Anixter International's (AXE) CEO Robert Eck on Q2 2014 Results - Earnings Call Transcript

Jul.29.14 | About: Anixter International (AXE)

Anixter International (NYSE:AXE)

Q2 2014 Earnings Call

July 29, 2014 10:30 am ET

Executives

Lisa Meers -

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

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

Analysts

Steven Bryant Fox - Cross Research LLC

Shawn M. Harrison - Longbow Research LLC

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

Steven Folse - Stifel, Nicolaus & Company, Incorporated, Research Division

Kwame C. Webb - Morningstar Inc., Research Division

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

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

Operator

Good day, and welcome to the Anixter 2014 Second Quarter Earnings Release Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Lisa Meers for opening comments and remarks. Please begin when ready, Ms. Meers.

Lisa Meers

Okay, thank you, Deanna. Good morning, and thank you for joining us for Anixter's second quarter 2014 earnings call. Today I'm joined by Bob Eck, President and CEO; and Ted Dosch, Executive Vice President and CFO, to discuss our second quarter financial results. After their remarks, we'll open the line to take your questions.

Before we begin, I want to remind everyone that we will be making forward-looking statements in this presentation, which are subject to a number of factors that could cause Anixter's actual results to differ materially from what is indicated here. We do not undertake to update these statements and refer you to our SEC filings for more information. In conjunction with today's earnings announcement, please find a supplemental slide presentation that further details the quarter available on our Investor Relations website, anixter.com/investor.

Today's earnings announcement includes both GAAP and non-GAAP financial results, the reconciliation of which is detailed in our earnings release and in the slides posted on our website. Now I'll turn the call over to Bob.

Robert J. Eck

Thanks, Lisa. Good morning, and thank you for joining us for our review of our second quarter 2014 results. This morning, I will offer my perspective on our business and the current operating environment, update you on each of our reporting segments and discuss our outlook for the second half of the year. Then I will turn the call to Ted to detail our financial performance and frame in more detail our thoughts on the rest of the year. Following Ted's comments, we will take your questions.

As you saw from this morning's press release, we delivered solid earnings performance in the second quarter, achieving record second quarter sales of $1.59 billion, a 0.4% increase on a reported basis and a 0.6% increase organically; operating income of $92.4 million, up 8%; earnings per diluted share of $1.61, up 15%; and adjusted earnings per diluted share of $1.57, up 12%, all year-over-year.

Our non-GAAP adjustments included a $1.6 million favorable impact from tax-related items that Ted will detail. All of my following comments this morning reference year-over-year comparisons that exclude the impact of these items.

Turning to our highlights. We were very pleased to achieve record second quarter sales of $229 million, an 11% increase versus prior year in our Emerging Markets geographies, as the recovery that began in the fourth quarter of 2013 continued. All segments achieved strong organic sales growth in the Emerging Markets region for both the second quarter and first half of 2014, driven by strength in Latin America. As well, we achieved organic growth of 2% in our EMEA region as we continue to experience stabilization in our Europe markets. Our Fasteners segment turned in its sixth consecutive quarter of significant performance improvements, with sales of $243 million, up 3%; and operating profit growing more than 100%, both versus prior year.

As in previous quarters, our focus on margin initiatives has resulted in a 40-basis-point improvement in gross margins to 22.9%, with all 3 segments delivering improved margins year-over-year.

Looking at the mix of sales in the quarter. Our ECS segment was 52% of the total, while Wire & Cable was 33% and Fasteners was 15%. Geographically, 67% of sales came from North America, 18% from Europe and the Middle East, and 15% from Emerging Markets. With that as the backdrop, let me review trends in each of our end markets.

Our second quarter ECS sales of $817 million increased 0.4% year-over-year. After excluding the impact of foreign exchange, ECS organic sales growth was 0.8%. Sequentially, ECS sales increased by 7.5% from the first quarter, which is higher than our typical seasonality. The adverse weather impact affected the first quarter -- that affected the first quarter helped the sequential sales growth by about 1% to 2%. However, this higher growth rate is encouraging, considering the 2 fewer billing days in Q2 compared to Q1. Our growth is an indication of improving underlying trends in the business that go beyond normal quarterly seasonality.

Turning to our market share. Based on conversations we have with our suppliers and supported by data we see in the market, it is our view that we maintained our share in our addressable data infrastructure market in the current quarter. Looking at our ECS business by region. Our largest market, North America, experienced a 0.2% decline organically. Sequentially, our North American business increased 8.2%, reflecting the gradual but steady improvement we continue to experience in this business. While we were disappointed at the pace of improvement in the market, we continue to have confidence in the recovery and expect to see stronger trends continue. We were pleased to exit the quarter with our North America ECS quarter-end backlog up 29% versus the prior year. We remain optimistic that our project pipeline will result in improved results in the second half of the year.

Similar to the previous 2 quarters, our Emerging Markets business was strong, fueled by a continuation of project business in Latin America, particularly in Brazil and Mexico. On a year-over-year basis, sales in our ECS Emerging Markets increased by 4.7% overall and by 6.6% on an organic basis. Our backlog continues to increase, ending the quarter up 14% versus a year ago. Based on the momentum we see in this business and the visibility we have into ongoing projects, we expect continued solid growth in this region for the remainder of the year.

