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Anixter International (NYSE:AXE)

Q2 2012 Earnings Call

July 24, 2012 10:30 am ET

Executives

Chris Kettmann - Senior Vice President

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

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

Analysts

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

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

Matthew S. McCall - BB&T Capital Markets, Research Division

Steven Bryant Fox - Cross Research LLC

Edward W. Wheeler - The Buckingham Research Group Incorporated

Anthony C. Kure - KeyBanc Capital Markets Inc., Research Division

Shawn M. Harrison - Longbow Research LLC

Jeffrey L. Beach - Stifel, Nicolaus & Co., Inc., Research Division

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

Operator

Good day, and welcome to the Anixter International's Second Quarter 2012 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Chris Kettmann for opening remarks and comments. Please begin when ready, Mr. Kettmann.

Chris Kettmann

Great, thank you. Good morning, and thank you all for joining us today to discuss Anixter's second quarter 2012 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; and Ted Dosch, Executive Vice President 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 in this conference call, including words such as believe, expect, intend, anticipate, contemplate, estimate, plan, project, should, may, will or similar expressions, are forward-looking statements. They are subject to a number of factors that could cause the company's actual results to differ materially from what is indicated here.

These factors include general economic conditions, including the severity of current economic and financial market conditions; the level of customer demand, particularly for capital projects in the markets we serve; changes in supplier sales strategies or financial viability; political, economic or currency risks related to foreign operations; inventory obsolescence; copper price fluctuations; customer viability; risks associated with accounts receivable; the impact of regulation and regulatory, investigative 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 Ted.

Theodore A. Dosch

Thank you, Chris. Good morning, and thank you, everyone, for joining us. Before I discuss our results for the quarter, I would like to quickly remind everyone of 3 significant transactions that occurred during the quarter, and more importantly, highlight the impact on our earnings and balance sheet. First, we announced and paid a $4.50 per share special dividend; second, we took advantage of the favorable credit market conditions in April to issue a 7-year $350 million bond, ultimately intended to fund the redemption of the February 2013 convertible notes; and third, we completed the strategic acquisition of Jorvex, an Electrical Wire & Cable distributor in Peru. These actions resulted in $600,000 of M&A-related operating expense, $3.2 million of incremental interest expense, a cash outlay of over $150 million for the special dividend and $56 million for the acquisition. There was no P&L impact in the second quarter from the acquisition as the deal was closed on the last day of the quarter. For the second quarter, we reported $1.28 earnings per diluted share as compared to $1.33 in the prior year quarter. While we experienced softness in our top line growth compared to our beginning of year expectations, the relative strength of our businesses in the face of weaker global activity can be attributed to our intense focus on helping our customers manage the cost and complexity of their supply chains, while minimizing working capital risks. In addition, I think it is important to note the headwind from both currency and copper in the second quarter of 2012 compared to the strong tailwind from both currency and copper in the prior year quarter. While currency and copper each contributed a positive 2% to revenue in the second quarter of 2011, currency and copper contributed an unfavorable 2% and 1%, respectively in the current quarter. In addition to the impact on revenue, the 15% drop in average copper prices year-on-year for the quarter reduced gross profit by $3.7 million and earnings per diluted share by $0.07.

For the second quarter, we recorded a 1% increase in year-on-year sales, resulting in the 10th consecutive quarter of sales growth. After adjusting for an estimated $17 million from the unfavorable effects of copper prices and $34 million of unfavorable foreign exchange effects, organic sales grew by 4% over the prior year period. During the quarter, we saw year-on-year growth in all 3 of our end markets, as well as all 3 geographic regions, including Europe despite continued weak macroeconomic conditions in that region. The 4% sequential increase in sales was somewhat less than the longer term historical trend, primarily due to a stronger U.S. dollar, less favorable copper effects, as well as softer project business.

Similar to recent quarters, our positive sales results reflect the success of our global strategic growth initiatives, which were partially offset by the impact of the relatively weak global macroeconomic factors that continue to persist.

Looking at second quarter sales trends within each of our end markets, we experienced the following: On a worldwide basis, Enterprise Cabling and Security Solutions sales increased organically by 2% compared to the second quarter of last year, exclusive of foreign currency effects. Continuing with the strong trends of recent quarters, total security sales grew 11% organically compared to the second quarter of 2011 and accounted for 27% of our worldwide Enterprise Cabling and Security end market for the quarter. On a sequential basis, Enterprise Cabling and Security sales grew 6% organically.

Worldwide Electrical Wire & Cable sales grew by 3% compared to the second quarter of last year. Excluding foreign currency and estimated copper price effects, we experienced a year-on-year organic sales improvement, up 9% globally with our fast-growing emerging markets business up 15% organically. Our continued investments in emerging markets are paying off as both our project business and the day-to-day business continue to grow.

On a sequential basis from the previous quarter, worldwide Electrical Wire & Cable sales increased by 7%. Worldwide OEM Supply sales declined 2% compared to the year ago quarter, however, excluding foreign currency, we experienced year-on-year organic sales improvement, up 2% globally. Organic sales in North America decreased 1% year-on-year while Europe, despite challenging economic conditions was up 1%, and emerging markets were up a very strong 31%.

Our market share gains through the addition of new customers and new part sets with existing customers was largely offset by production level reductions with many of our large OEM customers, resulting in relatively flat overall sales in this business.

Sequentially, worldwide OEM Supply sales were down 7% in the second quarter due to softening in production levels for many of our OEM customers.

Turning next to gross margin. We recorded second quarter gross margin of 22.7%, which was down 20 basis points year-on-year and sequentially. We continue to be pleased with our overall gross margin management despite the strong pricing pressure that exists in a falling copper price market, combined with relatively weak demand in many parts of the world.

