Anixter International Inc. (AXE) Management Discusses Q2 2013 Results - Earnings Call Transcript

Jul.23.13 | About: Anixter International (AXE)

Anixter International (NYSE:AXE)

Q2 2013 Earnings Call

July 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

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

Matthew Schon McCall - BB&T Capital Markets, Research Division

Shawn M. Harrison - Longbow Research LLC

Steven Bryant Fox - Cross Research LLC

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

Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division

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

Hamzah Mazari - Crédit Suisse AG, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Anixter International Second Quarter 2013 Earnings Conference Call. As a reminder, today's conference is being recorded. At this time, it is my pleasure to turn today's conference over to Lisa Meers for opening comments and remarks. Please begin when ready, Ms. Meers.

Lisa Meers

Okay, thank you, Andrea. Good morning, everybody, and thank you for joining us today for Anixter's Second Quarter 2013 Earnings Conference Call. Today, I'm joined by Bob Eck, President and CEO; and Ted Dosch, EVP and CFO, to discuss our second quarter financial results. After the remarks, we'll open up the line to take your questions.

Before we begin, I want to remind everyone that we will be making forward-looking statements in this presentation, which are subject to a number of factors that could cause Anixter's actual results to differ materially from what 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 a supplemental slide deck that can be accessed on the Investor Relations portion of our website at 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.

In addition, I'd also like to remind all of you that we will be hosting our Investor Day in New York on Thursday, August 8. Please contact me if you're interested in attending and did not receive an invitation.

Now I will turn the call over to Bob.

Robert J. Eck

Good morning, and thank you for joining us for a review of our second quarter 2013 operating and financial results. Today, I will offer my perspective on our business in 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.

Our second quarter earnings showed a 9% increase to $1.39 per diluted share and 4% growth in net income from continuing operations while improving our strong cash flow from operations to $112 million on a year-to-date basis. Continuation of the challenging economic environment resulted in relatively soft demand in some areas of our business, which was consistent with our expectations when the quarter began. However, over the course of the quarter, in our key North America Enterprise Cabling and Security Solutions business and Europe region in general, we experienced improving though slow growth in the business.

The 0.2% year-over-year increase in reported sales would have been an increase of about 1%, excluding the negative impact of the conclusion of a large Security Solutions contract that we commented on last quarter. Overall, Security sales remained strong with record second quarter sales of over $270 million. Organic sales growth, which excludes the impact of acquisitions, foreign exchange, lower copper pricing, decreased by 0.6% in the quarter.

In spite of the continued weak economy in the Europe region, we achieved positive organic sales growth in that region. We achieved record second quarter sales of $531 million in our Wire & Cable segment, including record sales in that segment for both our EMEA and Emerging Markets geographies. This performance was achieved despite the large drop in copper prices. With continued focus on margins, we improved operating margins in our ECS and OEM segments versus the first quarter of 2013, marking the second straight quarter of improved operating margins in our OEM Supply segment. As Ted will detail, we are on track with the implementation of the aggressive actions we detailed in the fourth quarter 2012 earnings call to realign our Europe business with a more cost competitive structure. These actions reduced our 2 largest components of operating expense: personnel and facility costs.

Finally, we've had an equally sharp focus on our working capital management, continued to make progress on each of our working capital initiatives, helping us to generate $59 million of cash from operations in the quarter. Consistent with last quarter, our outlook for the second half calls for mid-single-digit organic sales growth. And based on the activity we saw in the second quarter, we believe the 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 and offer my perspective in both our successes and challenges in the quarter. Second quarter, Enterprise Cabling and Security Solutions sales of $814 million accounted for 52% of total sales, declining 0.8% year-over-year. Adjusting for the conclusion of the contract previously mentioned, ECS sales would have increased by 0.6%. Considering the overall softness in the enterprise market, we believe this performance is an indication of our continuing strong share position. Additionally, we are encouraged that compared to the first quarter, trends in the business have improved.

Looking first at the North American region, we previously noted that we believe the overall data infrastructure market in North America climbed in each of the previous 5 quarters in the high-single to low-double-digit range. This market appears to have begun to firm up, with the second quarter showing solid improvement versus the first quarter. Second quarter organic ECS sales growth in North America of 0.3% would have reflected an increase of 2.3% excluding the contract conclusion.

While the data infrastructure market is more difficult to track in EMEA, the recessionary pressure in Europe continued to affect our ECS business, with our sales in that market down by 5%. Compared to the first quarter, performance improved in the second quarter, reflecting easier comparisons and modest stabilization in the market.

Emerging Markets region was somewhat weaker in the second quarter, impacted by declines in Brazil, Venezuela and the Caribbean. Our business in Asia, which is the smallest piece of the business, was essentially flat. It is our view that we gained share in our addressable data infrastructure market in the second quarter, as well as through the past 5 quarters of weakness in the market. Given the pent-up demand that we believe exists and supported by our current discussions with customers and pipeline activity, we believe the current improvements in this market should strengthen in the third and fourth quarters. ECS continues to benefit from strong global trends in Security, which accounted for approximately 27% of ECS sales in the quarter. Overall, ECS Security sales increased by 3% versus the prior year period. However, excluding the contract conclusion I noted above, growth would have been 9%.

Looking ahead, we have multiple growth initiatives in place to drive growth in our ECS business, including continued focus on Security, multi-tenant data centers, in-building wireless and e-commerce.