Moving to EMEA. Our business continues to improve, with sales up 3.1%, with improvement coming from the U.K., the Continent, and the Middle East. On an organic basis, sales declined 1.8% largely due to one very large project in the financial sector in last year's quarter.

Now let's turn to our other growth initiatives. Results in our Security Solutions business, which represented 26% of our ECS business in the quarter, declined by 2% from the prior year quarter. As we described in last quarter's call, we have evaluated this market and this business and have taken actions that we believe will reaccelerate its growth. Early results indicate that the changes we have implemented have helped the business regain momentum, as bookings per day improved each month through the quarter. We expect to see more evidence of the improvements in the second half of the year. We continue to believe that the physical security market, including video surveillance and access control, represents a significant opportunity for us, and returning this business to strong growth remains one of our top priorities.

Our in-building wireless business, while still a small part of our total business, achieved growth year-over-year of nearly 40%, and we expect this strong growth to continue through 2014. Finally, we exited the quarter with our global backlog in ECS up 19% compared to the end of last year's second quarter. We were also successful in winning several global accounts programs based on our unmatched ability to support these customers around the world.

Moving to Electrical and Electronic Wire & Cable. Our second quarter sales, up $525.5 million, decreased by 1%. Excluding the impact of foreign exchange and a $0.14 or 4.3% drop in the price of copper, organic sales were flat versus prior year. Looking at the business sequentially, global sales increased by 2.2%. The 2 fewer billing days in the second quarter more than offset the impact of poor weather in the first quarter, resulting in sequential growth that more approximates normal seasonality. By region, North America organic sales decreased by 4.5% versus prior year caused by fewer large industrial projects. We are currently seeing a steady increase in project demand in Canada, particularly in natural resources, energy and nonresidential construction. While our strong backlog in our Canadian business supports our view that trends in Canada will accelerate over the second half of the year, we remain cautious on the timing as some projects appear to be further out than we'd initially expected. Project activity in the U.S. is increasing. However, due to normal construction cycles, we expect to see only a modest pickup in the U.S. in the second half of the year.

Turning to EMEA. Our Wire & Cable sales of $88.1 million increased by 15.5% on a reported basis and 8.3% on an organic basis. Growth was driven by customers in Continental Europe, including the addition of new customers, and reflected solid growth in both our industrial and OEM businesses. Based on the current trends, we expect this business to remain solid through the back half of 2014.

Finally, sales in our Emerging Markets geography were strong, increasing by 19.4% to $67.9 million, driven by strength in both our Latin America and Asia-Pacific regions. In particular, stronger project business in the Mexican and Australian markets fueled the growth in the quarter. On an organic basis in Emerging Markets -- on an organic basis, sales in Emerging Markets increased by 21.2%. Looking ahead, we are seeing an increase in the number of large industrial projects in our pipeline. Ongoing global infrastructure investment across a broad spectrum of customer verticals and increased production rates at OEMs set up well for sales growth in both parts of our Wire & Cable business. We see strong quoting activity with new and existing customers and believe we have opportunities to take share in both our OEM and industrial Wire & Cable businesses as we leverage our global platform. As I noted earlier, our industrial communication and controls initiative continues to deliver strong growth. We continue to build momentum in this business with additional products and an expanded vendor base and are on track with plans to expand our focus beyond North America.

Now turning to our Fasteners segment. Once again, we were pleased with the performance of this business. Total Fasteners sales of $243 million increased by 3.4% from the prior quarter. Excluding the $6.1 million of favorable impact from foreign exchange, organic sales increased by 0.8%. Further, excluding the $11.6 million impact resulting from the previously disclosed transition of an existing customer to dual-source supply, organic sales growth would've been 6%.

Looking at the business by region. North America sales of $98.7 million compared to $103 million in the year-ago quarter, as steadily increasing production from our heavy truck customers was offset by slower production levels in other end markets, including agriculture and generator sets. Based on what our customers have said in their public disclosures, we expect further acceleration in the North America heavy truck customer vertical as the year progresses.

In our EMEA region, we achieved sales of $121.1 million, up 6.4% on a reported basis and 0.3% on an organic basis, driven by increases in production with existing customers and the continued ramp-up of a new customer facility. Finally, excluding the major customer transition I just mentioned, we were able to deliver a 12% increase in sales on an organic basis in this region.

Finally, we delivered 25% sales growth in our Emerging Markets as we continue to add new customers and grow with existing customers. While still less than 10% of segment sales, this region is beginning to contribute meaningfully to the overall growth of the segment. During the quarter, we were awarded 2 new significant programs in the U.S. and Emerging Markets. We are encouraged by the significant progress we have made in our Fasteners business over the past year. We have strong relationships with our existing customers and have an active pipeline of new business opportunities.

Let me now turn to gross margin, which was 22.9% in the quarter, a 40-basis-point increase versus the year-ago quarter. Our gross margin increase reflected year-over-year improvement in all segments, with the majority of the increase driven by our Fasteners segment.

