Anixter International's CEO Discusses Q3 2013 Results - Earnings Call Transcript

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Anixter International (NYSE:AXE) Q3 2013 Earnings Call October 22, 2013 10:30 AM ET

Executives

Lisa Meers

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

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

Analysts

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

Steven Bryant Fox - Cross Research LLC

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

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

Shawn M. Harrison - Longbow Research LLC

Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division

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

Hamzah Mazari - Crédit Suisse AG, Research Division

Operator

Good day, and welcome to the Anixter International's Third Quarter 2013 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Lisa Meers for opening comments and remarks. Please begin when ready, Ms. Meers.

Lisa Meers

Thank you, Carla. Good morning, and thank you all for joining us for Anixter's Third Quarter 2013 Earnings Call. Today, I'm joined by Bob Eck, President and CEO; and Ted Dosch, EVP and CFO, to discuss our third quarter financial results. After their remarks, we'll open the lines to take your questions.

Before we begin, I want to remind everyone that we will be making forward-looking statements in this presentation, which are subject to a number of factors that could cause Anixter's actual results to differ materially from what is indicated here. We do not undertake to update these statements and refer you to our SEC filings for more information.

In conjunction with today's earnings announcement, please find a supplemental slide deck that can be accessed on the Investor Relations portion of our website at www.anixter.com/investor that will further detail the quarter. Today's earnings announcement includes both GAAP and non-GAAP financial results, the reconciliation of which is detailed in our earnings release and in the aforementioned slides posted on our website.

Now, I'll turn the call over to Bob.

Robert J. Eck

Good morning. Thank you for joining us for a review of our third quarter 2013 operating and financial results. Today, I will offer my perspective on our business in the current operating environment, update you on each of our reporting segments and discuss our strategy to grow and gain share in each of our end markets. Then I will turn the call to Ted to detail our financial performance and frame how we are looking at the fourth quarter of 2013, after which we will both take your questions.

When we last updated you on our second quarter earnings call and our Investor Day in early August, we were more optimistic on how sales would progress through the quarter. While we were awarded multiple projects that had been in our pipeline for some time, we experienced some delays in how those projects were delivered. In addition, we were -- we won incremental business that should shift in the fourth quarter and early next year. The production volume increases, signaled by our OEM customers in June and early July, will reduce later in the quarter, although still above the first half production rates. We believe that our markets are improving. However, the pace is not as strong or as immediate as we had anticipated.

Starting with some of our highlights, we experienced steady improvements in certain markets, including significant sales and a profitability improvement in OEM Supply and over 7% sales growth in our European region with sales increases in all segments. Margin performance was strong with an increase in gross margin versus both the prior year and the prior quarter, helping to mitigate the impact of weaker-than-expected sales. A softer market in Canada, which represents close to 20% of our combined ECS and Wire & Cable segments in North America, connected our sales results in both segments. Additionally, we were impacted by delays in some Latin American projects. This combination of factors resulted in a decline in total reported sales of 3% year-over-year. Organic sales decreased by 2% in the quarter. Adjusted earnings per share from continuing operations of $1.52 increased by 6% versus the 2012 third quarter. We continue to make progress on each of our working capital initiatives, helping us to generate $8 million in cash from operations in the quarter. Year-to-date, we have generated $192 million in cash flow versus $126 million in the prior year period.

With that as a backdrop, let me review our sales trends in the quarter by segment. As a percent of total sales, our Enterprise Cabling and Security Solutions accounted for 52%; Electrical and Electronic Wire & Cable was 34%; and OEM Supply was 14%. Looking at the geographic mix, 69% of our sales came from North America, 18% from Europe and the Middle East and 13% from Emerging Markets. Our third quarter Enterprise Cabling and Security Solutions sales of $804 million declined 4% year-over-year. Adjusting for the conclusion of the contract previously mentioned, ECS sales would have decreased by 3%. Our region in North America had a solid start to the quarter. However, several large projects were delayed to the fourth quarter of 2013 and into 2014. We continue to hear from our customers and suppliers that while delays are extensive, end users are not canceling projects. Adjusting for the conclusion of the contract previously mentioned, North America ECS sales would have decreased 2.8%.