Looking next at operating expenses, we recorded a year-on-year increase of approximately 3.2%, excluding a favorable currency impact of $6.6 million. Keeping in mind that approximately 60% of our operating expense is related to people cost, we are managing our productivity very closely. If you compare our current cost structure and operating performance to the fourth quarter of 2008, our revenue has grown 13%, while our headcount has been flat. This significant improvement in productivity is a function of strict cost management, while still investing for the future in initiatives such as our emerging markets growth strategy and our digital marketing initiative.

While we continue to maintain the discipline of growing our cost structure at a slower pace than the top line, we did incur some significant expenses that were not directly related to the operations of the business. If you exclude the currency effects, the $600,000 of one-time acquisition-related expense and the $3.7 million of incremental pension expense that was driven by lower discount rates and lower investment returns, operating expenses would have been up 1.6% compared to the year ago quarter. Business [ph] operating expense increase is only 40% [ph] of the growth rate in organic sales.

To summarize, operating income was $89.9 million in the second quarter, representing a 2% decline from the $92 million in the prior year quarter. A 5.7% operating margin in the current quarter is down 20 basis points from the prior year quarter, primarily due the lower gross margin, offset by strong cost management. Excluding the $900,000 negative impact of foreign currency effects and $3.7 million related to unfavorable copper pricing, operating income would have improved by 3%. When you also exclude the acquisition expense and the incremental pension expense, operating income would have been up 8%, resulting in incremental operating profit leverage of 11%.

As we move further down the income statement, interest expense of $14.8 million was up from $12.8 million in the year ago quarter, driven primarily by the previously mentioned $350 million senior notes offering completed in April of this year. The incremental $3.2 million of interest expense on this issue drove the average cost of debt in the second quarter up to 6.2% from the 5% in the year ago quarter. At the end of the current quarter, approximately 86% of our outstanding debt had fixed interest rates, either by the terms of the debt or through hedging contracts.

Other net expense in the current quarter of $5.5 million increased by $3.9 million from $1.6 million in the year ago quarter. The increase over the prior year quarter is primarily due to the strengthening of the U.S. dollar against certain foreign currencies, primarily in the emerging markets where there are few cost-effective means of hedging. The effective tax rate for the quarter was 36.7% and is projected for the full year to be 36.3%, excluding the $9.7 million of tax benefits recorded and discussed in the first quarter of this year. This compares to 37.6% in the prior year quarter. Keep in mind, it is difficult to predict the full year tax rate this early in the year due to swings in country level profitability, but we believe that we will continue to have an effective tax rate near the 36% level for the remainder of 2012.

For the second quarter, the company reported net income from continuing operations of $44 million compared to $48.4 million in the year ago quarter. Diluted earnings per share of $1.28 declined 4% from the $1.33 per diluted share reported in the year ago quarter. Net income per diluted share would have been 6% higher in the prior quarter after excluding the negative impact of copper pricing and the incremental interest expense.

Moving onto cash flow, we generated $124 million of cash from operations during the quarter. The strong cash generation was due to reduction in working capital requirements compared to the prior quarter. Capital expenditures were $8.6 million in the second quarter compared to $8.4 million in the year ago quarter. We ended the second quarter with a debt-to-capital ratio of 51.9% compared to 44.7% at year end 2011. This leverage ratio is slightly above our long-range target of 45% to 50% debt to capital, and is driven by the combination of the higher debt from the new bond offering and the reduction in equity from the dividend payout. We expect this measure to be within our long-range target by year end.

We continue to have excellent liquidity. At the end of the second quarter, we had $289 million in available, committed, unused credit lines under revolving credit facilities, no borrowings outstanding under our $300 million accounts receivable facility and $67 million invested cash, resulting in over $650 million in total liquidity. Despite the challenging and uncertain macroeconomic environment, our continued solid operating performance puts us in an excellent position to support our growing business, while also giving us the flexibility to consider strategic acquisitions or selectively repurchase additional amounts of the company's outstanding shares. Our strong liquidity position and other favorable financial characteristics provide Anixter with the flexibility to quickly adjust to new market realities and fund investments in crucial long-term growth initiatives as we efficiently capitalize on future opportunities.

On that note, as mentioned earlier, for the fourth time in 8 years, we paid a special dividend. The $4.50 per share payout represented a total cash outlay of approximately $150 million and equated approximately to a 6.5% payout. Additionally during the second quarter, we completed the previously announced $350 million senior notes offering, as well as the acquisition of Jorvex, a Peruvian Electrical Wire & Cable distributor. The acquisition represents an important step in our emerging markets growth initiative and leverages our existing geographical presence and logistics capabilities in this key Latin American region. In addition, we expect this transaction to be immediately accretive to earnings in the second half of 2012.

At this point, let me turn the call over to Bob as he will comment further on the dividends, along with our strategic initiatives, current business trends and the near-term outlook.

Robert J. Eck

Thanks, Ted. Thanks, everyone, for joining us today. The second quarter of 2012 showed a deceleration in the rate of growth we have been experiencing in recent quarters. While our Electrical and Electronic Wire & Cable end market again experienced solid growth, our other end markets were affected by pressures from the macro economy. As we noted in the call for the first quarter, the data infrastructure market in North America overall declined during that quarter in the high single to low double digits. We believe a similar year-over-year decline impacted this market during the second quarter. Also during the second quarter, several of our large OEM Supply customers in North America and Europe announced production cuts during the quarter due to deterioration of their end market demand. In light of those challenges, we believe our performance during the quarter was impacted more due to macroeconomic factors than to any deterioration of our market share across our end markets. I will address each end market and segment in more detail.