As we look to the second half of 2014, we believe we are well positioned in each of our segments to capture global growth. And we are beginning to see consistent signs of improving growth in multiple regions and end markets. The slow pace of recovery in our communications infrastructure market has been disappointing, although we see increasing evidence that this business is improving in all of our geographies. In fact, our ECS business has an all-time record high backlog at the end of the second quarter, and we continue to expect that we will experience a meaningful acceleration in year-over-year growth in the second half of the year, with the strongest growth likely to come from our ECS segment. This pickup is further supported by forecasts we are seeing from Gartner, indicating stronger 2014 growth in IT spending compared to 2013, which is consistent with the sequential improvements we are beginning to see in our ECS business. While we expect to see full year growth in our Wire & Cable business, we continue to have fewer large projects than we had over the past 2 years. However, our pipeline is strong, driven by investment in oil and gas, alternative energy, mining and nonresidential construction. As well, our day-to-day and OEM businesses continue to deliver solid results. Finally, our Fasteners segment continues to be energized by their results and the opportunities we see for continued growth. With accelerating production by our heavy truck customers in North America, continued growth with existing customers in EMEA and the Emerging Markets, recent new business awards and an active pipeline of new business, we expect to continue to deliver solid results in this business in the second half.

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

Theodore A. Dosch

Thanks, Bob, and good morning, everyone. Before I begin a detailed explanation of our results, let me again highlight that our adjusted earnings of $1.57 per diluted share excludes a net $1.6 million benefit from tax-related adjustments that I will detail later in my comments. We believe the non-GAAP earnings measure is the best representation of our ongoing operational performance, and our release includes a schedule which reconciles the GAAP financial results with the non-GAAP adjusted results. All of the following comments this morning, including year-over-year comparisons, exclude the impact of these tax-related adjustments.

As Bob discussed, our record second quarter sales of $1.59 billion increased 0.4% compared to a year ago and increased 0.6% on an organic basis.

Moving down the income statement. We recorded the following results compared to last year: operating income of $92.4 million, an 8% increase; adjusted net income of $52.2 million, a 13% increase; and adjusted diluted earnings per share of $1.57, a 12% increase. We estimate that the average price of copper, which decreased by 4.3% from the year-ago quarter, negatively impacted our operating earnings by $1.1 million and our earnings per diluted share by $0.02. Through the combination of strong margin performance and tight expense control, we delivered over 100% operating leverage for the quarter, despite the negative copper impact and sales growth that was lower than we had anticipated when the quarter began.

As you know, the second quarter had 63 billing days compared to 64 days in the second quarter of 2013 and 65 days in the first quarter of 2014. Adjusting for the impact of 1 less day in the current year quarter, reported sales would've increased by 2%. And adjusting for the impact of 2 fewer days in the current quarter, sequential sales would have increased by 7%.

For the rest of the year, net billing days are as follows: 64 days in Q3 2014, compared to 63 in Q3 2013; and 61 days in Q4 2014, compared to an estimated 65 days in Q4 2013.

Our second quarter operating expenses of $270.5 million were flat versus prior year, reflecting our ongoing focus on expense management while still investing in the business, including both IT and strategic investments to support our strategic initiatives. Operating expenses of 17.1% of sales were flat with the year ago.

Consolidated operating margin of 5.8% increased 40 basis points versus the prior year and increased 20 basis points versus the first quarter. The strong operating margin improvement, despite a low top line growth performance, drove operating profit leverage of over 100%.

Looking at our operating margin by segment. ECS margin increased by 20 basis points versus prior year and increased by 70 basis points versus the first quarter. This strong margin performance, combined with excellent cost management, resulted in an operating profit leverage of 60%. Operating margin in our Wire & Cable segment of 6.9% decreased by 30 basis points versus both the prior year and the first quarter. Approximately half of the decline in operating margin was caused by the drop in copper price. This business also felt the margin pressure from geographic mix, as sales outside North America grew at a much higher pace than within North America.

Turning to Fasteners. Our operating margin of 5% increased 260 basis points versus the prior year quarter, reflecting both gross margin improvement, as well as operating expense leverage. Sequentially, operating margin declined by 10 basis points, reflecting a slightly weaker customer mix. The solid sales growth and tight expense control versus prior year resulted in an operating profit leverage of 81%. While we still have areas of improvement in this business, we are very pleased with the progress and momentum we have achieved over the past 6 quarters.

As we move further down the income statement, interest expense of $10.1 million decreased by $1.2 million year-over-year, reflecting the redemption of the 10% notes that matured in March 2014. Foreign exchange and other expenses of $2.6 million decreased $1.1 million from the prior year quarter due to lower foreign currency expense and a favorable comparison in the cash surrender value of company-owned life insurance policies.

