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Anixter International (NYSE:AXE)

Q1 2011 Earnings Call

April 26, 2011 10:30 am ET

Executives

Chris Kettmann - Senior Vice President

Ted Dosch - Senior Vice President of Global Finance

Robert Eck - Chief Executive Officer, President, Director, Chief Executive Officer of Anixter Inc. and President of Anixter Inc

Dennis Letham - Chief Financial Officer and Executive Vice President of Finance

Analysts

Ted Wheeler - Buckingham Research

Shawn Harrison

Anthony Kure - KeyBanc Capital Markets Inc.

Ryan Merkel - William Blair & Company L.L.C.

David Manthey - Robert W. Baird & Co. Incorporated

Matthew McCall - BB&T Capital Markets

Brent Rakers - Morgan Keegan & Company, Inc.

Operator

Good day, everyone, and welcome to the Anixter First Quarter 2011 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Chris Kettmann for opening comments and remarks. Please begin when ready, sir.

Chris Kettmann

Thank you. Good morning, and thank you, everyone, for joining us today to discuss Anixter's first quarter 2011 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 a Q&A session.

Before we begin, I want to remind everyone that statements on 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 viability; risks associated with accounts receivable; the impact of regulation and regulatory investigated and 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 than 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 we start with an overview of our first quarter results, I'd like to remind everyone of the announcement that we made in late February regarding my pending retirement. I will be retiring on June 30 after 18 years as the CFO of Anixter. Ted Dosch, who has served as the company's Senior Vice President in Global Finance since January 2009 has been named as my replacement.

Ted has participated on the company's earnings call for the last 18 months and has been sharing the Investor Relations work with me for the last year, including having a chance to meet or speak with many of you during that time. I've enjoyed the opportunity to work with all of you and have appreciated the support you have given to Anixter throughout my tenure.

At this point, I'd like to turn the call over to Ted, who will remain available for questions later in the call as needed. Ted?

Ted Dosch

Thank you, Dennis. Before going into the details on the drivers of our first quarter operating performance, we'd like to remind you that our first positive growth quarter post recession was during the second quarter of 2010. The first quarter of this year represented our fourth consecutive quarter of recovery with each 1 building positive momentum on the performance of the prior quarter. Also, as we have mentioned many times over the last 2 years, going into the recession and coming out of the recession, our longer-term historical seasonality patterns for sequential quarter performance have often not applied. The volatility of demand on both ends of the business cycle has made it very difficult to predict demand levels from a quarter-to-quarter basis.

Most recently, our historical seasonality would have suggested that Q1 sales would be relatively flat from Q4 levels with the positive benefit of fewer holidays in Q1 largely offset by lower capital project spending patterns early in the year and softer sales in the emerging markets. However, due to the strength of recovery across most parts of the business, we were able to deliver 5% sequential growth in sales, excluding the effects of foreign currency of which 3% was organic sales growth and 2% was from our Q4 acquisition of Clark Security Products. Going forward, we expect the business to return to historical seasonal sales patterns; particularly given we've already had 4 straight quarters of sequentially strong results.

Before getting further into the numbers, let me also explain the European restructuring charge mentioned in the earnings release issued this morning. Our first quarter results include $5.3 million operating expense related to cost associated with rationalizing our European cost structure. As we have discussed in prior quarters, improving the profitability of our European operations has been and continues to be a key priority for us. Returning that region to our pre-recession level of operating margin requires not just higher volume but also a rightsizing of our footprint and cost base. As is true across many companies and industries, our operating costs are higher in Europe than anywhere else in the world.

As part of our strategic one Anixter initiative that we've previously discussed, we continue to identify opportunities to leverage shared facilities across each of the end markets we serve. Additionally, as we convert the remaining facilities from prior acquisitions to our Anixter mainframe systems, it provides further leveraging opportunities.

The $5.3 million expense recorded in Q1 will actually be incurred over the next 2 to 3 years and will result in the consolidation of facilities and reduction in personnel. Once these actions are fully completed by the end of 2013, the annualized savings to be realized in 2014, the first full year of savings, are estimated to be $5 million. I believe this action is evidence of our ability to aggressively manage our cost structure along with multiple growth initiatives in a way that does not compromise our commitment to provide exceptional service to our customers.

This charge had a negative $0.09 per diluted share impact for the first quarter of 2011 resulting in an adjusted EPS of $1.32 per diluted share. In the first quarter of 2010, we reported a loss on early retirement of debt, which negatively impacted the as-reported earnings per diluted share of $0.16 by $0.53 per diluted share. Excluding these 2 items from their respective periods, we realized a 91% improvement in net earnings per diluted share from $0.69 in the year ago quarter to $1.32 in the current quarter.

Looking at our overall quarterly results, we are very pleased with another strong performance resulting in a 130-basis-point improvement in the year-on-year adjusted operating margin as well as a sequential 10-basis-point improvement. In addition, we delivered our fourth consecutive quarter of incremental operating margin leverage of more than 12%. The first quarter of 2011 marks another important step forward as we continue toward returning to our pre-recession levels of sales and earnings.

Now let's begin with the more detailed discussion of our first quarter sales results. In the first quarter, we reported a 19% increase in year-on-year sales. After adjusting for $29.5 million of sales from the fourth quarter 2010 acquisition of Clark Security Products, an estimated $25.2 million of favorable copper prices and $20 million of favorable foreign exchange effects, organic sales still grew by 13% over the prior year period.