However, before discussing the end markets, I do want to highlight several positive events in the quarter. Ted has already taken us through the details regarding our operating expense, but I think it is worth reiterating that had we not had the impact of pension and one-time M&A expense, our operating expenses would have increased less than 2% year-over-year organically, while we achieved 4% organic sales growth. This demonstrates the discipline our team has maintained in managing our controllable expenses. Secondly, we have frequently discussed our desire to pursue strategic acquisition opportunities to build our product and geographic scope. During the quarter, we were pleased to complete the acquisition of Jorvex, expanding the scale of our Wire & Cable business in the rapidly growing Andean region of South America. Third, through effective management of working capital, along with our operating results, we generated $124 million in cash flow. Finally, consistent with our long-standing practice of returning excess capital to shareholders, we returned $150 million to our shareholders through a special dividend and exited the quarter with substantial liquidity in the form of cash and borrowing capacity.

Turning now to our end markets, the Enterprise Cabling and Security Solutions end market experienced modest year-over-year growth led by North America. We had small declines in both EMEA and the emerging markets. Our research again indicates that the data infrastructure market in North America declined year-over-year in Q2. While data is somewhat more difficult to define in EMEA, we believe that the recessionary pressure in Europe caused the market to decline there as well. In the emerging markets, the story is somewhat mixed for us as our business, in Asia particularly, is dependent on the IT capital spending by Western multinational companies. We believe the spending pattern by MNCs in Asia is similar to what we are seeing in North America. Given this challenging environment, it is our view that we are continuing to gain modest share in our addressable data infrastructure market.

Security growth continued across all geographies, reflecting both continued investment in security and the shift to sophisticated Internet Protocol-based systems. The project activity by our customers continues to be positive, however, the decision cycle has extended in recent months, creating some uncertainty in our outlook.

Moving now to the Electrical and Electronic Wire & Cable end market, the second quarter experienced continued organic growth across all geographies, with double-digit organic growth in EMEA and the emerging markets. Our expansion earlier this year into Saudi Arabia has been a significant contributor to the growth we have achieved in EMEA. The market survey data we have indicates that we have continued to take share in both the industrial project and OEM sectors in this business. We continue to experience solid project activity in power generation, industrial, oil and gas and mining sectors. The continued global investments in industrial plant, natural resource development and power generation should continue to drive sales growth in our Wire & Cable market. We see strong quoting activity and increased opportunity to leverage our global platform in this end market. The initiative to expand in industrial automation has continued to strengthen this year across North America. We will expand this initiative into other geographies in 2013. The acquisition of Jorvex, our organic investments in geographic expansion, and the secular trends regarding capital investment should enable this business to continue to grow through the second half of this year.

In the OEM Supply end market, we experienced decelerating organic growth in EMEA and a decline in North America, offset by strong growth in the emerging markets. While we did not lose share at our existing customers, many customers in Europe and the U.S. announced reduced production rates during May and June. These production cuts had an immediate impact on our volume at those customers, and we anticipate that the lower production volumes will continue in Q3 and possibly through the end of the year. Although these changes are disappointing, they are consistent with the widely reported industrial production statistics and PMI data in the U.S. and Europe. Importantly, our seasoned [ph] management team moved very quickly to take cost out of our business and reduced inbound inventory in line with the reduced sales. Additional measures are being taken to reduce cost and working capital, while at the same time, we are gearing up to support a large contract for one of our customers in Turkey and continue to see positive growth in the emerging markets. We continue to have an active pipeline of new business opportunities, and we do believe that our outsourced Supply Chain Services should be even more appealing in this difficult economic environment.

As we assess the current unsettled economic conditions, we will continue to drive our value-added distribution model across all of our end markets and geographies. We have frequently spoken about the strength of our global footprint, common operating procedures and one Anixter sales approach in providing a single source, high value supplier to our customers. Particularly in light of the challenging environment we are facing again in Europe, it is worth noting that 2/3 of our top 100 customers have operations in Europe. Of those customers, 77% spent more than $100,000 with us in Europe last year. In addition, the growth and improvement in operating margin in the emerging markets reflects a healthy local business, coupled with strong global connectivity. In the absence of this global reach and a business model that stresses risk reduction, through technical support and supply chain management services, it would be difficult to maintain our industry leading share position and operating margins in North America.

As we look forward to the balance of 2012, we believe we are facing a more uncertain environment than we anticipated early this year. Our opportunity pipelines are quite active, and our backlog is currently more than 10% above prior year. The soft corporate IT spending, coupled with the macro uncertainty about manufacturing and across Europe cause us to be somewhat cautious about the second half of the year. However, we anticipate that organic growth in the second half of the year will be similar to the growth in the first half. We will actively manage expense and working capital to manage -- to maximize operating profit and return on capital given the environment we are facing. We do have significant liquidity, and we will continue to seek opportunities to invest in growth initiatives and expand the markets we serve. As we've demonstrated in the past, we will evaluate alternative uses of capital, and we'll return excess capital to shareholders when we think that is an optimal use of funds.

We will now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Ryan Merkel with William Blair.

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

So first, I'm going to start with a comment for, I guess, 4% to 5% organic growth in the second half of the year. Can you just provide a little more detail on which end markets you think are going to drive this?

Robert J. Eck

Ryan, I think it will look not that dissimilar from the way it's looked in the first half of the year. I think we'll see certainly growth in security. That's going to help the enterprise market. I think emerging markets will see stronger growth for sure than Europe. As you know, we've said in the past, Latin America tends to be back-end loaded, the second half of the year tends to sequentially grow from the first half of the year. We don't see any reason that, that trend would be any different. I think the Electrical and Electronic Wire & Cable business, which has shown healthy growth will continue to show growth. And I think the challenge is going to be what happens with the OEM customers and what happens with Europe particularly. But again, we're getting leverage in Europe and EMEA on the reporting segment out of the investments in Saudi Arabia, and of course, I think, we'll see some uplift come from our investments in Wire & Cable, aside from Jorvex, we have additional Wire & Cable investments in Asia Pacific as we've talked about, and we should see some benefit from that continuing in the second half of the year as well.