The reported effective tax rate in the current quarter was 32.5% versus a tax rate of 34.9% in the year-ago quarter. As previously mentioned, our tax rate this quarter reflects a net tax benefit of $2 million, primarily related to the reversal of a deferred tax valuation allowance in Europe. Also, due to a change in country level mix in the full year forecast of earnings, the second quarter of 2014 tax expense includes $0.4 million of additional expense to forecast an adjusted effective tax rate of 34.4% for the full year, excluding the tax benefit described above.

In the second quarter, we generated $79 million of cash from operations, up 26% from $63 million in the year-ago quarter. Year-to-date, the company has generated $87 million of cash from operations. The strong cash flow reflects the combination of our operating results and further improvements in our working capital efficiency, resulting from improved supplier payment terms and better-managed inventory levels.

At the end of the second quarter, working capital investment equated to 23.2% of annualized sales, compared to 23.7% in the first quarter. Finally, for the 6 months ended July 4, we invested $17.1 million in capital expenditures versus $17.9 million in the prior year period. For 2014, we expect to invest approximately $45 million in capital projects, including a combination of operational and strategic initiatives.

At the end of the quarter, our debt to total capital ratio of 41.7% compared to 44.9% at the end of 2013, with a weighted average cost of borrowed capital of 4.6% compared to 4.9% in the prior year quarter. Our current leverage ratio is below our long-range target of 45% to 50% debt to capital, and we expect our leverage ratio to remain near the lower end of the range through 2014.

Our liquidity position remains excellent, with $352 million of availability under bank revolving credit line and $200 million of outstanding borrowings under our $300 million accounts receivable securitization facility. As a result, available liquidity was approximately $450 million at the end of the second quarter.

Looking now at our capital priorities. We have disciplined and prudent approach to how we allocate capital, balancing our 4 priorities, including supporting the organic growth of the business; maintaining a strong balance sheet that provides a financial flexibility, especially in environments where market dynamics can shift quickly; pursuing strategic and financially attractive acquisitions; and opportunistically returning cash to shareholders. In total, through a combination of share repurchases and special dividends, we have returned over $750 million to shareholders from 2010 to 2013, representing over 70% of our available cash. Based on our expectations for a continued slow growth but modestly improving economy, and supported by our backlog and pipeline of new projects, we expect our organic sales growth for the full year to be in the low end of the mid-single-digit range. Based on our first half organic growth of 2.1%, our expectation is that growth trends will increase meaningfully in the third and fourth quarters. We continue to believe that top line growth will translate into high single-digit operating profit leverage. As you think about our organic growth rate over the second half of the year, which excludes the impact of currency and copper price fluctuations, please keep in mind the following: While currency was a negative impact for us in the first quarter, recent fluctuations resulted in currency being a positive impact on sales in the second quarter. However, in the second quarter, due to differing levels of profitability by country, overall currency had a negative impact on earnings. At current copper price levels, the year-over-year copper impact in the third quarter would be negligible.

Let me conclude by emphasizing that we believe the long-term secular drivers of each of our 3 segments are strong, and that the challenges we face are more related to timing and the pace of recovery in the broader economy. From a macro perspective, some key indicators that correlate to our business are improving. In particular, we know we see increasing signs of strength in non-res construction, with subsectors that are more relevant to our business, including private office, commercial and manufacturing spending leading growth. As well, we are seeing indications of improving capital spending by corporations, continued strength in the oil and gas market, and continued significant infrastructure investment, all supporting increased investment by our customers.

With respect to our core ECS business, we believe the secular trends remain very strong. The robust growth in mobility and connectivity drives demand for bandwidth and storage, which in turn drives demand for the products we sell. We are seeing an increasing indication of a gradual improvement in this market.

With that, we will now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Steven Fox of Cross Research.

Steven Bryant Fox - Cross Research LLC

I guess what I'm kind of struggling with is, you highlighted a lot of positive indicators across many of your markets and also year-over-year comparisons that maybe help you a little bit, but it doesn't sound like you're seeing all of that translate into sales as quickly as maybe it normally would. So I guess, my first question is, can you sort of confirm if I'm on the right track with that conclusion? And if so, can you sort of maybe walk us through again why that's the case?

Robert J. Eck

Steve, this is Bob. I'll take a shot at that. I think you're interpreting it correctly. We are seeing improving trends. We talked about backlog numbers across the business, particularly in the enterprise business, and we're not seeing it turn into sales as quickly as we would have if you looked back over the past couple of years. And we noticed the same thing, obviously, and in fact, went back and looked at prior periods to say, "When project activity was accelerating, how quickly did the backlog turn into cash, in effect?" Was there a lag because we had more projects in the backlog than day-to-day or small projects? And the answer is that the backlog does convert at a slower rate in high project activity environments, which makes sense, right? If you think of what we saw in 2013, 2012, 2011, softer project markets, particularly in enterprise, and we would book activity that, because it wasn't large-scale projects, would convert pretty quickly into billings. When you get more large-scale projects in the backlog, you run into a variety of things that impact the pace at which they turn into billings. It's certainly construction delays on the job site, it can be lead times for manufacturers, it can be on international projects, potentially delays in customs. So there's a variety of things that are mostly, honestly, out of our control that come into play that delay how those projects turn into cash. And so, when we look at the backlog trends, particularly in the ECS business across all the geographies, we have a pretty positive outlook for the second half because we are seeing those trends. And based on our past experience and some analysis we've done of prior periods, we would say what we're seeing is not unexpected when you start to have a pickup in project activity.

