Anixter International Inc. Q2 2010 Earnings Call Transcript

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 |  About: Anixter International Inc. (AXE)
by: SA Transcripts

Anixter International Inc. (NYSE:AXE)

Q2 2010 Earnings Call

July 27, 2010 10:30 a.m. ET

Executives

Chris Kettmann - IR

Dennis Letham - EVP, Finance & CFO

Bob Eck - President & CEO

Ted Dosch - SVP, Global Finance

Analysts

Matt McCall - BB&T Capital Markets

Shawn Harrison - Longbow Research LLC

David Manthey - Robert W. Baird

Ryan Merkel - William Blair

Chris Parkinson - Credit Suisse

Gary Farber - CL King

Ted Wheeler - Buckingham Research

Brent Rakers - Morgan Keegan

Jeff Beach - Stifel, Nicolaus

Operator

Good day everyone and welcome to the Anixter International Second Quarter Earnings Conference Call. (Operator Instructions) At this time it is my pleasure to turn the conference over to Mr. Chris Kettmann for opening remarks and introductions. Chris?

Chris Kettmann

Thank you, Lorrie. Good morning, and thank you, all for joining us to discuss Anixter's Second Quarter 2010 Results. By now, everyone should have received a copy of the press release, which was sent out earlier this morning. If anyone still needs a copy, you can go to Anixter's website or call Chris Kettmann at (312) 553-6716 and I can resend the information.

On the line today from Anixter's management team are Bob Eck, President and CEO; Dennis Letham, Chief Financial Officer; and Ted Dosch, Senior VP of Finance. After management completes their opening remarks, we will open the line for Q&A session.

Before we begin, I want to remind everyone that statements in this conference call, including words such as believe, expect, intend, anticipate, contemplate, estimate, plan, project, should, may, will or similar expressions are forward-looking statements. They are subject to a number of factors that could cause the Company's actual results to differ materially from what is indicated here. These factors include general economic conditions, including the severity of current economic and financial market conditions, the level of customer demand, particularly for capital projects in the markets we serve, changes in supplier sales strategies or financial viability, political, economic or currency risks related to foreign operations, inventory obsolescence, copper price fluctuations, customer liability, risks associated with accounts receivable, the impact of regulation and regulatory investigated in legal proceedings and legal compliance risks, potential impairment of goodwill and risks associated with the integration of acquired companies.

These uncertainties may cause our actual results to be materially different from those expressed in any forward-looking statements. We do not undertake to update any forward-looking statements. Please see the Company's SEC filings for more information.

At this point, I'll turn the call over to Dennis.

Dennis Letham

Thank you, Chris. Good morning and thank you for joining us. Before going into the current quarter's results, let me start by highlighting our expectations for the second quarter as we discussed on our call three months ago. For those of who were with us on the last earnings call, you will recall we described the start to the first quarter of 2010 where daily sales continued their nearly nine month pattern of being virtually flat.

As discussed that trend changed in March with a noticeable improvement in daily sales rates that continued through early April as we released our first quarter results. Those positive trends then became more broad-based across the various end markets and geographies in which we operate. Daily sales rates continue to rise through the first two months of the second quarter before leveling off, but not regressing in June.

Now three weeks into the third quarter, these higher sales levels that we're experienced in June up continued into the early part of the third quarter. As a result, we are on track with our previously discussed expectations at this stage of the recovery. As a reminder, our backlog equals approximately four weeks of sales and a high percentage of our orders continue to ship within 24 to 48 hours of receipt.

So while the trends over the last four to five months have been positive, some uncertainty in the macro economic environment remains, and there is no guarantee that this positive trends will continue for the remainder of 2010. Furthermore, we believe that a more significant improvement in financial results will require extended positive trends in the expansion of those macro economic trends to more fully include Europe. Before turning to the details of the drivers of our second quarter operating performance, let me note that the net sales were at the highest level in seven quarters, and operating earnings were at the highest level in eight quarters.

We realize however that we're only part of the way back to the operating levels of both revenue and earnings that were achieved prior to the recent recession. Nonetheless the strong operating leverage that we delivered in the second quarter combined with another quarter of strong cash flow performance is a significant positive first step towards the previous record levels of financial performance.

Let's begin with a more detailed discussion of our second quarter sales results. Consistent with our expectations sales were up 8% sequentially and up 12% year-on-year on an organic basis. The sequential improvement was evident in all three end markets and each geographic segments despite one less billing day in the second quarter compared to the first quarter.

We believe this is indicative of our company been well positioned to not only benefit from improving macroeconomic factors but to also grow our share in each end market worldwide. In the second quarter we reported a 12% increase in year-on-year sales.

After adjusting for 12.9 million of favorable foreign exchange FX, an estimated $19.6 million of favorable copper prices, and 33 million of unfavorable FX resulting from our decision to exit the Alcatel-Lucent contract, in late 2009, organic sales would have still grown by 12%, non surprisingly with the European OEM supply business down the greatest percentage last year. It was the portion of our business with the highest year-on-year growth in this quarter.

Looking at second quarter sales trends within each of our end markets, we experienced the following. On a worldwide basis, Enterprise Cabling and Security Solutions sales, exclusive of foreign exchange effects, increased organically by 7% as compared to the second quarter of last year. The organic increase would have been 12% excluding the previously mentioned exit of the Alcatel-Lucent contract.