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

Okay. And then a follow up there to the OEM. It sounds like third quarter expecting it to still be pretty weak. Could you just comment on -- was there any particular end markets in the OEM that slowed more than others?

Robert J. Eck

Yes, it's actually a couple of end markets that slowed in OEM. Heavy truck and drivetrain, engine drivetrain, as well as agricultural equipment, all -- some household names. They've actually publicly announced some of their production cuts. So that very quickly impacts us. Normally, maintenance turnarounds in the plants are done in the third quarter, and what typically happens is then production days get reduced, so if you had planned a 2-week turnaround, another week gets tacked on to the shutdown and so you lose that production. So that's why we anticipate that OEM Supply will be soft for the third quarter as well.

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

Okay. And maybe if I could just sneak one last one in. I'm just curious about trends by month in the quarter because I think I recall, March had some nice momentum, so if you could maybe just comment on that a bit.

Robert J. Eck

We did have some good momentum coming out of March. I think the biggest sort of shifts for us were we saw some deceleration in enterprise as we went through the quarter, and the OEM Supply changes really happened beginning in May. We started getting notice in May of production cuts, and they hit us very quickly. Basically, extra holidays were taken at Memorial Day. Additional holidays or reduced sort of going from 5 to 4-day production at some of our customers kicked across all of June.

Operator

We'll take our next question from David Manthey with Robert W. Baird.

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

First off, on the Jorvex acquisition. Could you talk about how big the pipe and belt business is, and just -- I'm trying to figure out how you're going to report this. Is this all going under Wire & Cable or is some of this going into OEM? How are you going to segment that?

Robert J. Eck

Well, we'll report it in terms of reporting segment all in emerging markets. From an end market standpoint, it will all go under Wire & Cable. The belt business is a small part of the total business. In fact, I would say, don't get too hung up on the belt business. They you do have an exclusive relationship with their supplier. And that's, frankly, where we see some leverage in this company. They have very tight relationships with their suppliers. They've been asked by their suppliers to expand into more countries across the Andean region, and like a lot of family-held businesses, were capital constrained largely because every year the capital got dividended out to the family. And so what this sets up for us is an opportunity with our financial capability to very quickly accelerate the growth of Jorvex into places like Chile and Ecuador where we already have existing legal entities, existing infrastructure on the ground. And frankly, a group of suppliers of Jorvex were eager to have us take them into those geographies.

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

Okay, so Wire & Cable there. Okay. Clearly, the ForEx and the copper and some of these things are outside of your control. And I know some of the expenses moved up a little bit this quarter. But when I look at 11% sort of contribution margins on 4% same-store sales, I'm wondering how sustainable that is. It seems like a really good result for you, and especially if some of these things hit in June. And I'm just trying to sort out how sustainable that is if we continue in this kind of lackluster growth environment?

Theodore A. Dosch

Yes, Dave, this is Ted. That's a great question. And the 11% incremental operating profit margin on 4% organic growth is not sustainable over long term. As I think both Bob and I emphasized in our comments, we have continued to take a very strict focus and close management of our cost structure, which has allowed us to do that in the short term. But as we continue to -- as this has continued to progress into the second half, I don't think that would be sustainable for the back half of the year. I think if we were to continue to experience these 4% to 5% organic growth type numbers for the back half of the year, seeing incremental operating margin leverage in the high single digits would probably be much more likely.

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

Okay. And last question, on the OEM business, just looking at the U.S. versus Europe, roughly split here. Could you talk about the top couple of vertical end markets, industries in Europe and the U.S. I know you mentioned the heavy truck and the drivetrain, and I'm trying to sort out if there's differences between the U.S. business and the European business in terms of industry end market exposure.

Robert J. Eck

Great question. And Dave, there's a little bit of difference. And the primary difference is actually that the European business has a little more automotive exposure, and particularly luxury automotive exposure. And that -- we made a comment, I think in the last earnings call about how we were benefiting from some of our customers in Europe having significant demand for products for their new products. And we have actually had some new car rollouts from one of our customers that has been hugely successful in Europe and in North America, and that's actually helping Europe quite a bit. So you kind of look at the macroeconomic statistics and you would have thought Europe OEM Supply would have been more heavily impacted than North America, but it is that customer mix difference.

Operator

And we'll take our next question from Jack Stimac with BB&T Capital Markets.

Matthew S. McCall - BB&T Capital Markets, Research Division

It's actually Matt in for Jack. Bob, you talked about strength in power gen, and I think you said industrial mining, oil and gas. But first part of the question, is that a global comment, or were you talking about any specific geographies? And then if you could just talk about the outlook for some of those areas of strength in the back half?

Robert J. Eck

That was specific to our Electrical and Electronic Wire & Cable business, and that is a global comment. There is -- and if you look around the world at Asia Pac, which includes Australia, you look at South America, you got lots of oil and gas and mining and new power generation being built. As you move into North America, you'll certainly have a mix of mining again, oil and gas and power gen. And then when we look at EMEA, there's a couple of things that happen in EMEA. One is, all the oil and gas development that goes on in the Middle East, but then in addition, we work very closely with a number of European-headquartered engineering procurement and construction companies that do business elsewhere around the world, and a lot of that activity tends to bill in our EMEA business regardless of where it ends up shipping because that's the preference of the customer. So those kind of secular trends are going to impact us, I think, in similar ways around the world.