Turning to Canada, after strong year-over-year comparisons in the first half of the year, our business was impacted by the decline in capital expenditures helped in part by the construction strike in Québec. As a result, we experienced a decline in our Canadian business in the third quarter. While the recession rate pressure in Europe continues to impact our ECS business, our sales in that market increased by 3.3%, so we begin to cycle easier comparisons and as the market begins to stabilize. Compared to the second quarter, performance improved in the third quarter, marking the second consecutive quarter of improvement in our Europe ECS business.

Our Emerging Markets region, specifically our Latin America business, was the most disappointing region relative to our expectations as the weakness we experienced in the second quarter persisted. While the macro environment has been a headwind, our third quarter performance was impacted by timing of some large projects. Our backlog is up double digits versus a year ago. And consequently, we expect solid improvement in the fourth quarter.

Based on the conversations we've had with our suppliers and supported by data we see in the marketplace, it's our view that we maintain share in our addressable data infrastructure market in the third quarter as well as through the past 7 quarters of weakness in this market. We continue to believe that pent-up demand exists, and this view is supported by our current discussions with customers and our pipeline activity.

Within ECS, our Security business accounted for 27% of sales in the quarter. Total ECS Security sales increased by 3% versus the prior year. And excluding the contract conclusion, growth would have been 7%. We continue to focus on multiple initiatives currently in place to drive growth in our ECS business, including security, multi-tenant data centers, in-building wireless and e-commerce.

Moving to the Electrical and Electronic Wire & Cable segment. Our third quarter sales of $529 million were flat versus the second quarter and declined 7% versus the prior year. Organic sales declined by 4% versus the prior year. Breaking out the impact of copper, the average copper price in the quarter was $0.29 per pound lower than the prior year quarter, impacting sales in this segment by approximately $10 million.

By region, North America organic sales declined by 6%. The most significant headwind was the decline in our Canadian industrial project business, which was largely related to a decrease in projects relating to mining and renewable energy, as well as the Québec strike.

Mining projects in Eastern Canada have slowed due to government negotiations on extraction royalties. It helped [ph] that our North American Wire & Cable business had very strong project activity last year. And consequently, we faced a challenging year-over-year comparison with Q3 of 2012, representing an all-time record for quarterly Wire & Cable sales.

Turning to EMEA, our Wire & Cable sales increased by 2% on a reported basis and 4% on an organic basis, resulting in sales of $75 million for that business and reflecting both stabilization in the market and strength from our growth strategies.

Finally, sales in our Emerging Markets region were soft as business in Latin America was impacted by delays in recent project wins. Partially offsetting that was strong project business in Mexico and in our Asia Pacific region.

Overall, even though the growth rate of large projects has slowed, we have visibility to a strong pipeline of industrial projects. We also successfully offset some of the impact of lower project business with a more intense focus on our day-to-day business. Ongoing global infrastructure investment across a broad spectrum of customer verticals sets up well for continued sales growth in our Wire & Cable industrial business. We have strategies in place to further penetrate existing geographies, as well as to leverage our global platform in the industrial business and continue to take share in these markets.

Our Industrial Communications and Controls business, which is one of our key growth initiatives in this segment, had a strong quarter, bringing year-to-date sales growth of 16%. We continue to build momentum in this business with additional products and an expanded vendor base and are on track with plans to expand our focus beyond North America, having established a solid business in both Europe and Latin America.

Turning to OEM Supply. Our third quarter sales of $225 million increased 9% versus the prior year on an organic basis, reflecting a pickup at our European region, including the ramp-up of a customer's new facility in Turkey. Our EMEA region, which represents 50% of segment sales, achieved organic sales growth of 12%, while our North America region, which represents 42% of segment sales, achieved organic sales growth of 1%. Consistent with our previous commentary, we experienced an acceleration in our U.S. business as heavy truck build rates increased, although projections for return to previous production levels has now moved out to 2014.

For perspective, as we exited the second quarter, our customers were forecasting higher production levels for the second half. In mid-August, these customers lowered current production levels by delaying the previously forecast increase in production. Current forecast call for significant acceleration in 2014 Class A heavy truck production levels, significantly higher than we have experienced this year and last year.