Moving to the Electrical and Electronic Wire and Cable segment, our record second quarter sales of $531 million increased by 3% versus the prior year and represented 34% of total sales. Including the Jorvex acquisition, the unfavorable effects of copper and the unfavorable effects of foreign exchange, organic sales were approximately flat versus the prior year.

Looking at copper, the average copper price in the quarter was $0.29 per pound lower than in the prior year quarter, impacting sales in this segment by $8.8 million. In addition to the revenue and operating margin impact from the lower prices, the sharp and sudden decline in the average copper price had an impact on some customers delaying orders in anticipation of securing lower prices.

By region, North America organic sales declined by 0.8%. Lower growth rate than we have experienced in the recent quarters is primarily a result of the decline in our U.S. industrial project business, which had very strong project activity last year, making the year-over-year comparison more challenging. Our Canadian business remains solid, with projects in Western Canada driving growth in that region.

Turning to EMEA, our Wire & Cable sales increased by 3.9% on an organic basis, resulting in record sales of $76.3 million for that business and reflecting strength from our growth initiatives. In addition, we also achieved solid second quarter growth in our Wire & Cable OEM business.

Finally, sales in our Emerging Markets geography nearly doubled, reflecting the second quarter 2012 acquisition of Jorvex. On an organic basis, Emerging Markets Wire & Cable sales increased 4.4%, slower rate of growth versus the first quarter, reflecting slowing growth in Mexico and general decline in project activity across Latin America. Growth in Asia continued to be strong, off of a lower base, driven by project activity, primarily in Australia.

Overall, even though the growth rate of large projects have slowed, we continue to have visibility to a strong pipeline of industrial projects. Ongoing global infrastructure investment in each of our regions sets us well for continued sales growth in our Wire & Cable business. We see strong quoting activity and increased opportunity to leverage our global platform in industrial business and continue to take share in these markets, while we expect that our Wire & Cable OEM business will improve as the broader economy improves.

Finally, our Industrial Communications and Controls business, which is one our key growth initiatives in this segment, had a strong quarter. Sales growth of over 20% has driven year-to-date sales growth to the mid-teens. We need to build momentum in this business with additional products and an expanded vendor base and are on track with plans to expand our focus beyond North America, having established a business in both Europe and Latin America.

Turning to OEM Supply, our second quarter sales of $235 million increased 3% sequentially. On a year-over-year basis, sales declined by 2%, which was caused by a slowdown in the heavy truck build rates year-over-year at the end of year of 2012. As we previously commented, we expect this business to pick up in the second half of 2013, consistent with industry projections.

Europe organic sales increased by 2%, marking an improvement from recent quarters and reflecting year-over-year growth in several large customer verticals. Looking at our overall OEM Supply trends, we believe we held our position in the market and believe that the combination of improved conditions in heavy truck market, our large customer vertical, combined with new contract wins and an active pipeline of new business opportunities, positions us well for top line growth looking out through the remainder of 2013.

Let me now turn to a discussion of gross margin, which was 22.5% in the quarter versus 22.7% in both the year-ago quarter and the first quarter of 2013. The year-over-year decrease in gross margin was caused by some weakness in the company's Wire & Cable and OEM Supply segments.

Looking first at Wire & Cable. Geographic mix, sharp drop in copper prices and a decrease in margin in our OEM business negatively impacted gross margin. Looking at our OEM Supply segment, customer mix was the most significant impact.

I want to clarify one point regarding the impact of copper price swings on our gross margin. Over time, changes in copper prices will not positively or negatively impact our gross margin. However, in the short term, when the price of copper increases or decreases both rapidly and significantly, it will cause a short-term impact on gross margin as the cost of product in our inventory works its way to the current market price.

Higher margins in the ECS segment were primarily driven by our ongoing focus on margin realization. With the ECS margin headwind of mix due to faster growth of the Security business, we were pleased with this ECS margin performance.

Let me conclude my comments with my thoughts on what gives me confidence that business conditions are improving. First, in our ECS segment, the 9% sequential sales growth that we experienced in the second quarter is the highest level of sequential growth quarterly in any quarter in the last 3 years. In addition, we saw improved trends over the course of the quarter in all regions, as indicated by the level of pipeline activity.

Looking at our Wire & Cable segment, we continue to experience solid business activity in North America, while our European region continues to benefit from our strategy to partner with European EPCs on complex global projects. In our Emerging Markets, while business slowed on an organic basis, our backlog is strong and supports our expectations of an improved second half.

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. The quarter showed a sequential improvement from the previous quarter and within the quarter, the daily sales run rates also strengthened through the quarter.

With respect to geographies, while Europe remains weak, we are seeing signs of stabilization and combined with our own strategy, we are cautiously optimistic regarding our Europe and Middle East business going forward.

Let me conclude by acknowledging that it is difficult to predict the timing of when we may see a more meaningful increase in sales, but we believe we are seeing trends improving that will benefit our sales growth for the remainder of the year and into next year. In addition, we typically benefit from seasonal pickup in the third quarter. And finally, our comparisons become easier, all of which support our confidence in achieving our second half protocols.

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 pertain only to our results from continuing operations. As Bob discussed, we reported total second quarter sales of $1.6 billion, a 0.2% increase compared to a year ago. After adjusting for the positive impact of the Jorvex acquisition and the dilutive impact of foreign exchange and lower copper prices, organic sales growth decreased by 0.6%. The reported sales would have been up approximately 1% after adjusting for the conclusion of a large Security contract in the fourth quarter of last year.