Within this end market, Security sales grew at an estimated 8% compared to the second of 2009, exclusive of foreign exchange effects. Geographically, our Enterprise Cabling and Security Solution sales reflected double digit organic growth in all geographies excluding the terminated customer contract sales

Specifically the sales were up 10% organically in North America, 17% in Europe and 20% in Emerging Markets as compared to the year ago quarter. As we closely monitor how various regions of the world are progressing at different rates in this recovery, it is important to note that on a sequential basis from the first quarter of 2010 to the second quarter we experienced Enterprise Cabling sales increased by 9% organically.

This increase was fairly evenly distributed across the regions and accomplished despite one less billing day in the second quarter. By geography we saw sales on a sequential basis exclusive of foreign exchange effects increased by 9% in North America, 7% in Europe and 9% in emerging markets.

Worldwide Electrical Wire & Cable sales, exclusive of foreign currency and estimated copper price effects, experienced a year-on-year organic sales improvement of 8% globally, with North America and Europe showing increases of 9% and 4%, respectively.

Improvements in the day-to-day business we are supplemented by the beginnings of recovery in some of the larger project business. On a sequential basis from the first quarter of 2010 to the second quarter Worldwide Electrical Wire & Cable sales increased by 10% organically again reflecting a strong increase despite one less shipping day.

North America delivered a very strong 14% increase in sequential organic growth with relatively no change occurring in the rest of the world.

As a reminder our world wide OEM supply business was our hardest hit market over the last two years. With that in mind, it was encouraging to see the positive sales trends that we began to see in the first quarter continue through the second. Sales for that end market exclusive of foreign exchange effects were up 20% on an organic basis as compared to the year ago quarter.

In North America we experienced an organic sales increase of 7% year-over-year while in Europe we saw an increase in organic sales of 39%. The North America results include an 8% decrease in aerospace and defense sales where the recession cycle downward pressure didn't begin to materialize until the second quarter of 2009 and it is expected to the muted until the middle of 2011. That was offset by a 16% growth with industrial customers.

Having experienced significant organic sales declines in the OEM supply end market for almost two years, the replenishment of depleted inventory levels of our customers, products combined with higher levels of capital spending in many customer vertical markets continue to present compelling opportunities for us to grow our sales with existing customers as well as with new customers.

Sequentially worldwide OEM supply sales were up 3% organically from a very strong first quarter level while more than offsetting of one less billing day in the second quarter. Europe experienced a 7% sequential increase in organic sales which was partially offset by relatively flat sequential sales in rest of the world.

This portion of our business is more directly impacted by corporate and consumer confidence levels as spending on capital industrial goods and durable consumer goods drives demand in this business. Bob will discuss the current business trends and implications for the future in greater detail in a few minutes.

Turning next to gross margins, in the second quarter we reported gross margins of 22.9%. The gross margin percentage reflects a 20 basis point improvement year-over-year and a sequential improvement of 10 basis points.

As mentioned last quarter, this stabilization of gross margins over the last six quarters is a positive indicator along with an improved daily sales run rate that an economic recovery has resonated in most parts of our business.

Looking next at operating expenses, we reported year-over-year increase of approximately 3% from 235.2 million in the year ago quarter to 242.9 million in the most recent quarter. Eliminating the $1.1 million negative impact of foreign currency effects on expense and the 5.7 million of severance in the prior years quarter operating expenses were up 5% versus a 12% increase in organic sales, exclusive of the terminated customer contract.

This reflects the full impact of last years cost reduction initiatives including those related to the terminated Alcatel Lucent on our cost structure. As expected operating expenses did increase sequentially by 5% on an 8% organic growth in sales primarily due to the higher variable compensation cost and variable cost associated with the increase in sales.

To summarize from an operating income perspective, operating profits were 70.1 million in the second quarter as compared to the year ago quarter's loss of 58.7 million. Excluding last year's goodwill impairment and severance charges, operating income would have been 47 million resulting in a 49% improvement year-on-year in operating income on an adjusted basis.

The 5.1% operating margin in the current quarter compares to an adjusted 3.9% in the year ago quarter. The improved gross margins combined with lower operating expense run rates not only contributed to the strong second quarter performance, but also position us well for further improvement in a recovering economy.

As we move further down the income statement, interest expense of 13.2 million was down 4.1 million from the year ago quarter. The decrease in interest expense was driven by both the lower average cost of debt, and the lower debt level within the year ago quarter.

The 6.3% average cost of debt in the second quarter was down from 7.4% level in the first quarter of 2010 due to the previously mentioned debt repurchase in the second quarter combined with the first quarter debt repurchases which occurred late in that quarter.

The average interest rate is also lower than the 6.8% reported in the year ago quarter. At the end of the current quarter, approximately 87% of our outstanding debt had fixed interest rates either by the terms of the debt or true hedging contracts. Current quarter repurchases of 3.25% zero coupon convertible notes resulted in a reduction of 28.6 million of debt and the recognition of the $800,000 of pre-tax gain.

Other income and expense included a $2.1 million foreign exchange gain due to the re-measurements of Venezuela's Boulevard denominated balance sheet at the rate of which transactions have recently been settled through the government's newly regulated foreign currency exchange system.

