Anixter International Inc. - Analyst/Investor Day

Aug. 8.13 | About: Anixter International (AXE)

Anixter International Inc. (NYSE:AXE)

August 08, 2013 8:30 am ET


Lisa Meers

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

William Galvin - Executive Vice President of Enterprise Cabling and Security Solutions

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

Giulio Berardesca - Executive Vice President of Electrical and Electronic Wire & Cable

Ian Clarke - Senior Vice President of Fasteners


Steven Bryant Fox - Cross Research LLC

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

Flavio S. Campos - Crédit Suisse AG, Research Division

Ted Wheeler

Craig Schissler

Gary Farber - CL King & Associates, Inc., Research Division

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

Lisa Meers

Good morning, everybody. Are we live, Tom? Okay. Good morning, everybody, and welcome to Anixter's 2013 Investor Day. Thank you all for joining us, both in person and to those of you on our webcast. I know that I speak for all of us today in Anixter when I say we're very excited to update you on our company and give you the opportunity again to hear directly from the team running each of our businesses.

So today, Bob Eck, President and CEO, will begin with a strategic overview of the business. He'll be followed by Bill Galvin, who runs our Enterprise Cabling and Security Solutions business; Giulio Berardesca, who leads our Electrical and Electronic Wire and Cable business; and Ian Clarke, who runs our OEM Supply business. Finally, Ted Dosch, EVP and CFO, will wrap up the day, tying together all the pieces from a financial perspective. We'll also have 2 Q&A sessions. The first will follow Bill Galvin, and the second will follow Ted.

Please note that between Ted's presentation and our second Q&A session, we're actually requesting that you take about 5 minutes to fill out a survey for us on the day. The feedback, as you can imagine, is extremely useful to us so that we can continue to provide you with the information that is most helpful to you.

Following our first Q&A session, we also invite you to visit our demonstration booths. In addition to Bill, Giulio and Ian and to Bob and Ted, we have our marketing team here who's ready to give you more insight into our products and our capabilities and answer other questions that you have about the business.

So with them, we've got very quickly Bob Graham with Wire and Cable. We've got Steve Leatherwood, Randy Mortensen and Dawn Marks with ECS. And we've got Marc Abbagnaro and Harmony Merwitz with OEM Supply.

We'll also be available in the demonstration booths following our second Q&A session until we wrap up the day at about 1:30.

At each of your seats, you'll find a flash drive that includes a broader selection of Anixter resources for your reference, as detailed on Page 4 of our presentation and also available online at

And finally, before we begin, I ask that you take a minute to review our Safe Harbor statement. We would like to remind everyone that we'll 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, and we do not undertake to update these statements. Please see our SEC filings for more information.

Now it is my privilege to introduce our first speaker, President and CEO, Bob Eck.

Robert J. Eck

Thanks, Lisa. Good morning. Thanks, everyone, for joining us on our second Investor Day. A couple of things I think I'll mention before we get started and just to frame a couple of changes since last year.

The first meaningful change since last year is we changed our reporting segments, which those of you who follow us are very aware of. We changed from geographies. We historically had talked about North America, EMEA and Emerging Markets, and we shifted to a focus on our end markets and designated those as segments.

The reason for that actually is that it reflects a migration we've been going through over time to manage the business across the end markets. The focus is, as you'll see today and as you've heard if you were with us in the past, there's very specific expertise in each one of the end markets, and we felt that it made more sense to manage the business aligned with that expertise as opposed to geographies.

You can imagine being a geographic-responsible executive and having 3 different end markets that have different expertise requirements. It's a little more challenging than actually managing the expertise and delivering the right solution sets to the customer. So that's a change for us.

And I also think, by the way, it makes us easier to understand. I think a lot of you have thought about us in terms of the end markets as opposed to geographies.

Next thing is that in the fourth quarter last year, we had a restructuring charge that you're all aware of, and we're seeing some of the benefits of that already this year. Some of those benefits, by the way, are offset by investments that we've made. And while I think that may have been a little bit surprising when we issued our last earnings release, in a way maybe we didn't prep everybody for it, but it shouldn't be surprising. We've always said we run the business for the short term and the long term. That means we're going to manage as cost effective and efficient an expense structure as we possibly can as an organization, but, in the meantime, we're going to continue to invest in initiatives that help grow the business for the longer term. So we're realizing some of those cost-saving benefits. And in fact, we've spent some of that cost savings on continuing to invest in our growth initiatives. We think that's the right strategy to have, and it's consistent with what we've done over time.

So the theme for today is the compelling value proposition that we deliver to our customers, our suppliers and to our shareholders. And I think if I can highlight a couple of points from this slide, one of them is large, diverse markets. We are in a very big, highly fragmented markets that have diverse drivers. And they're also global. So they're geographically diverse so that these initiatives we're following, these markets that we're participating in are fairly similar in terms of technology around the world, but they are global. And that creates a big opportunity for us. So they're very big markets. They're global. Their drivers are global. And in addition, they're very fragmented. And when I say fragmented, I mean lots and lots of customers, lots of suppliers, but very fragmented competition as well, and I think that's an important point when you think about our business.

This is not a market where we have 3 or 4 significant players duking it out to own the market. This is a market with literally hundreds of players in the big geographies, like North America or Europe, and tens of players even in countries like Brazil. So that fragmentation actually sets up well for us to take market share. If we have a differentiated model, and we believe we do, we should be able to take share in that highly fragmented environment so that even in periods of lower growth, we should be able to get reasonable growth for the company.

The other key, and this will be consistent throughout all the presentations you'll see today, is our differentiated business model. We focus on 3 things: global presence, and by global presence I mean actually being global on the ground with real human beings, warehouses, et cetera; technical knowledge about the products and the applications the products go into; and supply chain services. And that will be a consistent thread further in my presentation and the other ones you're going to see today that hopefully will help explain what's different about our model and how we go to market versus a traditional wholesale model.

Finally, on financial strength, let me just say one thing. Ted's going to show statistics about cash flow generation and cash flow use. We've always been focused on generating strong cash flow through up and down cycles, managing a more leveraged business model, in other words using debt, relatively low-cost debt compared to equity in the capital structure. We think that's a smart thing to do. And we think if you have the ability to generate cash flow, it's not a risky position to be in, so to speak. If there's risk perhaps, very well understood. Importantly, when we have excess cash, we've always been consistent that we invest in organic growth. We look for good M&A opportunities, and we return the excess cash to shareholders.

I had somebody say to me a couple of weeks ago that does it create the potential that this desire to return cash to shareholders actually restricts your ability to invest in the business? And the answer simply is absolutely not. First, if we have a mature M&A opportunity, we would not return cash to shareholders if we think that's the right opportunity and the board agrees. We'll use that cash, that excess cash, to do that acquisition. But the other thing is, if you really have a good transaction to do, you can get it financed. So the fact that we return cash to shareholders doesn't restrict our ability to invest and grow the business. And frankly, I think the idea of keeping lots of cash on the balance sheet for a rainy day earning 0 is not in the best interest of the shareholders. We'd rather give them their money back so they can invest it where they think they can get a good return.

So what we're going to do now is run a short video. This is going to give you a little history of the company, and I think it will hopefully give you a flavor for how the business has evolved over the years. Roll video, please.


Robert J. Eck

To me, the takeaway from that video is actually the notion that we continue to evolve the business. As we've seen different market opportunities, we'll change the products we sell, we'll change the technologies we pursue, we'll enter markets that we think can leverage the infrastructure that we have in place. And that kind of evolution that's happened since 1957, both in products and technology and service offering, is something that's part of our DNA. It's what we do, and we expect that to continue into the future.

So let me talk a little bit about our businesses. We have a division that's Enterprise Cabling and Security Solutions. That's our largest reporting segment with a little over half of the revenue. Electrical and Electronic Wire and Cable, which is what it sounds like, and the guys who'll get up will talk more about the products and the specific technology and services in those businesses. And OEM Supply as well, which is fasteners and Class C parts delivered direct into production lines.

The thing about this, I said these are fragmented markets. And if you look at some of the opportunities and, in the case of OEM Supply, the vertical markets that we're participating in, you can see that these are very big market opportunities. Data centers has been talked about for years and years now. A huge market opportunity. And even as it evolves between a market that's more enterprise, direct, end users owning their own data centers to more outsourced cloud services or hosted data centers, we participate in that data center construction across all those technologies. And in fact, that's a market that bleeds across both Enterprise Cabling and Security Solutions and Electrical and Electronic Wire and Cable.

We've had a One Anixter initiative since 2006. We don't talk a lot about it publicly. Partly for me, it's because, one, fill in the blank with the name of the company has become really fashionable to talk about. And actually, it's a little bit hard to execute on because you kind of get a lot of human beings in the field rowing the boat in the same direction every day. So we don't talk a lot about it publicly. But frankly, in the data center space, and in the OEM market, we have had tremendous success leveraging across these 3 businesses together. So today in data centers, we quite often not only get the data products that we think about, the copper, the fiber, the racks, the cabinets, UPSs, et cetera, we also get the power cables supplying the data center. And that's actually spend that's typically bigger than the data cable in the data center. And we become very effective at capturing that and capturing it globally.

So big markets. When you think about these vertical markets for OEM Supply, the thing to think about that in terms of fragmentation and opportunity and scale is, first, it's any manufacturing that uses a fasteners or a Class C part. That means all manufacturing, it's big companies covering lots and lots of countries with many plants and many Class C SKUs per customer. So that creates a lot of opportunity, and there's tremendous fragmentation in that Class C product opportunity.

And if you look at the Electrical and Electronic Wire and Cable and thick of the industrial projects space, that's a huge space, lots of projects. There may be ebbs and flows geographically. A lot of talk about mining being down in Australia, iron ore mining particularly because of demand from China. Well, in the meantime, there are still investments going into new copper mines being built in Latin America. So there's always ebbs and flows across these markets, and that creates an opportunity for us, because of our global reach, to participate in the upswings of those ebbs and flows.

So the long-term drivers, data technology growth, very clear. I think the interesting new switch -- or twist on this would be mobile. And mobile's not new, but mobile data is becoming a bigger and bigger issue.

And actually, if you think of Facebook's earnings release, there was a lot of talk about they're increasing mobile ad sales. And to me, all that, for our purposes, is a proxy for how much people are going to handhelds to get things done, whether it's Facebook stuff or actually applications that have a business use.

What does that mean to us? That means lots more data. Lots more data is being analyzed, the whole big data trend. And what that means is more and more data centers and more and more data infrastructure. And that trend doesn't seem to go away.

Security. All you got to do is read the headlines. Unfortunately, even in the recent weeks here, that trend is not going away. It is also global in scope. And the migration from analog to IP is still under way. The market is still heavily analog and still converting to IP.

That also drives the data opportunity because that video stream, when it converts to IP, now becomes 1s and 0s. Now you can apply software to it. And by the way, you're going to store a bunch of video in a data center so that you can apply the applications, the analytic applications, to it.

Outsourcing is a global trend that we're all familiar with. When you think about these flat markets we've been in and you think about the earnings calls that you all listen in on, controlling operating expense, controlling working capital is a big piece of every company's initiatives, and that plays right into that trend for us.

So what's common across these 3 businesses? We sell Class C items in every business we're in. The infrastructure we sell into a data center is a very small percent of the spend of the data center, but it's lots and lots of part numbers and pieces. The cabling we sell into an oil facility, an oil production facility, is a tiny percent of the spend for that complete complex. The fasteners we sell into a motorcycle or a luxury auto or a Class A truck are a tiny percent of the cost to manufacturing that item.

But the key is all these items have a technical component that if the item fails, if the cabling can't support the application, if the cabling can't support signaling or power in that oil facility, if the fastener fails that holds the wheel onto the -- holds the rim onto the axle, those are all critical issues.

There's not tremendous technical knowledge or ability to provide technical knowledge around Class C items, and managing an efficient supply chain for the customer is a key differentiator for us. And that key differentiator is not easily replicatable. And I say that because, one, we deliver globally with real people and real places around the world. Secondly you have to build the expertise, you have to invest in labs. So those things are hard for small competitors, too, and actually big competitors struggle to get there as well.

We have great customers, great suppliers. You know a lot of these names. We'll use the hourglass in the middle just to remind everybody that where distribution really adds value is in these fragmented markets, lots of suppliers, lots of customers. We can get in the middle and help the suppliers get to the customers more efficiently and help the customers buy the suppliers' products more efficiently.

So here's our primary differentiators. And I've mentioned these already. But it's this global presence with global reach with local presence. Again, real people, real facilities on the ground. And this is very leverageable when you think about drivers for growth in the company.

Our enterprise business carries most of the burden of being in all these -- all of these countries. That means there's opportunity for Wire and Cable and OEM Supply to penetrate across that global footprint.

But for a customer, we're truly global. If you look across our largest customers, many, many of our top 100 customers do business with us in more than 1 country, and we have some of our customers that do business with us in 20 to over 30 countries. So that global footprint is real, and it is a real advantage.

The customized supply chain solutions, we have supply chain experts that sit with customers and develop actual solutions. And we have this tremendous technical expertise, which we'll talk a bit more about.

The global capabilities and local presence, remember we're crossing borders legally every day, which, for FCPA and U.K. anti-bribery-compliant companies, is a relevant capability. We manage customs, we manage VAT. We have inventory on the ground in the countries.

Customized supply chain. What supply chain really does is it manages risk for customers. If you think about this. If we can take the supply chain of Class C items, and we can ensure that they get delivered on time, the projects get completed on budget, we reduce risk. We reduce risk that the project won't be completed. We reduce risk that a production line might be shut down from lack of a fastener. If you can imagine that, would you really want to shut down a production line because you don't have screws in a bin in a place in the production line? That's a huge negative for the manufacturer of that item. So we take that risk out. So if you think about this. We also eliminate the risk of excess and obsolete inventory in that supplier's business, and we reduce their working capital.

And technical expertise, again I said these parts aren't well understood. This also fits in risk management. The risk we manage here is will the application perform the way it's expected to perform? Will -- and that application can be how a fastener fits and the durability of the fastener. It can also be how data transmits. And it can also be held signaling or power is transferred in an industrial application.

I'll just make one point off this slide further, and that's this point. We have the only UL-certified lab of any distributor anywhere in the world. And we don't do UL testing. What UL certifies is that the protocols we use in the lab do exactly what we say they do. So they test to validate that we can do what we say we do. And we do a couple of things in the lab. We test products for quality and conformance with specifications, and we do proofs of concept for customers. And you'll hear in some of the videos about how those proof of concepts go, but that means when the customer comes in the lab, we replicate their environment, and we deliver a solution for them.

And the category program that most of you have heard of, Category 5 and Category 6 copper cable, was actually Anixter's purchasing specification that was called the Levels purchasing specification. We developed that specification when cabling wasn't well understood, data and voice cabling wasn't well understood. And that specification was adopted by the industry in whole to become the categories program. So that's our legacy. We've been in this a long time. And it's absolutely core to what we do different. And I think you can see that these things aren't simple to get done, and it does create a meaningful differentiator that's hard for competitors to replicate.

So now, we're going to roll a video, and I'm going to that some of our people in their own words tell you more about these differentiators.


Robert J. Eck

So hopefully, that helps you appreciate what some of the differentiators are, how we actually deliver those differentiators, how we see them in our business.

I'd just make one point on differentiation to close it out. And that's simply this. If you do all this stuff, you got to get paid for it somehow. And somehow, it has to bring value back into our company and value to our owners. And I think it happens in 2 ways. First, market share. If you follow us, you we talk about how we feel we're doing in market share in some of our quarterly earnings releases, and we think we're taking share across most of the markets geographically and all of the end markets, through all the segments that we report in. So we're taking share, and that's clearly one way we're driving value.

The other way we're driving value, and it's a little harder to see today because we don't face many -- there are virtually no global competitors, but anything similar to our business model, but we make any margin. And when we report it on geographic segments, and you could compare us more closely to companies that have public releases, you could see that we have higher gross margin and higher operating margin. And that's the other way we do get paid. We certainly have to spend some of that higher gross margin to deliver the services, but, ultimately, some of that falls through to the bottom line as well.

So the scalable business model, simply the notion that we can ramp up to take on new opportunities. And importantly, we have this infrastructure in place around the world to leverage our across all 3 of our segments, our end markets and new product opportunities as well.