Moving down the income statement, we reported operating income of $86 million, which was a 5% decline; net income of $46 million, a 4% increase; and diluted earnings per share of $1.39 or a 9% increase. We estimate that the negative earnings impact of the previously mentioned Security contract was $0.02 to $0.03 per diluted share. In addition, we estimate that the negative earnings impact from lower average copper prices was $0.03 to $0.04 per diluted share. Excluding these 2 items, our year-over-year operating income would have been nearly flat and diluted earnings per share would have been approximately $1.45 or a 13% improvement. Both this year and last year had 64 billing days in the second quarter.

Our second quarter operating expenses of $270 million increased by $2.3 million or 0.9% versus the year-ago quarter. As a percent of sales, operating expenses were 17.1%, up 10 basis points versus a year ago. Excluding the acquisition and currency-related impacts, expenses were down approximately 1%, in line with the change in organic sales.

We are on track to deliver the estimated $20 million of operating expense savings from our previously announced restructuring and pension plan changes. These actions have resulted in approximately $5 million of savings per quarter compared to 2012. Keep in mind that approximately 2/3 of these savings is related to restructuring actions and over half of that savings is in Europe.

Largely offsetting these structural improvements were continued strategic investments in our Industrial Communication and Control business and our in-building wireless business and our ICC platform, including our digital marketing initiative, along with Wire & Cable investments in the Emerging Markets. These areas, along with the onetime margin increase in U.S. medical benefit expense, accounts for approximately $4 million of increased spend year-over-year. Consolidated operating margin of 5.4% is flat sequentially and compares to 5.7% in the year-ago quarter.

Looking at our operating margin by segment, ECS operating margin of 5.2% compares to 4.7% in the first quarter and 4.8% in the year-ago quarter. The strong operating margin performance was driven by the North American market, which accounted for 74% of the segment sales in the quarter and had solid performance across the board. Wire & Cable operating margin of 7.2% compares to 8% sequentially and compares to 8.4% in the year-ago quarter.

Margins declined in North America and Emerging Markets, partially offset by higher margins in Europe. Drivers of the operating margin decline include the mix between industrial and OEM products, lower pricing due to the 8% drop in copper pricing and continued investment in our Emerging Markets and ICC growth initiatives.

Finally, OEM Supply operating margin of 2.4% increased from 2.1% in the first quarter and compares to 2.9% in the prior year quarter. Sequentially, our OEM Supply segment continues to make steady progress with a second consecutive quarter of profitability in our Europe region. Total segment operating profit of $5.7 million compares to $4.9 million in the first quarter of 2013. The entire increase in operating margin is a result of our cost reduction initiative.

As we move further down the income statement, interest expense of $11.3 million compares to $14.8 million in the year-ago quarter. The decrease of $3.5 million reflected the redemption of the convertible notes that matured in the February of 2013, partially offset by the interest related to the $350 million senior notes offering completed in April of 2012. Going forward, interest expense is projected to remain at approximately $11.3 million per quarter.

Foreign exchange and other expense in the current quarter of $4 million decreased by $1.5 million from the year-ago quarter primarily due to lower expense related to foreign currency. The effective tax rate in the current quarter was 34.9% versus a rate of 36.7% in the year-ago quarter. For the year, we are expecting our tax rate to continue at approximately the 35% level, depending on the global mix of income.

We generated $112 million in cash from operations in the first 6 months of the year compared to $59 million of cash generated from operations in the same time frame last year. This $53 million improvement is attributable to our strong focus on working capital management combined with a slower rate of growth in our sales. Recall that a hallmark of our business model is our ability to generate significant cash flow in times of slower growth. Working capital level stood at 22.4% of sales at the end of the second quarter compared to 23.9% for the year-ago quarter. We believe we have opportunities to further improve our working capital efficiency as the year progresses.

Finally, we have invested nearly $18 million in capital expenditures year-to-date versus nearly $19 million in the year-ago period. For the year, we expect to invest approximately $40 million to $45 million for capital expenditures.

At the end of the second quarter, our debt-to-total capital ratio was 45.1% compared to 50.3% at the end of 2012, with a weighted average cost of borrowed capital of 4.9% compared to 6.2% in the prior year quarter. Our current leverage ratio is within our long-range target of 45% to 50% debt-to-capital and we expect this ratio to remain near the lower end of the range as the year progresses.

Currently, our liquidity position remains excellent, with $404 million of availability under bank revolving credit lines, $235 million of outstanding borrowings under our $300 million accounts receivable securitization facility. Available liquidity was over $465 million at the end of the second quarter.

Looking at our capital 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 a financial flexibility, especially in environments where market dynamics can shift quickly; pursuing strategic and financially attractive acquisitions; and opportunistically returning cash to shareholders.

As Bob said, we expect our sales growth for the rest of the year to be in the mid-single-digit range, consistent with what we described on our last call. This would result in organic revenue growth for the full year in the low-single-digit range. Operating profit leverage would obviously improve in the back half to go along with the improved sales performance.

Keep in mind our organic revenue growth excludes not just acquisitions but also currency and copper, both of which unfavorably impacted revenue growth in the first half of the year. At current copper pricing, we would expect the unfavorable impact of copper to continue 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. We have heightened the focus on slowing the growth of our cost structure and we will be extremely prudent about how we grow cost as sales begin to recover. As well, we have a very strong focus on working capital improvements. We feel good about our progress while acknowledging we have further improvements we can make.

Finally, as you model the second half of the year, please keep in mind that the timing of our 2013 fiscal year end results in the fourth quarter including 1 additional week.