All 3 of our end markets as well as each of our 3 geographic segments delivered strong year-on-year growth during the quarter. As mentioned earlier, the sequential quarter increase in reported sales included a 3% increase in organic sales. The strong North America and Europe sequential quarter sales growth was stronger than what is normally experienced, while the decline in emerging markets was less than we typically experience from the fourth to the first quarter. We believe our positive sales results reflect the combined impact of the improving macro economic factors and the implementation of our global strategic growth initiatives, which Bob will discuss in more detail later on in the call.

Looking at first quarter sales trends within each of our end markets, we experienced the following: On a worldwide basis, Enterprise Cabling and Security Solutions sales increased organically by 7% as compared to the first quarter of last year exclusive of foreign currency and the Clark Security acquisition. Security sales grew an estimated 18% compared to the first quarter of 2010, exclusive of foreign exchange effects and the Clark Security acquisition.

Geographically, our Enterprise Cabling and Security Solutions sales reflected organic sales growth of 5% in North America, 1% in Europe and 21% in the emerging markets as compared to the year ago quarter. The smaller growth rate in North America is attributed to the prior year's quarter, including 1 very large nonrecurring project. Excluding that 1 project, the organic sales growth in North America is 8% compared to the year ago quarter.

On a sequential basis from the fourth quarter of 2010 to the first quarter of 2011, Enterprise Cabling and Security sales declined by 4% organically. The decline in this end market is more heavily impacted by the larger seasonal decline in emerging markets, since 84% of the sales in the emerging markets are from this end market. It is also worth noting that with the continued strong growth in security plus the addition of Clark Security, sales from security products now account for 24% of our worldwide Enterprise Cabling and Security end market.

Worldwide, the Electrical Wire & Cable sales, exclusive of foreign currency and estimated copper price effects, experienced a year-on-year organic sales improvement of 21% globally, with North America showing an increase of 27%, while Europe declined by 2%. In addition, sales were up 37% in the much smaller but strategically important emerging markets in which we continue to invest. We continue to see our project business strengthen, while the day-to-day business improves as well. On a sequential basis from the fourth quarter of 2010 to the first quarter of 2011, worldwide Electrical Wire & Cable sales increased by 10% organically, again reflecting very positive growth in excess of what historical seasonality patterns would suggest.

Worldwide OEM Supply sales once again reflected strong organic sales growth with a 20% increase compared to the year ago quarter. This end market is the only 1 of the 3 that has delivered double-digit year-on-year growth each of the last 4 quarters and has averaged 19% organic growth during that time.

In North America, we experienced an organic sales increase of 10% year-on-year, while Europe was up 34%, and emerging markets was up 29%. The OEM Supply business in Europe has averaged a 36% organic sales increase each quarter for the last 3 quarters. Our global OEM Supply business has benefited not only from the higher production levels of our OEM customers in almost every customer vertical, but we have also achieved market share gains by adding new customers and new part sets to existing customers.

Sequentially, worldwide OEM Supply sales were up 15% organically in the first quarter due to the share gains I just mentioned as well as more production days for our customers in the quarter compared to the normal seasonal schedule plant shutdowns in the fourth quarter. More importantly, we believe this end market is benefiting from gradually improving corporate and consumer confidence levels as spending on capital industrial goods and durable consumer goods drive demand in this business. Bob will discuss current business trends and the implications for the future in greater detail in a few minutes.

Turning next to gross margin. We reported first quarter gross margin of 23.2%. Year-on-year gross margin improved by 40 basis points, while the sequential quarter gross margin was down 10 basis points. We continue to be pleased with the stabilization of gross margin over the last 3 quarters. As we have discussed in each of the last 2 earnings calls, gross margin continues to be negatively impacted by cost pressures in our European OEM Supply business due to significant unilateral cost increases from European-based fastener manufacturers.

Despite the fact that we were successful in negotiating price increases from our customers that offset this initial round of cost increases from our suppliers, we are now dealing with a second round of supplier cost increases. We are confident that our strategy of negotiating customer pricing in the context of long-term contractual agreements while selectively resourcing some of these components to lower-cost manufacturers will allow us to fully offset these gross margin headwinds over time.

Looking next at operating expenses. In the current quarter, we reported a year-on-year increase of approximately 8% from $232.7 million in the year ago quarter to $252.3 million in the current quarter, excluding expenses associated with the Clark Security acquisition, the impact of currency and the European restructuring charge. This increase of 8% compares very favorably with the 13% year-on-year increase in organic sales, which also excludes the acquisition, currency and copper pricing impact.

As expected, operating expenses increased sequentially by approximately 1%, excluding the currency impact, the Clark Security acquisition, the restructuring charge in the current quarter and the unfavorable arbitration award in the previous quarter. Both the year-on-year and the sequential quarter increase in operating expense are due to higher variable compensation and other costs associated with the increase in sales and earnings.

To summarize, from an operating income perspective, excluding the impact of the restructuring charge in the current quarter, operating income was $88.4 million in the first quarter, representing a sizable 55% improvement compared to the prior year quarter's $57 million. The 5.8% operating margin in the current quarter is 130-basis-point improvement compared to 4.5% margin in the year ago quarter. The improved gross margin, combined with the lower operating expense run rates, contributed to the strong first quarter performance. We continued to improve our competitive cost position in the quarter, which can be further leveraged as we take advantage of a continued macro economic recovery.

