applications, managing quality control; and our supply chain solutions, which help customers manage their costs, reduce working capital and take risk out of their business.

We believe we have attractive growth opportunities that we can capitalize on through our current business model. We operate in large, global and fragmented end markets that set up well for our business model, with growth driven by product and service expansion, share gains, geographic expansion, excellence in execution and M&A. And as we have done in the past, we will constantly evaluate alternative uses of capital, and we'll return excess capital to shareholders when we think that is the optimal use of funds.

Thank you for joining us this morning.

Operator

And that does conclude today's conference. We do thank you for your participation.

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