Let me conclude by emphasizing that we believe the long-term secular drivers of each of our 3 segments remain strong and that 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 and have increased confidence that market is improving and will strengthen over the course of the year.

While the quarter overall was challenging, we believe that we saw some very encouraging trends, including the solid performance of our North America ECS business and solid performance in our EMEA geography in all 3 segments, a testament to the aggressive restructuring actions we took in 2012.

We continue to believe that we offer an unmatched value proposition to our customers with a truly global offering, including highly customized solutions and technical sales teams that, we believe, is unequaled in the market, enabling us to bring solutions to our customers that reduce complexity, risk and ultimately, costs 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] We'll go first to David Manthey with Robert W. Baird.

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

First off, I was wondering -- you touched on this a little bit when you talked about the outlook, but I think in this type of environment, where the growth outlook is uncertain as it is, could you talk about your company-specific initiatives that will help you drive stronger growth? I know you talked about the cost side of the equation. And maybe included in that, can you give us an update on your growth initiatives? You touched on expanding products in the Emerging Markets, in-building wireless, industrial automation just as a starting point. And then second, is your mid-single-digit growth estimate for the back half predicated on market improvement, or is that just sort of business-as-usual in the environment we have today?

Robert J. Eck

Dave, this is Bob. I'll start the answer. The mid-single-digit growth in the back half does expect some market improvement. In other words, we think the markets are trending up. It's not purely us taking share. I think it would be challenging to take -- to generate mid-single-digit growth surely off share gain in very difficult markets. So we do expect some lift in the markets. And we think we're seeing, as I indicated in my comments, some of those signs. Going back to your first question, the growth initiatives are -- we called most of them out, but I'll start with ECS, multi-tenant data centers, which we've talked about a couple of times. And that's simply looking at a subset of the data center market where there is more investment today. And it's sort of -- you read a lot about cloud services, hosting. What it does is just create a flexible way for companies to build out data centers at lower cost. And we think those hosting companies, the multi-tenant data center companies, are a good target for us. So that's clearly an initiative. In-building wireless, we've talked about continuing to be an initiative. As Ted commented, we had a little bit of a drag in operating expense because we continue to focus on recruiting people to serve that market. We think it has some unique requirements and some unique skills are required. So we've added people with experience in that market to our organization. Security continues to be a focus for us, as well. And I think all of the trends that we've seen in security in the past continue to hold up, potentially at more subdued rates than you saw over the past few years, but we think that holds up as well. Shifting to Wire & Cable, the geographic growth strategy continues in place in Latin America and Asia Pacific, our Emerging Markets geography, the Middle East. In addition, we talked about ICC, Industrial Communication and Control, which is the communications infrastructure piece of industrial automation. So sort of everything between the PLC and the data network sits in that bucket in terms of products. We've added products in that segment. We've added vendors in that segment -- in that business, rather. I'm sorry. And we're seeing good growth there. And again, because of expertise required in that market, we've hired people with expertise in automation. And that drives a little bit of an expense overhang, but we think those are really good expenses to incur for the long-term growth potential of the business. We think those are -- all the markets I've just mentioned, we think, are big, growing and highly fragmented set of opportunities for us. And in OEM Supply, our growth initiatives are absolutely targeted at new customer acquisition and selling more products to existing customers. And again, very large market, lots and lots of competitors ranging from a couple of large organizations to just lots and lots of mom-and-pop competitors. And we think our value proposition for the right type of customer sets up well there, so we have a very targeted new customer account acquisition strategy there. So I think all of those different initiatives are what set us for growth above sort of market trend.

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

Okay. I appreciate that. And then just quickly, I was having a hard time hearing in the call. Ted, I think you itemized about $4 million, which you said were onetime spend items in the quarter. I was wondering if you could just touch on those. And then tell us the number of selling days in the fourth quarter. And that will do it.

Theodore A. Dosch

Dave, I have listed some strategic initiatives that drove some of the incremental expense year-over-year that were not onetime. And I referred to the investments in -- like our additional people for ICC, IBW, as well as Wire & Cable in Emerging Markets and our digital marketing strategy. Those I referred to as all strategic investments, not onetime. I did also comment that we did have a onetime large increase in our U.S. medical benefit in the quarter. So that was about 1/3 of that $4 million number I called out. Now the rest would not be considered onetime. We also had, on the expense side, we also had a postretirement benefit adjustment in our Latin America business that was onetime as well, which amounted to about $0.75 million. The second part of your question relative to shipping days, as I said, Q2, we just finished with 64 both this year and last year. Q3 will be the same year-over-year, 63 each. Q4 would be 66 days this year versus the 62 of last year. So again, as I commented in my script, because of the timing of our fiscal year end, we'd actually have 14 weeks in our Q4 versus the 13 weeks of last year.

Robert J. Eck

And I think maybe just to add a little color to that, one of the cautions we provide in the years where this comes up is that we do pick up an extra week of expense, but we don't necessarily pick up a full week of sales. We pick up incremental sales but not -- because it's in the holiday season, we don't really pick up a full week.

Operator

Our next question comes from Matt McCall with BB&T Capital Markets.

Matthew Schon McCall - BB&T Capital Markets, Research Division

So just going through some of the components, you talked about the cost savings, the pension savings. You quantified the interest expense expectations and then your tax rate lower year-over-year. So if I add those up, that's about $0.77 roughly on a year-over-year basis. So what I want to talk about, I guess, is some of the offsets. A few things you mentioned, and I'm really looking more broadly at the year, but you talked about mix. You talked about the elimination of the contract on a year-over-year basis, copper, FX are going to hurt. And then the investment spend. Could you go through those 4 and kind of give us an idea what the offsetting impact to earnings could be this year?