As we move further down the income statement, interest expense of $12.8 million was down $2.8 million from the year ago quarter. The decrease was driven by a lower average cost of debt than the year ago quarter. The 5.2% average cost of debt in the first quarter of 2011 compares favorably with the 5.6% level in the fourth quarter of 2010 and the 7.4% in the year ago quarter. The continued reduction in this metric was primarily driven to the early retirement of high-cost debt, partially offset by higher debt levels in the previous quarter. At the end of the current quarter, approximately 61% of our outstanding debt had fixed interest rates, either by the terms of the debt or through hedging contracts.

Current quarter repurchases of the 3.25% 0 coupon convertible notes resulted in a reduction of $21.2 million of accretive value for these notes and the recognition of $100,000 pretax gain. This slight gain compares to the $30.5 million pretax loss associated with the early retirement of debt in the year ago quarter.

During the current quarter, the effective tax rate was 37.5% versus 40% in the year ago quarter. The lower effective tax rate in the current quarter is primarily a result of improved earnings in all reporting segments and various foreign tax effects. The global dispersion of income projected for full year 2011 allows us to more fully benefit from lower tax rates in some of our foreign operations. At this early point in the year, it is very difficult to anticipate the impact the country-level profitability will have on the full year effective tax rate.

For the first quarter, the company reported net income of $44.3 million or $1.23 per diluted share compared to $5.9 million or $0.16 per diluted share reported in the year ago period. After adjusting for the restructuring charge in the current quarter and the loss on early retirement of debt in the year ago quarter, the current year net income would be $47.6 million or $1.32 per diluted share. This represents a significant increase of 92% from the adjusted net income of $24.8 million or $0.69 per diluted share in the prior year period.

Moving on to cash flow. We consumed $5.5 million of cash in operations during the quarter due to the working capital requirements associated with the 19% increase in sales. Our ability to nearly fund the entire incremental working capital needs with cash from earnings can be attributed to our strong margin performance coupled with excellent working capital management.

Capital expenditures increased to $6.1 million in the current quarter compared to $4.1 million in the year ago quarter. We anticipate positive cash flow generation for the balance of the year with cash from earnings exceeding the cash required to support the working capital requirements associated with further increases in sales.

During the quarter, we utilized funds from our long-term revolving credit facility to reduce debt through the repurchases previously mentioned. We ended the first quarter with a debt-to-capital ratio of 47.4%, up slightly from 46.9% at year end 2010. This leverage ratio is within our targeted range of 45% to 50% debt to total capital.

At the end of the first quarter, we had $184.6 million in available, committed, unused credit lines, $200 million of outstanding borrowings under our $200 million accounts receivable facility and invested cash balances of $65.4 million. On April 8, we refinanced our revolving credit agreement, increasing the size of the facility from $350 million to $400 million with a new maturity of April 2016. With this additional capacity, our available committed, unused credit lines would total $234.6 million. Our ability to successfully complete this refinancing at a higher level of capacity with more favorable terms is further indication of our strong financial position, which we believe is an important differentiator for many companies in today's still volatile market. We will continue to evaluate strategic acquisitions as they arise in the optimal use of our capital. If additional near-term acquisition opportunities do not materialize, we may from time to time repurchase outstanding common shares or further reduce borrowings including the 3.25% convertible notes.

Our current leverage on the balance sheet and other favorable financial characteristics provide Anixter with the flexibility to adjust quickly to new market realities, fund investments in 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.

Robert Eck

Thanks, Ted. Thanks, everyone, for joining us today. The first quarter generated stronger sales sequentially than we had been expecting. We just had a very strong finish to 2010 and our normal seasonal trends from the fourth quarter to the fourth quarter. The sales strength was seen across all of our end markets and reporting segments. Particularly noteworthy was the strong acceleration in growth in our Electrical Wire & Cable end market in North America.

While we expect growth in this market to accelerate as we continue on the recovery, the performance in this market has been outstanding. Expenses continue to be well controlled in light of the increase in volume, and we were able to deliver good operating leverage. We do anticipate that as growth continues through this year, we will need to invest to add capacity to the business, which will likely decelerate our operating leverage as the year continues.

The continued focused on tight working capital management minimized the invested capital necessary to support the 19% sales growth. We are very pleased with this performance and continue to drive initiatives that will further improve our working capital management.

Enterprise Cabling and Security Solutions end market experienced strength in data-related projects as well as double-digit growth in security during the first quarter. Gains were broad based with 34% growth in Asia Pacific, strong performance in Canada and solid growth in other geographies. The recent project trends that we have seen globally in the enterprise market reflect ongoing investment in new IT infrastructure, particularly continued growth in data centers.

A recent trend in data center construction is a shift to smaller scale initial projects followed by adding more cells to the data center to support growth and storage and applications. While this leads to fewer very large projects, it should lead to a more stable volume of midsized projects over a longer time period. In addition, we are seeing several U.S.-based multinational companies invest more heavily in IT infrastructure in emerging markets. Our unique capability to support those projects both at the U.S. headquarters and the local facility places us in a good position to support those customers and the project integrators.

Many of our suppliers have announced price increases for copper data cables and related connectivity taking effect in the first quarter of 2011. We are beginning to see those increases filter into selling prices. In addition, there has been some recent indication of price increases in jacketing and insulating compounds that could lead to cable price increases as we move through the year. It is important to remember that copper cabling is only 1 of many product sets in our Enterprise Cabling and Security Solutions end market.