This gain was offset by the like amount of foreign exchange losses and other expenses. During the current quarter, an effective tax rate of 40% resulted in income tax expense of 23.1 million, compared to an effective tax rate of 50.4% resulting in 10.5 million as income tax in the year ago quarter.

The elevated prior year tax rate was primarily driven by lower levels projected profits outside the U.S. and a higher level of unrealized tax loss benefits. At this point in the year, difficult to anticipate the impact the country level of profitability will have on the full-year effective tax rate.

This will likely be in the effective tax rate will remain vulnerable for the near term plus making precise predictability of our rate difficult for the remainder of 2010. For the quarter, the Company reported net income of 34.6 million or $0.98 per diluted share, compared to a loss of 89.8 million, or $2.53 per diluted share in the year ago period.

After adjusting for the current period, foreign exchange gain in Venezuela and the prior year's impairment charge, severance charge and loss on interest rate hedging contracts, net income in the second quarter of 2010 would have been 33.8 million or $0.96 per diluted share. This compares favorably to an adjusted second quarter 2009 net income of 15.6 million or $0.42 per diluted share.

As noted at the beginning of this call, we were pleased with another quarter of strong cash flow performance. During the quarter, we generated 36.6 million in cash from operations, as compared to 171.6 million in the year ago quarter. This quarter's positive cash flow was achieved despite the working capital requirements associated with the strong consecutive quarter sales growth experienced in the most recent quarter.

Last years second quarter cash flow resulted from a significant decrease in sequential sales that enabled a very substantial reduction in working capital. Capital expenditures were $6 million in the quarter compared to 5.7 million in the year ago quarter.

We anticipate continued positive cash flow in the second half of 2010 through both earnings growth as well as strict working capital management. We recently renewed our accounts receivables securitization facility with more favorable terms than the previous agreement.

Borrowings under this agreement along with the current quarter's cash flow were used to reduce outstanding 3.25% zero coupon convertible notes by approximately 28.6 million.

This has resulted in a debt to capital ratio of 43.1% at the end of the current quarter down from 44.8% at year end 2009 and 46.9% at the end of the second quarter of 2009.

Our position regarding strategic acquisitions remains the same as we discussed in prior quarters. We continue to evaluate the optimal use of our capital and we would anticipate additional opportunities becoming available as we emerge more clearly from the previous difficult economy environment,

If near term opportunities do not materialize we may from time to time repurchase outstanding common shares or further reduced borrowings including the 3.25% convertible notes.

We have approximately 299 million in available, committed, unused credit lines, 85 million of outstanding borrowings under our $200 million accounts receivables securitization facility and invested cash balances of 35.9 million.

We continue to regard our strong financial position and significant liquidity as important differentiators for many companies in today's still volatile market.

Our reduced leverage on the balance sheet and other favorable financial characteristics providing an extra with the flexibility to adjust quickly to new market realities, fund investments and crucial long-term growth initiatives and allow us to efficiently capitalize on an improved yet uncertain global economic environment.

At this point let me turn the call over to Bob to discuss strategic initiatives, current business trends and the near-term outlook.

Bob Eck

Thanks Dennis and thanks everyone for joining us today. The second quarter demonstrated good recovery across our reporting segments and end markets. We have been saying for the past several quarters after seeing two to three quarters of macroeconomic growth, we would expect to see a rebound in capital spending that will lead to growth in our sales.

We believe we are seeing that effect and the numbers we reported today.

The organic growth that we achieved is the result of continued focus on our market initiatives as well as helping new business wins in all end markets.

Expenses were well controlled and the rising demand environment and we were able to improve our operating leverage.

Strong cash flow continued both from operating results and working capital management and we repurchased that in quarter reducing our balance sheet leverage further.

Overall we're very pleased with the performance of our organization during the quarter. The Enterprise Cabling and Security Solutions end market continued to show improving trends. The recent project trends that we have seen globally in the enterprise market reflect ongoing investment and new IT infrastructure, project activity for data centers and other IT upgrades were strong in North America and in the emerging markets.

Our year-over-year comparison in the emerging markets were strong was nonetheless dampened somewhat by lower sales in Venezuela due to the situation in that country. New business development was very strong across all geographies for the enterprise cabling and security solutions end market. Sales for the federal government and global customers have continued to show very strong results as well.

In leveraging our technical and supply chain expertise along with global platform, we have been able to deliver a service offering that has proven valuable to customers with complex requirements. Our leadership in technology reflected in our seminar stories which continues to attract very strong attendance from end users and integrators by providing them with the most current information on data center and security design.

Turning to security sales, we experienced a reasonable recovery across most reporting segments. Organically sales were up 8% worldwide with EMEA and the emerging markets up strongly while our more mature security business in North America experienced more modest growth.

The trends toward IP based security systems and the desire to secure public and private places continue to create growth opportunities in this market. The technology shift toward IP has further raised focus on the importance of infrastructure capable of supporting the IP centric higher bandwidth applications increasingly being deployed. Our long standing strength and infrastructure recommendations and design enable us to be a key resource to customers evaluating those IP centric security technology.

Moving now to electrical and electronic wire and cable end market, in the second quarter copper was moderately favorable but later into the quarter and in to the early weeks of the third quarter copper has been fairly neutral in this business. This reflects the general stability in the spot price of copper. The project environment has begun to increase from both a billing and booking perspective. This is in line with our expectation for this point in the recovery.