Theodore A. Dosch

First, Matt, we can take some of the discussion off-line, but I'm not sure how you came up with the $0.77 for starters on that. That sounds on the high side for those items. So we can go through the math in more detail later. As far as the increased amounts, first, from an FX standpoint, even though the FX was lower, total cost was lower than last year in the quarter, obviously, it was higher than Q1. And that's a function of the volatility in FX in many of our larger markets, Brazil being one as an example, where the cost was higher than Q1. FX, obviously, is extremely hard to predict. But I would suggest, just for modeling purposes, if you assumed Q2 run rate for Q3 and Q4 would be reasonable for that. From a copper standpoint, I think as we explained last quarter, I think it's still a reasonable estimate for you to use that a $0.10 swing in copper amounts to about a $3 million impact on the revenue line. And then relative to that, that translates into about $650,000 of operating margins or somewhere between $0.01 and $0.015 per share. So as we said, in this quarter 2, $0.29 swing in copper is how we guided to that approximately $8.8 million of revenue. Sitting here today, if copper doesn't change and it's sitting here at $3.19 today, we would have a 30-plus cent loss year-over-year in the back half because Q3 was still about $3.52 last year. So I think using that approximate amount of impact of copper again in Q3 and Q4 would be reasonable if you assume copper just stays where it is right now. I think you had one other item you asked me to...

Matthew Schon McCall - BB&T Capital Markets, Research Division

Well, yes, the other is you talked about the elimination of contract. I think you said that, that was $0.02 hit in the quarter. And then the other was investment spend. I think you broke that out and I was just...

Theodore A. Dosch

The contract, I would say, you could use a similar amount for Q3 and slightly less than that for Q4 because that contract really phased out last year in November. On the investment spend, again, if you look at this Q2 OpEx run rate and back off somewhere between $1.5 million approximately of what we would consider more onetime OpEx, that would be kind of a reasonable run rate for kind of core spend adjusted by volume as we grow the volume in Q3 and Q4.

Matthew Schon McCall - BB&T Capital Markets, Research Division

Okay. And then you talked about an improvement in the operating contribution margin and you talked, I think, about high single digits in the past. Is that still a good range to use on that low-single-digit organic growth assumption for the year?

Theodore A. Dosch

Well, if you just look at the back half, because obviously, we were flat on the revenue through the first half, but if you look at the back half, we drive at mid-single-digit revenue growth, call it around 5%, then yes, we should drive high-single-digit operating profit leverage for the back half.

Operator

We'll hear next from Shawn Harrison with Longbow Research.

Shawn M. Harrison - Longbow Research LLC

I have a couple of clarifications. Just, I guess, first on the $20 million of restructuring savings. What is the net amount you expect at the end of that after making, I guess, the investments here in the second quarter in some of these businesses?

Theodore A. Dosch

Well, Shawn, 2 completely separate actions. Let me explain it in 2 parts. The 20...

Shawn M. Harrison - Longbow Research LLC

I guess maybe -- sorry to cut you off, Ted, but there was an expectation of $20 million of synergies. You're making these investments. So I'm just trying to figure out, if we add the 2 up, 12 months from now, what would be the net benefit to the P&L?

Theodore A. Dosch

I would think the net delta would be in the $8 million to $9 million range. If you net it off, approximately $3 million, $2.5 million to $3 million per quarter of these incremental strategic investments that I've mentioned, ICC, in-building wireless, Wire & Cable expansion into Emerging Markets and digital marketing.

Shawn M. Harrison - Longbow Research LLC

Okay. Will you have incremental investments maybe on the second quarter, or was this kind of a step-up to a new level?

Theodore A. Dosch

No, I don't think we would have incremental to this run rate in subsequent quarters.

Shawn M. Harrison - Longbow Research LLC

Okay. And then just as a few follow-ups. Maybe, I guess, we can just talk a little bit on Brazil, what you're seeing. Any delays in spending patterns or issues either because of currency or because of the protest? And then also, just the extra week at the end of this year, does that replicate in 2014, or is that just kind of a every-few-year event?

Robert J. Eck

Shawn, first, on the extra week, that happens every few years, so don't expect in your model for that to occur again in 2014. It won't. So on Brazil, first, the protests aren't having an effect on the business one way or the other. We saw some delays in spending that started in the second half of last year and that was really, I would say, largely recessionary in nature. Brazil did have an economic slowdown that definitely impacted capital investment. So I would say nothing unique about that. We are seeing the spending coming back. We're seeing projects being released in Brazil currently. So we do expect Brazil to rebound. That's part of what we have factored into our growth outlook for the second half of the year. We do think the Emerging Markets are going to rebound in Brazil as part of that.

Shawn M. Harrison - Longbow Research LLC

Okay. And then just to finalize, I guess, my questions. With the debt-to-cap now close to the bottom end of the target, how low would you let that fall before you would add some incremental leverage?