Security sales were up approximately 36% over Q1 of 2010, over 18% excluding sales from the Clark acquisition with all markets showing acceleration. The trends toward Internet protocol-based security systems continue to create growth opportunities in both video surveillance and access control. 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. This technology trend is pointing out similarly around the world.

We continue to make progress on our integration of the Clark Security Products acquisition. As we get deeper into the integration, we are confirming the strong synergies that exist between Clark's and the Anixter's technical capabilities while there is minimal customer overlap. We are also quickly working through certain facility consolidations that will reduce expense as we go forward.

We have undertaken an expansion of our UL-certified Infrastructure Lab to add access control demonstrations, greater data center capabilities as well as the new section devoted to industrial automation. Our investment in our lab and technical capabilities is a reflection of our commitment to continue to enhance our market-leading technology capabilities in the data security automation and electrical infrastructure markets around the world.

Moving now to the Electrical and Electronic Wire & Cable end market. The first quarter saw copper price increases at about 6% to year-on-year sales growth. We experienced project billing increases and increased bookings in line with our expectations that at this point in the cycle, we would see a ramp-up in the longer-cycle industrial, energy and mining projects.

We have seen ongoing strength in engineering activity for larger industrial projects as well as project awards being released along with good project backlogs at the engineering, procurement and construction customers. In addition, we continue to see very strong buying at our Wire & Cable OEM customers, consistent with the industrial production rates we are seeing across most parts of the world. The continued solid global trends in industrial production, natural resource development and energy generation should lead to healthy sales in our Wire & Cable market as we go through this year.

If the price of copper stabilizes at or near its current level, the impact of copper price inflation on our business results on a year-on-year basis will continue but decline in significance in the later part of the year. Our initiatives in the Wire & Cable end market continue to include focusing on new business development, geographic and product expansion and enhancing our support for global customers including EPC companies.

We are making progress with our expansion in Latin America. We also continue to win large projects in mining, power generation and oil and gas with both end users and the global EPC companies around the world. As an example, we were recently awarded a large project that was designed by a U.S.-based engineering firm by a team in the U.S., which includes products manufactured in North America and Chile that will be delivered in Peru for a Chinese mining company. Our ability to support U.S.-based engineering and purchasing as well as in-country project management organizations in projects like this positions us well to participate in this type of project activity, which we see increasing.

Turning to the OEM Supply end market. In the industrial vertical, we are continuing to experience strong sales growth compared to already strong sales numbers in Q1 of 2010. We achieved strong sales growth in North America due to both new wins and increased volumes of existing parts at current customers. In addition, gross margin improvement initiatives yielded positive results.

Sales in EMEA were also well ahead of prior year on new business and improving production volumes at our customers. Gross margin initiatives in EMEA continue to lag behind the ongoing price increases from our supply base.

We continue to seek and gain price increases from our customers while pursuing the resourcing of supply to lower-cost countries. We have added temporary and full-time engineering staff to accelerate the supplier qualification process both internally and with our customers. In addition, through the implementation of new forecasting and scheduling software that directly engages both our customers and suppliers, we are improving our inventory turns while also improving service levels to our customers.

Both of our OEM supply expansion markets in Mexico and China experienced very strong growth in the first quarter over prior year, which we expect to continue. We are ahead of our new business targets for the year and expect those programs to begin to contribute to our results late in this year and into the future. In addition, the pipeline of new opportunities, particularly with global customers finding to consolidate volume with fewer suppliers is promising.

The aerospace vertical market continues to experience weak sales as the market broadly is not showing growth. Therefore, we anticipate ongoing challenges for the aerospace vertical market until the commercial aircraft market experiences a meaningful recovery. We do have a very active pipeline of new opportunities and anticipate implementing recent wins as we go through 2011. As the aerospace market begins to recover later this year, we anticipate seeing improved sales trends.

All end markets continue to relentlessly strive to add new customers, and we have been successful with this effort in all geographies. In addition, the geographic expansion we have discussed on recent calls is progressing well with sales and logistics presence added in several cities in Asia and South America along with our first location in Africa with the establishment of our business in Morocco.

As the only distributor in end markets in which we participate, delivering a value-added technical support and supply chain service model in over 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 markets specialties.

As we look forward to the balance of this year, we believe we can generate 2011 sales growth solidly in excess of GDP growth rates through market share gains and our growth initiatives. Comparisons will become more challenging as the year progresses due to the impact of the economic recovery and our sales improvement last year. We will continue to invest in growth initiatives that can lead to better operational leverage of our expensive and in some cases, underutilized global service platform. We will also strive to continue to improve our management of working capital.

The combination of sales growth and continued operating leverage should lead to further improvements in operating margins in the coming year. We also anticipate generating positive cash flow from operations this year in spite of improving sales. We recently announced the renewal of our revolving credit agreement and additional borrowing capacity. This added capacity and anticipated cash flow provides us with ample liquidity to pursue acquisitions or capital structure actions that can enhance shareholder returns in the coming year.

Before turning the call over for questions, I would like to take a moment to thank Dennis for his 18 years of service to the company. Over that time, we have experienced tremendous growth and geographic expansion, been through a couple of challenging business cycles and successfully entered the OEM Supply market. Dennis has been a key contributor throughout this period and has been a great partner for me over the last 3 years. While we will miss him, Ted has done an outstanding job learning our business and brings a wealth of experience from his prior positions. He has already proven to be a talented financial leader in our company, and I expect the succession will be very smooth.

We will now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from Matt McCall with BB&T Capital Markets.