We have seen a pickup in engineering activity for larger industrial projects as well as project awards being released. We think that this trend should continue in the coming quarter unless customers change their outlook on the strength of the economic recovery.

If the project bidding and booking trend continues we anticipate experiencing improving sales in the second half of the year. Our initiatives in the wiring cable end market continue to include focusing on new business development, geographic expansion and enhancing our support for global customers including engineering, procurement and construction companies.

We are making progress with our expansion to Latin America. We are at full staff and building a pipeline of opportunities. We continue to win large projects with global EPC companies including large projects in North America, Latin America and EMEA. Our programs focused on winning new customers continue to trend positively as well.

Turning to the OEM supply end market, the aerospace vertical market continues to struggle in comparison to the prior year. This market was the latest into the recession and is accordingly lagging on the way out.

While recent announcements of new aircraft build rates are positive, it is important to understand that those new aircraft will be built in 2011 and therefore are not impacting current demand. However the build rate projections are a positive indicator that should help the aerospace supply chain later this year.

In the industrial OEM vertical we are pleased that we continue to grow organically off a very difficult year last year. Growth was broad based in EMEA and North America. The growth was coming from three sources, increased production rates of our customers, extending our programs at existing customers to include more products and new contract wins.

The new contract wins contributed very modestly to the second quarter. However as the program implementations for those new contract wins are completed, we will provide additional growth in the second half of the year.

Our geographic expansion into China and Latin America continues to gain traction. The combination of extensive quality control and our ability to efficiently manage our customers supply chains for fasteners and Class C items continues to resonate well in those markets.

Across all three end markets and geographic reporting segments, we are maintaining inventory levels in line with an improving outlook. We do not want to build inventories too quickly ahead of demand. At the same time, we do not want to subject our customers to service failures due to inadequate stock. We monitored lead times and usage very actively to balance our service level and working capital goals.

We believe that we continued every opportunity for some inventory improvement in the OEM Supply end market, particularly in the aerospace vertical. However, if organic growth continues as the trend we've recently seen, it will require that we increase inventory to support our customers needs.

All end markets continued to relentlessly stride to add new customers and we've been successful with this effort in all geographies. New customer acquisition and our product and technology initiatives are tracked monthly in each end market and segment.

As the only distributor in the end markets in which we participate, delivering a value-added technical support and supply chain service model in 50 countries around the world, we continue to find success with customers by providing global reach with a local touch and cross-selling across our end market specialties.

As we look forward to the balance of 2010, the improved economic conditions and capital spending, cause us to believe that we should continue to generate year-over-year growth in the second half of this year. We believe the positive trends will continue, although likely of slower rates sequentially, and we're managing our business to take advantage of those trends on not letting our expense structure get ahead of the improving business.

We do expect to see the normal seasonal effects in the third quarter of OEM plant shutdowns and the European vacation period. Our in-country expansion programs in certain emerging market countries are underway, and may deliver modest growth later this year and then ramp 2011.

If some of the more cautious economic outlooks recently reported lead to decelerating growth. We believe, based on our recent past performance and current expense in working capital management that we will respond quickly and appropriately. We expect a good positive cash flow going forward, and we will continue to look at opportunities to make our balance sheet more effective.

A number of acquisition opportunities has increased in recent months, as always where we were only pursue an acquisition if the strategic fit and pricing can create clear shareholder value.

We will now open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will go first to Matt McCall with BB&T Capital Markets.

Matt McCall - BB&T Capital Markets

Thanks. Good morning everybody.

[Multiple Speakers]

Good morning.

Matt McCall - BB&T Capital Markets

Okay. So, just wanted to clarify couple of those last points, Bob, I think you said year-over-year growth a little slower. I assume we're talking about relative to the 7% that you just reported. Is that correct in your Q3 outlook?

Bob Eck

I think, what we're saying, as you know, we don't provide guidance. What we were saying is that based on the economic trends we see out there, while we expect improvement year-over-year, we think the sequential trend which has been very strong from Q1 to Q2, that rate of increase quarter-over-quarter may sequentially decrease.

Matt McCall - BB&T Capital Markets

Okay. But, it sounds like the trends that you saw in the quarter improved, and sound like maybe peaked in June and then it's kind of stabilizes that level in July. So, that would lead us -- are you kind of carrying through that July period, the July trend into the next two months to get at that point. Is that point driving that?

Bob Eck

We have carried into the third quarter the kind of peak sales rate and booking rates that we saw late in the second quarter. Adjusted all these peak sales rates and booking rates that we saw late in the second quarter. Adjusted only for the fact that there is one more holiday in Q3 plus, the impact of Europe vacations and OEM factories shutdowns would normally occurring in July and August.

Matt McCall - BB&T Capital Markets

Got it, okay. And then you did talk about some second half strength both from some customer win rates and then you talked about -- what is the last one -- the project activity with the EPCs, how does that net out? How -- what's the magnitude to those wins on those respective end mark or those respective segment to your business?

Bob Eck

Well Matt, as you know, we don't call out specific customer contracts or specific wins as we go through the quarters. So the way to think about is this, we've had a number of new contract wins in the OEM supply business, we've had new customer acquisition in the other end markets, and we expect those to be a positive effect as we go through the second half of the year.