Steven Bryant Fox - Cross Research LLC

That's helpful. And just to be clear on the backlog comments, how clean do you feel the backlog is with respect to these larger projects coming on? Like, do you actually see them ramping, but it's just the pace is slow? Or do we still have to wait to make sure that we don't see further delays?

Robert J. Eck

Yes. I think projects are ramping, and we're having the normal slowdown in just how they get delivered. We don't put -- we've talked about this in the past, but it's maybe helpful. We don't record projects or an order in backlog until we have a purchase order from a customer in hand. So the question of, "Gee, if you've got this high backlog you reported in ECS, does that potentially fall off over time because the orders get canceled?" You know what, there's always a slight amount of order canceling that flows through the business. In terms of these projects, though, we have purchase orders in hand, and we feel like the backlog is really solid, in fact.

Steven Bryant Fox - Cross Research LLC

Okay, that's encouraging. And then, just one final question, within ECS, just looking at the security business. Can you talk about the pace of recovery now? As some of these initiatives are under way, the growth rates -- I know there's been some extraneous items in there, but the growth rates have been pretty de minimis for quite a while now. How quickly can you get back to what would be attractive growth for the business? And what is that rate in your mind going to be?

Robert J. Eck

Yes, Steve. Fair question. So on the last earnings call, I talked about our disappointment on our performance in security over the past couple of quarters and that we had made a senior level management change to help us get that business back on track. That change became effective in May. The person was transitioning some other responsibilities as he transitioned into this role. We then started some pretty specific tactical execution activity. And what we saw in late May and in June was an increase in the bookings in security on a daily basis, so per billing day in the month, year-over-year. And approaching our plan rates, which we don't disclose what our internal plans are except for in a very broad way, when we do our proxies and the CD&A. So I'm not going to disclose what the specific targets were. But what we're targeting is what I would characterize as market kind of growth rates in that business, which get us back into high single, low double-digits, and it will vary a little bit across geography. And I want to go back and highlight what I said in the last quarter's call. This issue is primarily a North America issue. We're experiencing very good growth in the other geographies in our security program.

Operator

We'll take our next question from Shawn Harrison of Longbow Research.

Shawn M. Harrison - Longbow Research LLC

Wanted to focus on ECS as well, but just the core x security. Maybe if you could talk about the core in North America x security, what it did on both the sequential and year-over-year basis and year-over-year organically, obviously.

Theodore A. Dosch

Yes, Shawn. This is Ted. I don't have the sequential number there, but I think it was in the 3% to 4% range, as far as year-over-year growth.

Robert J. Eck

North America.

Theodore A. Dosch

Yes. North America, specifically, yes.

Shawn M. Harrison - Longbow Research LLC

North America, specifically. And that year-over-year growth, is that all project-related now? Or is that project tailwind, it sounds like, still to come, and that 3% to 4% was more of kind of the short-cycle activity?

Robert J. Eck

Yes. I would characterize it as more short-cycle activity, maybe a little bit of the bigger projects starting to hit.

Shawn M. Harrison - Longbow Research LLC

Okay. And then, is there any -- I know, typically, ECS carries a lower gross margin relative to the Fastener business, but is there any difference in the gross margin profile with larger projects hitting relative to the shorter-cycle business?

Robert J. Eck

There can be a difference. It actually depends on how the project gets delivered. So in a large-scale project, if there's more direct ship content in it, the margin will tend -- the gross margin will tend to be lower. But as we've talked about in the past, there's virtually -- there's very little working capital. There's no inventory in the direct ship. There's accounts receivable offset by accounts payable to the vendor. There's also 0 operating expense since we don't touch it. There's a little bit of sales expense. So the gross margin comes down, but in terms of profitability, we think it's as profitable as the rest of the business. If we deliver more supply chain services with those large projects -- and we have a mix across our project business. Some have supply chain services attached to them. Some not so much. If there's supply chain services, the margins tend to be sort of at or above the average for the ECS business. When you compare ECS to Fasteners, I think the important comparison isn't just what's the gross margin, but the operating expense as a percent of sales, the operating leverage we get in the business and then also the working capital that gets tied up in the business. So from a return on capital standpoint, the enterprise business is our most efficient user of working capital. And so even though when project activity ramps up, it might get a slight degradation in gross margin based on the mix between direct ship and supply chain, we expect to see even higher working capital turns, and so very good return on capital. And I think it's important, as you think about it, to keep the working capital aspect and return on invested capital perspective in mind as you think about gross margin, too.

Theodore A. Dosch

Shawn, I think you asked about both year-over-year and sequentially, and I only gave you the year-over-year number. On a sequential basis, core ECS grew 8% in North America and 7% on a global basis, but the core, excluding the security part of ECS.