We manage complex deployments. We also have a single operations organization globally. So when we went to this segment structure, the other thing we did was took our operations and inventory management team, and that became 1 team under 1 executive around the world. And that allows us to leverage our facilities much more effectively. We use global relationships with real estate firms that allow us to nail up dedicated facilities for specific projects or programs for customers literally anywhere in the world.

So on these growth engines, you've probably seen most of these, and I'll highlight a couple of things. But in the first place, we've been consistent. We've been chasing these things for some period of time, some of them newer than others, but these have been consistent objectives for us. We haven't wavered from them. And we think they're delivering benefits when you look at the revenue numbers tied to them.

I do want to highlight Emerging Markets. I said earlier that the Enterprise business carries most of the cost of being in the 53 countries that we're in. What that means, though, is that the infrastructure is in place in those emerging market countries for the Wire and Cable business and the OEM Supply business to come in at very low cost and build their business in those countries. Got to bring a little inventory, and you got to hire some people with some brains. But basically, that's a pretty low-cost way to expand our business around the globe and follow that footprint that we built under the ECS business.

E-commerce. This just highlights how much volume we do through electronic interfaces with customers. And I'll talk a little bit more about E-commerce.

The Industrial Communication and Control market, we used to refer to it as automation. We've changed how we're referring to it basically to specify that we go from -- that we cover everything between the programmable logic controller and the data center. So it's the sensors, it's the cabling, specialized connectors, the infrastructure that's in between the 2 that carries that signaling that moves the information. That's the space where we think we can bring value. It's a market that's migrating from legacy fieldbus technology to Internet protocol to Industrial Ethernet. And as it's going through that migration, as often happens, there's a lot of proprietary implementations of Industrial Ethernet. We have the ability to bring technical knowledge around that and, again, the supply chain to deploy it effectively.

Our E-commerce platform has been a core part of how we've gone to business for a very long time. It includes some things you'd expect. Traditional EDI [ph]. You'd expect us to have EDI [ph] capability, right? You'd expect any large distributor to be able handle EDI [ph]. We've also done custom integrations for decades with customers. And when we say custom integrations, we mean any-to-any communication.

So we have a customized ERP that we built in-house, and that ERP talks every day to SAP, to Oracle, to AREVA, to customers' in-house, homegrown applications as well. And that's been a core part of what we've done. We have a dedicated team of people in our IT organization who do integrations.

The next step to that was to add eAnixter, and I'll get this wrong, but it was more than a decade ago. I wouldn't frame the exact time. eAnixter was an online capability, a web-based capability to track orders, to create requests for proposal and deliver those to us. And we today have literally hundreds of customers who use our eAnixter platform.

We also use automated JIT programs, and those are the bar-scanning programs that we use in the OEM Supply business, and have also customized JIT programs that we use other branding for. We call one of them RapidFire. And RapidFire is used for consigned inventory programs at our contractor customer base. All of these are electronic replenishment, electronic order systems that we've had in place for a number of years. And you can see that a fair amount of revenue actually is touched by e-business, and that's actually orders flowing through electronic platform. More of our business is actually touched by e-business when you add in the eAnixter capability.

And finally, digital marketing. We've talked the last couple of years about investments we're making in our digital marketing program. Look, this is all about we're going to have the capability to interface with customers, the way customers want to interface with us. And that changes over time.

30 years ago, a customer wanted an inside sales person who may be occasionally an outside salesperson to talk to. As you roll forward, what customers want today is sometimes they need an engineer, sometimes they need a supply chain expert. Sometimes they want to talk to an inside sales person, sometimes they'd really just like to go into a website and they'd like to punch in what they want and order it. And that's a capability that we will be launching yet this year, credit card buying online, and what that does is gives us really the complete range of ways that customers might want to interface with us and transact business with us.

And I'll highlight one thing about this. It does -- what it does for us, we've done -- we've put a new search engine on our catalog. That's not as trivial as it sounds like. It sounds like you buy a piece of software, plug it in and away you go. You actually have to clean up the data. And we've cleaned up data on 70,000 part numbers to make them more searchable, and we've established new criteria of how we collect data on part numbers. That's not a simple task. It takes a lot of time to do that, but it makes us more searchable. We've done search engine optimization work, we do search engine marketing, and that also helps us find new customers. When you look at this growth in RFQs statistically, nearly doubling in RFQs, we got requests for quotes online in the past. Since we've made these changes, that's nearly doubled. It's found us new customers. It's actually found projects or opportunities that start as a web opportunity that become a larger-scale project as we learn more about it. And by the way, it's also higher margin than our traditional business. So this is a very effective initiative for us. And frankly, we think it's mandatory. It's -- we think it's something we have to do if we're going to continue to support our customers.

So I'm about to pass the baton here to Bill Galvin. Before I do that, let me say one thing about our team.

This is a great team, honestly. I -- if you say, you can go pick anybody you'd like to work with anywhere in the world, I wouldn't change any of the players you're going to see today.

We have people who have tremendous depth of experience in the markets, guys like Bill and Giulio who are so well known in their markets the suppliers come to them for advice about how the industries are functioning and what they think the suppliers should do given certain market dynamics. So there's that tremendous expertise.

And then you look at Ted and Ian. Ian brings a lot of expertise from the fastener business and industrial markets. He's new to us. And what Ian brings is challenging our way of thinking.

And I guarantee you, when Ted showed up, one of the things Ted -- after he learned the business and got his head into it, he started challenging how we're doing things. And boy, I can't have a better mix of leaders than people who are deeply ingrained and know the business very well and newer folks who come in challenge the way we think so we don't get stuck in the mud. If you think of yourself as an industry leader, and we do think of ourselves that way, it's pretty to start breathing your own exhaust. So that mix of new folks in the organization, along with long-term, tenured people who are really leaders in the business, leaders in the industry, is just a great team to have in place. I couldn't be happier with the team. We got the right folks to execute.

So with that, let me turn it over to Bill Galvin, the leader of our Enterprise Cabling business.

William Galvin

Thank you, Bob. As Bob said, my name is Bill Galvin. I'm the Executive Vice President for Enterprise Cabling and Security business. And I'm excited to be here today for a couple of reasons. One, to have a chance to give you a more in-depth look into our ECS business, tell you a little bit about how we're positioned to go market and how we're positioned for growth. And then secondly, I grew up in New York, so it's always great to come back to New York. As a matter of fact, I started my communications career working for Urban Trust in their computer center almost 30 years ago. So it's always great to come back to New York and to see all the friendly faces here today.

So let me jump in and talk a little bit about Anixter's ECS business. I'm going to focus throughout the presentation on 6 specific areas that I think sets us apart from our competition and also sets us up for growth long term, unmatched global capabilities. Bob referenced this several times throughout his presentation. I'm going to give you the size and scope for the ECS business of what we mean by unmatched global go-to-market capabilities.

A unique approach to the sales model of working directly with our end user customers, and we've been doing this for many years, how that works and then how we work together with our channel partners to provide unique solutions for our customers, is a unique approach to the market. Bob mentioned one of the core foundations of technical expertise is critical to our business. And I'm going to tell you how that applies to the ECS business on a global basis.

And of course, another key area is supply chain. What does that really mean? How does that work in our business? But most importantly, what does it mean for our customers specifically as it relates to Enterprise Cabling and Security Solutions? And Bob mentioned suppliers, but I'll mention them again. They're a critical part of our business and our strategy. Suppliers are not folks we just buy and sell products from, they're folks we collaborate with on new technologies, go-to-market strategies, growth areas and how do we run a successful business together. It's a great position to be in to have partners like we have, and we continue to try to strengthen those positions.

And of course, the breadth and depth of security and infrastructure products are surpassed by none, especially when you think about this as a - on a global basis.

When you think about Anixter's ECS business, as Bob said, we are in all those 50 countries. We have people on the ground with local presence and connections with customers and channels in all these markets. As a matter of fact, over 25% of our business is outside North America and we expect that percentage to grow over time, as we expect the Emerging Markets to grow faster than some of the other markets around the world. Some of the secular drivers that we look at are drivers for growth in our business includes security, which I'll talk more in-depth about, mobility, Big Data, as Bob mentioned, the cloud migration and how does that apply to our business and the demand for constant connectivity by our customers.

Segment margins in the ECS business has improved. As a matter of fact, I think you know in the earnings announcement that Bob and Ted did, the margins in the ECS business improved from Q2 -- Q1 to Q2 and the year-over-year. So we view that as a positive trend and something I'll talk a little bit more about as we move through this.

One of the challenges for anybody when they look at our business is to understand the breadth and depth of the products and solutions that we provide our customers and the complexity that has in bringing all those solutions to the markets. So I thought it'd be helpful if I walk you through some of those solutions to give you a sense of the types of products and solutions we bring to our customers. So roll the video, please.


William Galvin

As we think about the perimeter and the solutions for our customers -- our perimeter solutions for video and surveillance, for access control solutions, providing unique devices in our acquisition for door entry products with Clark a couple of years ago, again, inside the building, cameras and access control devices for our customers, many piece parts to pull those solutions together, all coming back to a security command center. For video storage video retrievable for incident -- for helping customers achieve -- receive incidence facts from that. Things like in-building wireless at the head end, all the products that go into that but then there's much more, all the products that go on the floor, providing that cellular technology and cellular connectivity within the building. Many piece parts to pull that solution together.

The biggest segment, the horizontal cabling. Inside of buildings, everything behind the wall to put connectivity to workstations, headsets, things like that are part of that business, all coming back to a data center and all the piece parts that go in the data center from cabinets, from floor tiles, power distribution products, fiber connectivity power and cooling, test equipments to make sure all the connectivity solutions are working correctly, intelligent lighting solutions for energy-saving products, things like that and then right down into the cabinet, where multiple products are going into these cabinets. So think of that breadth and depth of all these piece parts that have to come together as you build the data center.

And then as you go outside the data center and you look at now connectivity between buildings across the city and I'm going to talk a little bit more about parameter security, as well as citywide surveillance in smart cities, but wireless technologies, connecting building to building, fiber between the buildings, surveillance, as I mentioned before, emergency phone-type products so a very wide breadth of products and solutions that we offer to our customers, always changing, constantly growing but great opportunity.

So when you think about Anixter's business and the ECS world, there are really 4 areas that you'd want to focus on, to catch all and the biggest segment is going to be that communications infrastructure business and as I've showed on the previous slide, that would be all the horizontal cabling products. That could be headsets for call centers, it could be unified communication products, very large segment and I can fairly say that in the past several years, that segment probably has shrunk. Now we believe we're taking share in that segment, but again, it's a big host of products and we believe, over the next 3 years, that segment will grow in low single digits.

And you have that data center business, which includes some of those products, but very specific in the data center. We think that's going to be a critical growth area for us for the next 3 years and not only that, when you think of data centers, think of it really in 3 different -- 4 different buckets, cloud computing, end user data centers, colocations and service provider data centers, these are all segments of the market that we're positioned and that we have focused on for growth to make sure that no matter what decisions customers make in their data center investments, we're positioned in the right way to do that.

We believe that the data center business will grow over the next 3 years on a global basis, anywhere in the high single digits. So again, positioned in the market for growth and as we move on to security, the security business is a growing part of our overall mix. I think in the last earnings call, Bob and Ted talked about that being 27% of our overall revenue, growing piece, growing faster. So we think it's a tremendous opportunity for growth.

Video surveillance over the next 5 years is predicted to grow on a compounded annual rate of over 13%. IP video and network, what we call network video, is probably 22% of that. In 2014, it's predicted by IHS that network video will surpass analogue video for the first time in the history of video security. So again, a lot of growth engines and later on in the presentation, I'm going to talk to you about some specific applications for our Security Solutions that enable us to be positioned in the right area for growth in that market.

And then in-building wireless, we've mentioned this before. In-building wireless is a small market that's addressable for us today and this is the privatization or bringing that cellular network into the building as Bob had mentioned. Now we expect that somewhere in the next year around $200 million base, but growing at a 30% to 45% compounded annual growth over the next 3 to 5 years. So again, a high-growth area, one we've invested in and we're positioned to help our customers understand the need there.

So as I go on, when you think about Anixter and our ECS business, one of the things to recognize is, we've been working directly with end users for many years and end users across multiple verticals. Here, I've listed some of the verticals that we have strong positions and focus on whether it's healthcare or retail, education, finance and verticals like that, transportation verticals, so we go in and actually work with these customers directly on network solutions, that go across all the different technologies I talked to you about before. Not only that then, we partner with our channel partners to address the installation practices of all those solutions that we're selling to our customers. So it's a great synergistic approach to the market and think about this, we're not going to call on every single end user in any market, but we're going to work with our channel partners to address those markets.

If you go back and think of Anixter 10 years ago, I would have stood up here and said most of our channel customers are datacom contractors. Today, we're selling to security integrators, to network integrators, to engineering procurement or EPC companies, to global SIs. These are partners that we go to market with to address segments within the business. So again, a very complex type of sales model, but enables us to reach all the markets that's available for us to sell these products in.

Okay, if I go back one, I wanted to show you a little bit, as Bob talked about our global presence, but let me bring it down to specifically our ECS business. We are on the ground in over 50 countries around the world. We have 1,600 technically trained sales professionals in local markets, speaking local language, in local currency. It's an important part of our value proposition for our customers and Bob brought up stories about how many countries we're dealing with specific customers around the world. This is something we're going to continue to invest in and we continue to manage the cost infrastructure to do it, but it's a critical part of our overall presence and our value to our customers.

We not only have that, we have supply chain specialists who sit with customers and design solutions to build lower-cost delivery models for our customers, lower landed cost, high-value to our customers and those are in local language, local people working with our customers and we have local engineers doing the same thing on new technology solutions around the world. This is something we're committed to and we will continue to provide for our customers. And then also, Bob mentioned as one of the core values for Anixter and we continue to make investment in this area, supply chain solutions. We can execute this supply chain solution on a global basis. Nothing better than working with a U.S. customer, talking about a specific design of a security system that they want implemented around the world consistently in the same fashion. How many companies can they work with that can actually provide that for them in local markets around the world?

The other thing we're focused on is building new, innovative supply chain solutions. So this isn't a stagnant model, this is something that we're sitting down, looking at what are the next trends in technologies that we can build for our customers, providing end to end supply chain solutions, ready to go was on there and that's a simple solution where we've actually taken configurations of 6, 8 and 12 cameras and up to 16, I think. And we put together the end-to-end solution of everything a customer would need to deploy that video solution, including all the way through storage. So it's a plug-and-play environment.

So smaller institutions, smaller customers, such as education, won't have to go through and try to figure out how to make all these products work together. We've built this and we have this ready to be deployed for our customers and many of these have turned into custom solutions where customers want little tweaks and changes to that. So it's been a tremendous opportunity for us to bring something new and innovative to the market. We will continue to provide that kind of value for our customers.

So in order to really understand our supply chain solutions, let me roll a video and give you a sense of some of the things we might do within a data center for our customers. Roll video.


William Galvin

So hopefully that gives a good visual of the type of services we provide our customers. I'd like to just give you a little example of a live global integrator who's actually a colocation company whose come to us and deployed a similar service to that. Now what you have to think about is many of the data centers today are being built in what they call pods, all right?

So customers aren't going in and building out complete data centers with all the equipment at a one-time basis. They build what they need and then as they need more, they add pods. Now imagine going into a data center with -- that's already up and running with pods actively running and trying to then implement a new pod with all the piece parts that would show up with the dust and the garbage in an operating data center. These are things that are top-of-mind for the customers that they cannot afford to have happen. So in this case, we've designed this ready solution to show up with minimal garbage on site, minimal dust in live working data centers as they deploy pods around the world. And we could not only design those pods in 1 place, we can replicate that anywhere in the world for our customers and then also ensure that we've introduced them to the appropriate, qualified installers around the world, capable of providing the same standard, critical installation practice that we want and the customer wants.

It's a very complex scenario for our customers but also extremely important and supply chain plays a critical role in our capabilities and ability to do those types of things for our customers.