The other piece was regarding the wire and cable business whereas we've been saying it's a lag or out of the recession because of the project cycles, not only the engineering cycles but also when the electrical and electronic products tend to go into the project. So we expect normally to have sort of enterprise cabling come out of recession first and electrical and electronic wire and cable tends to come out a little slower.

And what we said was, what I was trying to convey was that based on the activity we've seen in bidding activity, project towards our booking and billing rates, we'd expect to see a pickup in the wire and cable business in the second half of the year.

Matt McCall - BB&T Capital Markets

Hey perfect, and then you mentioned, final question, you mentioned the continued weakness in Aerospace and Defense, did you have any parts of your business and that you've seen deceleration either in June or July in the daily sales rates?

Bob Eck

No, this time. Matt, the daily sales rates continued strong as we said through the increase through the first couple of months on the quarter, leveled off more in June and that higher rate has continued in July and virtually all of those same business with the exception of Aerospace.

Matt McCall - BB&T Capital Markets

Got it, thank you all.

Operator

Moving on, we'll go next to Shawn Harrison with Longbow Research LLC.

Shawn Harrison - Longbow Research LLC

Hi, following on some of those questions, may be if you can just talk about you have to start but within the enterprise business, have you seen any I guess, pressure in terms of project spending just related to public sector budgets coming in or anything that would lead you to believe there could be some deceleration in the back half, or do trend look like you're going to continue to improve given the positive dynamics status and the spending etcetera that you touched on?

Bob Eck

We do not see deceleration; we are seeing public sector pressure. And having said that, we have a very, very broad mix of customers in the enterprise business from the markets that our contractor and integrated customers participate in, the security market, lots and lots of different vertical markets variety, so if there were some pressure say in state and local government, it's being offset by strength and other sector.

So, we're not seeing a slowdown. I think what we're trying foreshadow is that we're being a little cautious about the second half of the year because recent economic forecast have been a little more skeptical, I guess, about continued strong recovery.

So, we're trying to be cautious as well as our outlook and not get too far ahead of ourselves, and project for you that we think there's going to be acceleration from Q2 and to Q3.

Shawn Harrison - Longbow Research LLC

Okay, fair point. The other question just is touched on being copper are essentially neutral right now to the business. Maybe to the other side of that, copper is stabilized, what are you seeing in terms of competitive pricing dynamics right now within either the enterprise or the wiring cable business?

Bob Eck

We're not seeing any particular competitive pricing pressure at the present.

Shawn Harrison - Longbow Research LLC

Okay, and then one final just clarification question in interest expense Dennis for the September quarter, I guess it should tick down, but maybe if you could give us a range?

Dennis Letham

It should tick down marginally from the third quarter number, the second quarter number, which was 13.2 million, but then we only took out $28 million worth of debt so it won't come down materially, okay.

Shawn Harrison - Longbow Research LLC

Around may be 13 million or so?

Dennis Letham

That's in the ballpark.

Shawn Harrison - Longbow Research LLC

Okay, thank you.

Operator

We will take our next question today from David Manthey with Robert W. Baird.

David Manthey - Robert W. Baird

Hi guys, good morning.

[Multiple Speakers]

Good morning David.

David Manthey - Robert W. Baird

Could you give us the number of shipping days in the second and third quarters, just so we are clear?

Ted Dosch

64 days in Q2, we just completed in 63 in Q3. We only would have both the 4th of July and the Labor Day holiday affecting our Q3.

Dennis Letham

And Q2 would have only been Memorial Day. I mean you've got some foreign holidays that float around the fringe of that but with the U.S. being 65% of the volume -- the holidays that Ted just mentioned are the primary factors.

David Manthey - Robert W. Baird

Okay and then just to complete the picture, Dennis I don't know if you have first quarter and fourth quarter there also?

Dennis Letham

First quarter had no holidays in addition to basically the way it fell because New Year has got caught up in kind of the tail end to the year and fourth quarter would have Thanksgiving and Christmas in there plus the attended weakness that comes with the day after Thanksgiving, the Christmas Eve type holiday as well, so that probably is three to four days out of the forth quarter which would put you at 61, 62 type number.

David Manthey - Robert W. Baird

Okay, great and then thinking about the sequential thoughts here, in terms of when you're saying things stabilized in June, I guess we're -- you're implying that the run rate of sort of late May then continued into June because June flattened relative to whatever you were looking at, that would imply that it flattened relative to May, is that correct? So it's longer than just a three weeks in the end of the period here, it was probably more like four or five weeks it's been running like that?

Dennis Letham

No. I think the acceleration that we have described continued through April, May and the early part of June and then as we went through the last couple of so weeks of June and the first few weeks of July on a per day basis, we've seen a flattening of those sort of early June run rates.

David Manthey - Robert W. Baird

Okay, so it was a June, July flattening.

Bob Eck

Right, yeah, so I think the right way David, and then give it a sort of acceleration through the quarter stabilizing at the end of the quarter.

David Manthey - Robert W. Baird

Got it, okay. Well, and as we think about the trend into July and into the third quarter, a slower quarter-to-quarter growth rate would be normal for you, if you got back and look historically you've always seen real strong sequential trends from first quarter to second quarter, and then those growth rates sequentially have moderated from second quarter to third quarter so is that basically what you're telling us is that were you seeing sort of normal trends not that there are some sort of inherent weakness here?