Shawn M. Harrison - Longbow Research LLC

Very helpful. And just one quick follow-up. I know it's not apples-to-apples. Wesco, the past couple quarters, has put up in kind of their all-in business that you can try to overlap with yours, some slightly higher growth rates. Are you seeing a greater competitive dynamic in that market? I know early on you think you said you held share, but maybe can you just talk about the competitive landscape?

Robert J. Eck

Yes. I -- when I've talked about this in the past, Shawn, I think one of the things to remember is that these are pretty big markets. So there are a lot of competitors in these markets. And I think based on Wesco's reported numbers, they're doing well in the broader market. We would argue that we're holding our own in the broader market. And therefore, I would say not specifically losing share to Wesco based on how we see it. And if we look at global customers, we're actually taking incremental wins in global customers in our enterprise space, and so, in fact, feel very good about how our global model is playing out there.

Operator

We'll go next to Ryan Merkel of William Blair.

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

First, wanted to dig into the cadence of sales throughout the quarter. I think you had a decent end to March and a pretty good start to April. So did May and June slow? And then maybe could comment on how July is looking.

Theodore A. Dosch

Ryan, as we look at how the quarter played out, actually, it was kind of the reverse of that. We actually started slower in the month of April, and daily billing rates increased as the quarter went on. In fact, the last half of the quarter was probably about 300 basis points of growth -- of higher growth than the first half of the quarter.

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

Okay. And what do you attribute that to? Is that maybe some of that project stuff starting to come in ? Or is that still delayed and it was maybe the day-to-day business picking up?

Robert J. Eck

I think it's a range of things. I think there is some project billing coming in. There certainly was some big project billing in Latin America that came through, and some of that came later in the quarter. We had some project billing in Wire & Cable in Australia that came through late in the quarter. The other issue that we had in the OEM supply business is that we saw a little bit weaker start and then holiday bridging in Europe, particularly early in May. There's a number of holidays that come early in May. May 1, for example, in Europe, it landed on Thursday. And in the manufacturing environment, quite often, then the Friday gets bridged in Europe, and there's a 2-day shutdown for the holiday. So we did see some of those impacts as well as we came through the first part of the quarter.

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

Okay. And then, moving on to the North American OEM supply weakness. You mentioned agriculture and generator set were areas of weakness. Can you just give us a sense of the magnitude? Are we talking down double digits? And then, were there any markets that offset that? Where is there some strength?

Robert J. Eck

Yes. I think it's sort of a story of 2 things happening in the other markets being fairly flattish for us. Heavy truck accelerated in the quarter. And then we had companies that manufacture generator sets actually take their production rates down. What that specifically relates to is a very low forecast for the hurricane season for this year, which, so far, has proven to be the case. And so they found themselves basically stacked with inventory that didn't have a home. And so they reduced their production rates on generator sets. And so that, of course, immediately and directly affected us. In ag, we had our customers take their production rates down. And that is -- in fact, I think one of the ag manufacturers late last year called out a change in that they were going to project for the coming couple of years in capital spend cycle and agriculture in North America that we were coming off the back of a sort of 3-year high spend cycle, and they expected a 1- or 2-year lower spend cycle, and we think that's exactly what's playing through. Frankly, in fact, we hadn't thought a whole lot about it as we hit the early part of this year. We were very fixated on heavy truck accelerating. And I would say, the effect of those 2 largely offset each other with a couple of other puts and takes.

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

Okay, all right. And then, last question for me, the OpEx controls have been very good. I'm just wondering where are you finding the places to save money because you are still investing in growth? So maybe you could just list off a few of them.

Theodore A. Dosch

Yes, Ryan. There's a couple of main contributors to that. And first off, there's the broad, general expense control associated with how we manage in a slow revenue growth environment. So that's typical as you would expect us to do to try to compensate for slower top line growth. More specifically, we have some areas that have contributed more significant growth, the largest of which is in the area of pension expense. You remember that we took some steps at the end of 2012, and we got the benefit of part of those savings in 2013. And now in 2014, we have the full benefit of that. So that's helping to offset some of the more strategic investments that we're making, for example, with some of our IT initiatives, which includes a very large increase in expense. And it's also helping to offset some other increases, for example, medical expense. But overall, the pension expense reduction is the single largest reduction in operating expense year-over-year in addition to just broader, tighter, day-to-day management control.

Operator

We'll go next to Steven Folse of Stifel.

Steven Folse - Stifel, Nicolaus & Company, Incorporated, Research Division

My first question -- first question is on ECS backlog growth in North America. Last quarter, you talked about how a lot of the growth was primarily focused in the data center markets. Was that kind of the same thing -- same trends that you saw in this quarter? Or did the non-res improvement that we've kind of seen as the year progressed kind of contribute more this quarter to that strong backlog growth?

Robert J. Eck

We've, in the past, tried to be cautious about calling out specific contribution from data centers versus other non-res growth because when we do it, it's purely an estimate. It's hard sometimes to track the specific project activities. It flows through a contractor. We don't necessarily always know where the product is going. My gut is that we are seeing a little bit of recovery in data center spend. Part of it is in customers who operate colo sites or cloud providers, and certainly, part of it coming from enterprise as well, and I think coming off the back of extremely slow growth in data centers over the past couple of years. So we're seeing, I think, a little bit of bounce-back in that. And then, finally, yes, there probably is a piece of it coming from the pickup in non-res construction as well.