We mentioned security as a significant driver to our overall business. One of the fastest-growing areas of our security business is in citywide surveillance. As a matter of fact, this is the fastest-growing segment within security. It's an opportunity that we're positioned very well for and have put a very specific strategy around getting after citywide surveillance around the world. Its top-of-mind for our customers so I'd like to run a short video for you to give you a sense of what that entails and think as they go through, think of it as a smart city, it's not just for citizen protection, it's also for other things at these stages are investing in this and then we'll talk a little bit about what this means and about what the global opportunity is. Run the video, please.


William Galvin

So this is a market that obviously, around the world, as Bob had said, is being addressed by many of the governments, many of the state and local municipalities. It's a market that, as you can see, we've taken a unique approach and have even gone into working with our integrated partners in designing this solution both from a financial improvement point of view, but also an operational improvement. If you think about deploying cameras around the city, you have to think about the complexity and coordination and the amount of installation time, right, but again, working with our integrators and partners, building these unique solutions and also unique deployment solution puts us in a position to address this market around the world. We have already deployed many cities in the U.S. and around the world with this capability.

One interesting story is we've been told recently by a city that the solution we helped deploy and design for that city has led to the apprehension of 200 criminals. So you don't usually get those kinds of information, but it's nice to hear that we're actually actively involved in providing safe cities and smart cities for our customers. So again, largest growth segment for security and a tremendous opportunity to work with companies and governments around the world.

So hopefully I've been able to give you a broad scope and also an in-depth scope of our ECS business and the growth opportunities and capabilities for us for the next 3 years. Our relentless focus on the 4 segments of communications infrastructure, data centers, security and IBW, enable us to stay ahead of technology and put ourselves in a position to take advantage of growth markets. And of course as Bob mentioned, these growth enablers through our global expansion and execution, our superior technology expertise, as well as our innovative supply chain solutions and the constant development of new solutions for our customers and then wrapping that together with our e-commerce capabilities puts us in a unique position for growth.

I'm excited to be part of this industry and a part of this overall market growth opportunity and I'm looking forward to being able to answer any questions that might come up during the Q&A session. Ted?

Theodore A. Dosch

Thanks, Bill. As Lisa commented this morning, I understand that we're going to break the morning up with 2 different Q&A sessions. So we'd ask you for this first session, maybe try to direct your questions at either for Enterprise Cabling and Security Solutions business with Bill or questions for Bob, based on what he's presented. You'll have another opportunity at the end to ask questions related to the Wiring Cable business and our OEM business after you see those presentations. And we've got microphones, if you would, please use the microphones, since we are webcasting, so that people on the line on the web will be able to hear your questions as well.

Question-and-Answer Session

Steven Bryant Fox - Cross Research LLC

Two questions on the Enterprise Cabling business. One sort of relates to one of Bob's comments, which is market share gains. I was curious you talk about it consistently on your conference calls. Can you provide some real life examples of share gains maybe beyond just sort of some of the new products that you ordered -- new services you talked about, where maybe you were gaining share, especially overseas. And then secondly, with the in-building wireless market, you mentioned a $200 million addressable market, which seems kind of small to me given the trend underway there, I was curious what that addressable market is and how big it can be for Anixter going forward.

William Galvin

Sure, I'll -- am I on? Okay. So I'll address first the in-building wireless. So the addressable market I referred to is the technology and the investment going inside the building. So when you look at DAS, or distributed antenna systems, that's addressing micro cells and cells outside the building that many of the carriers are deploying. When you think of that also for the most part, we had thought, going into this, that venues such as stadiums and whatnot, would be more carrier-centric than what we would consider private-network-centric and what we're finding is we've actually landed several of those kinds of projects in the venue side. So now it's really the venue back through the in-building or private network side and the private network side refers to customers who want to own that network themselves, but it still requires that you work with the carriers for that network. So that $200 million segment is a new segment that's growing where private enterprises actually own that network.

Robert J. Eck

I think importantly the $200 million just reflects the products that we can sell, that go into it, it doesn't include labor. So, for example, when you see some of the statistics that talk about the size of this market that are bigger numbers than the $200 million, Steve, to your observation, they're including, not just the products that we sell, they're including labor and they're also including this big stadium market and some of the carrier-served market that we don't think is addressable necessarily by us. So we take a subset of that and that's how we get to our $200 million market size number.

Theodore A. Dosch

And if I could just add, Steve, it's a great question because the $200 million is our estimate for today, but as Bill said, we project that business to have a 30% to 40% compound annual growth rate. So it will be the fastest-growing product segment within Bill's business.

Robert J. Eck

The second question you had was on market share and how do we validate that. We triangulated a couple of ways. Some of the markets we're in, we can get -- we rely on external sources to tell us how big the market is and how much the market has grown and we compare our own growth statistics against that to decide whether we have or haven't taken share on that market. We also, in some of the markets, don't have that kind of data. So we kind of triangulate between public releases of suppliers into that industry, whether they're our suppliers or other suppliers, some customized surveys that are done, public competitors data and we pull all those points together and that's how we come to our conclusion about whether we are or not taking share and you said some specific examples. If you look at our entry into Saudi Arabia, we go from basically 0 volume in Saudi Arabia to a business in Saudi Arabia. So that's a place we'd look at that and say, "Well we're clearly taking share, because people were buying the widgets we sell in Saudi Arabia already and now both in Electrical and Electronic Wire and Cable and in Enterprise Cabling Security Solutions. We have a presence on the ground and we're selling in to the country.

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

Probably a question for Bill. Just in terms of the trends in data centers, more of the colos, more of the cloud, I'm just wondering -- I know it's an opportunity, but what about -- what are the risks on the other side, if that's going to be the trend going forward, that maybe we should be aware of. So an example is in the cloud, I think it's just more efficient and the architecture is such that there's less wires required and then in terms of the colos, with the bigger shift there, is there any negatives to that because I recall there was kind of excess capacity, so then maybe the pricing was under pressure until we caught up. So just on those 2 trends, just talk about some of those considerations.

William Galvin

So Ryan, the first part I'll address is on the colos. So the prediction for instance is that, in total data centers spend 9% today going to '14 will move to the colocation. Now the economic value proposition for the end-user is really all about the end users saying, "Do I want to go out and find real estate, build 4 walls, figure out how to get power to the building, how to get all the connectivity? Or do I want to go into a space that already has all of that done, right, and then I can move in and not have to worry about the gray space, but go right into a space where I can turn up a network quickly and more economically over a long period of time?" and we expect that trend to continue. That's why, several years ago, actually 4 years ago, we've put together a strategy to get after all the colocation companies around the world. So we are partners with many of the largest colocation companies. So as that shift happens, we're prepared to either work with our end users or to work with a colo. And it gets kind of complex because in some cases, the colos build the facilities, but the end users still decide on what technology and still, in many cases, procure the technology going into the colocation. That model's going to continue to change, but we feel really good about the position we are in the market.

Robert J. Eck

Ryan, to your point in your question about is the architecture different, honestly, I don't think it is. Bill talked about the enterprise data centers going more to pods and hosting companies going more to a pod approach. We started seeing that pod approach in the enterprise probably 3 years ago, coming out of the recession and we talked about it. I know on a couple of our earnings calls that we were seeing projects that were just smaller in size because people weren't building out the whole data center, but the technology that's being used in those pods is really the same whether it's a colo site or an enterprise site. And I think this notion of are we kind of overbuilt in colos and is that going to slow down. To me this is very similar to timeshare back in the 1980s and so Ted Wheeler and me and Julie are probably the only people who remember the 1980s, but if you think back to the 1980s, when I first started working, companies didn't have their own mainframes. Big companies did, huge companies had their own mainframes. Everybody else went to timeshare and you rented mainframe time, that's a cloud service. If you go forward to 2000, the big thing was application service providers where you rented application time, you'd rented your SAP from some guy who had a data center, that's a cloud service. So we go through these ebbs and flows between owning the data center yourself and outsourcing the data center it's a pretty tactical decision and it changes because companies just change their philosophy on what they want to own and what they want to outsource. We have applications, we run in cloud services in our company, we also have our own data center and our backup data center is through a colo site. So I think that mix is what you're going to see and there will be ebbs and flows across the mix, but there's so much data being produced and people are trying to do so much data manipulation, you can't minimize this big data trend and what that means about storage, it means you're going to store piles and piles of data to try to analyze it. So will we go through ebbs and flows where the colos might be overbuilt yes, we'll see that kind of stuff, but as we look at the long-term trends, we aren't worried about that as a short-term blip that could affect a short-term period of time, but we really don't see that.

William Galvin

Ryan, I'll make one other point about the cloud. Many of the cloud companies that you would think about are global by nature and they're offering these application services for these customers. I think it's important to understand that we're helping many of those customers build those data centers around the world. So there are -- many of them are big customers for Anixter. So think of them as building big data centers to host those applications. So if end users are going to stop or go to cloud services more often for some applications or they're going into other data centers to do that and we're helping build those data centers.

Flavio S. Campos - Crédit Suisse AG, Research Division

This is Flavio with Credit Suisse. Just a quick question on ECS. You guys are starting to point towards some recovery towards the second half of the year, some amid single-digit growth. I was wondering if you can give us some details on data points that give you confidence on that or some color on which end markets are going to be -- which subsegments are going to be stronger.

William Galvin

Bob, do you want to...

Robert J. Eck

So we don't update after the end of the quarter what we've said about our outlook. So we won't update our outlook here. But we talked about in the conference call, things like ABI, we saw the trend in ABI beginning to pick up. We think that while ABI may not be a perfect indicator for us coming in the business, particularly the commercial industrial subset of ABI has been a positive territory for a while. That ultimately means there's remodels and new construction that are in the pipeline. There's always a lag, a 9 to 12-month lag. I think is what ABI predicts between a change in the ABI and when the actual projects hit. So we feel's that a positive indicator for us and we've also said many times now that the low level of spending is very similar to recessionary periods and it typically doesn't go beyond much more than 6 quarters, last quarter was the seventh quarter. We expect to see a turnaround and as we said, our backlogs were improving and our pipeline was improving as well. So those things still hold up.

Unknown Analyst

Obviously, it's a fragmented market, but as far these integrated solutions in the data center, who will you say is your biggest competitor? Is it an Arrow, Avnet, that kind of thing? And if that's the case, how do you guys compare to a distributor like that?

William Galvin

Yes, in the data center space, the integrated solutions would not be the Arrow-type companies. It would probably be the traditional competitors you've talked about before, Wesco, Graybar, those types of folks. I think it depends where you are in the world and who you talk about our competitors, right? Because in the U.S. market that would be true, but in, of the 50 countries or the 250 cities Anixter's in, in the ECS business the local competitors are very different and some of those competitors I mentioned before aren't in those places. So -- but it would not be the component guys it would be more the full-line, full end value distributors.

Theodore A. Dosch

Ted, did you have a question? Harmony?

Ted Wheeler

A lot of commentary around the data center issue and there's some commentary that the operators of data centers are finding they can run at higher temperatures, the range is not so critical. There may be some improvement in sort of the uptime of servers such that the capacity that was put in place is really a hell of a lot more than originally designed. I don't know if that's a true comment. If you have any comment on that, and if so, where are we, do you think, in the capacity utilization of previous data center construction.

William Galvin

I'll definitely talk about the design part of the data center and there's absolutely been advances in the density design in the data center and smaller footprints. I went to a customer site not too long ago and saw a pod or a section of the data center that was built up 5 years ago versus the current design, footprints very much smaller, all right? The heating and cooling elements are different, the more contained design practices. So there are absolutely changes going on in that market in efficiencies gained and we would always expect that. But intelligent lighting, things like that, are going into energy savings within the data centers. So as they add the innovation, there's also opportunity, right? There's new products, new solutions going to market, and those product life cycles in those new solutions usually have a pretty good curve, profitability and things going forward. So I would expect to continue to see that. But keeping up with the expected growth of information and technology is the issue. If mobility is growing at 66% compounded annual growth for the next 5 years, is the density going to keep up with that type of growth? And I think that's the question at hand. And we still see lots of big projects in the development and buildout of new data centers.

Robert J. Eck

I guess if I can address one other thing to tag on to that, and this gets to your question about what's the capacity that currently exists and are we bumping up against capacity limits. I'll say this, we don't have a great answer for that in the sense that we know what sort of capacity in mega flops or whatever exist in data centers. My thought would be that virtualization is not new. And virtualization is what really enabled this high density, this higher density because you could get -- some of it's heating and cooling, some of it is how much capacity can you get out of a server that you couldn't before. You had to have multiple servers, now you have one. You jam all this stuff and erect. Virtualization has been around for a while. And so if you think of the impact virtualization had on capacity of existing servers, that impact has been in existence now for a number of years. So I wouldn't say it's run its course, but I would say it's mature, it's a known quantity and I think we'll be driven much more by the trends build just described on the amount of data, as well as capital spending, IT capital spending.

Theodore A. Dosch

I think your question, Ted, also hits on a very important example of one of the differentiators that Bob talked about earlier and Bill talked about on the technical expertise. Because as this technology changes, our folks are on that leading edge, and we're out there with the program, in this case called Data Center HealthCheck. We have people with the technical expertise. They go in there and can help that customer in the data center, understand not just what those heating, cooling requirements are, but as that technology changes, what needs to change in that data center infrastructure itself.

Craig Schissler

Craig Schissler from Basswood Partners. Just -- I know most of the financial questions, we'll save for later. But just as it relates to this particular segment, I have 2 questions. One is, given the number of countries that you are in, I assume there's still a scale issue in some of the more emerging market countries, so is there a way to sort of quantify the margin drag just from being in so many countries, maybe without the revenue to support the infrastructure? So that's the first question. And then the second question is all the nice videos you showed of the service opportunity, how does that sort of affect the margin mix in general going forward?

Theodore A. Dosch

Yes, let me take the first part of it, and I'll let Bob maybe speak to the service side. But, Craig, excellent question. And I think it's -- when we previously reported with our geographic segments, what you saw was our North American margin's much higher than, say, emerging markets. Emerging markets is the best example of where -- as Bill said, ECS being the only 1 of our 3 segments in all 50-plus countries. So we've been investing in Wire & Cable, for example, in both Asia Pacific and Latin America, but we don't have the level of business yet that has allowed us to get to the cost efficiencies in Asia, in Latin America like we do in North America. What we've said though is that, over time, we would expect the emerging markets margins to move up closer towards that corporate average and as we get a little bit of help from a very weak eurozone macroeconomic environment, we would expect the European margins to move back towards where they had been previously, never quite up to the corporate average, but within a couple of hundred basis points of that. And the combination of those 2, I think, will largely be driven by some of that leverage that we'll get by growing the 2 smaller segments in each of those regions versus Bill's much more mature ECS business.

Robert J. Eck

And I think to address the question about margin, how do we get paid for services in effect, what's the margin mix. So first, we don't disclose gross profit margin by each one of the segments, but we do disclose operating margins. So as I said, and as was present in some of my slides, we actually touched a lot of our revenue with supply chain services. For example, about 30% of the revenue has some kind of supply chain service attached to it. So you might say, "Well, wait, you guys have just laid out this whole interesting story about these differentiators, why isn't it 70% or 80%?" And the reality is, there's frankly a lot of day-to-day business where we build a relationship with the customer based on that supply chain capability. And that relationship extends over time, and we get day-to-day business because of that. So having 30% of the revenue touched by a supply chain, what that really means is the bulk of the OEM Supply business has a supply chain and the other 2 businesses have kind of in the 15% range. And you can think of that about this being sort of comparable to the project mix in those businesses, sort of in the aggregate in a softer economy. As I said, what it does is we get higher gross margin and higher operating margin. And to touch point, when you look at the old segments that were geographic and you could look at our North American segment versus some of our competitors, public North American segments, you saw higher gross profit and higher operating profit, and typically, adult. So depending on who you're looking at, anything from 1 to 1.5 operating margin to multiple points of operating margin.

Theodore A. Dosch

Okay. We have time for one more question in this Q&A session.

Unknown Attendee

Can you give -- be a little more specific in regards to security? I think we all are sensitive to the fact that the demand ought to be out there for a lot of different reasons. But if you can maybe address where the interest is the greatest, say, in terms of verticals, commercial, industrial, government and then also geographically, globally. I mean, who's really driving the adoption curve? And you talked about kind of the growth rates that you have for video and so forth. Obviously, they're very generalized numbers. But is it a steady level of demand and interest, or are there tipping points of significance that have yet to be reached, et cetera?