Matthew McCall - BB&T Capital Markets

Thanks. So a few comments on seasonality. I want to make sure I understood what we were talking about starting with the top line. I think, Ted, you said you returned to a normal seasonal pattern. When I look back at the last 5 or 6 years, it's been maybe up 4% Q2 versus 1 and up another 3% Q3 versus Q2. Is there anything that's funky in that historical map that we should think about?

Ted Dosch

I think that's what we would anticipate as returning more to that level. The only thing maybe unusual this year is just the fact that in our European business, we'll have a few less billing days than even in the historical seasonality. Across the entire EMEA business for us, our billing days will actually average about 61 days partly because of the added holidays in the U.K., which due to the wedding later this week and the U.K. is the biggest proportion of our European business. But we still expect to be in that same range despite the fewer billing days.

Matthew McCall - BB&T Capital Markets

Okay. And what was -- is the billing days this quarter, so I can compare that, 61 to what?

Ted Dosch

65 in Q1. We did not have any holidays in Q1.

Matthew McCall - BB&T Capital Markets

Got it. Okay. And then 1 question on the contribution margin. You made the comment that you've done over 12% for 4 quarters in a row. It gets more difficult. And I think, Bob, you talked about some investments that you plan to make this year but then 1 of the final comments was, “Hey, we're going to see some improving operating margin trends through the year.” So just kind of put all those together for me. What are the kind of expectations maybe from an incremental margin perspective given that you're going to see tougher comparisons?

Robert Eck

Well, first, let me just clarify 1 thing on the sales days that those comments were specific to Europe. In the U.S., we'll have the same impact and in Canada, the holidays that we would normally see in the quarter. Europe is the place where you have a change in holidays. So let me put together some of those comments and Ted and Dennis will jump in as well. What we expect is that we'll continue to have positive operating leverage as we go through the balance of the year. But as we've been saying I think for the last couple of quarters, the operating leverage will decline as we get deeper into the recovery, because sales will hit a level where we'll begin to add people back into the business. At the moment, I don't think we see significant facility yet, but there will be volume-related cost that will come back into the business.

Ted Dosch

Yes. I think the only thing I'd add to that, as Bob said, the incremental operating profits leverage will drop, but we still expect it to average pretty close to that double-digit number for the whole year starting Q1 at about 13% and then drop as we progress through the year.

Matthew McCall - BB&T Capital Markets

Okay. Okay, perfect. Thank you.

Dennis Letham

Thanks, Matt.

Operator

And our next question will come from Shawn Harrison with Longbow Research.

[Technical Difficulty]

Operator

Our next caller will be Ryan Merkel with William Blair.

Ryan Merkel - William Blair & Company L.L.C.

Thanks. So I'll start with the European OEM Supply market. It sounds like we still have some gross margin issues there. Does this limit sequential gross margin improvement on a total company basis going forward? Or can mix and initiatives trump this European OEM Supply issue?

Ted Dosch

Yes or no to your question. No, we don't think that will be significant enough to limit our total consolidated gross margin improvement. As we mentioned, we feel like our team in Europe has done a very good job of offsetting this first round of cost increases. Unfortunately, with some of the cost of steel helping to fuel a second round of those cost increases required us to go back through to our customers, where we have these long-term contractual agreements and renegotiate. So we're confident that we will be able to offset that and would project that over the next couple of quarters, we would be back to the gross margin levels we were at in mid-2010 before these manufacturer cost increases really skyrocketed. The other thing I would add, Ryan, just as you look at the OEM Supply margins, we've talked about the fact that aerospace is the 1 part of our business that really hasn't seen recovery yet. Bob commented that we'd expect to see some growth in that by year end. I think as we've also said in the past, that's a very high margin business for us. So as it has actually declined year-over-year, it was a very high margin that was also put downward pressure on the overall margins for the OEM Supply business.

Dennis Letham

I think, just to throw something else in there too, in the 2 Cabling-related businesses, we've got stronger growth in project activity that you do day-to-day business. Projects are typically going to have a lower gross margin on them than the day-to-day basis but a lot more efficiency in terms of servicing the order. So it really -- to some degree, we get too hung up on what's to the right of the decimal point. On gross margin, that's more about the operating leverage that you get from the overall increase in volume.

Ryan Merkel - William Blair & Company L.L.C.

Okay, thanks. That's great color. And then second question on copper, it looks like it was slightly more meaningful to sales growth than it had been in the prior quarters. Does this reflect vendor price increases coming through? Or is these large projects coming through at higher-spot copper?

Robert Eck

I think it's both. I think price increases are sticking better than perhaps they have in the past. But we clearly have more project volume, and the project volume was negotiated at higher-spot copper. So that is the effect we're seeing. I think as you look through the rest of the year, copper will have a benefit over the next couple of quarters. By the time we get into the fourth quarter, if copper has stabilized, the effect -- the inflationary effect will be minimal. And I still think we have to be careful about taking spot copper and imputing too much into the operating earnings of the company, because we are selling cable. And as we've said many times, the number of the types of cable we sell don't trade closely to spot copper, which is actually a very small portion of our Electrical Wire & Cable business. And that's why you'll probably see less copper inflation running through the business than you might have expected given what's happened and what's the spot price.

Ted Dosch

The only contributing factor to that is as we talked about Wire & Cable being the fastest growing of our 3 end markets so it is a larger percentage of our total business compared to both Q4 as well as a year ago quarter. So we just have some higher copper content due to that as well.