Matthew S. McCall - BB&T Capital Markets, Research Division

Okay. And understanding that there's not a lot of direct non-res construction exposure for you guys, can you just talk about anything that you're seeing that might be related to some improvement in the non-res environment specifically in the U.S., that's the question.

Robert J. Eck

Well as you say, we really aren't tied to non-res construction. So while I can create some variability in our business, it's not a big driver for our business. So honestly, it's a segment we don't payment much attention to.

Matthew S. McCall - BB&T Capital Markets, Research Division

Okay, that's fair. And then final question. Just on the inventory front, just to the volatility in copper. Where your inventory stands at enterprise, industrial and then maybe any geographical comments you can throw in there.

Theodore A. Dosch

Yes, I think, Matt, in general, we're happy with where our inventory is. As you know, especially in Electrical Wire & Cable business, we manage that purchases and inventory balance very closely, especially in periods when copper price is as volatile as it has been lately. So striking the right balance between maintaining availability for the customer and minimizing the risk to copper exposure is a clear focus for us. We ended the quarter in what we believe is a very good position, considering the trends in the business. And again, as you know from the numbers we reported, Electrical Wire & Cable was the one showing the strongest growth, both year-over-year and a sequential basis for Q1 to Q2. So I think, we feel very well-positioned there. Fasteners, as we've seen these OEM production level decline, I think we've been appropriately aggressive in managing those purchases to keep our inventory in line with that new level of demand.

Operator

We'll take our next question from Steven Fox with Cross Research.

Steven Bryant Fox - Cross Research LLC

Just 3 questions from me. First of all, from a number standpoint, if I look sequentially at your results, how much of an impact was currency during the quarter relative to where it started out? And then going forward, relative to the 5% organic growth, if copper prices and currency stay around these levels, what kind of drag it is to earnings and profits and then I have a follow up.

Theodore A. Dosch

Yes, Steve, it's difficult for us to measure the currency impact sequentially quarter-to-quarter. But overall, I would say it was not a significant difference between the quarters. However, from a year-over-year standpoint, the currency was a much bigger impact in the quarter than it was the previous quarter. So year-over-year Q2, the impact was much larger, more than -- I think about double what it was in Q1 year-over-year. Copper was a little more of a headwind in Q2 year-over-year as it also was sequentially as we saw the average price of copper drop from $3.79 in Q1 to $3.54 in Q2. So even though both quarters were down about 15% year-over-year, that continuing downward trend from Q1 to Q2 did have a bigger impact for us here in Q2. Now to your point on a go-forward basis, without trying to predict where either currency or copper is going, I will tell you that if copper stays about where it is today, we would expect to have a similar year-over-year impact in Q3. Last year's Q3 had an average copper price of $4.07. So if currency stays in that $3.40 to $3.50 range, once again, have close to a mid-teens impact as far as a drop in copper price year-over-year.

Steven Bryant Fox - Cross Research LLC

Okay. And then just in terms of the -- for the funding of the pension expense, was that a decision that was made at the beginning of the quarter, during the quarter, was that something that was planned and how do we sort of factor that in going forward? Could there be other additional funding for the rest of the year?

Theodore A. Dosch

Great question, Steve. So let me try to clarify. First off, this was not a funding impact. We have not changed our cash funding. In fact, our funding this year will be pretty much in line with what we've funded each of the last 2 years. This all comes down to the accounting for pension expense from a GAAP standpoint, which as you know, and as most companies are experiencing the 2 big drivers of expense and especially in the current environment, are the discount rates, with interest rates as low as they are, we like, I will say, most companies, many companies, had a -- were using a lower discount rate in the current year. So that helps to drive up the expense. And then the second part of it, which is the new information, if you will, here in Q2, is the projected rate of return on pension assets. Every year, we go through an in-depth analysis in Q2, which is the earliest. We try do this with all the information available from the prior year, and then you use that analysis to determine what should be the projected rate of return for the current year, and that does impact pension expense. So in this quarter, we made the decision to reduce the projected rate of return on the pension assets. So what we booked here in the quarter was a catch up, if you will, for both Q1 and Q2 in that regard. So that incremental pension expense that I quoted in my comment, you could really step back and look at that and say about half of that incremental expense was due to a lower discount rate and about half of it was due to a lower rate of return on the pension asset.

Steven Bryant Fox - Cross Research LLC

Great. That's very helpful. And then just lastly from a big picture standpoint, just going back over the enterprise market. Can you sort of provide a little bit of color in terms of how things have slowed down during the quarter, specifically how much is tied more into the local area network versus data center versus maybe co-location opportunities. Any color there in terms of where the relative weakness is on the overall market would be helpful.

Robert J. Eck

Yes, Steve, this is Bob. The relative weakness seems to be in the -- I'll call it the corporate sort of end-user IT spend. What happened in the course of the quarter that changed up a bit for us is the decision-making cycles have really stretched out. And I know you're very familiar with that market. That's usually a sign that companies are being cautious about their IT spending, which isn't surprising in the uncertain environment. It doesn't mean the projects are necessarily going away. It just means there's I guess a little more evaluation being done on the projects. Data centers that are sort of cloud-related or colo-related, we did not necessarily see a decline, and we still see pretty active project boards from our cloud-related customers. And colo business, I think, continues to be reasonable. It seems to have slowed a little bit in terms of some of the investment. I think that kind of stuff ultimately over time catches up with itself just because the amount of data traffic being created, the amount of data being stored, particularly from mobile devices, the colo business ultimately has to come back to some degree. How that comes back and how it affects us, obviously, we'll see as time plays out.

Steven Bryant Fox - Cross Research LLC

We'll go next to Ted Wheeler with Buckingham Research.

Edward W. Wheeler - The Buckingham Research Group Incorporated

I wanted to -- just on the pension, following up. If the rate of return that you're now using holds and the returns assumption is sustained, what would we just sort of be looking at in expense next year relative to this year?