William Galvin

Sure. So first, the majority of the security business, we place in a network video. So the demand is coming from the growth in network video or IP solutions. So the segment I focused on in the presentation was this -- specifically around citywide surveillance as a growth segment. I would also tell you in other segments like education is a big investor in Security Solutions. Retail, obviously, has always been a big part of the investment. But governments around the world are addressing smart cities and safer cities. And these solutions are being used to monitor traffic patterns, as well as criminal activities and criminal prevention. So that's why we're focused specifically on that, and I think the value proposition is different. When you go into those organizations, you have to have the expertise and know what they're looking for to pull that solution together. So it's a wide breadth of investment from our customers, and it grows across multiple segments. But there are some of these segments like education. Citywide surveillance is growing faster, and we expect that to continue, quite frankly. Only next year will network video surpass analog, and it's -- we've been in this business now for 12 years roughly. So that trend is going to continue, and there are certainly lots of headrooms. And there's even some mature markets that have only begun to really transition into new, innovative security solutions, and that's why its such a global opportunity and important for us. But the solution's critical, because it's not just cameras. It's entire -- put on very fragmented product set together for customers, from cabling infrastructure, access control to video surveillance to storage and everything like that. So tremendous need by our customers to understand what's the best technology, what's the right solution. So long answer, a lot to go into but it's a very dynamic market that we have. We're very bullish on the continued growth for that.

Robert J. Eck

I think if you look across geographies, part of your question was about geographies. If you look across geographies, the trends are generally similar. Latin America has very high uptake in video surveillance, both in private environments as well as municipal or governmental-controlled sites. Europe, same story. Middle East, same story. We get a little bit of difference in Asia, not in -- we think of Asia as Asia Pacific including Australia, internally. If you think of Asia proper, there's a little bit of a difference. And one piece of it is addressable market. There's a chunk of the market in China, for example, which you think would be potentially a huge market, that's just not addressable to us. It's government controlled and businesses are transacted, frankly, in a way we can't participate in. So that makes that a little bit smaller market than you would think of for the size of the Chinese economy. The other market that's a little different is India. And the reason India is different is the cost of labor is so extraordinarily low, and so India is still using more human security than technology for security. So we see India having a much lower growth rate in security than we would expect in other parts of the world or for the size of the economy.

Theodore A. Dosch

Just one last thing to add to -- to add with your question, Bob. We refer to this product segment somewhat generically as security. But as Bill just said a moment ago, it's -- video surveillance for all types of purposes, not just physical security. So one of our major customer verticals is in retail, which is more about loss prevention than physical security per se. Those example on traffic, as we've seen in many cities, including our hometown of Chicago, they use it not just for traffic management, but your camera on top of the light pole that flashes the picture of your license plate when you go through the red light. Things like that, that weren't possible in the analog world that through software you can do and in digital. The video surveillance has expanded the potential market for these products.

Theodore A. Dosch

So with that, I want to remind you, as Lisa said, we've got booth set up in the back. And we potentially allow some extra time here than just a normal break. I would ask you to please visit back. We've got one booth for each of the 3 business segments. We've got additional folks beyond the speakers, from the marketing groups that are very knowledgeable about the products and how we go to market with each of those areas. Please avail yourself of the opportunity to ask questions, and see some of the videos and the demonstrations. Thank you.


Giulio Berardesca

Good morning. My name is Giulio Berardesca, and I'm the Executive Vice President for the Wire & Cable segment of our business.

It's always interesting when Bob leads off and you look at the video that he left. We let off this morning with -- talking about Anixter. It was like going back in time. We talked about being in this business in 1957, and we bought by the mile and we sold by the foot. And that brings back memories because I've been here for 40 years, and I was here when we actually bought by the mile and we sold by the foot. So hopefully, we've added a few things in the Wire & Cable business along the way, because we are a profitable business and we are a growing business.

And it's nice that -- the one thing though about the video and bringing back memories, it -- I have had the opportunity to work in other parts of Anixter. So when you talk about CATV and the telecom and developing into the data networking and now into security and then supply chain solutions and fasteners, it's been a interesting 40 years. And where we're at now is a full circle, 360 degrees, and I'm here to talk about the Wire & Cable business, not only today, but moving forward.

So with that, we're going to talk about unmatched global capabilities and go-to-market strategies, supply chain solution experts and expertise, superior technical expertise, the cover-off on wire and cable and support and supply. Interesting conversation at the back that says, "Well, do you guys just do wire and cable, or like where do you fit in with the wholesalers and electrical bulks?" And a lot of people don't recognize that we do a lot of things just outside of wire and cable. We talk a lot about wire and cable, but that's because it's our core competence and expertise and specialization that we go to market with. So we'll touch on that. And then obviously, close partnerships with market-leading suppliers and then dedicated focus on 2 primary markets, which is industrial and OEM, which is -- we'll clarify what is the difference between Wire & Cable OEM and Ian, who we'll be hearing about shortly, his supply chain OEM business.

So with that, Anixter has the unique combination of unmatched global capabilities for wire and cable specialization, allowing us the -- to tailor a complete supply chain solutions, even for the most complex environment. No one else in the industry has this well-defined and proven track record value proposition that we've created for ourselves.

Unmatched global capabilities with infrastructure set up to manage wire and cable needs of customers. Some other companies, some of our competitors have strong global infrastructure, but not suited to the nuances of wire and cable programs, where cable management is a critical requirement for the customer's ability to deliver projects on time and on budget.

Supply chain solutions is a broad menu of services in which we tailor our solution to the specific needs of each customer. Our greatest advantage is our ability to provide flexible solutions where we can adapt service offerings for both our OEM, industrial projects and, depending on the unique needs of our customer, execute in any part of the world.

Broad cable management offerings for industrial projects and flexible supply chain solutions, programs for our OEM customers' ever-changing manufacturing and global footprint and following them around the world. Anixter is the only distributor -- combined with that, Anixter is the only distributor partner with technical expertise where we can engage early in the design and spec and provide engineering services and support all the way through the installation and successful completion of projects. This would not be possible without partnering with world-class leading wire and cable manufacturers. Anixter is the leading -- one of the premier leading channels for many of the world-class manufacturers for wire and cable and support products. It is our intent to marry up best-in-class manufacturing with Anixter's best-in-class services and provide a collective extraordinary experience for our customers.

While we are specialized in wire and cable, along with electrical and support products, Anixter offers the broadest product offering to address the full needs of any wire and cable application from industrial project requirements to OEM applications and the industrial communications and control requirements for the automation space. Given our commitment to specialization and providing solutions that meet the specific needs of each customer, we segment our business to provide global solutions but in a very flexible manner that no one else can. This specialization allows our teams to become subject matter experts in understanding customer needs, partnering with supply -- partnering with suppliers in a more relevant manner and in setting up the most efficient supply chain and unique requirements of an OEM or industrial customer. Our dedicated end market focus gives us the ability to offer the lowest cost -- the lowest total cost solution to customers and we can apply our value to all customer verticals.

So if we look at the 5-year perspective on the business, 2 things that I want to highlight here and we want to focus in on is if you look at the pie chart, this is how our Wire & Cable mix breaks out. So if you look at -- 74% is in North America, it's our core business, followed by 15% in EMEA and 11 sent -- 11% in emerging markets. What I want to highlight here and focus in on, the 11% of emerging markets.

I'll talk a little later about the size of the Wire & Cable business, and that is roughly -- we estimate it to be about $75 billion is the accessible market. So -- and when you take that $75 billion, the biggest part of that business is in -- is in emerging markets, which represents about 46% -- 46% of emerging markets is represent -- is of the $75 billion. So when you look at our market penetration of 11%, you can quickly guess where we're going to be investing because Anixter Wire & Cable has its resources and best and the highest sustainable growth opportunities, and emerging markets is definitely one of those opportunities for us.

And then in our market-leading positions that we have in our mature markets, we will grow with what the market will bear and also take share, and we'll get a little more specific shortly on that. If you look at -- if you look of the graphs, we're very proud, and you look at the 5-year look -- look back 19 -- in 2009, we were $1.4 billion. In 2012, we've grown to $2.1 billion, obviously, exceptional growth, given even some of the challenging macroeconomic environments that we have faced, and you see the first half of '13 at $1 billion.

Trends driving our business. If you look at the industrial, energy, power generation, natural resources, that is what we would describe as our MRO, our day-to-day business. MRO stands for maintenance, repair, overhaul. Those are moves, adds and changes that happen in any environment, whether they're in the energy space, the power generation space, oil and gas, natural resources. We've got a -- I've got a slide in that -- of the industrial verticals that would give you a broader range. But those are either MRO contracts, where the moves, adds and changes that are support and supply related or wire and cable. So when we described about buying by the mile and selling by the foot, that's the business that we're talking about. It's actually literally keeping 60- to 104-inch reels in stock and cutting every single minute of the day, every hour, all day long, all week long.

Combined with a complex multinational supply chain management. And this is now the project side of the business. And this complex multinational supply chain management is our ability to reduce the complexity in the global project space by reducing or eliminating escalating cost overruns on multibillion-dollar projects. And really when you look at an oil and gas, whether it's a retrofit or a new plant that's going up, what's the major -- the first major concern of that end user that is investing in that plant is -- before they give it to the EPC and then the electrical contractors and then it goes to people like us is how are you going to mitigate and eliminate cost, the cost overruns. Because I want to spend $4 billion on this project, and I don't want to spend anymore. If you can come in under, maybe there's an incentive for you. But I definitely do not want to spend $1 more.

This is also supported by a strong -- so when we look at our -- the project space, this is supported with a strong pipeline of industrial projects for the next few years that is mainly going to be driven by the oil and gas petrochemical spend.

Our OEM business. Anixter's supply chain specialization allows us to provide the lowest total cost of ownership for wire and cable and support supply needs for the OEM customer. We can offer this value in the dynamic and complex environment where OEM customer's manufacturing footprint is moving across the globe. You've heard Bob talk about global -- our global footprint and our global relationships as it relates to customers. This is one area that Bob was talking about, where you can have that global presence, the relationship, so on and so forth, but you have to execute locally. You do not have any choice but to be close to that manufacturing OEM facility to make sure that the products and the value and the on-time delivery, so on and so forth, that you do not shot that manufacturing down, which is absolutely critical. You can't do that from abroad. You have to do it on a local basis with the infrastructure, the operations, the bricks and mortars and the inventory and the specialization as it relates to people on the ground.

Industrial communication and control offers contained, sustainable growth in both the process and discrete manufacturing. Our solution is agnostic and objective to the real needs of our customer. We aren't selling a brand, but rather, the best solution for the particular application. We now have the technical support and proof of concept with our lab environment that provides us with application testings for new technologies and changing manufacturing needs.

And -- so we would -- the next slide, let's look at the 3-year outlook. So we talked about our core in industrial business. That's going to be driven by expanding our customer base with the MRO day-to-day business and MRO contracts. In this space, we would expect -- we've got an aggressive growth strategy. We will -- we are large enough that we will definitely grow with what the market will bear in any given year. And on top of that, we think that we have the right products, sales strategies, people, specialization, value-add proposition that we can continue to take 1% to 2% share in our mature markets. However, as we invest in emerging markets, the expectation in emerging markets for this core business is double-digit growth moving forward.

OEM. We feel that same opportunity presents itself as it relates to what the market will bear with a more bullish market share growth, with our global OEM accounts initiative and program. There is really nobody that resembles us -- that resembles our OEM model in this place, in the OEM space and any place that we do business in the world. We really have a unique value proposition that really fits, whether we're talking in emerging markets, whether that's Latin America or APAC or in our core businesses in North America or, for that matter, EMEA. It's definitely a model that differentiates.

So global accounts is really what's going to drive that business, obviously, with local and in-country manufacturing. So they don't know how to be global. And this is when -- where we talk about a One Anixter internally. This is a perfect example where the -- our OEM business really dovetails into Ian's OEM Supply business. And so one may say, "Well, that's the difference." And I'm not the expert on Ian's business, because you're going to hear about that in the next 30 minutes, but as it relates to wire and cable, it's really anybody that's manufacturing a finished product, and in that finished product, there happens to be some wire and cable and/or anything that's terminated, touching it, splicing it, so on and so forth, that when that finished product comes out and is going to either an industrial environment or the consumer environment, that finished product has some wire and cable in it.

The interesting thing is that most of our customers would have a play for our OEM fasteners supply business and vice versa. So our strategy is in these OEM accounts, we're either leading with our -- with our wire and cable OEM specialization and then pulling in Ian, with his specialization, to go after his opportunity or vice versa. We're leading with a fasteners expertise and specialization and following Ian in there and getting, obviously, a bigger spend of the -- getting a bigger available -- getting a bigger spend of the available customers spend.

Our ICC. ICC will continue to grow exponentially as the factory plant floor environment continues to change and migrate into the IP space. So we're going to go and drill down a little further into the Industrial Communications and Control. As you can see, the growth has been a nice growth for us, an entry for us into this market, 23% CAGR growth since 2009, very impressed with that, and for the first half of '13, $117 million in the first half, which is up 18% over first half of 2012. So very good traction there, and we think that we can keep those growth rates growing moving forward.

The interesting part of this, and what's most interesting to us, is that when you look at the product mix, the pie chart, and you go back to 2009, wire and cable -- because we were leading with wire and cable, wire and cable represented somewhere in the vicinity of 80% to 85% of that business. And how we specializes is with special cables that were manufactured for the upcoming revolution of Industrial Communications and Control as it migrates from the factory floor up into the IP world. And since 2009, as you can see -- so we would lead with that wire and cable specialization, the cables that were design called VFD cables, which stands for variable-frequency drive type cables. That was our specialization, our expertise. So we led with that, 90%. Over the last 4 years, you can see how that mix has changed where wire and cable only represents 52% of that overall business, and that doesn't mean we're selling less wire and cable. It means that the other products are growing a lot faster. What that tells us is we're being very successful in selling the components that go into the factory floor application, so on and so forth, but it also tells us that our solutions sell, end-to-end solution sell is gaining momentum. And that's how we're changing that shift. The one thing that should be of importance to you as it is important to us is not just the growth opportunity in this space, but all of the other products other than outside of the cable are more profitable products for us moving forward.

So with that, let's take a look at quick short video of the ICC space. Please roll the video.


Giulio Berardesca

So we want -- what we want to talk about next is obviously, the market opportunity. So from our assessment and research, we feel that worldwide wire and cable market is a $150 billion. The accessible market available through distribution is $75 billion. Our 2012 Anixter revenue on the Wire & Cable was $2.1 billion with the first half of 2013 revenues of $1 billion.

Again, referencing back, if you look at 74% of that $2.1 billion today comes from North America, which we would consider our core markets right now. And then -- that only represents 24% of the overall $75 billion. You got 30% in EMEA and then that 46% in emerging markets. And again, we're only 11% of that available 46% market of the $75 billion, so lots of growth opportunities in every geography and end market verticals. It offers tremendous growth on a global basis for Wire & Cable moving forward.

So just a quick view of our product set. Our specialization wire and cable allows us for exciting, continued growth within complementary products that fit into our flexible supply chain offering and technical support. The step and depth and breadth of the product offering helps increase our value and scope for our customers' wire and cable needs. Everything from electrical to electronic wire and cable to all auxilliary products to the high-growth market of the automation with our ICC offering.

So when we look at some of the customer verticals, there's a much broader range, but these are really the main verticals of focus for us drivers of our -- not only our MRO business, but our project business. You're looking at oil and gas, petrochemical, power. You're looking at the power and the distribution of power. Industrial is mainly the plant for -- and environment. You're looking at pulp and paper, solar panel, which is alternative energy, mining, water and wastewater treatment. And then the facilitators of all of those projects are basically your engineering, procurement and construction companies, your EPCs, alongside with them doing the engineering, the handoff goes to the contractors who, obviously, are going to install.

So when we talk about complex environment, what exactly does that mean? Well, let me give you a for instances. How complex these projects are on a worldwide basis? It's becoming even more complex. I'm going to take an oil and gas and petrochemical live example, not naming names, but live examples that we've concluded over the last couple of years. There's a -- it's basically an LNG plant that was being constructed, a brand-new plant. So you have the end-user that says, "Okay, I want to build this plant and I'm going to build it. How much is it going to cost me to go to the engineering firms, they do feasibility studies, cost studies, so on and so forth." And hopefully, we're in at that point, giving them what is the cable going to cost you on this project and what type of cables are you going to be using, because now they want to come up with the most cost-effective solution that's going to total that $4 billion. And we're going to give the experts on the cable for fit, form and function, so it's not under design, but we don't want it over designed either. We want quality products in there with quality manufacturers.