Looking at our overall OEM Supply trends. We believe that the combination of improved conditions in the heavy truck market, our largest customer vertical, combined with new contract wins and an active pipeline of new business opportunities positions us well for top line growth looking out through the remainder of 2013 and 2014.

Let me now turn to a discussion of gross margin, which was 22.9% in the quarter versus 22.3% in the year-ago quarter and 22.5% in the second quarter of 2013. The year-over-year increase in gross margin reflected margin increases in all 3 segments driven by strong margin performance at our North American ECS business, the result of our continued focus on margin realization. With the ECS margin, headwind of mix to the faster growth in the Security business, we continue to be pleased with this ECS margin performance. As well, we were pleased to achieve a year-over-year improvement in Wire & Cable margins in spite of the significant year-over-year decline in the average copper price.

Let me conclude my comments with my thoughts on the fourth quarter. While we are still confident that we will see an improved second half versus the first half of 2013, we were impacted in the third quarter by volatility in Canada and our Latin American markets that we had not anticipated when the quarter began. We also did not experience the seasonal acceleration that is typical in the third quarter. Based on project delayed until the fourth quarter, some of that seasonal acceleration may shift to the fourth quarter this year. We also see solid indicators that business conditions are improving, if more slowly and less evenly than we had expected. Work appears to have stabilized. Our operating margin trends are positive. Our backlog, particularly in Latin America, is strong. And our OEM Supply segment has made significant progress.

Let me conclude by acknowledging that the global economic recovery continues to be gradual and uneven. We are encouraged -- however, we are encouraged from the trends that we see. Companies remain cautious about investing their capital, resulting in a longer recovery cycle. However, we believe that the underlying drivers of our growth remain very much intact. We are well positioned to capitalize on that growth when it materializes.

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

Theodore A. Dosch

Thanks, Bob, and good morning, everyone. Our press release highlighted several items from both the current quarter and prior year quarter that impacted the comparability of results. We streamlined our release by summarizing all of these items in a table at the end of the financial statements, which reconciles the GAAP financial results with the non-GAAP adjusted results.

Our goal is to add clarity to the impact of each of these items and how they affected year-over-year comparability. Third quarter results for this year, including net favorable noncash earnings adjustment of $0.10 per diluted share related to closing prior tax years, partially offset by an increase in the full year tax rate applied to the first 2 quarters of the year. And as you recall, our third quarter of 2012 included noncash charges of $28.2 million or $0.84 per diluted share related to an impairment charge and an associated inventory valuation adjustment, along with an increase in the full year tax rate applied to the first 2 quarters of the year.

All of my following comments this morning pertain to result from continuing operations, and year-over-year comparisons exclude the impact of these adjustments. As Bob discussed, we reported total third quarter sales of $1.56 billion, a 3.2% decrease compared to a year ago. Organic sales growth decreased by 2.2%. Recorded sales would have declined by approximately 2.7% after adjusting for the conclusion of a large security contract in the fourth quarter of last year.

Moving down the income statement, we reported operating income of $92.4 million, a 3.4% decline; net income of $50.4 million, a 5% increase; and diluted earnings per share of $1.52, a 6% increase, all compared to the prior year. We estimate that the negative earnings impact of the previously mentioned Security contract was $0.01 per diluted share. In addition, we estimate that the negative earnings impact from lower average copper prices was $0.04 per diluted share. Both this year and last year had 63 billing days in the third quarter. Please note that the fourth quarter of 2013 will have an estimated 65 billing days versus 62 billing days in the year ago quarter due to a 14th week to be included in this year's fourth quarter. Because we will incur an additional week of expenses with only 2.5 to 3 days of incremental revenue, we expect the impacts to be approximately neutral to earnings and a slight drag on margin.