Bob Eck

Correct. Right.

David Manthey - Robert W. Baird

Okay. All right and then last question as it relates to copper. Based on where inventories are sitting right now, Bob I don't know, did you say that copper would have virtually no impact next quarter? Is that the implication?

Bob Eck

No I don't want to call out what copper is going to do next quarter because certainly it could be affected by significant swings in the stock market for copper which we - as you know we aren't in that position to call that out. I am not trying to foreshadow coppers impact in Q3.

Dennis Letham

Dave, I think what we've said for the last couple of quarters is as long as copper stays in the general range of around $3 a pound, the impact on revenue is probably somewhere between 1 to 1.5 percentage points. When we're doing year-on-year comparisons that could be a plus or minus depending on which direction the comparisons that could be a plus or minus depending on which direction the comparison is and then about 20% of that revenue impact will be the impact on gross margin. So, first quarter we were looking at 15 million on a 1.270 billion and volume this quarter we are looking at 19 million on the current quarter volume.

So, it's a factor but it's not a big factor at this point in time, until copper were to make a move significantly out of the $3 range for an extended period of time.

David Manthey - Robert W. Baird

Terrific. All right. Thanks a lot guys.

Operator

And we'll go next to Ryan Merkel with William Blair.

Ryan Merkel - William Blair

Thanks. Two questions from me guys. My first question is on Europe, sequentially its awesome gross margin pressure. I am wondering if you can provide some more color there and then what turns that around going forward.

Bob Eck

Ryan a couple of things, one certainly is the strengthening of the dollar. I think we have talked in the past and estimated that about 20 to 25% of our product purchases there are U.S. dollar denominated. So, in the short term with how quickly the dollar strengthened that puts some pressure on our margins which is probably the single biggest driver there.

Ryan Merkel - William Blair

Okay that makes sense then my second question is on the emerging market segment. You saw pretty good operating leverage out of the other segments, but in the emerging markets you didn't see very much operating leverage. I am wondering why that was and then how do we think about milling that going forward, does that start to improve?

Bob Eck

Yeah I think Ryan the answer is that we had a little more expense in the business due to the initiatives. I mentioned that our Wire & Cable initiative in Calah was now hired at full staff. So, the way to think of that is a number of investment headcounts added into the business. Not a whole lot of investment in other fixed cost but we had a lot of heads into the business and those heads are right now unproductive relatively speaking which you have to hire sales people, they have to then build a pipeline and then we have to close the pipeline and turn it into cash. So, honestly we are right where we want to be, we have made investments in Asia-Pac as well in a similar fashion. So, I am very comfortable with where we are at and if we execute well in our initiatives we will see a turn around in that as we go forward.

Ryan Merkel - William Blair

Okay thanks. Great quarter guys.

Bob Eck

Thank you.

Operator

Moving on we'll go next to Hamzah Mazari with Credit Suisse.

Chris Parkinson - Credit Suisse

Good morning this is Chris Parkinson on behalf of Hamzah. Thank you. Can you just add a little more color on the improvement in your North American business besides exiting the low margin contracts and when the incremental margin of [15.7%] you have begins to normalize in terms of timing?

Dennis Letham

Well I think when you look at the incremental margin, both company-wide as well as North America. Our comments over the last couple of quarters have been that once we get into a recovery mode, we think we can drive incremental operating margins with average between 10 and 12%, over a six-to-eight quarter recovery period, okay? But the early quarters in that being at-or-above the high-end of that range and the latter quarter has been at the low-end or slightly below that range as consolidated operating margins move up. So, I think the trend you are seeing there is just kind of the initial leverage that you are going to get out of the recovery as it's nothing more and nothing less than that.

Chris Parkinson - Credit Suisse

Okay. And then, could you add a little more in your comments on the current acquisition landscape or particularly in the emerging markets and the how aggressive you plan on getting there, given that visibility, so I've gone a little bit better?

Bob Eck

So, I think rather than calling our specific sort of opportunities, I will just say that there are opportunities in the pipeline. They are in emerging markets, they are in EMEA, they are in North America. What we intend to do as we look at acquisitions as what we always done; we are basically looking to either add new customer base, add geographic coverage, add products or technology. And certainly we want to have acquisitions that we think fit somewhat within our operating model that we've established, or that we can leverage our operating platform.

Chris Parkinson - Credit Suisse

Perfect. Thank you very much.

Operator

Moving on, we will go next to Gary Farber with CL King.

Gary Farber - CL King

Yeah, thanks. I just had a few questions. Can you say if you are taking market share, as part of your revenue growth, is that driving it at all?

Bob Eck

Early to tell frankly, we think we're doing well in the markets we're in. But, we are early in the recovery and frankly, the market sizing data lags. So, it will be sometime before we can actually get a reasonable grip on how much the markets have grown in the same time period.

Gary Farber - CL King

Right. Okay and then, as far as the third quarter, typically what percentage of your sales would come in September?

Dennis Letham

Well, we typically, we work on a 445 fiscal calendar, and September, probably, in the third quarter, carries a little more weight than just a map of 445 because of the vacation softness that we see or the OEM softness we see in July and August. So, you know, it's going to be a few more percentage points above just the [5 13s] number.