Steven Folse - Stifel, Nicolaus & Company, Incorporated, Research Division

Great. Then turning to specialty Wire & Cable in North America, sounds like Canada was a little bit stronger than the U.S. Can you give some specific growth rates that you saw by country in that division? And then, also moving forward, the large project pickup, is that -- are you expecting that to occur in both geographies? Or is that primarily going to be a Canadian thing?

Theodore A. Dosch

Yes, Steve. Let me comment first on the trends. We don't disclose country-level revenues. I can't really give you revenue growth in Canada versus the U.S. But just as indicative of the improving trends, I will tell you that across North America, our Wire & Cable business showed a 27% increase in the backlog versus the same time last year, end of Q2. But in Canada specifically, it was up 68%. So remember we are comparing to a relatively soft period last year in Q2, as I think the whole industry experienced, but this is evidence of what we have seen as a very nice improvement in the trend in Canada. Quite frankly, we're seeing that growth occurring pretty much across the country and as a function of both day-to-day business, as well as some improvement in the project space in particular.

Operator

[Operator Instructions] And we'll go next to Kwame Webb with Morningstar.

Kwame C. Webb - Morningstar Inc., Research Division

I just want to touch on the topic of capital allocation. So the business is sort of an interesting one when growth arrives, capital -- working capital levels really expand. When it doesn't, you guys end up with sort of a paucity of cash. I guess, sort of number 1, how are you guys thinking about returning cash to shareholders should you fall below your leverage levels? Are you more inclined to do dividends or share repurchases? And then also if you could just talk about how you guys feel about the strategic positioning of the portfolio. It seems like you've been out of the M&A market for a while now. Kind of curious to know if there's anything out there that will be a nice complement to the business' longer-term positioning.

Robert J. Eck

Kwame, this is Bob. I'll start and -- our view of whether we issue dividends or do share buybacks is a decision we make at a point in time based on valuation and tax issues, other considerations that we have. So we don't typically have a preference. We don't have a stated preference, one or the other. We make those decisions with our Board of Directors at a point in time. As to strategic positioning the portfolio, et cetera, like, I assume, most companies, we always have a pipeline of M&A opportunities that we're interested in pursuing. We, of course, never talk about what's in the hopper, what markets those targets might be in and what we might do about those targets. So I'm not going to talk about that specifically, other than to say we do have an active pipeline. We are looking at things. And we've said before that targets, for us, would be in areas where we're looking at expanding market share in a geography or strengthening our capabilities in one of our strategic initiatives, like security, like in-building wireless or like Industrial Communication and Controls.

Kwame C. Webb - Morningstar Inc., Research Division

Great, great. And if I could just squeeze one more in here. So you talk about data center enterprise cable as a bit of a headwind. Aside from just overall market improvement, are there any things that you guys can do organically to accelerate growth there?

Robert J. Eck

In Enterprise Cabling, I actually think as we come into the second half, with the backlog we're carrying, it'll be a bit of a tailwind and help us in the second half. And in terms of what we can do organically, frankly, it's a sales execution opportunity for us. We just need to be out in front of customers, and we need to be actively working the pipeline, trying to find new types of customers. So there's -- I guess I'll say it this way: There's no particular magic about how we go after it. We just need to be chasing customers and finding opportunities.

Operator

We'll go next to Brent Rakers of Wunderlich Securities.

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

Yes. I think, first, if you could maybe provide a bit more of a review on the Emerging Market performance. It seems like you guys have been doing well for the last several quarters there. Wanted to talk about maybe what you thought the future visibility was, both in terms of existing backlog, but also in terms of bidding activity. And then, I guess, lastly, the regular way business in Emerging Markets as well.

Theodore A. Dosch

Yes. Let me run through quickly each of the segments, Brent, and then Bob can chime in on some other project color and so forth. But first and foremost, with our ECS business, you'll remember that we talked, starting in late 20 -- or middle of 2013 and throughout the last 4-plus quarters, we had seen some softness in the broader economies in the countries that we're largest in, like Brazil and Mexico. We began to see our pipeline building in that late last year, early this year. And I think as we called out specifically, Latin America within the ECS Emerging Markets business was very strong for us with some very large project business. We expect that growth to continue as that part of the ECS business tends to be more heavily weighted to the back end of the year. So we expect that to continue strong growth for us here to the balance of the year. From a Wire & Cable standpoint, we didn't have as much growth in the Emerging Markets, but we are coming off some very large projects in Emerging Markets and just beginning to see the early stages of some other large projects, primarily also in Latin America. And then, lastly, a small part of our Emerging Markets business is the OEM Supply Fasteners business, which had exceptionally high growth, even though that Fastener business in the Emerging Markets only represents about 10% of the total Emerging Markets business. We've seen very good growth there, primarily through new customer wins. And so overall, I think we're helped by a little bit of strength in the economies, especially in Latin America, combined with some of the new customer cultivation that we've done in each of those segments translating into higher growth rates within our business there.