Ryan Merkel - William Blair & Company L.L.C.

Okay. Now I'm going to sneak 1 more in. Any change in the profile of new bookings in the large-project business either by end market or customer size?

Robert Eck

No. I think other than the comment I made about data centers in my prepared comments, I don't think there's anything we would highlight.

Ryan Merkel - William Blair & Company L.L.C.

Great. Thanks.

Robert Eck

Thank you.

Operator

Our next question will come from David Manthey with Robert W. Baird.

David Manthey - Robert W. Baird & Co. Incorporated

I was wondering, first off, if you could -- just to clarify the number of days issue, could you just tell us what you think the effective number of selling days are in each of the 4 quarters of this year just so we have it?

Ted Dosch

I don't have all 4 quarters in front of me. 65 was the day -- was the number of days in Q1. In Q2, it will probably be about a weighted average of about 63, 64 in North America and closer to 61 in Europe. I don't have Q3 and Q4 in front of me.

Dennis Letham

Q3 you'll have Labor Day and Fourth of July, so you're going to be roughly a 63 number there and then I'm not sure on Q4.

David Manthey - Robert W. Baird & Co. Incorporated

Okay. Usually, it's about 61 I think. Does that sound right?

Ted Dosch

Correct.

Dennis Letham

That's about right.

Ted Dosch

Yes.

David Manthey - Robert W. Baird & Co. Incorporated

Okay. All right. And then just thinking about this -- the sequential growth rates, when we look at organic average daily sales rates excluding copper and currency and everything, by our calculations, revenues daily sales were about flat sequentially, which would seem kind of normal. And I know what you were talking about getting back to normal trends. Are you talking about daily sales trends or overall? And if you could clarify that just as it relates to the normal trend you'd expect to see from the first quarter to the second quarter sequentially.

Ted Dosch

Yes, we were referring to overall.

David Manthey - Robert W. Baird & Co. Incorporated

Okay. So based on those number of days, what would that average be? I mean, we have our own calculation, but I want to square with what you have.

Robert Eck

I think we're not targeting a specific number, but Ted did say in his comments that we expect it to be in the kind of mid- single-digit sequential growth rate.

David Manthey - Robert W. Baird & Co. Incorporated

Okay. Great. And then just 2 other quick ones here. First of all, could you tell us approximately what percentage of revenues today you think are projects? I think in the past, you talked about it ranging from a low end of 10% to a high end of 20%. Could you tell us where we are in that continuum approximately?

Robert Eck

We don't have a specific number, but we're roughly somewhere in the 15% range today and moving towards the 20% range as we continue through the year would be my best guess.

David Manthey - Robert W. Baird & Co. Incorporated

Okay. Thanks, Bob. And then the last question would be as you look forward here and a little bit longer term, sort of 5 to 7 years out, how important to Anixter do you think access control and industrial automation will be?

Robert Eck

I think access control will be increasingly important. Access control has been a little later entering the shift to IP technology than video surveillance was. That process is underway now, and I would say accelerating. It's a very big market globally, certainly huge in North America, very large in Europe and very large in Asia Pacific. A little bit smaller in Canada, which might just be sort of GDP driven, but it's a very large market. It will be significant assuming that we execute well on our strategy, which I think we will. Industrial automation I think will also have the potential to be a big market for us over the next 5 to 7 years, and it will again be a global story for us. If you look at the developed world, automation is going to be critical to having healthy manufacturing industries. And when you look at rest of world, even in China now, labor costs are beginning to increase. Certainly not like the U.S., but they are increasing for low-value ad manufacturing compared to companies that they would compete with on a labor cost basis. That'll drive more automation there as well. So I think automation in that 5- to 7-year horizon is an important market for us to participate in and be successful in.

David Manthey - Robert W. Baird & Co. Incorporated

All right. Great. Thanks much, and Dennis, thanks.

Dennis Letham

Thank you, Dave.

Operator

Our next question will come from Anthony Kure with KeyBanc.

Anthony Kure - KeyBanc Capital Markets Inc.

Looks like in emerging markets, sequentially, margins declined, and I just see from the comments that it might be due to some investments in that particular region. Can you just discuss the magnitude of the investments in the emerging markets, how impactful that was to first quarter margins? And then how long do you expect this type of elevated spending to progress through the year or through next year? If you could just talk about that a little bit.

Ted Dosch

Yes. Let me start with the biggest driver of those margins is the seasonality. Q4 tends to be the strongest market, excuse me, the strongest quarter in emerging markets, especially so in Latin America, which as you know, is almost 3/4 of that total region sales. So we get some negative leverage on that fixed cost infrastructure, which was the primary driver of the lower margins. You'll note those margins were pretty -- were actually flat with last year's Q1, so it wasn't so much that it was unusual. However, we have continued to invest over the course of last year, primarily to support small but very important and growing industrial Wire & Cable business for us down there. So over the course of that period of time, we added approximately 20 people in sales and marketing for that industrial Wire & Cable business and are seeing nice growth rates, as I commented earlier, it's still off a very small base.

Anthony Kure - KeyBanc Capital Markets Inc.

Okay. And then just looking at growth rates in Wire & Cable in North America year-over-year versus Europe -- I apologize if I missed this in the opening comments. Could you just discuss sort of the disparity among those 2 this quarter?