Gary Farber - CL King

So, would you say that's the best read of the quarter itself is going to be, how things recover in September?

Bob Eck

I think the fair read is that we're coming into the quarter with healthy sales and booking rates and assuming that holds up well. But we'll have a good quarter.

Gary Farber - CL King

Okay. And then just lastly on Venezuela, is that, I mean, is that a material portion of your revenue at all?

Bob Eck

It's meaningful to the Latin American numbers and that's why we call it out as a little bit of a dampening effect. We have had very strong numbers in Venezuela in the past. So, importantly, while Venezuela is on a negative path, which is, I think, you know if you read the papers here, you will understand. The rest of Latin America is growing, in fact, stronger than the emerging market numbers would lead you to believe.

Gary Farber - CL King

And Venezuela, just relative to specific to your business. Would you say that things here is getting more difficult?

Bob Eck

I think, things have been difficult this year. And I don't think they're getting any more or less difficult at the present moment.

Gary Farber - CL King

Okay. Alright, thank you.

Operator

Moving on Buckingham Research, we will hear from Ted Wheeler.

Ted Wheeler - Buckingham Research

Hi, good morning everyone.

Bob Eck

Good morning, Ted.

Ted Wheeler - Buckingham Research

I just want a small clarification, you commented on Aerospace and the bill rates improving I guess sort of the middle timeframe of next year but I think I then heard maybe supple chain responses to that could be seen later this year, is that how I should think about it?

Bob Eck

Yes, I think that's exactly right.

Ted Wheeler - Buckingham Research

Okay, so you could see a little bit of a pick up before that for you in there, yield result.

Bob Eck

We think, I just said.

Ted Wheeler - Buckingham Research

And one other on the OpEx guidance that you've been giving I think that maybe six to eight quarters of incremental margin based on the capacity that you kind of already have or didn't reduce but what if sales keep going or in this 12% range, would that shorten that period of time of incremental margin leverage? I think the guidance is a little bit more high single-digit would produce this sort of upbringing or maybe it's net picking, but I am just curious.

Dennis Letham

I think that the fact the incremental margin in the quarter was 15 to 16%; it is inductive of the strong 12% growth in the quarter. When we've been talking about the 10 to 12% incremental margin target over six to eight quarter recovery period that was within expectation that we were dealing with high single-digit growth, so if -- I'm not suggesting any which a performance is going to happen but if we were to have a double-digit revenue growth continuing then, you're going to see higher incremental margins continue and that it will on the tail end of the recovery period accelerate when you have to bring some additional cost in the play because you will have absorb the access capacity that the organization has whether that's sales, time capacity whether it's warehouse capacity or what have you which is really a good problem.

Ted Wheeler - Buckingham Research

It's a good problem. And I gather we're not sort of making plans to do that just yet, in other words it's a….

Bob Eck

No.

Ted Wheeler - Buckingham Research

Okay. And just lastly on pricing I guess I've been hearing that your customers have been still a bit unable to adjust to copper prices. I mean is there any possibility that copper stays at three bucks, there's still some catch up from the wire fabricators and cable makers to raise prices or do you think that whole equation is in balance?

Bob Eck

No. I think right now, the equation is relatively in balance. You'd have to talk to the manufacturers to find out how much price advantages they'd like to get if they could in the market. I think its in-balance currently given that there are still I believe a lot of access capacity in the manufacturing space and that's what's creating the sort of the limited ability to say push through higher price increases.

Ted Wheeler - Buckingham Research

So, really the impact of copper on the upside has been muted by that for you guys?

Bob Eck

True, that's fair.

Ted Wheeler - Buckingham Research

Pretty quarter, thanks.

Bob Eck

Thank you.

Operator

Our next question today is from Brent Rakers with Morgan Keegan.

Brent Rakers - Morgan Keegan

Hi, good morning. I'd like to see if you guys maybe touch a little bit more on the gross margin side, maybe given us a little bit of help in terms of the three different geographic regions and then maybe the follow up to that would be, what would take that overall company gross margin, what would it take to get that level back to that kind of 24 to 24.5 that was normal between '04 and '07?

Ted Dosch

One of the factors that we talked about in the past that has a fairly significant impact is the mix of the business. As we talked about our OEM supply business, it is the portion of the business that was off the most and also happens to be our highest margin business, so as that begins to recover to a similar mix of our total business that we saw back in the '07, early '08 timeframe that will have a natural and upward pressure on that gross margin and not necessarily get us back to 24, if that was really happening at a time when everything was say perfectly aligned to a high copper price, high demand, high supplier capacity utilization, keeping upwards pressure on all goods at that point in time.

But we would expect to see gradual margin improvement, partially by mix of the business, partially by some of the initiatives Bob talked about earlier.

Dennis Letham

And somewhat by geographic mix as well, as we've talked about many times in the past, Europe is the higher gross margin segment and again as like Ted described in OEM supply, it was the most negatively impacted in recession and is clawing it's way back as the mix stays more sort of North America focused, that does put a little bit of downward pressure on the gross margin.

Brent Rakers - Morgan Keegan

Bob, any sense on how far the apples-to-apples gross margin is down when you axe out the effects of both geographic and division mix?