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

Great. Just one other question on company-wide gross margin. Again, you've had, I think, a company-specific initiative to really focus on driving the gross margin improvement the last 2 or 3 quarters. Just wondered where you are in that development and maybe what other facets of gross margin can you look to improve on a go-forward basis?

Robert J. Eck

Yes, Brent. This is Bob. We continue to focus on gross margin. If you ask me, I wouldn't want to quantify for you what we think additional upside potential is in gross margin, but we'll continue to focus on gross margin. We have a variety of initiatives in place at the sales desk. We're seeing benefit from them. We have some incremental activity we're going to undertake as we go through the year that we think will drive some incremental improvement in margin as well. So I would say we've made good progress. We're not done focusing on it, and we think there's a little more margin opportunity to be gained.

Operator

We'll take our last question from David Manthey of Robert W. Baird.

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

First off, maybe if you could just -- I want to make sure I have this correctly. Did you say that a 4% decline in copper, was it $0.02 or $0.06 in EPS?

Theodore A. Dosch

It was $0.02 year-over-year.

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

Right. Perfect. Okay. And second, when you talk about your expectation for faster growth in the second half, there you're talking x copper, excluding currency effects, and that's on a daily sales basis because of this big swing in days in the fourth quarter. Is that correct?

Theodore A. Dosch

Yes, yes. And just to elaborate a little bit further, I mean, sitting here today, copper at $3.23 a pound is right at what the Q3 average was the last -- in 2013. So if it stays flat, we should see negligible impact of copper on a year-over-year basis. And with currency, if it stays flat with where it is right now, again, I would expect it to be relatively negligible, possibly a little positive on the top line and a little negative on the bottom line like we saw here in Q2.

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

Right, okay. And then, there's been quite a bit of discussion today about the backlog. Could you remind us what percentage of your business is backlog-driven?

Theodore A. Dosch

Well, typically, at any point in time, again, as Bob said, just to clarify, it's not considered or measured in our backlog until we've actually received a PO. We oftentimes have one project business, like we usually have one project business long before we actually book a PO, which makes it show up in our backlog. So at any point in time, our backlog may only represent about 4 weeks of sales for us, but we track, like I said on the project basis, much more than that, that hasn't translated into that backlog. Also, if you also remember the 2 cabling businesses, a large percentage of our orders -- close to 60% of our orders, actually ship out within 48 hours upon receipt, which is part of that day-to-day business within those 2 cabling businesses. So it is a mix of business that turns quite rapidly in the backlog, supporting day-to-day cabling businesses, as well as these larger project businesses.

Robert J. Eck

The way we look at it as opposed to being a straight measure to forecast sales off of, it's a directional indicator of how the business is moving.

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

Yes, that's fair. I was under the impression that projects were generally less than 20% of your sales overall. So that makes sense. And then, the final question, you've always thought very strategically about your business. And we've talked about the M&A landscape. You've talked before that you don't think you'll go beyond the 3 major segments that you have today, but is there anything potentially you're looking at that you may deemphasize going forward, whether that's a segment or a geo? Or are you pretty happy with the growth potential in all parts of your portfolio today?

Robert J. Eck

I think the portfolio is performing well today. I think, from a geographic standpoint, I think we're closing in and really leveraging a lot of the expense in building the footprint. As volume has been increasing, particularly in the Emerging Markets, we take a lot of expense to operate in the Emerging Markets. And Dave, you've been following us for long enough to remember when we used to have segments based on geography. That would be one of our lower operating margin segments. As we get volume in there, it leverages very quickly the fixed cost in place. So I would say, right now, I don't know that we'd be looking to expand aggressively in a new country, but I like the footprint we have. I like the depth and capability we have in the footprint. It absolutely helps us win business with global customers. And so, I think we're, for the time being, about where we need to be.

Theodore A. Dosch

And just another thing to think about, along those lines, Dave. I think what that should translate into through a combination of both organic and inorganic growth is that Emerging Markets should continue to be the fastest-growing region, followed by North America, and Europe being the slower growth, the slowest of the 3, partly because of the macro and partly because of us not investing or targeting specific inorganic growth in a high-cost environment like Europe.

Robert J. Eck

So thank you all for joining us today. I think our queue is empty. So I'm going to conclude. As we move into the second half of 2014, our differentiated platform continues to deliver strong value to our customers. By providing a true global footprint, technical and engineering expertise, and a highly customized supply chain system, we help our customers take complexity, risk and cost out of their supply chains. Our leading positions in large, diverse and highly fragmented markets create attractive opportunities for profitable growth in all of our segments and geographies. We continue to pursue growth organically in our key strategic initiatives, including Security, Emerging Markets, Industrial Communication and Control, as I touched upon as I reviewed our segments. As well, we continue to have an active M&A pipeline. Finally, in the end, it comes down to people, and I am confident that we have the right team in place to drive our strategies and continue to move our business forward. Thank you for joining us this morning.

Operator

Thank you for your participation. That does conclude today's conference.

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