Ted Dosch

I think in North America, the growth that we referred to through the back half of last year and continuing into this year with the project growth was primarily North American based. The other thing that contributed to it is our North America Wire & Cable business has also a very strong OEM Supply portion, which is the sale of the smaller cabling to wire harness shops, which goes to the OEM. So that has mirrored over the course of the last several quarters the same very high growth rates that we've seen we in our OEM fastener business. In Europe, our Wire & Cable business is much more heavily weighted in the U.K, and as we know, the economy there has not been nearly as strong in coming out of the recession.

Anthony Kure - KeyBanc Capital Markets Inc.

Okay. Great, and that's helpful. And then finally, just -- if you could just discuss sort of the cadence through the first 3 months of the year, any disparity from normal seasonality? Or is this sort of the first quarter that you're starting to see this sort of normal seasonal progression? And is that the source of your commentary?

Robert Eck

I think it's the first quarter we've seen the normal seasonal progression. We had the typical Q1, where you start slow in January, you ramp more volume in February, and it continues through March. So that's what we would expect to see in sort of a normal environment.

Anthony Kure - KeyBanc Capital Markets Inc.

Okay, great.

Operator

And our next question will come from Brent Rakers with Morgan Keegan.

Brent Rakers - Morgan Keegan & Company, Inc.

I guess just maybe first, to follow up on that last question about maybe some semblance of monthly trends with an eye to seasonality as well. Within North American Enterprise, was there any impact to the project business or project start-up timing whether it relates to budgetary delays or possibly weather effects?

Robert Eck

No, I think the main thing we called out on North America was that we had a large project last year that was not repeated this year that impacted our growth. Feeling that project out, we had what I would characterize as probably market-level growth across the data part of the business and very solid growth across security.

Brent Rakers - Morgan Keegan & Company, Inc.

Bob, did that project complete in March a year ago? Is that an issue with comparisons in Q2 as well?

Robert Eck

Yes, a very, very small piece in Q2.

Brent Rakers - Morgan Keegan & Company, Inc.

Okay. And then I guess sticking with North American Enterprise, any sort of shift that you're seeing in terms of competitive balance in the business, competitors being more aggressive? Anything like that that's structurally changing the environment out there?

Robert Eck

No, I think competition has been and continues to be aggressive. It's not all price driven. But we face a good group of tough competitors, and that is not changing.

Brent Rakers - Morgan Keegan & Company, Inc.

Okay. And then I guess last with maybe -- and I know you've kind of touched around this, some of the gross margin issues, but I maybe wanted some clarity on the outlook. And you talked specifically about 2 areas. First, it sounds like the OEM Supply in Europe -- despite the headwinds, I think in the quarter related OEM Supply, European gross margin was still up year-over-year. I just wanted to clarify that the headwinds in that specific group were in Q1, and they expect to start improving in Q2 of that. Or is my timing wrong there?

Ted Dosch

The headwinds I think you're referring to started late last year. We originally thought that we would recover from that in about 6 to 9 months. It looks like it's going to be 9 months plus. Remember, we started talking about that in the middle of Q3 of last year, but we would anticipate to be kind of fully recovered some time during Q3 of this year.

Dennis Letham

Yes, there's a -- the lag in achieving the recovery I think Ted characterized very well as being the 2 rounds of price increases that came from European fastener manufacturers. The other factor is that the resourcing effort has taken a little longer than we would have ideally hoped for, and it's a couple of factors involved. 1 is the sheer volume of parts we're trying to resource, and that's required us to add temporary as well as full-time engineers to help in that process. In addition, lead times coming from the low-cost countries have been increasing, so the time to get samples in, have the samples approved in our shop and then approved by the customers' shop has taken a little longer. And finally, customers are facing -- industrial customers are facing all kinds of cost pressure in their business. And so as they focus across all the parts they buy, we're probably a little bit lower priority as a percent of their cost for the finished good. And so that's caused a little bit of a delay, and they're accepting the resourcing exercise as well. So if you put all those factors together -- and this has taken longer for us to crank through than we would have hoped, but we do feel like we're making progress. We have gone out for another round of increases, and we are actually meeting with good success on those increase.

Brent Rakers - Morgan Keegan & Company, Inc.

And Bob, just to back up on the timing, the Q3 margins were the period -- were under particular pressure, and you saw some recovery when you got some of the increases in Q4 and then you got on with another round of increases that's going to take a little delay to get as well. Does that sound roughly correct?

Robert Eck

Correct.

Brent Rakers - Morgan Keegan & Company, Inc.

Okay. And then I guess the other gross margin comment I think you alluded to was in the emerging markets with the lagging impact of some of your price increases. Could you maybe quantify what the negative effect would have been there in the quarter and how quickly you can recover that?

Robert Eck

No, I don't think we called out an issue with gross margin in the emerging markets.

Brent Rakers - Morgan Keegan & Company, Inc.

Okay. Great. Thank you.

Operator

We do have a question from Shawn Harrison with Longbow Research.

Shawn Harrison

Okay, a few clarifications. Just on kind of the organic growth rate year-over-year, backing into some numbers, it looks like it may be high-single digits, maybe low-double digits, best case scenario, for the June quarter, might kind of in that range with the high-single digits on an organic, all-in, year-over-year growth?

Ted Dosch

I think if we continue to see the general strength overall in the economy, we should be able to continue with those types of levels organically.

Shawn Harrison

Okay. A follow-up on North America, and I apologize if this was asked before. But with operating margins essentially flattish sequentially even though volumes were up, knowing that some of that was tied to the M&A as well as copper, were there other limiting factors that happened? Was the Clark acquisition coming in at a lower margin? Was it headcount additions in the regions? Just kind of trying to triangulate the flattish gross margin sequentially.