Bob Eck

I think there is a lot of backers that go into this one, one that we haven't touched down here, the currency. As Ted has mentioned earlier about the impact of the stronger dollar negatively impacting Europe margins in the current quarter, when we were back at the 24% margins, keep it in mind, much at that time we were dealing with an environment where the dollar was depreciating so that dollar denominated product that was being sold at Europe was creating capital role in short term pricing advantage or margin advantage there.

So, there is a ton of factors that go into this, mix is by far the biggest, but you have to look at currency, you have to look at where copper was at, where the inventory was priced relative to where the copper price points were in the market, those sorts of things. I think the other thing we are playing it would be vendor rebates to some degree as volumes rebuild and we have the opportunity to earn more under those programs that helped margins a little bit, so there is a ton of individual components that go into the Delta as it came down and as you rebuild it, I think that the important thing is that the margins have stabilized and have now started to show some pickup with the mix starting to bend a little bit, if we get a little bit of help on the dollar firming, not firming but kind of stabilizing against the euro level help some in Europe.

Brent Rakers - Morgan Keegan

Right, then maybe just couple of house keeping to wrap up, any sense on the gross margins by geography in the quarter and then I didn't see the DD&A number provided in the release or on the earlier commentary if you could maybe help me with those.

Dennis Letham

We typically haven't given gross margins by region but I can get you the appreciation numbers there. 8.4 million.

Brent Rakers - Morgan Keegan

All right. Thank you.

Operator

And sir anything further? (Operator Instructions). Our next question today is from Jeff Beach with Stifel, Nicolaus.

Jeff Beach - Stifel, Nicolaus

Yes. Good morning, Bob and Dennis.

Bob Eck

Hi Jeff.

Jeff Beach - Stifel, Nicolaus

First I don't believe I could have missed it that you mentioned security if you did, would you just talk about the growth there and trends in that part of your business?

Bob Eck

We did in fact mentioned and it was worldwide approximately 8% organic growth. Very strong in EMEA and the emerging markets positive number but more modest in North America largely because it's our more mature market growing off a larger base, so we are seeing more rapid sort of wrap up in the other parts of the world. But still a solid number across the board and good trends in North America and we feel good about the market. I called out that these trends weren't securing public and private places that we have seen continues to happen and importantly for us the trends where it's IP security continues to shift - the market continues to shift from analog to IP which is a positive trend for us as well.

Jeff Beach - Stifel, Nicolaus

All right. The second were the project activity picking up at this point. Has there been a shift in your overall mix of projects and can you give us if there has been something meaningful what its projects are as a percentage of your sales?

Bob Eck

We are in the middle of that shift, we have talked about in a very strong economy projects are about 20% of the sales mix in a recessionary environment though less than 10 typically and we are going through that shift to call out exactly where we are in the shift I think we would be taking a complete stab in the wind.

Jeff Beach - Stifel, Nicolaus

Okay. But it is -- projects are obviously helping drive the sales?

Bob Eck

Absolutely.

Jeff Beach - Stifel, Nicolaus

The last thing with your continued losses in Europe, can you give us any color between your different business segments, what's making money, what's losing money?

Bob Eck

We don't call out operating results by end markets because they share an operational infrastructure. That's why we report operating earnings based on the geographic segments.

I think we have talked in the past on some of the calls about initiatives we have underway. We have in the enterprise business we are adding additional suppliers and products into the business. In OEM supply we are pursuing new business; we are pursuing geography expansion with Wire & Cable across the continent. So, all those different items are in motion, we opened a redistributor that we have talked in the past in Europe that is in its early phase, it's beginning to ramp up some volume as well. So, there is a mix of things happening, we are focused very much on expenses in Europe as well.

I guess I can tell you that it is as you look across the organization you look across the reporting segments, the single biggest focus right now of the management team is improving profitability in Europe.

Dennis Letham

Just as a reminder Jeff, when we finished last year, went into the first quarter, we were talking about an expectation of taking Europe from the last position we have last year to something that would be marginally in the black this year. We were in the black in the first quarter. A head win for the strengthening of the dollar and the impact that had on gross margins in Q2, we would have been marginally in the black again in Q2. So, and as we work through the timing around that inventory valuation on dollar inventory, you would expect that as the year progresses, we would end up on line with our regional target have been marginally in the black, but it would be choppy. It won't be into a straight line trend.

Ted Dosch

The other thing maybe of note in Europe as Bob and Dennis said it's an area of intense focus for us, not only was the OEM supply business, the off the most over the last 18 months, from the end market perspective. But Europe was off the most from a geographic perspective. But the compound that OEM supply in Europe was the single portion of our business segment off the most significantly. So, like in this quarter, even though it was marginally negative at the operating profit line, it was about a 240 basis point improvement in operating margin year-over-year. And we would expect to see that business continue to have some of the best fixed cost leverage as the business returns.

Jeff Beach - Stifel, Nicolaus

Alright, thank you.

Operator

And gentlemen, there are no further questions at this time. I would like to turn the call back over to you for additional or concluding remarks.

Bob Eck

Thanks for joining us today. We believe that the global economy is undergoing a modest recovery and our global reach, strategic initiatives and value-added business model position us well to support our customers in the improving economic environment. Thank you.

Operator

Once again, that does conclude today's conference. I'd like to thank everyone for your participation.

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