Theodore A. Dosch

Ted, I don't have that number off the top of my head. I'll have to get back with you on that.

Edward W. Wheeler - The Buckingham Research Group Incorporated

Okay. On Jorvex, I guess it's going to be accretive from the get go. Are the margins on that business similar to industrial wire margins? And if they're different or lower, do you think they can get to industrial wire margins over time?

Theodore A. Dosch

Yes, I think it's a reasonable assumption for you to -- for you guys to use that Jorvex is operating at margins at our emerging markets Wire & Cable business, and we would expect the combination of those 2 businesses to improve further as we leverage some of the customer synergies that Bob mentioned earlier, as well as some cost synergies as we grow in that business. As I think we have already said, that Jorvex had a bigger Wire & Cable business in Peru than we did, and we look for it to be a great foundation to build on for that broader Andean region.

Edward W. Wheeler - The Buckingham Research Group Incorporated

And just lastly, back on the enterprise project, I guess there's stretch outs happening now. Did I hear you -- I know you talked about the pipeline as being pretty solid in industrial wire. Is it also pretty active on the enterprise side? Or is that kind of slipping as well?

Robert J. Eck

No, the pipeline, Ted, continues to be pretty active. The change really has been this decision cycle. Let's say, the extending maybe of the sales cycle. Customers aren't making decisions as quickly as they have in the recent past. So pipeline's active, but as always, when you get into these extended decision cycles, you get a little bit cautious about how quickly that pipeline turns into revenue.

Edward W. Wheeler - The Buckingham Research Group Incorporated

Is that the type of -- I mean, it's understandable given all the news we read about. Is this something that you see fairly frequently over time? Or is this kind of unusual and reminiscent of '08, '09?

Robert J. Eck

That's a great question, Ted. This is not something we see routinely in a growing economy. It's something that we see typically happen when the economy is trending down. So from that standpoint, it's always a bit concerning to see this kind of extension of the decision making process on IT spend.

Edward W. Wheeler - The Buckingham Research Group Incorporated

So, okay. And I guess the day-to-day activity levels are pretty steady? Or -- because they can move around a little bit.

Robert J. Eck

No, I think that's the right conclusion. The day-to-day activities in enterprise are pretty steady because the variability in the short term always comes from the projects.

Operator

We'll take our next question from Tony Kure with KeyBanc.

Anthony C. Kure - KeyBanc Capital Markets Inc., Research Division

I just want to talk about Europe a little bit. If you could just speak to the seasonality normally in Europe for the third quarter and fourth quarter. I guess according to my numbers, I have it stepping up a little bit usually in the third quarter, and then again in the fourth quarter. Are my numbers right or could you maybe give me some direction on that normal?

Theodore A. Dosch

No, Tony. Europe tends to have the most pronounced negative seasonality Q2 to Q3. And that's really for 2 reasons. One, the prevalence of kind of extended holidays over there in both the U.K. and the Western Europe countries, which hit much heavily in the July-August time period, combined with the fact that 40% of our business over there is OEM. So when you think about summer shutdowns for retooling and so forth, that tends to also hit July and August, and has a greater impact on Europe than elsewhere. So they would typically be down Q2 to Q3, I think, to the tune of several percent, 3% to 4% at least. Whereas, our typical long-term seasonality as a total company would be up about 3%, Q2 to Q3. Then their Q4 would tend to be flat to slightly up, so where they don't have those holiday time periods. They do tend because of the high percentage of that business being OEM tend to have more factory downtime in that Christmas-New Years time frame which tends to make the December a weak month for them as well.

Anthony C. Kure - KeyBanc Capital Markets Inc., Research Division

Okay, great. That's helpful. As far as staying in Europe, the tariff issue going on there. Can you maybe give us a quick update on how that's progressing or maybe if there's additional detail and some line of sight as to when that might help you?

Theodore A. Dosch

Yes, first off, nothing's changed relative to the tariff you're referring to is -- was enacted by the E.U. on Chinese mainland-produced fasteners imported into Europe. That is in effect till 2013. We have continued to make progress in our gross margin recovery. We said at year end that we estimated that we had recovered about 50% of the margin degradation that started to hit us in Q3 of 2010. We're a little ahead of that right now, but don't anticipate fully recovering the balance of that. We said until the end of this year or early next year. We continue to make progress in resourcing some of those parts with other manufacturers, other than obviously, mainland China. So I think we're continuing to eat away at that deficit, if you will, or that gross margin pressure that we've been experiencing for almost 2 years now in the European Fastener business.

Anthony C. Kure - KeyBanc Capital Markets Inc., Research Division

Okay. And then just on the profitability side in Europe. You've stepped down from first quarter to second. Obviously, volumes probably didn't help as mix probably didn't help either. So looking forward, with the sequential step down in the third quarter, then maybe a little bit of help in the fourth, are we looking at sort of breakeven for the second half of the year? More like the second quarter as far as Europe's profitability goes?

Theodore A. Dosch

I think on the -- it's reasonable to assume on the lower volume that it will be closer to Q2 than Q1. I'd like to think with some of the continuing initiatives that we're working on that, that will offset some of the negative volume pressures. But as we talked about on Q1, and it's true again here in Q2, and I'm sure you've noticed that the margin pressure from a European standpoint is what really hurt us in addition to lower volume. And Bob talked about -- I think last time as well. Not surprisingly, in a tough market from a volume standpoint, that's when pricing pressures increase in the cabling businesses. So we're kind of dealing with both the volume pressures, as well as pricing pressures. In essence, everybody out are fighting for their share of a smaller pie, if you will. And so that's creating added gross margin pressures in the cabling businesses.