Robert J. Eck

There's a couple of moving parts in that. We really don't want to predict out when we would do something about the leverage in the organization. But basically, if you're thinking about shareholder-friendly actions, we do have a limitation in one of our covenants, that we didn't cap the limitation but came close to it with some of the actions we took last year. That basket gets rebuilt out of net earnings, so as net earnings get rebuilt, we have flexibility to do shareholder-friendly actions. We'll look again at how do we feel about the outlook for the business? Does that suggest that more leverage is prudent? What's in the M&A funnel and how close are things to maturity in the M&A funnel? And do we want to use cash for that? If the answer to both of those is comfortable with more leverage and we don't have anything for M&A, then obviously, we'll, as we have in the past, look at shareholder-friendly actions.

Shawn M. Harrison - Longbow Research LLC

And I guess to that point, how is the M&A funnel?

Robert J. Eck

It's always active. And things always take longer to come to a close than you would like them to. But we do have an active funnel of opportunities across our end markets and across our geographies.

Operator

Our next question will come from Steven Fox with Cross Research.

Steven Bryant Fox - Cross Research LLC

Couple of questions. First of all, just getting back to the expense line, I think I'm still a little bit confused. I guess if I look at your expense dollars, operating expense dollars in Q2 of $270 million, it's up about $30 million quarter-over-quarter. How much of that would you say is sort of investment-related for future sales, putting all the sales people in place, et cetera? And then I think I understand the forward-looking aspect of what you're saying about OpEx, but what are the chances that you could make more investments on the sales force that would show up in the OpEx line later in the year? And then I have a follow-up.

Theodore A. Dosch

Steve, first off, the single biggest driver of that increased OpEx year-over-year was cost associated with -- or expense in the Jorvex business that we acquired. So that was probably 35%, 40% of that increase. Separate from that, and I commented before, probably something in the range of $2.5 million to $3 million is what we would call out as being more specific to these various strategic growth initiatives. Other cost increases are more inflationary-related or more of the onetime nature, like I mentioned, probably another $1.5 million or so related to the 2 items I called out that are more onetime.

Steven Bryant Fox - Cross Research LLC

Okay. But the investments you made are now parts of your cost base. So you're still guiding for something $270 million less a couple million dollars going forward, with volume help maybe raising now. I'm just trying to get a -- make sure I have the correct base going forward.

Theodore A. Dosch

Correct. Correct, you said that correctly.

Steven Bryant Fox - Cross Research LLC

Okay, good. And then just on the business trends, going back to the Enterprise side of the business, I guess you talked about the momentum recovery. I guess, Bob, maybe if you could talk a little bit about the likelihood of how it continues. I mean, if you look -- in your experience with looking at cycles once you do start to recover off the bottom, what's the usual reaction from your customer base and how it could be different this time both better or worse?

Robert J. Eck

Steve, I'll speculate as well as anyone can on what's going to be different this time. Normally, when we come off, we experience a little more strength coming off the bottom. And we actually saw that in 2011, when we started coming off the bottom from the 2009 recession. Each time is different. We saw a slower recovery coming off the 2001-2002 recession in the Enterprise business. It took us a couple of years, actually, to ramp up and accelerate in ECS. So I am certainly not looking for a hockey-stick type of recovery or growth, pickup beginning in the second quarter. But based on what we're seeing broadly across our geographies and vertical markets, if you want to think of it that way, we're seeing lots of projects activity, projects being awarded and coming into our backlog. So I see this as not a hockey stick, a more modest pickup. I think some of our initiatives will help us in that respect. We'll pick up some business we might not otherwise have picked up. But I think it's going to be kind of tempered. So I think that will be consistent with that mid-single-digit back half growth we're looking for as well.

Steven Bryant Fox - Cross Research LLC

And just a quick follow-up on that relative to market share gains. Are you implying that maybe there's a chance this time for more share gains off the bottom because you were investing more heavily over the last year or so and it's been a longer downturn? I'm just trying to figure out how to interpret that last comment.

Robert J. Eck

Yes, I think if we look across the company more broadly than just Enterprise, the investments clearly are targeted in share gains, but share gains in some of these new initiatives, right? So you have people investing in multi-tenant data centers and in-building wireless, so we -- there's spend that exists in those markets that we should get share gain in. And in-building wireless is a growing market in itself. When we look at ICC, where we're making investments in people, that also is a market where largely, there will be some growth in the market and we'll also pick up share gain. When you look at kind of mid-teens growth in that for the first half of the year in ICC, there's clearly some market lift and a lot of market share gain in what's a new market for us, that we're a new entrant in a big market.

Operator

Our next question comes from Ryan Merkel with William Blair.

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

I want to start with the margin. I think last quarter, you said you expected higher operating margins for the year. And I was wondering, is this still the outlook?

Theodore A. Dosch

I'm not sure exactly which comment you're referencing previously. But yes, we would anticipate that we would drive higher margins in the back half of this year, with flat to potentially slightly up gross margin but much better operating expense leverage on the higher revenue base.

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

Yes. Last quarter, I asked a question, a clarifying question based on some of the numbers you gave on incremental margins and implied that margins, you thought, would be up year-over-year for the year. And I think you said that, that wasn't the outlook. So I guess now I get it that we're expecting incremental margins to be better in the second half, and I'm just wondering if that comment about higher margins for the year is still intact.

Theodore A. Dosch

Yes. So with being slightly below last year through the first half, we deliver mid-single-digit revenue growth, it should result in margins at or slightly above last year at the operating margin level.

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

Okay, okay. And then I think, Bob, if I heard you right, the one additional week that we get this year, that's actually a bit of incremental margin headwind to the math, correct?

Robert J. Eck

Yes, it is, because we pick up a week of expense and a little bit less than a week of revenue.