So the EPC does all of this. The -- it gets signed off. It goes. And now the engineering needs to be done. In this case, the engineering was done in 3 different countries. It was done in the U.S. parts of it were done in the U.S. parts of it were done in EMEA or the U.K. and engineering needs to be done. In this case, the engineering was done in 3 different countries. It was done in the U.S. -- parts of it were done in the U.S., parts of it were done in EMEA or the U.K. and parts of it were done in Singapore. I'm sorry, not Singapore, Shanghai. So you've got 3 engineering handoffs that happened that we have to follow with our specialization, our expertise and our teams. So rather than flying teams around the world, we have this in-country specialization already built that we actually hand off and we keep this project moving and in sync from an engineering perspective.

So while that's going on, it's decided -- and you're helping them take costs out of their business by fit, form and function. The supply cable management, which I will get in a minute, and while you're doing that, your -- the procurement is going to be done in -- somewhere in the Philippines. Now you've -- we've got our cover-off on the procurement people, because they need to understand the value that we're providing at the front end of this business in helping them design and take costs out of their business. While that's happening and there's an RFQ coming out, we're now -- we're now at the leading edge of knowing what's going to become now for fit, form and function. We're now positioning and looking for low-cost quality manufacturers that are going to be competitive on this particular project, and that is now happening in another part of the world, where the lowest cost manufacturers can manufacture these products.

And last, but not least, the project is in another part of the world again, and that's where we're actually going to do the cable management. So you can understand the complexities of the handoff, staying on top of the situation and working as one. We talked about One Anixter within divisions. This is amongst divisions. This is One Anixter within our own division, where we have to act as one organization and one wire and cable business around the world.

When you get into the cable management piece, you now have the engineers who now have probably have piecemealed 2 other parts to 2 other engineers. You already have now established, hopefully, a frame agreement for all the cable and support and supply and anything that's carrying the cable, which is the cable trace, so on and so forth. And now the project starts. And everything that you said that I have to eliminate or mitigate cost now starts to come into play, because it hasn't come into play up to now. You just provided additional services to help them win the contract and keep it on schedule.

So now let me give you, for instance -- because I can talk for 3 hours on cable management and the benefits of how you eliminate and mitigate cost overruns. But let me give you an example. You're -- now there's $40 million in the $4 billion project, there's probably about $40 million to $50 million of cable that's going to be required, about another $10 million of tray and about another $10 million of support and supply products that is outside of the electrical bulks package, okay? So if we look at the cable, $40 million worth of cable, if they were going do to it on-site, on -- by their -- on their own,, they're going to place it with a manufacturer and truckloads upon truckloads of $40 million worth of reels are going to show up on the site. What's problem #1?

Space is at a premium on a site. So imagine acres of -- these projects take up acres, okay, and you're going to have literally thousands of reels sitting on a site. Cable is bought by the mile and is sold by the foot. So now imagine that there's going to be at least 6 to 8 contractors, all pulling from this frame agreement from these thousands of reels that are sitting on a site. Now the contractor has to find the reel, in the sea of reels, has to pull it, okay, set it up on-site and cut 150 feet.

So the other thing is, remember, every reel that goes to site for a project ends up with an unsellable length. So if the capacity on-site is only to handle 60- or 84-inch reels, we can we can handle up to 120-inch reels. So the more optimum lengths that we could bring into our warehouse and then cut off of those ultimate -- off of those lengths that reel -- that same reel, we're going to end up with -- I mean, we're going to end up with shorter end of runs that is going to free up a lot of cash on that project. So that's just one example.

You look at doing this project in a controlled environment, where -- our machines are calibrated. So if somebody wants 250 feet, we're going to cut at 250 feet because our machines are calibrated. On-site in an uncontrolled environment, contractors pulling this, okay, we're -- because he's got it rigged up and he gets to 250 feet and goes, "You know what? I'm not sure if this is accurate. So I'm going to pull another 10 or 15 feet." Those are the -- it's little wastage, but let me tell you what that little wastage adds up to. On any projects, we claim and we will go on record and put in as part of the contract that we can do this for under 1% of the job, mitigate those cost overruns as it relates to how the cable is handled, procured, installed, cut, to all of those servings to 1%. They shake their head and they say, "Are you sure you can do it for 1%?" Because their experience is when they do it on-site, okay, we're talking somewhere at the low end, if they think they're really, really efficient, 10%. At the high end, we've seen it as high as 20%. So if you just do the math on just that one area of cable management that I just described, okay, you're talking literally hundreds of thousands of dollars. So just to give you a flavor of what we would consider complex, a complex project environment.

On the OEM customer verticals, again, our specialization goes way beyond just the broad industrial OEM segmentation. This is all -- again, all about taking cost out of the manufacturing and making sure that we free up costs for them for fit, form and function and allow us to free up some cash so they can reinvest back in their business. And this hopefully gives you a broad example of the verticals. It's much broader than this, but you look at it the audio/video, the automotive sector, the industrial, government. We know government spending is down.

So one of the nice things about this OEM space is industrial manufacturing-based and it's consumer-based. So if 1 or 2 verticals are down, there are so many other verticals that we can take our resources and go after where money being spent and invested in some of the other verticals. So for instance, transit today is, we think, on a global basis, transit upgrades and new systems and so on and so forth, that's an area that we think is hot right now. And we know that government spending is down, at least in North America. So taking some of those resources, not vacating that space, but taking those resources and redeploying them into other verticals that we think are growing, such as transit. And if you look at panel shop, we recently put panel shop up there, is that's going to be a big play for us in the ICC space in that special -- again, taking that specialization and going to panel shops and helping them with the technology and how that's changing.

So we talked about -- let's look at global capabilities with a local presence. Our global capabilities is not just in physical infrastructure. This is where Anixter differentiates its value for customers in a very meaningful way. Our people infrastructure, whether it be technical services or in our sales and operations teams, is specialized to apply the best wire and cable solution for our customer. This is how we can manage through complex wire and cable requirements for our customers and deliver the highest level of service at the lowest total costs.

Effectively, no one else executes like Anixter and our unique global capabilities with specialization and local presence. Our global capabilities are highly specialized, technical-trained sales force of over 750 people, supported by 8 highly respected electrical engineers that sit in Canada, the U.S. and EMEA to provide value and support to customers and lead the way for our industrial business. OEM is supported by another 60 shared supply chain specialists, complemented by a team of 10 Industrial Communications and Control specialists as we continue to invest in that business and broaden our expertise. And these are just some of the highlights that differentiate Anixter in the market, that we can actually say we're truly specialists at what we do.

So when you look at customized supply chain solutions for industrial cable, whether our industrial customized supply chain consists of tailored solutions for vertical industries and then tailored to individual customers, personal requirements or a contractor offering value-add services like PARAPULL, which you'll see some demonstrations in the back, to provide labor cost savings, to managing complex, multibillion dollar oil and gas expansions, where project -- where the project is engineered, sourced, procured and cable managed in another part of the world. We help our customers mitigate, eliminate and optimize savings within their business so that we can free up some soft dollars and they can reinvest back into their business.

Not too dissimilar to our industrial value-add proposition and offering, our customized supply chain for OEM customers is helping them become more efficient and reduce operating cost, whether it's product evaluation for fit, form and function to product enhancement services, like best-in-class supply chain solutions all supported by compliance and engineered technical support. Our value proposition is tailored to the OEM environment and such -- with such programs as RapidFire, inventory management systems or just-in-time lead feed programs delivered consistently across the world to our global customers.

That is all supported with technical expertise. To support all of the -- we've assembled one of the best engineering technical team in the industry. Our engineering resources are not only there to support our highly specialized sales force, but available to our customers for installation recommendations, assist in codes and standards compliance, assist in design of for custom cable for demanding applications, cable sizing to meet environment and load conditions, cable fault analysis. The Infrastructure for -- Solutions Lab demonstrates end-to-end solutions, performance and integrity testing and proof of concept. And the reason we do this is because also at Anixter, we support our vendor partners, and we believe the quality of products we represent. We want to stand by and we're proud of taking to market.

So with that, you've heard me talk about engineering services, cable management, value-add services. We've got a short video here that's called Anixter in Action and How We Are Different. Please roll the video


Giulio Berardesca

So in closing, our growth engines, relentless focus on growth markets and emerging markets, both organically and through acquisition, a growing robust, global industrial pipeline, growth in Industrial Communications and Control, growth organically and through acquisition, a global and complex account management program, all supported with unique and compelling value propositions a total -- a global supply chain, cable management, program-flexible and tailored to wire and cable, continued specialization with technical services for both industrial and OEM. And we will continue to deliver and be the primary channel to market for industry-leading manufacturers.

Thank you... With that, I will turn it over to my colleague, Mr. Ian Clarke. Sir Ian Clarke, as he wants to be known as, so.

Ian Clarke

Thanks, and good job. Good morning. By my calculation, I think it's a year to the day since the last time we were here together. Boy, has that time gone quickly. So for those of you that were here a year ago, welcome back. Those of you that were not here, just welcome, and I hope that you'll find the next 20 minutes or so informative.

On a personal level, I guess there's been 2 stand out items for me over the last 12 months. No, actually, I should say 3, because last week, our stock hit an all-time high. And I probably should've call that one out as a standout item. But the other 2 standout items for me were, first of all, I went to my first Cubs game at Wrigley Field, and we lost. But it was a great experience. And the other standout item is I got my Green Card. And they tell me that providing I stay out of trouble, I could probably stay for the next 10 years. So I'm looking forward to that.

I'd like to open up this morning by framing the core components of our business model that, together, have enabled us to not only provide value but to grow on a global basis. In the time available, I'm going to talk against a couple of these. First of all, as you've heard, really woven into all of the presentation is our global capability. We talked there about unmatched global capability. As recently as the last 3 or 4 months, we put additional people on the ground in the emerging markets. We've got additional people now promoting our value proposition, supporting our customers in India, in Brazil, in Turkey to name but 3. And that will continue to be a core element, a differentiator in the market space in which we provide. I'd also say at this moment that there are people in our market space that talk about being global. What they actually mean is they've got a strong presence in North America and a very token presence -- an office maybe in Europe or Asia or, indeed, the other way around. A strong presence in Europe and then an office here and an office there in other parts of the world. You'll see later in my presentation the highly developed infrastructure, not only within the OEM fastener, the OEM Supply end market, but also leveraging off the infrastructure that exists in Giulio and Bill's business.

I'd also like to talk for a moment here about the close supply partnerships that we have. Only last week, I got a call from the president of our largest supplier to our North American business, who'd heard that we'd recently opened a second facility in Brazil, place called Indaiatuba 60 miles northwest of São Paulo. And he'd heard about this and he rang me to say specifically that they'd identified significant market opportunity in Brazil and that -- and given the close relationship that we have, would we work with him and, in essence, provide the route-to-market for his products, acknowledging that his core competency is manufacturing. That's just an example, a live here and now example. And that's manifested itself in a series of joint meetings, which we've now scheduled for the middle of September.

And just before I move on from this slide, you've heard this morning, again, woven into all of the presentations, our technical expertise. In the OEM Supply business, we have around 1,800 people globally. Somewhere in the region of 10% of those people have in their title either technical or engineering. That is extremely unusual, and I'd put it to you, it's unmatched in the market space in which we operate.

I'm going to take time out here for a moment to just explain some of the things that we've done very recently to improve profitability, and specifically, in our European business. When I stood here a year ago, I could look back on the 2 prior years that I've been the senior leader of our Americas business. In those 2 years, with some pride, I could look back on very significant increase in the top line revenue stream. At the same time, we've been able to leverage off of our existing infrastructure. So there was very little incremental expense that we'd added to support that top line increase in revenue. And we saw a fairly significant drop-through to the bottom line in the years '11 and '12.

So around about a year ago as I stood here, I've just been asked by Bob to take on a global responsibility, so to take on responsibility for our businesses in EMEA, Europe and Asia. So in doing that, really, what I wanted to focus in on was the same 3 core objectives that we've been able to implement, we've been able to embrace in our Americas business. So they were to accelerate the revenue stream, accelerate the sales growth by very focused targeting of specific customers, leveraging off of the relationships we have with those customers in other parts of the world, at the same time, is to hold the expense, as a minimum, hold the expense where possible is to take that expense down and, obviously, get the same leverage off of that and the drop-through to the financial performance and focus very much in on optimizing the utilization of our inventories, which obviously has significant working capital benefits.

And it's very pleasing for me to be able to reflecting in a fairly short order of time that so far in the last half year, we've seen significant sequential top line sales growth in the last 2 quarters in EMEA. We've been able to see a -- almost a double-digit reduction in our operating expenses, and we've been able to see significant improvements in turning the inventory. And I'd also be failing if I didn't call out that one of the -- one of the fundamental reasons we've been able to achieve that is we've changed some of the senior management. We've got 2 new leaders, one in the U.K., one in Continental Europe, that have been in the business for some years, and we promoted them to senior leadership roles. And that has had a significant impact, also.

I think one final thing before I move on and this was an important -- I think this was an important part of my review today is that I think if you were dropped in to any one of our 70 global operations in the OEM Supply business today, I think there's a fair chance that you'd hear the same 3 objectives repeated back to you: accelerate the growth in our top line revenue stream whilst holding the expense and turning the asset, turning the inventory quicker than we've turned it before.

So let's take a quick look at this year, 2013. Margins are up. We moved the EMEA business back into profit in quarter 1, which has continued in quarter 2. We believe we've held our position in the first half. It is very difficult to get an accurate market data in our segment, and I'll talk about that a little later. But we believe we've held our market position. And with the forecasted growth now in heavy truck, coupled with new business wins and a very active pipeline, we think we've positioned -- we are positioning our business very well for further top line growth as we go into the second half of 2013.

You'll see on this slide that about -- just under 50% of our revenue is generated in the EMEA region. So I think it puts into context the changes, the implementation of that focused strategy that I talked about on the last slide with such a big portion of our business coming from an area that traditionally had poor financial returns.

A lot of data here, and I'm going to let you -- I'm no -- I've no intention of calling all that data out. I'll let you perhaps just absorb some of that information.

And while you're doing that, I'd like to give you another example of where having a global capability, but we're able to implement that on a local basis. About 6 months ago, in fact, it was December of 2012, unexpectedly, we had a call -- I had a call from our U.K. business leader to say that one of their major suppliers into our largest OE customer in EMEA -- one of those suppliers had gone into administration, had gone bust, essentially. And that obviously, raised a significant issue, A, with the OE who was relying -- the original equipment manufacturer, the end customer, who relying heavily on Anixter to manage that supply chain.

So we very quickly became engaged with the insolvency practitioner, the administrator appointed to run the business looking for a buyer. And we provided some funding upfront for that business to continue under the management of that insolvency practitioner. But not surprisingly, with that news, a number of the key people began to leave the business, putting even more strain and stress on our ability to keep that supply chain moving until we could find an alternative.

So what we did, and drawing on the experience, drawing on the capability that we have in North America, I think many of you -- probably all of you know that we've got some manufacturing capability in our Wood Dale facility near the airport in Chicago. I was able to take 2 of our key people, and these were not management people, these were shop floor-based experts in setting machines, and I flew them to the U.K. and I inserted them in this business for an 8-week period that helped us ramp production so that we could build enough inventory to provide a buffer to keep that customer going until an alternative path could be found. That is a real live example of the capability and the flexibility that we have in Anixter, and put to you, is unrivaled by any of our competitors.

This is a slide -- this is a picture you'll have seen before, those of you here a year ago. This is one of our value proposition. All too often, customers or potential customers focus on the cost of the piece part and they don't focus intensively on that total cost of acquisition. And what we've -- what we're summarizing here are the additional elements that, together, greatly exceed the cost of the components, and that's where Anixter has developed its capability over a period of time. We are able to provide the logistics. We've -- as I've already mentioned, we've got a significant number of people in our organization with engineering capabilities, who, oftentimes, reinsert those people into the customer's facility. And ultimately, the objective here is to allow the customer to concentrate on their own core competencies and whatever product it is that they make and they can almost remove from their concerns the management of the supply chain. And you'll hear a little later in our presentation, testimony that speaks against that capability.