Anthony C. Kure - KeyBanc Capital Markets Inc., Research Division

Okay, thanks. And then just last sort of maintenance question. Shipping days per quarter, if you could, if you have those for third quarter and fourth quarter?

Theodore A. Dosch

Yes, they're both the same as last year. So 63 in Q3, and 62 or 61, if you will, in Q4. There's 3 official holidays in Q4, which is why we say they're 62. But from a relative impact standpoint, with kind of a half day before Thanksgiving and half day -- or half day the Friday after Thanksgiving and a half day before Christmas. It really works out to about the equivalent of 61 ship days for Q4.

Operator

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

Shawn M. Harrison - Longbow Research LLC

I just wanted to follow up on the pricing comments again. Is it abnormal pricing you're seeing right now? Or is that the pricing that you would typically see when you get kind of these delayed selling cycles and push outs into the marketplace? I guess tied into that, are there concerns that maybe some of your competitors have too much inventory and that's pressuring pricing?

Robert J. Eck

Yes, Shawn, this is Bob. I think, I'll take it by end market because I think there's some different factors. Pricing in the Electrical and Electronic Wire & Cable business is being driven by the decline in copper year-over-year, not so much of other competitive pressures. In the enterprise business, there's definitely some competitive pressure right now. When you've got the low demand situation that we're in, in a market where there's excess manufacturing capacity, it certainly creates pressure on pricing. And I think the pressure gets driven by the manufacturers. It also gets driven in the distribution channels. Distributors are fighting to maintain or take position in a soft market. And we felt that both in North America and in Europe. And I think the other thing is mix shifts a little bit because as the data part of the business is soft, yet we're getting growth in security. Security tends to be a little bit lower gross margin business as well.

Shawn M. Harrison - Longbow Research LLC

Okay. And then, Ted, as a follow up on inventory. It sounds as if you think internally, you're pretty well-positioned for the market. But just in terms of thinking about inventory dollars as we move through the rest of the year, we haven't had a lot of normalcy for the past few years. How would expect the dollar of inventory to track into the third and fourth quarter? Should we see a lower balance of inventory to exit the year?

Robert J. Eck

I think that question has everything to do with what happens with sales in the back half of the year because certainly we can have some of the project inventory rotate through fairly quickly, day-to-day inventory tends to stay in place a little bit longer. And we react fairly quickly to changes in the demand situation. So honestly, without knowing exactly where we're going to end up on sales, it's hard to predict where we'll wind up on inventory. But the discipline we have around our purchasing practices will continue. So that if sales are flattish, my expectation is we'd have a little less inventory by the end of the year. If sales grow, we might have a little more. I think that's how the thing plays out. With Wire & Cable, importantly, because of the volatility in copper, we're being much more sensitive on inventory because as copper falls, I think we said a couple of years ago one time in a falling copper environment, when do you want to catch a falling knife? You really want to be very careful about taking an inventory position and not that the copper has found a bottom. So that means you tend to keep a little less inventory in the Wire & Cable business.

Robert J. Eck

The other thing that I'd add to Bob's comments. I agree with him completely. If you look right now, our inventory is virtually identical to where it was at the end of last year. I would expect by the end of this year that we would still be at or certainly very close to the inventory turns we are right now. So to Bob's point, I think our management processes are robust enough that regardless of which way that revenue goes, we'll maintain -- we're able to maintain availability of service levels with our current level of turns.

Shawn M. Harrison - Longbow Research LLC

We'll take our next question from Jeff Beach with Stifel, Nicolaus.

Jeffrey L. Beach - Stifel, Nicolaus & Co., Inc., Research Division

A couple of questions. You're experiencing solid organic growth in the emerging markets in your Wire & Cable business and in your OEM business. You've said, trends should continue through the rest of the year. Is this a reflection, do you think, of healthy end markets? Or is this more Anixter performance? And are you seeing any weakness in your end markets in these emerging geographies?

Robert J. Eck

So Jeff, let me start with the OEM and Wire & Cable. I think it's 2 factors. I think it's us performing well in good environments. Really, I can't parse which is contributing more myself. But I believe both are compelling factors when you look at the economies we're operating in. And in both of those cases, OEM and Wire & Cable, our investments in emerging markets are newer than they are in North America and Europe, and therefore we're still in sort of that early growth phase, where you can grow rapidly off a smaller number. So we're still facing that. I think the enterprise end market has some different dynamics. I think it looks in some other countries different than the U.S., in some other countries, looks very similar to North America. So I think enterprise as you saw this quarter will be a little more uneven in the emerging markets.

Jeffrey L. Beach - Stifel, Nicolaus & Co., Inc., Research Division

Okay. The second question. Could you give us the growth in your security business by geography?

Robert J. Eck

Jeff, I don't have that at my fingertips. I don't think Ted does at the moment either. So let us get back to you with that information.

Jeffrey L. Beach - Stifel, Nicolaus & Co., Inc., Research Division

Or can you just give kind of relative growth rates on that 11%.

Robert J. Eck

I can do that. I can tell you, Jeff, that very roughly in North America, the growth number would have been in the mid-to-high single digits, rest of world would have been well into the double digits.

Jeffrey L. Beach - Stifel, Nicolaus & Co., Inc., Research Division

We'll take our next question from Brent Rakers with Wunderlich.

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

Ted, I guess try to ask this pension expense question a different way. I know you needed to get back on the 2013 outlook. But it looks like you tracked about $4 million a quarter last year. You did $5.6 million in Q1 and $7.6 million it looks like in Q2. Any sense for the second half of this year even in terms of how much of the elements of this quarter should extrapolate to a regular quarterly rate for pension?