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

Right, okay. And then I'm sensing some pretty good confidence from you guys about the second half pickup and you gave a lot of good reasons, including trends and quoting activity. Is there any other factors you can point to, possibly customer feedback or industry forecast, that can add to that confidence?

Theodore A. Dosch

Yes, one I'll comment on, Ryan, that we mentioned last quarter and still appears to be very much the case, is within the OEM supply business, with our fastener business. Remember, that's the part of our business, the one segment that declined the most in the back half. It was down double-digit kind of percentage levels in Q3 and Q4 last year primarily due to a significant reduction in heavy truck production levels. And manufacturers in that segment are projecting, as recently as this morning, with one of the heavy truck manufacturers releasing their numbers, projecting full year production levels to be slightly up year-over-year, which, at this point, would indicate a very significant increase in production levels in the back half. That's what we're -- that's consistent with the forecast data that we're receiving from that customer vertical. So because that is such a significant part of our OEM fastener business, that will certainly help to show some nice improvement in that segment in particular.

Robert J. Eck

And I think if you throw onto that the ABI, the non-res construction growth tends to lag ABI on, like, a 9- to 12-month period. And the ABI has been up and has been in positive territory consistently for a number of months now, so that would also suggest that we ought to see some lift in non-res construction that part of the year. And the other metric that drifts around up there are things like freight miles in trucking. And freight miles in trucking in the U.S. are up year-over-year. So that will also indicate some lift in the economy. So I think there's some general macro indicators like that, that are a little more positive than they've been in prior periods.

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

Great, that was very helpful. And then my last question is, what do you think is driving the decrease in large project business? And then also comment, is that broad-based across geographies, that comment? Because I think in the prepared remarks, you mentioned that Western Canada is still pretty good, so it kind of implies the weakness, then, is really U.S.-based, or maybe Emerging Markets.

Robert J. Eck

I think what I specifically was referring to was Wire & Cable in the U.S. And we did have less project activity in Wire & Cable in the U.S. But we do expect to see some rebound in that as we go through the year.

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

And is that just based on the bookings and backlog?

Robert J. Eck

Exactly.

Operator

Next, we'll hear from Noelle Dilts with Stifel.

Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division

Most of my questions have been answered. And I think you've touched on this a bit, but I just wanted to get your thoughts on -- you talked about in the Wire & Cable business that you saw some delayed purchases in the quarter, with customers expecting lower copper prices. So with copper having stabilized here in the past few weeks, do you think that maybe some deferred demand will start to come out in the third quarter?

Robert J. Eck

Yes, it should. We've kind of been through this cycle before, where you get a steep drop in copper. If the drop stops and copper stabilizes, people would have the flexibility to hold off making orders again to make the orders because they kind of get the sense that there's not another big leg down in copper to try to take advantage of. So that should help.

Operator

Our next question comes from Brent Rakers with Wunderlich Securities.

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

I want to start -- maybe I have a number of clarification questions. On the investment spending, was that something that contributed at that $2 million, $2.5 million drag effect level in the first quarter as well that just wasn't talked about, or has this really been initiated starting in Q2?

Theodore A. Dosch

Some of the spend was there in Q1, but it ramped up a little bit in Q2.

Robert J. Eck

Brent, I can add a little color to that. Normally, we make some decisions in our budget timeline, where we're going to add incremental investment to growth initiatives -- or investment initiatives of any kind, including rebuilding internal infrastructure, whatever it might be. And particularly, if they relate to hiring people or retaining subcontractors to do work for us, for example, expertise in Web development of some kind, going from making a decision that says, yes, let's go ahead with this at the time the budget gets approved by the board, to then finally bringing people onboard or signing subcontracts creates a lag effect. So there would have been a little bit of the impact in expense in the first quarter but a full quarter expense in the second quarter.

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

Okay, great. And then just to remind me, I believe you talked about a $0.03 to $0.04 drag in the quarter from copper. I just want to clarify, is that related to gross margin percentage impact, or is that just the lost revenue impact there?

Theodore A. Dosch

That's the lost revenue and margin flow-through associated with that. I didn't quantify in that what we would consider the more onetime kind of gross margin percentage impact because that is temporary.

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

Okay. Was there a temporary detrimental impact in the quarter?

Theodore A. Dosch

Yes.

Robert J. Eck

Yes. And we would expect that to recover, as well, as we move forward.

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

Okay. And I'm sorry, just to clarify, was that the $0.03 to $0.04, or was the $0.03 to $0.04 related to the lower revenue and gross margin dollars?

Theodore A. Dosch

$0.03 to $0.04 was related to the $8.8 million of lower revenue as we've estimated the ongoing impact of the copper pricing. Kind of what Bob described as more the onetime impact as we get our inventory cost more in line with the market price of copper would have been additive to that in the quarter.

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

Any sense for what kind of range we're talking about for that impact, Ted?

Theodore A. Dosch

Well, we estimated it was between 10 to 20 basis points on Wire & Cable business, so it was probably another couple of cents.

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

Okay, great. And then just to clarify on the extra week this year, is that -- when you're giving an outlook for the second half of mid-single-digit revenue growth, is that on a daily basis, or is that benefiting from that extra week?

Theodore A. Dosch

That is benefiting -- in Q4, that is partially benefiting from an extra week. But remember, as Bob described, not the equivalent of a full week of sales, considering the time of the holidays.

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

Should we think of it, then, as kind of a low-single-digit daily kind of outlook and then mid-single digit when adjusted for the additional 4 days?