I've talked already about some of the core components of our business model or our value proposition. The common theme woven into all of these presentations this morning is our global capability combined with the expertise that we have from a technical standpoint, solution driven and the additional ability to customize the supply chain to suit individual customers. Every customer has its own individual requirements.

I do want to call out on this slide the item at the bottom there, our manufacturing expertise, which I've already paid testimony to. Since we acquired that capability 4 or 5 years ago, it's proven to be an invaluable additional element of our value proposition. And I'm delighted to be able to share with you that a few months ago, we were able to announce a significant investment in that facility in Chicago. We've ordered 2 new, state-of-the-art machines, which are scheduled to be delivered in quarter 4 of this year, an investment of something over $3 million. And that will not only enhance our flexibility, it will also give us a leading edge from a cost perspective. It reduces the cost profile significantly.

And when those machines are in and operating, we do intend to have an open day. And that open day, not surprisingly, we will invite our key customers. But also we will invite our key suppliers, because we're working very collaboratively with our supply base. And this is in no way a reflection on any lack of confidence that we have in the supply base. Moreover, we want to be able to share best practice when those machines are in with our suppliers. We want our suppliers to come and see us and see the way we do things, and we want to go and visit them and see the way they do things.

As you made your way here this morning and probably over the weekend, you will have undoubtedly brushed against many of the product offerings that we have in OEM Supply. Some of you will have traveled here today by train, by the underground, and we've got customers embedded in that segment, as you can see here, mass transit. You'll have arrive by car, and depending on what type of car you drive, it's highly likely that the fasteners that put your car together will have been supplied by Anixter. In essence, fasteners and the type of fasteners that we supply are indeed all around you. Many of you I can see have laptops and handheld devices here that have a chip inside them, semiconductor, and we are supplying the companies with fasteners that make those machines, make the machines that make those semiconductors. So when I look about the opportunities to promote our business, albeit at the very high end of the segment, the opportunities are very significant.

This is a slide that you will have seen a year ago or, rather, it's a variation on this slide. What I'd like to call out here is those are all key customers. I think all of those companies are readily recognizable as a global brand. They're drawn from multiple customer verticals. We've got off-highway, leisure, automotive, appliance and renewable energy. And that gives us the diversification that we're seeking. What is also pleasing, if I've got my math right, there are 9 more -- there are 9 logos on there that were not on that slide a year ago. And that, I think, again plays to the way that we continue to attract and develop global companies, customers that want that support consistent and repeatable every time.

At that, I'm going to pause -- excuse me, I'm sorry. Go back. Okay, thank you. I'm going to pause for a moment and allow some of the other members of our team to talk against the capability -- the capabilities that have enabled us to provide differentiation in the markets. So if you'd roll the video, please.


Ian Clarke

Thank you. I think the -- my summary of what you just heard, I think our customers have demonstrated -- you heard the word consistency. Our consistent consistently demand from us more for less forever. I think at Anixter, we're ready to pick up that challenge.

I want to move here, to a specific case study. This would be a very well-known iconic brand operating globally. And I just really wanted to talk to the background, to the complexity that we managed for this customer. It's a long-standing relationship. It's stronger than ever. It's a company that is invested in diverse markets, complementary to one another. You can see there, they're in the new luxury car business, they make truck and buses, they're heavily involved in the agricultural market. And sales in 2012, somewhere in the $58 million range. And you can see that there's a great expectation on Anixter. We currently manage 850 vendors, on their behalf, across 74 sites, in 12 countries. And we believe that we've been able -- we've earned the right to grow with them because of the consistency that we've provided them over that -- over the period that we've been in partnership with them.

I wanted to talk for a moment about -- specifically about, our technical expertise. You can see some of detail on the screen there. Let me, again, talk about a very specific example. One of our largest, if not our largest, customer approached us earlier this year and said they'd like to talk about a 2-year extension to our current long-term contract agreement. And in doing that, we felt it was necessary to look back over the last 2 or 3 years and see -- and do a sanity check on the value that we've provided to this customer. And in doing that, we were able to identify that, 3 years ago, the level of quality that we were supplying them, and its often referred to in our market segment as PPM, which stands for parts per million, we were supplying them with a defect level of about 250 parts per million, 3 years ago, which, at that point, was class leading. No one in our market space had got a demonstrable track record of delivering that level of quality.

2 years ago, we were able to reduce that to less than 150 parts per million. And in the 12 months, to me standing here, our parts per million capability with this customer has been less than 50. If I've got my math correct, that is less than 0.05 of 1%. That is unrivaled. There is no one in our market space that comes close to being able to provide that level of consistent quality. When you consider, we manage 1,170 vendors, suppliers, for that customer, that speaks to our capability from a quality standpoint.

Very quickly, I'd like to talk about another case study, a well-known manufacturer of excavators, off-highway products, came to us with a very specific challenge. They were launching a new product and they wanted us to work with them to design a range of fasteners that would give them significant reduction in the number of SKUs used on that line. And we engaged with them, we put our experts into play. And over a 12-month period, working collaboratively with this customer, you can see there that we were able to significantly reduce the number part numbers that, in turn, has manifested itself in improvements in their assembly lines, in their manufacturing process. And ultimately, that gave us the ability to achieve Supplier of the Year Award to this customer. This customer operates, and we're supplying them, in China, in the U.K., in India and, now, we're in talks with them to supply them in Brazil, which, again, talks to our global capability, but also the innovation that we have with Anixter that we're able to put that type of expertise into play.

I mentioned briefly the market opportunity, and it is very difficult to get accurate data to scope out the size of the market that enables us to understand market share. But with that said, one thing that we can see very clearly, the market is growing and we can see the areas that the market is growing, it's growing in the emerging markets. And I mentioned very briefly, although that we took some restructuring charges in quarter 4 to realign some of the cost profiles in our business, and that manifested itself in reduced headcount in some of our operations and reduced facilities. But where we see the market opportunity, I think Bob referred to it in his opening presentation, that we are investing, we are investing to capture the opportunities in the developing markets. And no better example than to share with you the traction that we're getting in Brazil, in India. Our operation in China, just outside of Shanghai, has had a particularly strong performance this year relative to the first 3 or 4 years. And so, in terms of the global market opportunity, it's very significant. We play in huge, highly fragmented markets. So though -- although these numbers call out that we've got relatively low market share, we are the major player, certainly, in the North America and the EMEA markets.

And let me just finish with what we see as the trends and the strategies that we're employing to capture growth on a go-forward basis. I've talked many times, in the last 20 minutes or so, about our geographic expansion and that remains at the center of our growth strategy. We will support those well-known global brands who want consistency on a global basis. And we will put the investment team where it's needed, specifically, the OEM Supply, but increasingly, working with Bill and Giulio to leverage off of the existing infrastructure. We're going to continue to use the skills and the expertise we've developed in our existing markets, and take of those to the -- to new market segments where we can use that expertise.

We are intensifying the relationships with our suppliers, and I called out one example. And there's clear evidence that, as we become more integrated in the supply chain, both up and down the supply chain, that the opportunities for growth are accelerating.

And then, I want to finish, maybe, and if not intended to be this way, but it is a great way for me to finish, on One Anixter. Giulio made references to it. There's now very strong evidence of the opportunities that we're seeing by working collaboratively between these 3 end markets. And oftentimes, as Giulio had said, we talk about One Anixter across the divisions, we talk about One Anixter within the divisions. I'm going to make a couple of references here.

At the back of the room today, you'll, hopefully, bump into 2 of our team, Bob Graham, who moved from the OEM Supply business. It was Bob's role that I took when I moved to the States, 3 years ago now, Bob. Time flies. Bob moved from the OEM Supply business into Wire & Cable. And obviously, took with him the knowledge, the expertise, the know-how, and he's been able to play a major role in leveraging the OEM Supply business into Wire & Cable suppliers and customers, and vice versa. And then, very recently, you also bump into Marc Abbagnaro. Marc has moved into the OEM Supply business from ECS, where he spent the last, I'll probably get this wrong now, 15 years, Marc, I think. 15 years in the ECS business, very strong performer, and came to work with me, around April of this year. And in the first 100 days, that Marc has been in the business, has already made a difference, in terms of leveraging the One Anixter capabilities with customers and suppliers. So for me, that's a great way to finish. The clock says 0, I finished on time. So at that point, I'm going to hand over to Ted. Thank you.

Theodore A. Dosch

Well, thanks, Ian, as well as Giulio and Bill. I think each of their presentations, in conjunction with the videos, should be giving you an even better understanding of, not just the products that we take to market, but much more importantly, the capabilities. The 3 differentiators that we've repeated throughout these presentations today are not just differentiators in word only, but hopefully, have been able to demonstrate the capabilities between that global capabilities with local presence around the world, the customized supply chain solutions, along with the technical expertise, that really makes us a value-add distributor in each of the markets that we play.

I want to try to give you an overview of kind of how we got to where we are today. So just a few slides on some historical data that really built the strong foundation that we have today, which positions us so well to continue the success into the future. We'd do it by talking about the value creation drivers that each of the last 3 presenters hit on within respect of the businesses, and really tee up for you, how this is what drives the long-term financial opportunities, both for us, as a company, but also, very importantly for you, as shareholders.

If you look at our current segments, these 3 different end markets, and think about what's changed over the last 4 years, the pie chart on the left shows the mix of these 3 businesses in 2009 versus the right side of the chart, here in the first half of 2013. What you see from this is that the most significant change is the growth of the Wire & Cable business, as a percentage of the total. I should also point out that, even though, ECS is a smaller percentage of the total today, all 3 of these businesses have grown significantly during this time period.

Wire & Cable has grown faster than the other 2 for a couple of reasons. One, the strategic growth initiative, that everybody has touched on here today, but especially Giulio, in extending our Wire & Cable business into emerging markets. 3 or 4 years ago, we had virtually no Wire & Cable business in emerging markets. So that big jump in Wire & Cable, as a percentage of the total, was a function of both expansion into markets around the world, along with the acquisition of Jorvex, a very strategic acquisition of a wire & cable distributor in Peru, just a year ago.

If you look at the mix, by geography, here, I think this says just a couple of other key things as a part of where we see this -- how this business has grown, but also where we're going in the future. You see North America, which, remember, for us, is U.S. and Canada, because we include Mexico in our Latin American business, you see the U.S. and Canada, North American business, being relatively flat, about 70% of the total. But you see a very significant change in the mix of EMEA and emerging markets. So as we began to invest pretty extensively in the emerging markets, starting about 3 years ago, in Wire & Cable capabilities, in the OEM Supply, fastener capabilities, you see a growth of 300 basis points, from 10% of our global revenue to 13% of our global revenue here in the first half of this year. And even though Europe, the EMEA business, including some significant growth in the Middle East, even though it's grown during this time period, it is strong, because a percentage of the total.

We've been talking about that, expecting that to happen, and a lot of that, obviously, is driven by the macroeconomic conditions in Europe that we're also very well familiar of. If we had this chart projected out another 3 or 4 years, I would expect to see a similar trend continue, and that North America will probably be in that high 60s to 70% of the total, but you'll continue to see emerging markets grow as a percentage of the total, and EMEA shrinks somewhat. So again, just as a reminder, as Bill said, he has the only business that's in all 50-plus countries around the world. We've got a cost structure there that is very, very significant, as we grow the Wire & Cable business and the fastener business by already having the back office capabilities and support in those countries. So Bill, in 50-plus countries, Giulio only in 30-plus and Ian, right now, only in 12 countries around the world. We've got an infrastructure that will provide a tremendous amount of leverage as we continue to grow those other 2 segments around the world.

Now taking a look at operating income for a moment. The left side is 2009, the right side, 2013, and it shows what the total earnings were, as well as the mix of that earnings from each of these 3 segments. Let me remind you quickly, as you look at those absolute numbers, the left is 12 months and the right is only 6 months this year, but again, 2 key differences. One, you see Wire & Cable growing to a much larger percentage in the first half of this year, total, as a percent of global earnings versus where it was in 2009, approaching 50% of our global operating margin. Again, consistent with the growth in sales, both organically and as well as through the acquisition we did last year.

But I think, also of note, is the significant turnaround in the performance of the OEM Supply business. Ian, very intentionally, spent a few minutes at the front end of his presentation talking about the incredible focus we've had on operational improvement in that business over these last few years. And so we've gone from a loss position in 2009, in that business, to profitability. And I'll come back and talk a little bit more about that here in just a few moments.

Total company sales, you've seen these numbers, but this shows you the trend over the last 4 years. Significant growth, 2011, 10% -- excuse me, 2010, 10%; 2011, over 15%; leveled off here, in 2012, as we've talked about softening in the ECS market, it's pretty much around the world, as well as significant softening in the OEM supply segment in the back half of last year. This year, as you know, as we reported 2 weeks ago, our sales through the quarter and year-to-date, through the first half, relatively flat versus the same period last year.

I want to take a minute and talk a little bit about copper pricing. We get the question often. Many of you, as you try to understand the impact of copper on our top line and our bottom line, what this chart shows, and I think it demonstrates very well, as you look at the blue line running through that -- those 5 years, you see the price of copper. On this chart, you see as low as $2.37 a pound, as high as $4. And, those are just average prices for each of those years. If you looked at it by month or by quarter, you'd see much more volatility than even that. In that 5-year period, copper was as low as $1.30, and as high as $4.40. So significant fluctuation in copper, and yet you see our gross margins continuing to perform within a fairly narrow band, in that 22.5% to 23%, during that time period.

So I think it's an indication of 2 things: one, copper has a more direct impact on our margins, to much a lesser extent than what it did, historically, with the growth of ECS, the growth of fasteners, with very little direct impact of copper. But even within our Wire & Cable business, we estimate that only about 30% of that business, where we're talking about the larger power cabling, with a much more significant copper content, where you have the more significant impact of copper pricing. But I think it also speaks to the great job that Giulio and his team do with mitigating the risks associated with changes in copper price, like we've seen this year. Last quarter, copper price was down 8% year-over-year. Currently, its about 10% below where it was last year. So his team does a great job in mitigating that risk, in both how we place orders for copper, how we renegotiate pricing with our customers.

Looking at operating margin and EPS, and I should also point out, in all of my charts here, we're referring to adjusted operating margin. Adjusted for the things we've already reported in each of our quarterly earnings release, excluding the impact of impairment charges, restructuring and other onetime charges like that. There is a slide in the appendix that spells out what each of those are, if you want to reference that. But again, looking at this, you'll see significant growth in earnings, total dollars, as well as EPS coming out of, call it, the depths of the recession in 2009, where we grew our operating margins by over 50% in that 2-year period, from about 4% to 6% ROS.

Yes, we kind of leveled it out, somewhat, last year, as we had softness in a couple of our markets as I just mentioned. But I think we've done a pretty good job in a very challenging economic environment, including pricing pressures, inflation, et cetera, to continue to demonstrate the ability to take advantage of the revenue growth and deliver some significant operating profit leverage.

So let me speak to that a little bit more, as we look at the 3 individual business segments that we have. First off, Enterprise Cabling and Security Solutions. You see a fairly nice improvement in that, from the recession up through 2011. Growing the operating margin for that business very near to our corporate average of around 6%. You have some downward pressure on that business last year and through the first half of this year, for some of the reasons that Bill touched on, whether it's pricing in the marketplace, whether it's -- the fact that the security part of that business is growing faster than any -- the rest of the data center and infrastructure portion. And you've heard us say in the past, that security, by its nature, tends to have a little lower margin than the rest of the business. So put some downward pressure there, while we saw, in our Wire & Cable business, significant growth, significant operating leverage, through both that organic growth I mentioned, as well as the acquisition, to gain about 200 basis points up to over 8 points of operating profit margin there. A little bit of slippage in the first half of this year, partly because of the pressure on copper price, partly because of the investments that we continue to make in growing that business in the emerging market countries.

When you look at OEM Supply, again, I want to come back to Ian's comments and his examples of some of the steps that he and his leadership team have taken to make significant operational improvement in that market. It went from a loss in 2009, of almost 3 points, a negative margin, to over 2 points of profitability in the first half of this year, a 500 basis point improvement in just a few short years. We'll be the first to say that, certainly, where it's operating today is not acceptable for us, and shouldn't be, for you, as an investor.