Ted Dosch

Certainly, you touched on Clark. That was a part of it. As I think we've said before, we'd expect for the full year Clark to be -- operate at a little bit lower margins than our -- the rest of our Enterprise Cabling and Security business for the year, but those margins will improve as the year progresses as we continue the integration and realize the cost synergies that Bob alluded to earlier. Another factor that's in there is due to the very strong end to the year last year with our Q4 sales growing as much as they did year-over-year, we were able to realize some nice benefits from vendor rebates in Q4. So if that had been, say, spread over the full year of last year, which is, in essence, where they were earned, we would have shown gross margin improvement and operating margin improvement from Q4 to Q1 in North America as well.

Shawn Harrison

Okay. And then kind of getting back to the hiring question. It sounds as if most of the hiring was going on in OEM Supply is going or is occurring within the emerging markets. Maybe if you could speak to just briefly, as we look over the next 8 months of this year, what regions do you expect to be hiring the most. And is it going to be continuing in the emerging markets? Or are you going to see more hiring in North America first?

Robert Eck

Actually, the answer is, to a degree, everywhere, and I'll kind of hold out EMEA maybe as a separate thought on that. But for us, it's productivity driven, and we measure productivity at the warehouse level based on lines picked as well as some quality metrics. We measure productivity across the staff functions based on relevant metrics for those people. We measure salespeople based on gross profit dollars. All those metrics we track very closely over a period of time, and that guides us towards when it's appropriate to add headcount. And frankly, as volume ramps up, you hit pressure where in the warehouses, you can with manage with temps or overtime, and you ultimately have to shift to full-time people. In the sales organization, you also hit points where you have so much volume coming in, you need to add headcount there. We've also added minimal headcount around some of our initiatives who are our sales specialists. So all those kind of things work together over the course of the year to get us to the point of saying that the operating leverage -- while we expect to have positive operating leverage as we run through the year, the percentage will decline as we get late in the year.

Shawn Harrison

Okay. I guess as a follow-up to that, do you think you'll still be within the fourth calendar quarter at a double-digit number or for the operating leverage? Or was that kind of a commentary for in aggregate 2011? Just want a clarification there.

Ted Dosch

I think by the end of the year, we would be -- by the fourth quarter, be in the high single digits but still average double digits for the full year.

Shawn Harrison

Okay. And then a final question, just a clarification on taxes. I know it's tough to kind of model, but if we use the 37.5% rate through the remainder of the year, is that a good starting point at least based upon what you know right now?

Ted Dosch

Yes. As I think you know, we record each quarter and effective tax rate based on what the full year projection is. So at this point in time, that would be our best projection.

Shawn Harrison

Okay. Thanks so much for taking my questions.

Ted Dosch

Thanks.

Operator

We'll take a question now from Ted Wheeler with Buckingham Research.

Ted Wheeler - Buckingham Research

I echo the thanks much to Dennis.

Dennis Letham

Thanks, Ted.

Ted Wheeler - Buckingham Research

On the cash flow comments, I think you said operating cash flow would be positive. Do you think free cash flow will be positive this year? Or is it too soon to know?

Ted Dosch

I think we would be positive at the free cash flow level as well.

Ted Wheeler - Buckingham Research

Okay. So the -- in other words, the working capital investment tapers off, excuse me, as we go forward here?

Ted Dosch

Yes. The incremental sales growth quarter-to-quarter would have a much more muted impact on cash requirements each quarter as we progress through the year.

Ted Wheeler - Buckingham Research

Okay. Yes, and 1 other item. I guess Clark is on track maybe even a little pleasant surprise. But if I recall, you're not expecting much earnings contribution maybe even a little dilution this year and then some enhancement next year. I'm wondering if you could just review that.

Ted Dosch

Yes. Positive earnings, little dilution within North America ECS, the Enterprise business, due to a slightly lower margin this first year.

Ted Wheeler - Buckingham Research

Well, actually, you think you'll get some benefit before the year's over from Clark.

Ted Dosch

Positive earnings, yes. It was positive in Q1, just at a lower operating margin than the rest of our Enterprise and Security business.

Ted Wheeler - Buckingham Research

Now does it get to corporate or segment average margin, security average margins within the next year or so?

Dennis Letham

Probably drags a little bit, Ted, because you've got amortization of intangibles on the acquisition. If you looked at it on an EBITDA basis, it will get close to the rest of North America over the next couple of years. But when you throw the amortization expense in there because it's an acquired business as opposed to the rest of the business and Enterprise & Cable being organically built, you get a little bit of a delta around that amortization expense.

Ted Wheeler - Buckingham Research

Got it. Got it. Okay. And I guess last question, on projects, I guess if we could separate them just individually from Enterprise and Industrial Wire, is the -- I think you -- well, is the momentum in terms of engineering work, et cetera up in both? Or is it principally in the Wire & Cable?

Robert Eck

It's up in both.

Ted Wheeler - Buckingham Research

So in other words, the sort of leading indicators you look at for projects are pretty positive in both verticals?

Robert Eck

Yes, they are.

Ted Wheeler - Buckingham Research

Great. Thanks again.

Robert Eck

Thanks. Since we're coming up on the hour, we'll wrap up the call at this point. So thanks, everyone, 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

Thank you, sir. That does conclude today's teleconference. We do thank you all for your participation.

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