Theodore A. Dosch

No, I think that's overly complicated. I think -- just think of it as a mid-single digit all-in because the real effect when you get to the earnings numbers, you're going to have an extra week of expense and less than an extra week of sales added together. So I think look at it as a bit of an expense lift from the extra week. And I wouldn't try to psych out in any level of detail how many days that extra week we're actually going to get billings and what those billings are going to look like. We believe we'll have something in the mid-single-digit range growth in the half.

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

Okay. And then just last question. Any comment about Jorvex? The revenues, on a sequential basis, at least, looks like they dropped about 20%, yet the SG&A accelerated sequentially. Any comment about the Jorvex, maybe seasonality or thoughts going forward there?

Theodore A. Dosch

Actually, we think there's been a little bit of a slowdown in 2 things in Peru. One is new mining projects have slowed a bit. By the way, don't read into that long-term that they've stopped because that is not the case. But there was a slowdown in mining projects in Peru in the short term. And also, government infrastructure projects which Jorvex also participates in slowed down quite a bit this year. So we think that turns around as well.

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

And is there any onetime factor in that SG&A down there for jumping up despite this lower sales?

Theodore A. Dosch

No.

Robert J. Eck

No.

Operator

Our final question today is going to come from Hamzah Mazari with Crédit Suisse.

Hamzah Mazari - Crédit Suisse AG, Research Division

The first question is just on your second half improvement, which you gave some color on. Maybe if you could touch on what you're baking in, in terms of Wire & Cable recovering? And any large projects you expect to hit in the back half?

Robert J. Eck

Hamzah, we don't call out specific projects we expect to hit in the back half. But I will tell you that we do have some project wins that are already on the books, that orders are sitting on manufacturers and actually, in some cases, shipments are already being made. So we do have some of that pickup sort of baked in.

Hamzah Mazari - Crédit Suisse AG, Research Division

Okay, great. And just last follow-up. Maybe if you could talk about how we should think about balancing M&A with organic growth initiative spend. How are you thinking about that balance over the next 12 to 18 months?

Robert J. Eck

So Hamzah, one of the things we said in the past is we don't, specifically, in our internal plans, target a certain amount of revenue growth to come from M&A. The reason we don't do that is that we think that creates an unnatural pressure to do M&A that may not be the right transaction. We've been pretty focused on doing M&A where the business model doesn't have to be identical to ours but has to have some similarity to ours. We're trying to move away from doing some of the smaller transactions that we've done. We think they're expensive to get done, don't yield as much benefit. So when you put some strategic framework around what you want to do in M&A, I think if you said we're going to make sure that we drive x amount of revenue growth off M&A, you create pressure to do transactions that might not be the right transactions. And we've also said we have pretty significant discipline around valuation. So I think the way all those things play in is we do plan for organic growth initiatives. We keep an active funnel of M&A and we're a little more, I guess, I'd say, opportunistic. We keep borrowing capacity available. And I also absolutely have the personal belief that if we find a good transaction, we can get a good transaction financed. So we're not trying not to do M&A. We're trying to do M&A, but we're going to do the right kind of transactions for us. And we will continue to fund organic growth. I think to say we're going to do one or the other would be a mistake. But organic growth, you actually can plan to put all the investments in place, the timing of the investments and specific targets. So it just works a little bit differently than M&A.

Operator

We do have a follow-up question from Noelle Dilts with Stifel.

Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division

I just wanted to go back to a couple of questions. You talked about your beliefs that the government infrastructure slowdown in Peru and the mining slowdown in Peru is temporary. So I guess, what are your thoughts surrounding the timing of that recovery? And then more broadly, could you just talk about -- we've heard about mining slowdowns in Canada. You said Canada is still relatively strong. Could you just talk about, generally, how much of an impact you've seen from the mining slowdown on a global basis?

Robert J. Eck

Okay. So we had a big project in Eastern Canada last year that was not repeated that was mining-related, but we don't see the mining business going away in Canada. We continue to participate in mining projects across the country. In Peru, I think I did make the comment that we expect a recovery in mining. We actually are engaged in specific projects right now in Peru that are in the process of being awarded. Some parts of the projects have already been awarded and we've been a beneficiary of that. So we do see that bouncing back. I don't want to put a stake on the ground on the governmental spending because I haven't personally dug into that in Peru and be confident that I can give you sort of turnaround time. I will make the other comment in the other market that there's been a lot of discussion about mining slowing down in Australia. We are a very small market share player in Wire & Cable and mining in Australia, so we don't view that as being sort of a gating factor for us in our Asia-Pac Wire & Cable initiative.

Okay. Well, with that, I'm going to conclude for today. So with the leading positions that we have in large, diverse and highly fragmented markets, we believe our differentiated platform sets us up well to drive top line growth and margin expansion. Companies are under pressure to take costs out of their supply chain, minimize inventory on hand and manage complex projects, all while 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. First, our global capabilities, consistent operational discipline, quality and ability to work face to face with customers across multiple geographies and transact business in local currency and local language; next, our technical value add, which entails providing product recommendation, developing solutions for specific applications and managing quality control; and finally, our supply chain solutions, which help customers manage their cost, reduce headcount, 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 strategies. Finally, in the end, it comes down to people. I have confidence that we have the right team in place to drive our strategies as they have done through the past year of very challenging market conditions.

Thank you for joining us this morning.

Operator

And with that, once again, ladies and gentlemen, that does conclude today's call. Thank you for your participation and have a great day.

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