But we've got this business on the right track. We've got steps in place that will allow us to continue to improve the profitability of this business and, as you might expect, you saw one of Ian's charts, that show that 50% of his business is in Europe. So in a market where the macroeconomic conditions haven't been the best, combined with the region of the world that tends to have the highest cost structure. So again, we're a distributor. Our primary cost drivers are people, facilities and transportation costs, all 3 of which tend to be higher in Europe than any other region of the world. Not to be an excuse for the overall profitability in this business, but just factors that we've had to address, as we try to rightsize, not only the infrastructure to support that business, but also position ourselves to drive more growth, both with existing customers, as well as new customers, in those markets.

So the key drivers of value in the past, we believe, are some of the same key levers that we'll build on for driving value in the future. When you look at sales and profitability growth, I've talk about it in the past, that through the last economic cycle, over a period of 8 years, we grew our top line over 9% on an organic growth basis. During that same time period, we grew our operating margin by 18%. I think, clearly, being able to demonstrate that, with the revenue growth, we do a pretty good job of what this second bullet point addresses here, of very robust cost management culture at Anixter.

We will make the strategic investments for the long term, which you've heard referenced many a time, but at the same time, we're focused very intently on not letting our cost structure get ahead of our revenue projections, or as we oftentimes say at Anixter, we have to let revenue pull the cost through, so we don't get ahead of ourselves from that standpoint. So that's what has allowed us, in the last cycle, as I said, to deliver an 18% CAGR on our operating profit growth, with a 9% organic revenue growth per year.

That's the kind of operating leverage that, as we see some strengthening in the market, and as I think we will see here in the back half of this year, we'll be able to deliver much higher levels of operating leverage than what we were able to do in the back half of last year, in the first half of this year, with a much more muted economic -- macroeconomic environment and a much lower revenue growth period.

When you combine that with an intense, equally intense, focus on the balance sheet, all of our leaders, not just the folks here in this room, but up and down the organization, are incentivized to not just deliver revenue growth and earnings growth, but to manage the biggest investment we have, which is working capital.

So whether it's the inventory, the receivables or how we manage payables with our supply base, I'll talk in a moment about some of the improvements we've made there, but it's that TNO [ph] performance, combined with that balance sheet performance, that has allowed us to deliver some very strong cash flow over many years, which, then, gives us choices, gives us opportunities to determine how we best want to distribute that capital, how we allocate that for strategic growth, but also back to our investors.

I really like this chart, because it shows, over an extended period of time, certainly over a broad economic cycle, you can see the relative impact and relationship between profitability and cash flow. So if you look at this orange line that runs through this, it's revenue growth each year. And if you look at the period from 2001 through 2009, you kind of see there's book ends on either side of this, where we had a recession, where the revenue dropped in that time period. The blue bar shows cash flow, each of those years. And so, what you see is, in those periods where the revenue dropped, we have some of our highest cash flow we were able to generate. In fact, in 2009, we generated over $440 million of cash flow, all-time record level of cash flow. So part of that, you would say, well, you should do that. You're a distributor. Your revenue dropped, you take some inventory out, you collect some receivables. That's true. But I think what we've proven is to be able to, not just take out what you would expect through kind of the natural evolution of that revenue trend, but through various working capital initiatives, to drive more leverage in our working capital efficiency as well.

Here you'd see the more recent few years of cash flow. And if you look over on the right, you'd just see, in the first half of this year, we're well ahead of the pace of cash flow generation, where we were last year. Keep in mind, 2009 was when we had a contraction in the top line, threw off a tremendous amount of cash. 2010 and '11 were periods of some fairly significant revenue growth. So we had to take some of that cash and reinvest in working capital to support the business. But then you'll see, as I mentioned, this year, with revenue growth probably approximating last year, we are on track to deliver significantly more cash flow this year than we did just last year.

So speaking of working capital efficiency. For many, many years, going back probably through the entire decade, of the first part of 2000s and before, this was a business that typically required $0.25 of working capital investment for each dollar of revenue. In other words, revenue grows by $1, it took another quarter of investment for working capital to support that business. That number peaked here, as you can see, in 2009, a little over 30%. Going through the recession, took us a little bit of time to get that inventory and receivables down at that new run rate, from a revenue standpoint. But then you see, in 2010, and '11, so forth, we got that number down below 24%, and then even below 23%. We're hovering there between 23% and 24%, and I think we've got opportunities, of the various initiatives that we're working on now, to take that number down further. And I think, what we'll see in upcoming periods, as we continue our various initiatives to more efficiently and effectively utilize the working capital investment in each of these 3 businesses and around the world, to drive that number down below 23% as well.

Okay. So we talked about the P&L, driving operating profit leverage, combined with working capital efficiency, generates a lot of cash flow. So what do we do with it? So in the period between 2008 and 2012, a 5-year period of time, we generated $1.2 billion of cash flow. And as this chart summarizes, 3/4 of $1 billion, we're returning to our shareholders, almost 2/3 of all the cash flow that we generated. We're not a regular dividend payer, so we return that value to shareholders through a variety of different ways, primarily, share repurchases or special dividends, and have done it somewhat opportunistically, based on the market conditions, based on the current -- how we perceive the current valuation of our stock. So if you break that down a little bit further, year-by-year, over that time period, you'll see, when it comes to share repurchases, the biggest portion of that, return the value to our shareholders, almost $350 million. During this period of time, we repurchased at 6.75 million shares of our stock, a cumulative 19% of our outstanding stock, during that time period.

In addition to that, we declared 2 special dividends that amounted to $7.75 per share. So the combination of those 2, delivered over $600 million of value back to our shareholders. And some of you might remember, if you go back just a little bit further, we had 2 other special dividends just prior to this time period. So over an 8-year period of time, we had 4 special dividends totaling $13.25 per share. So if you stack that up against our current stock price, you see it's a fairly significant return in the high-teens, just in the special dividends, before you can take into consideration the share repurchases.

We think that the way that we've chosen to allocate our capital had been very successful in the past. We revisit this multiple times throughout the year, as Bob mentioned earlier this morning, it's a regular discussion we have with our board. And so, we think, from a go-forward standpoint, the best use of our cash is, first and foremost, to fund organic growth in our business. That really means 2 things, whether it's growth in mature markets or growth in, call it, the less mature markets, like emerging markets, where we are investing by putting more people on the ground, more inventory in country, and helping to support growth in these strategic growth opportunities, but then complementing that with strategic acquisitions.

So as you think about, whether that's an opportunity to enhance, geographically, expand the footprint in a certain part of the world. That's very complementary to our objectives, like Jorvex, we've been -- begun to invest organically in Wire & Cable growth in emerging markets, but yet, and even though organically, we grew the Wire & Cable business in emerging markets by 80% in one year and 40% the next year, organically. The acquisition of Jorvex allowed us to more than double the size of that Wire & Cable business in Latin America overnight, and helped us accelerate the growth with extremely strong relationships with both customers and suppliers in that market, or acquisitions that give us opportunity to extend a product line for a service offering. Most recent example there, that Bill touched on earlier this morning, Clark Security. Prior to acquiring Clark Security, 95-plus percent of our security business was all about video surveillance. Now we've extended that product set and driven some great strategic leverage between those businesses, between the surveillance side and the access control side.

Our strategy, relative to acquisitions, in one respect, you might think is fairly simplistic, but one that, I think, is also a key to allowing us to be very successful with acquiring and integrating these acquisitions. It has to deliver on 3 key objectives. First and foremost, it has to be that right strategic fit, as I just described.

Secondly, it has to be the right valuation, and equally important, it has to be with a reasonable amount of risk. You guys all know, when you read the same kind of data that says 70% of all acquisitions don't deliver on the business case, but we haven't had an acquisition yet that hasn't delivered on the business case. And so we'll continue to be equally diligent as we look at things in our pipeline. And as we've said, Giulio's ICC business, Industrial Communication and Control, is a prime area for us, as we continue to look to build on that 23% CAGR that his team has delivered, with growing that, organically, to also expanding that through acquisition. We'd certainly look and continue to look at further opportunities to expand in emerging markets. And then also, security or other areas, where it makes sense in a certain part of the world.

And then lastly, and very importantly, the next priority is returning value to shareholders. We just continue to believe that a combination of special dividends and/or share repurchases, depending on where the market is, at any point in time, is the right way for us to further deliver value and return value to our shareholders.

So let me get a little bit more specific about how we see the environment today, and obviously, at any point in time, there's tailwinds and some headwinds out there in the marketplace. And I'm talking here about, both the remainder of 2013, as well as going into 2014 and beyond. We just said 2 weeks ago on our call, that we've been encouraged by what we've seen in the North American ECS business. It's the biggest part of Bill's ECS business and it's been more encouraging by what we see in the pipeline, so that the capital projects, the larger projects seem to become a more -- to complement that strong day-to-day business that he has.

Global Security, we expect that business to continue to be a very fast growing -- and with the exception of IBW, the fastest growing part of Bill's business. Emerging markets, really for all 3 of our segments, but especially in the area of Wire & Cable and our OEM Supply business. Ian touched on heavy truck. We're only calling out one specific customer vertical, because it is major for us. It's 40% of the North American OEM Supply business and almost 20% of the global OEM Supply business. And yes, that is a fairly high concentration in one industry, but with additional customers that we continue to win, it has shrunk, as a percent of our global business, and we would expect it to shrink through further customer diversification in the future.

And then lastly, from a very macro standpoint, the continuation of fairly low interest rates, and we all read, whether it's the U.S. Fed or U.K., more recently in Japan, all with desires to keep the interest rates low for an extended period of time. We believe, as an enabler to help release some of what we have seen of that pent-up demand for capital projects spend that should benefit each of our businesses.

On the headwind side, I'd be remiss if I didn't mention copper, I already said, it's sitting there today at about 10% below where it was year ago. So that would be somewhat of a headwind in the foreseeable future. FX, again, as you know, it isn't just a function of how strong the dollar versus these foreign currencies, it also depends heavily on just how much volatility there is out there. So I think we do a pretty good job in the countries we operate in, with a hedging strategy to help mitigate the risk associated with foreign currency swings. But when you have currencies like, most recently, the Brazilian real, that fluctuates as much as 6%, 7%, 8% in a given month, it's next to impossible to fully protect yourself against those risks. But again, I think, our operators do a really good job in trying to manage that, mitigate that, in how we go-to-market and how we price our product.

Europe, on a broad sense, despite the fact that it has been such a -- had such a negative outlook, we believe, as we said a few weeks ago, again, that we've seen bottoming, flattening, some signs of optimism there. And I think some of the economic data that's come out of the Eurozone, in U.K. PMI, very recently, would tend to support that.

More specifically to the second half of this year. Just to reiterate what we said 2 weeks ago, we're looking for organic sales growth in the mid-single digits, not where we expect our long-term growth rate to be as I'll talk in just a moment. But that would be a significant improvement from where the business and where the industry has operated in the first half of the year. And as I talked earlier when I talked about operating profit leverage, we will do a really good job and continue our focus in managing, not only -- or the cost side of our equation but managing pricing and gross margin to deliver strong leverage associated with that revenue growth.

So longer-term, go beyond the back half of this year, longer-term throughout the cycle, because of our core business, combined with these strategic growth engines that each of the guys have talked about here today, whether it's security, emerging markets, our e-commerce platform is a great enabler for us, ICC and IBW, we're projecting that over the course of the cycle, organic revenue growth in the 6% to 8%, driven by these 4 buckets. And one thing I think you would notice, we're not getting overly optimistic on that far left side. We're not basing that 6% to 8% on saying, hey, we're going to have a tremendous global economic recovery. That 2% to 3%, as we would estimate it, is really driven by probably a similar number over an extended period of time in North America GDP, a much lower number than that in the EMEA region from a GDP growth standpoint. But a much higher number approaching the mid-single digits over time from an Asia and Latin America perspective.

So if we drill down into those other 3 buckets a little bit further, and just to help put it in perspective for you how we're going to get market share gains. Where we're going to get growth or product line or service extensions and market penetration in geographic expansion, I won't read all these to you. Most, if not all, of these, you've heard mentioned 1 or more times over the course of this morning of how we're driving, how we're focusing our resources and continuing to grow the core business but also focused around these strategic growth engines. And some of which, like across the bottom, you see there as part of our One Anixter platform, e-commerce, global security, et cetera, that really cuts across multiple businesses as we look at how we intend to drive growth in our business.

So what will that translate into if we deliver top line growth or when we deliver top line growth in this 6% to 8% range? Again, let me just remind everyone, that's organic growth. So that's excluding impact of acquisition, FX and copper pricing. So that 6% to 8%, we think, over time, over a period of years, should drive our operating margin up into that 6.5% to 6.75% range. 2011, with 6%, we believe that leveraging the growth that were going to drive across the emerging markets and elsewhere in the world much as by these strategic growth initiatives, that we can leverage our cost structure, drive part of that, a small part of that margin improvement through gross margin enhancement, but the larger share of that operating margin improvement through cost leverage across our business.

That will allow us to more consistently deliver operating profit leverage in that mid- to high single-digit range. I mentioned our working capital initiatives, were sitting here a little over 23%. We will get that down in the 22% to 23% range. We believe that is a reasonable goal. But also as Bob said, we're pretty comfortable with our overall strategy around debt to total capital. And operating -- we'll continue to operate in that 45% to 50% range. I know last year we were in the 50% range before we redeemed the convertible bonds. It's now sitting at the end of Q2 at the lower end of that range. So we're pretty comfortable in operating within that.

So to sum that up, we think it's a pretty compelling value proposition for our customers and that's what translates into a compelling value proposition for our shareholders. We do have a leading position across a variety of markets around the world, 3 key differentiators that we hit on repeatedly this morning, which makes us very much a value-added distributor, and value-added service offering. Keep in mind you don't see Anixter brand on any products, Anixter brand is all about those customized supply chain solutions, technical expertise and the global capabilities with a local presence. We think we've got the right strategies in place to drive this growth and continue to deliver nice returns for our shareholders. We see at the bottom of this page, how our shareholder returns stacks up against one of the index, the S&P in this case, and we believe we've got the strategies, and the team in place to continue to drive that direction in the future.

So before we go to our Q&A session, we're going to have Bob and Ian and Giulio join me up here. But before we do that, I'd like to ask all of you to take just a few minutes. During the break, we put on your place a little survey like this. And as Lisa said this morning, very helpful for us to get the key takeaways while they're fresh in your mind here instead of waiting until tonight or tomorrow when you get back to your offices. And just tell us give us some reaction to this morning and that will certainly help us in improving upon this even further for next time.

So we're going to take just a couple of minutes to allow you to do that very quickly while the rest of us assemble up here and then we'll start to the Q&A session in just a few moments. Harmony and Don will be out of there with the microphones again. So please just raise your hand if you got a question and we'll come to you.

Theodore A. Dosch

So looks like most people are finishing. You can just leave those surveys there at your place. We'll pick them up when we break for lunch here in a few minutes. Thanks very much for taking the time to do that. So we'll open it up for questions and let me remind you if you would please just state your name and your firm so we know where the question is coming from. And we got a question there in the back, Harmony?

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

Ryan Merkel, William Blair. First question on the long-term [indiscernible] margin, I think you knew this was coming. But 6.5 to 6.75 just probably seem a little low to everybody in the room. Could you just talk about why you think that is kind of your long-term targets? And maybe in your answer just address it in terms of each of the 3 business segments, particularly OEM Supply, kind of 2-ish percent margin today. Why can't that be 5 or higher just talk about why, why it's not higher than what you gave?