Our third quarter operating expenses of $265 million were approximately flat versus the year ago quarter. As a percent of sales, operating expenses were 17%, up 60 basis points versus a year ago, reflecting the impact of the lower volume. Improvements in our core operating expenses were offset by investments we continue to make in technology and our growth initiatives, including ICC, e-commerce, Emerging Markets and IBW. We are on track to deliver the estimated $20 million of operating expense savings from our previously announced restructuring and pension plan changes. These actions have resulted in approximately $5 million of savings per quarter compared to 2012. With a significant portion of the savings relating to Europe, we believe we have made good progress in better positioning all of our European businesses.

Consolidated operating margin of 5.9% is up 50 basis points sequentially and flat versus the prior year. Looking at our operating margin by segment, ECS operating margin of 5.3% compares to 5.2% in the second quarter of 2013, reflecting further progress on our margin initiatives in the North American market. Versus prior year, ECS operating margin declined by 30 basis points caused by the negative leverage of lower volume. Wire & Cable operating margin of 7.9% increased by 70 basis points from the second quarter and compares to 8.5% in the year ago quarter. The year-over-year margin decline was caused primarily by lower volumes in the segment Canadian and Latin American markets related primarily to mining and renewable energy projects. The primary driver of the operating margin improvement versus the second quarter was a mix shift as the day-to-day portion of our business was greater percent of the total.

Finally, OEM Supply operating margin of 3.7% increased by 350 basis points versus the prior year quarter and increased by 130 basis points on a sequential basis. We are pleased with the strong progress in this business with this quarter marking the third consecutive quarter of profitability in our Europe region. The combination of the improved volume and our restructuring efforts has yield operating profit leverage of over 40% for the quarter.

As we move further down the income statement, the decrease in interest expense of $5.3 million year-over-year reflected the redemption of the convertible notes that matured in February of 2013, partially offset by the interest related to the $350 million senior notes offering completed in April of 2012. Going forward, interest expense is projected to remain at approximately $11.5 million per quarter. Foreign exchange and other expense in the current quarter of $1.7 million was down by $1.5 million from the prior year. The adjusted tax rate in the current quarter was 36% versus an adjusted tax rate of 36.8% in the year ago quarter. For the year, we are expecting our tax rate to continue at approximately 36% based on our estimate of the global mix of income.

We generated $192 million in cash from operations in the first 9 months of the year compared to $126 million of cash generated from operations in the same timeframe last year. This $66 million improvement is attributable to our strong focus on working capital management combined with a slower rate of growth in our sales. Recall that a hallmark of our business model is our ability to generate significant cash flow in times of slower growth. Working capital levels stood at 23.2% of sales at the end of the third quarter compared to 23.6% for the year ago quarter. We believe we have opportunities to further improve our working capital efficiency in future quarters.

Finally, we have invested $23.9 million in capital expenditures year-to-date versus $26.5 million in the year ago period. For the year, we expect to invest approximately $35 million for capital expenditure and a combination of both operational and strategic initiatives.

At the end of the third quarter, our debt-to-total-capital ratio of 42.8% compared to 50.3% at the end of 2012 with a weighted average cost of borrowed capital of 5.1% compared to 6.3% in the prior year quarter. Our current leverage ratio is slightly lower than our long-range target of 45% to 50% debt-to-capital. And we expect our leverage ratio to remain near the lower end of the range as the year progresses. Currently, our liquidity position remains excellent with $417.5 million of availability under bank revolving credit lines and $250 million of outstanding borrowings under our $300 million accounts receivables securitization facility. Available liquidity was over $500 million at the end of the third quarter.

Looking at our capital priorities, we have disciplined and prudent approach to how we allocate capital, balancing our 4 priorities, including supporting organic growth in the business; maintaining a strong balance sheet that provides the financial flexibility, especially in environments where market dynamics can shift quickly; pursuing strategic and financially attractive acquisitions; and then opportunistically returning cash to shareholders. Based on our expectations for a continued slow growth but modestly improving economy and supported by our backlog in projects that were delayed from the third quarter, we expect our sales growth in the fourth quarter to be in the low single-digit range. This would result in approximately flat organic revenue growth for the full year. Organic revenue growth excludes currency and copper, both of which unfavorably impacted revenue growth in the first 9 months of the year. At current copper pricing, we would expect the unfavorable impact of copper to continue through the balance of the year. Assuming the continuation of the current low-growth environment, we will maintain the discipline necessary to improve our gross margin. We have tightened the focus on slowing the growth of our cost structure, and we'll be extremely prudent about how we grow costs as sales begin to recover. As well, we have a very strong focus on working capital improvements and feel good about our progress while acknowledging we have further improvements we can make.