Theodore A. Dosch

I think it's more like in the ballpark of $6 million. A little over $6 million in the back half because as I mentioned in this quarter, with that change in the rate of return assumption, we had to book 6 months worth of that incremental expense, since we adjusted the assumption here in Q2.

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

Okay. So basically, you just take the average of the first 2 quarters, correct? And then, would there be a reason why that, Ted, next year wouldn't -- that number next year in theory would stay very similar, correct?

Theodore A. Dosch

Yes, and that's probably the best assumption to use for now, just recognizing that a lot can change between now and then, including discount rates or that rate of return. But with what we know today, I think that's a reasonable assumption.

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

Got you, okay. And then you've talked a lot, and I know Bob talks a lot about some of the pricing by the verticals you're in. Could you maybe speak a little bit to how that may have impacted the sequential change in gross margin with the 3 various business lines?

Robert J. Eck

Yes, I'll take it first with Wire & Cable. Copper definitely had an impact on us. So that would be one of the movers in gross margin. Enterprise also would've been a mover in gross margin, on the downside. As Ted said, we've done well with gross margin in OEM Supply. If anything, that might have offset some of the softness in the other 2 businesses.

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

And just to clarify by me, you are speaking on a percentage basis of those impacts, correct?

Robert J. Eck

Yes, exactly.

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

Okay, great. And then just last question, I know you've commented in the past in terms of your gross margin by region. Could you give me a sense of the gross margin by geography in the quarter?

Theodore A. Dosch

Yes, we'll have those numbers published in our Q when we put that out, Jeff. We haven't released those yet. But I'll tell you that the gross margins by region are very similar to Q1 with some further -- a little bit further degradation in Europe, and a little bit of improvement in emerging markets. So overall, I think, within about 10 basis points in total.

Operator

And we'll take our final question from Ted Wheeler with Buckingham Research.

Edward W. Wheeler - The Buckingham Research Group Incorporated

On Europe cost adjustments, could you, are there quantifiable actions you're taking or is it just sort of day-to-day reacting to the volume trends? Or are there some specific things you can share with us that you're doing there.

Theodore A. Dosch

Ted, it is both. As I guess you would hope we are doing. So let me back up to the announcement that we made with the restructuring in Q1 of 2011. You'll remember, we announced a restructuring charge of $5.3 million and said at the time that we would realize -- annualize savings of about the same amount. And again, all of that related to Europe, about 2/3 of that related to our Fastener business in Europe, most of it associated with facility savings and/or people savings as we consolidate facilities. That was enabled by both from systems conversion and coming to the end of some leases from some of these companies that we had acquired over the years. What we said though is we would not fully realize the benefit of that until Q2 of 2013 because of the timing of some of these facility closures. So by the end of this year, we would have expected to have realized in our P&L, in essence, about 3/4 of that savings by the end of 2012. With a little more of that to be realized next year. In addition to that, we are continuing to look at all 3 of our end markets, every one of our facilities, and looking at how we rightsize our structure for the -- not just the level of business, but for the competitive environment that we're operating in, in each of those end markets.

Edward W. Wheeler - The Buckingham Research Group Incorporated

So you, I assume, are contemplating further action?

Theodore A. Dosch

Yes, we're continuing to look at -- I don't know that you'll hear us talk about another formal restructuring charge per se. A lot of this will be kind of ongoing as we look at a combination of not replacing some headcount as we go through attrition, as well as in some parts of the business, maybe being a little more aggressive in how we can further consolidate roles and reduce some personnel cost.

Edward W. Wheeler - The Buckingham Research Group Incorporated

Yes, I guess I'd throw that over time when things get to normal, whatever that is, margins could get to that 5-plus percent level in Europe. Is that still something that's potentially there? Or do think we need to just think in terms of a lower structural -- I know, it's hard to comment today. But just in terms of how do you look at that as a really longer-term strategy?

Theodore A. Dosch

Ted, I guess, longer term, and certainly from a strategic standpoint, I think 5%, the way we see it right now would be a bit of a stretch. Our peak margins pre-recession had peak margins, as well as peak revenue. We were about 4.7% operating margin back in 2007. We're right now just back to the same revenue we were at that point, but we've incurred almost 5 years of inflation since then, as well as some of these other competitive pressures at the gross margin line. What we had said after delivering a little over 1.5% margin last year, that if we could have grown the business by about $100 million of revenue this year, again, before we realized the magnitude of the soft economic climate there, that we thought we could get that bottom line operating margin up closer to 200 -- 2.5% this year. We said -- this is what we said kind of last year in the Q3-Q4 time frame that get an improvement of 100 basis points. As we said last quarter, that's not his card [ph] with very soft top line. So I think that if we have some stabilization in Europe, we're able to build back some of this revenue, which will give us the cost leverage that we need, as well as these various actions we're taking to improve margin through mix, as well as take some cost out, that it is within line of sight to say in the next 2 to 3 years, we'd have that back up in the 3% range, and then build on for that in the longer term.

Robert J. Eck

And I think, Ted, as we focus on Europe, as I made a comment in my prepared comments earlier today. The fact that we're in Europe gives us leverage or opportunity with global customers that, in fact, helps us maintain operating margins in North America that are greater than our publicly-traded competitors. And I think it's a direct correlation to the fact that it's a higher value proposition. It's the ability to be one throat to choke, and if we were able to, say, close down Europe completely and walk away, I think the impact on our business would be significant in North America as well.

Operator

And at this time, I'd like to turn the conference over to Bob Eck for any closing and additional comments.

Robert J. Eck

Thanks for joining us today. While we face a year with some economic uncertainty, we believe that there are many opportunities around the world, and that our diverse global reach, strategic initiatives and value-added business model position us well to support our customers and increase sales in the months and years ahead. Thank you.

Operator

And that concludes today's conference. Thank you for your participation.

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