Theodore A. Dosch

Yes, sure. Let me throw out a couple of thoughts there, Ryan, to start with. First off, I tried to -- we tried to put all of those goals in terms of over this economic cycle. So that's not saying that's the end game. That's saying over the course of this economic cycle of which we're probably already, depending on how you measure it, a couple of years into it. Secondly, the improvement in operating margin, a significant portion of it, should come from the OEM businesses as you suggested, with that being a little less than 20% of our total business. As that grows by 200, 300 basis points, that obviously, will drive improvement. As we see margins in the emerging markets, we should also see -- even though we don't report by region now, but the margins across emerging markets should improve as we had that infrastructure that's in place there initially, to support the ECS business. We'll leverage that cost structure very nicely with the growth in OEM and Wire & Cable in those markets. And we also expect to see improvement in Europe since that, as you know, fairly recently, had lost money in Europe. And so we'll see improvements there as well. Offsetting that to a certain degree is somewhat the mix as we've talked for example within, in Bill's business, as he grows profitability across that entire enterprise cabling businesses, we get some downward pressure with the fast growth of the security products business within there. And we would anticipate continuing to make some strategic investments to support the broader offering of both products and services in each of those businesses.

Robert J. Eck

I just have a couple of pieces of color. One is, first, to piggyback on the point I just made, we've always have a philosophy that if we try to ratchet a operating profit too high in the short term, we will absolutely squeeze our ability to invest in new market opportunities. There's just no question about that. The numbers that you see are also partly not trying to be out ahead of what we think we can really accomplish and project a number that is a substantial stretch to get to that we really may or may not deliver on. We're trying to project numbers we think we can actually deliver on. And why I say stretches, we mean meaningful improvement to get above that number, meaningful improvement in OEM Supply. And we need meaningful leverage in the emerging markets. So more growth out of Wire & Cable and OEM Supply in emerging markets. And that 6.75 number, you've heard us use that in the past and that was basically taking a high watermark period that -- I'm sorry, probably going to grab the wrong year, but I want to say it was like part of '05 or '06 when we had a significant onetime inventory gain on copper where there was rapid jump in copper at a time with a very tight capacity in the market. And so we were able to pass-through a price increase kind of like the oil companies do at a gas pump wherein the gasoline you're buying didn't cost $100 barrel of oil. It was $80 barrel of oil. We had that kind of effect and we took a gain. When you back that gain off you get a high watermark, margin of the 6.75 with a little bit different mix in the business. So you look at that and say, we think that's a reasonable target to go after with what we know right now with, again, leveraging emerging markets, some improvement in OEM Supply and not getting far ahead of ourselves and set up for you and for the investors an expectation that we can rapidly outstrip that.

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

Okay, fair enough. And then a second question was more in Wire & Cable. Just -- it's been a strong business the last 3 years. I'm just wondering, as you look at the backlog today versus where it was 12 months ago, is there any change in either geography end market mix? Is there anything getting stronger, anything getting weaker? And then the second part of that question is, what are some the forward-looking indicators that you look at, that suggest that our business over the 12 to 18 months could continue to perform strongly?

William Galvin

Ryan, can you repeat your first question, please.

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

As you look your backlog today and just the mix of it, is there anything that's changed over the last 12 months, either in terms of the end markets, where the projects are focused, or in terms of geographies?

William Galvin

No. Our backlog has stayed pretty consistent. I think the -- any effect on backlog, are going to be timely, time-related. And what I mean by that is the inflow of projects, the start of projects when they actually hit our backlog versus the build-out of that. Right now, we're seeing -- we are seeing a good coating activity in the project space. We are going into our backlog on existing projects that are -- we're shipping out. But, we're we don't see the million-dollar type projects but we're saying a lot of the smaller type projects that are making up for that. And as a result of that, our backlog has stayed very consistent in North America. It is growing in the emerging markets. And surprisingly enough, our backlog has stayed stable and slightly grown in Europe.

Theodore A. Dosch

Regarding the indicators, Ryan, I think, among the indicators, we're looking at, ABI certainly applies. PMI certainly applies in the OEM part of the Wire & Cable business, very dependent on industrial production. The other thing that we follow anecdotally is through conversations with customers, particularly the EPC companies, what their backlogs and what their coating activity look like, and that gives us a view typically out 2 to 3 years what we think the project cycle looks like. And so that also gives us some confidence that the we're not setting up for a fall.

Steven Bryant Fox - Cross Research LLC

Steve Fox with Cross Research. So 2 questions in growth rates. So it looks like you lowered your growth expectations by about 200 basis points versus a year ago, which, given the market for the last year, doesn't surprise me. But can you talk about what changed in your analysis year-over-year, especially within what you control? And then secondly, the presentation on OEM Supply was very interesting again. But the business did $235 million in sales this past quarter. You go back 2 years ago, did about $235 million in sales. I understand the market's tough. But a lot of -- you mentioned just the fragmented markets that you're dealing with. Why hasn't the business been able to go faster? It seems like you should be able to control your own destiny a little better in that segment?

Theodore A. Dosch

Let me address the first part of your question and I'll let Ian address the second one, Steve. In the organic growth rate, part of it is just the basic math. We figure we're another year into this cycle with flat growth. So the ability to deliver 7 to 9 over the entire cycle, it's just become that much more difficult with revenue growth that we are experiencing here this year. When you combine that with the, I would say, the more tepid outlook of some of the emerging markets like Latin America -- Brazil is our largest market there and, again, you guys see the same numbers. It's not the 5% GDP that we had, say, 2011, with practically a flat GDP down there last year and ending in the first half of this year. So part of it is just purely a function of what the opportunities are, both in more mature areas but also certainly in emerging markets, such as that. I don't think it's in any reflection of a change in our belief in the opportunities that exist around our specific strategic growth engine so...

Ian Clarke

I'll take that second question, Steve. I think you made a reference to the same quarter 2 years ago and I think my initial response is that we're at different -- differing stages of the economic cycle. We -- in my presentation, I talked about the objective of diversifying into new markets. and the objective there is to address exactly the point that you raised. In some of our traditional markets, that have provided us with volume, they're cyclical in nature, heavy truck being the most obvious and having the biggest influence in North America. In 2011, that cycle was very strong, it continued strong the second half of '11 and into the first half of '12. And then from the second half of '12 and into the first half of '13, that cycle turned down. All of the available forecasts suggest that cycle is turning up again. If we switch to Europe, Europe, obviously, has suffered significantly, some of the macroeconomic issues that have affected the demand in Europe. So we remain very focused on the strategy to take the expertise that we've developed over a long period of time, the high quality, technical expertise and apply to new segments so that we can do a better job of being anti-cyclical from some of those traditional markets.

Robert J. Eck

If I can have one piece of color for Ian, the other thing about his business, we have 2 focuses. One is operational improvement and Ian started with a scorecard about the business. And we also have this top line growth and find new business. So if you think about those 2 pieces, as we put a lot of energy behind operational improvement, we actually slowed a little bit, some of our new customer acquisition because the feeling was we wanted to get our operational infrastructure in the position we needed to have it going forward so that we really had a good base to leverage off of. And then secondly, when you say okay, so then you turn the engine back on for new business equipment, how long does that take? Well, realistically in enterprise and in Wire & Cable, when you turn that engine on, the time period from turning on the engine to actually getting billings is much quicker than an OEM Supply. The typical sales cycle in enterprise for a project is 6 months or less. In electrical Wire & Cable, the sales cycle to billing might be a little longer just because of the way they billing flows into the project. In OEM Supply, the sales cycle from identifying an opportunity walking and meeting with the customer to getting an award is typically well over 1 year. It's typically in the 15-month range. And then from that period, to do implementation while they burn off existing inventory that's in place from incumbents, we source new inventory. You run through the implementation cycle, set up, direct electronic integration with a customer. That's typically another 6 months until you're getting meaningful billing. So you're really have about a 2-year lag from "let's really get the engine cranked up" to let's -- to seeing actual billing come out of that. And I think were at the point where we'll begin to see some of that opportunity come through.

Gary Farber - CL King & Associates, Inc., Research Division

Gary Farber, CL King. Just a question on the acquisitions. Can you add some more color as to just what the pipeline looks like right now and how we should think about it over the next 6 to 12 months?

Robert J. Eck

You want to go head?

Theodore A. Dosch

Yes, we think that we've got some very interesting opportunities on our pipeline. As you know, we don't comment on specific companies. But our priorities remain as they have for the past year, focused on ICC and that would most likely be a North American type opportunity, as well as either a Wire & Cable or ECS distributor in emerging markets like Jorvex, we did in Peru last year. And then certainly, if it were the right opportunity with the right strategic products and so forth in the security area, could be another interesting opportunity for us.

Robert J. Eck

I think the other thing about M&A, 2 things, maybe. One, first, we've moved up our size. We typically did fairly small transactions. We're moving up the size. That actually changes up a little bit of the dynamics around finding the opportunities. And also it causes us to be pretty diligent about the potential of the risk. If you start to get -- moving from, say, a $50 million revenue size to $120 million revenue size, is it meaningful in terms of risk or complexity? Part of moving that up simply is it takes so much time and expense to get a small transaction done as a bigger one. So we want to do ones that move the needle. It does narrow the pool a little bit, we're not trying to do a roll-up strategy lots and lots of small distributors because there's a lot of cost complexity that comes with that. The other thing is we have a lot of discipline around the process. Ted said earlier that any study [indiscernible] says typically M&A doesn't pay off well. We want to make sure we do transactions that we're confident are going to be accretive to organization. Not just being accretive to a reported revenue but accretive to economy value add in the organization through a business cycle. And that means we have discipline around valuation that causes us to turn away from opportunities that come our way as well and we'll maintain that discipline. So we've got an active funnel of opportunities of the type that Ted just described. How those mature is going to be very dependent on the sellers position in their own cycle. And some of it will depend on our valuation thresholds.

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

And by moving the needle, if you're saying 50 million was the smaller size, you're saying it's moved the needle, it's a tripling of that as far as revenue or even more so than that?

Robert J. Eck

I think we would say we don't want to do things smaller than 100 million. We wouldn't set an upper -- artificial sort of upper limit other than to say really, really huge "transformative transactions" don't necessarily transform a business in a positive way. So we don't know that we'd be looking to do huge transactions. But certainly, we'd look to do bigger opportunities.

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

It's Matt McCall of BB&T Capital Markets, the organic geographic growth you, broke out some country count, 50 for ECS, I think 30 for Wire & Cable in '12. Can you first remind me of the trajectory of each one of those over the past few years, what that's been like? And when you talk about, I think your 1 or 2 points from geographic growth, what kind of country counts are we assuming there? What's baked into that, that outlook?

Theodore A. Dosch

Yes, starting with ECS, that number is down from 50 to 53 in the last, say, 3 years, most recently with the expansion into Saudi Arabia and into Morocco, it's a North Africa footprint for us there. From a Wire & Cable standpoint, that total country count is probably doubled in the last 3, 3.5 years as we started to invest in higher and resources in, both Latin America, as well as Asia-Pacific for that region. Prior to that, that business was primarily a North America and EMEA business. And more specifically, it had 70% of the revenue coming from U.S., Canada and U.K. So even our business on the continent wasn't that meaningful for us overall. So doubling, probably, Matt, as I said in Wire & Cable and a number of countries we operate in, the 12 that we're in today as far as OEM Supply business, that's also probably doubled in the last 3 or 4 years. And as we think about where that's going in the future, you heard Ian comment, for example, in fasteners about India and Brazil. We think Brazil is a tremendous opportunity. We're going to take it at the right pace because, again, the technical expertise required for his business to avoid shutting down the assembly line of these OEM manufactures not only is one of the most critical requirements to maintain the business over time but one of the most critical and complex parts of new customer implementation. So what I think will come out of that is our ability to leverage our cost structure in emerging markets and even to a lesser degree, in Europe, where we've got an embedded cost structure that we've addressed very aggressively through these last 2 restructurings over the last 3 years, that is, that can support a significant growth in revenue. So yes, we'll add sales people and we'll add some inventory on the ground. But we've got a back office that will support a significantly higher level of support there. Last part of your question, I'd be hesitant to throw out a -- necessarily a target -- what will the 53 grow to in time. I would say right now, we don't have a country that we're in process of -- a completely new country that we're looking to set up a legal entity in. But we have many like Brazil with fasteners looking to expand into where we already have that presence. Craig?

Craig Schissler

Just wanted to clarify on the question I think, was asked earlier about the organic growth and the change in it. You mentioned that the 68 was function over the cycle effect, this year is obviously below normal. But I'm just trying to get a sense what this is meant to be. I mean is this meant to be inclusive from 2010 to 2016, is it meant to be just a going forward long-term sort of revenue assumption because, obviously, if it's just looking forward, than what happened this year shouldn't really matter into the target. So just a little clarification of what this meant to be. Same thing I guess to the operating margin target. I mean is this 2016 we're talking about, 2017? Is it not any of that? Just a little more clarity would help.

Theodore A. Dosch

Yes, certainly on the organic growth number, we intended that to be a view of the economic cycle. So that would typically be the first 2 years coming out of a recession with much stronger growth. And then as you get through the cycle, growth rates might start to decelerate a little bit. Obviously, these first couple of years of this cycle have not been that strong. So yes, it's the first part of what you said. It is looking at that entire cycle. Secondly, as far as the operating margin, we'd be hesitant to put a specific year on it. But yes, we believe in this next 3 to 5 years. At the most, we should be operating at that type of a level of operating margin. Any other questions? She's got a mic for you, Ted.

Ted Wheeler

On the external investment chart you showed, you've had something every year. I don't think there's anything in '13 as yet, either a special dividend or buyback or an acquisition. If you had to -- on your debt rations at the low end, if you handicap, what would you think could happen? Without predicting, is there any one of those 3 things that's more likely?

Theodore A. Dosch

I don't think it would be appropriate for us to put a time frame around that as much to say, we revisit that each quarter, both internally with management, as well as with our board. I would also say the level of share buyback and special dividends we did in the last 18 to 24 months is somewhat tapped us out relative to some of our debt covenants. We've talked before about we've got a restricted payment basket associated with. So short of going back and renegotiating some of our debt agreements, we're somewhat limited in the magnitude of returns. But that's a restricted payment basket that gets replenished a little bit each quarter that goes by. I would say I think it would be accurate to say and consistent with what we've said in the recent past that of those uses of cash, the highest priority with where our balance sheet is right now would be a strategic acquisition to help further strengthen our overall platform, but also help to supplement what has been a softer organic growth rate than we have had historically.

Unknown Attendee

So I just had one last question and today has been very information, a lot of information. I don't mean to harp on the one thing you didn't give, but our return on invested capital target long-term would also be helpful. So maybe you could just talk about, first of all, how you calculate it, where you're at today and then where do you think you could go with that metric?

Theodore A. Dosch

Sure. Internally, we tend to use a measure we refer to as return on tangible capital. It's a more ideal metric for us as we look at, as I said earlier, with our business leaders being held accountable to manage both P&L and the balance sheet side of the business. Return on tangible capital takes into consideration fixed assets employed, as well as working capital, with obviously working capital being the much, much more significant component of that. Our business today operates in the 24%, 25% return on tangible capital. And as you might expect, some parts our business deliver higher than that and some parts of our business are currently delivering lower than that. So our goals, both -- sorry, internal goals are certainly to drive those parts of the business that are currently performing lower than that. Wouldn't surprise you based on what we've disclosed. Since we also disclosed a balance sheet for each of the 3 segments there, OEM Supply is currently performing at the lowest of the 3 with that internal metric. Hence, a focus we have on both the profitability improvement but also the working capital improvements. And Ian commented on some fairly significant improvement that made in the last 6 to 12 months from an inventory efficiencies standpoint. So we set a threshold for each of our businesses that have a time frame or a plan of what it would take to get to that number. And then some of our more mature businesses, especially the 2 cabling businesses in North America, we're operating at a level higher than that and continue to set stretch objectives beyond that. That's also threshold we use when we look at acquisitions. So that we're looking for an acquisition to be accretive to that number. And as you might remember, a couple of years ago when we sold our aerospace financing business -- our aerospace fastener business, we said one of the main strategic drivers for deciding to divest that business is we couldn't see getting that business to our targets from an ROTC standpoint, despite the fact that it had a much higher operating margin than the rest of our business.

Okay. Thanks everyone. Before we formally break, let me remind you that we not only have lunch provided here for you that hopefully you'll stick around and grab something to eat, but just as importantly, we'll be in the back and the other folks from our 3 business segments, along with the displays and we'll certainly be here to answer more questions that you might have relative to any of the 3 businesses.

Thank you very much. Those of you here in the room and those of you participating via webcast, feel free to reach out to Lisa if you have questions as a follow-up or go to our website at our Investor page for copies of any of the information that we've shared with you here today. Thank you.

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