Let me conclude by emphasizing that we believe the long-term secular drivers of each of our 3 segments remain strong and that the challenges we face are more related to timing and the pace of recovery in the broader economy. As we look at some of the key indicators that we believe correlate to our business, we note that an improving ABI and PMI both support what we believe to be gradual improvement in our markets, although at a slower pace than we had anticipated earlier in the year. We have managed through a prolonged period of weakness in our data center business, but we continue to believe the secular trends that are driving -- secular trends that are driving both bandwidth and storage demands are unchanged. Our confidence that the market is improving is supported by industry forecasts that continue to call for increases in spend in data center hardware. While the quarter overall was challenging and did not progress as much as we had anticipated, we are optimistic regarding the underlying trends in the markets we serve. As Bob highlighted, margin improvement in our U.S. ECS business, strong backlog in Latin American ECS, continued improvements in our OEM Supply business and signs of stabilization across Europe give us conviction that the fourth quarter will see both year-over-year growth in sales and an increase from the third quarter. We recognize that Latin America may continue to be volatile and Canada may recover more slowly, so we will make the necessary adjustments in those markets. We continue to believe that we offer an unmatched value proposition to our customers with a truly global offering, including highly customized solutions and a technical sales team that we believe is unequaled in the market, enabling us to bring solutions to our customers that reduce complexity, risk and, ultimately, cost associated with their supply chains.

We will now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Dave Manthey of Robert W. Baird.

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

First question here, in terms of the low single digit same-store sales growth, does that factor out the impact of the extra selling days, the meeting, is that daily sales or is that just overall organic sales? And related to that, I think we're using 66 days, but I guess you're saying, effectively, it's more like [indiscernible]. Is that all correct?

Robert J. Eck

Yes, Dave. The number we're quoting there with the low single-digit sales growth is total sales, not on a per day basis. You'll remember that typically, the seasonality results in a drop in sales from Q3 to Q4 of about 3%. So the fact that we have these additional billing days which, you're right, we're estimating to be 2.5 to 3 incremental days year-over-year because you look at a day like Christmas Eve, which effectively we're operating, but always is a very short selling day, so that the incremental days from the week 14, combined with some of these project delays from Q3, is how we get at that low single-digit growth rate year-over-year and a sequential increase from Q3 when it normally would be a decrease.

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

Okay. And second, looking at the gross margin, I think you mentioned maybe it would decline slightly as you went into the fourth quarter based on this days issue. But is it also potentially under pressure as some of these project delays got pushed into the fourth quarter, and as those start to happen, outweighing the day-to-day business might put a little pressure on GP? And then also, on the copper side, I seem to remember that copper was up a little bit towards the fourth quarter last year. Would the impact be the same in the fourth quarter this year in terms of year-over-year declines that we saw in the third quarter, or would it actually get a little bit worse eventually?

Robert J. Eck

Dave, this is Bob. I'll take the first part about margin and how that may or may not relate to the delays, and then Ted will pick up the copper piece. So on margin, honestly, I don't think the projects hitting in Q4 will have a meaningful downward impact on margin. The margin we earn, the gross margin we earn on projects is dependent on a variety of factors, including the supply chain services that we use in the projects and a variety of other factors. Certainly, what we're hearing from general contractors, particularly, is that a lot of the delays are being used by end customers to try to squeeze better pricing and terms, but these projects are already awarded. The margins are already fixed, so we have good visibility into that. And we're not forecasting that the push of the project activity from Q3 into Q4 is going to have a meaningful negative impact on gross margin.

Theodore A. Dosch

And then on the copper piece, Dave, you're right, there was a little bit of an uptick in copper price in Q4 of last year. But as you saw, in Q2, copper price, on average, was down 8%. It was down 9% in Q3. And sitting here today, the margin's at $3.44 for copper. That would be a 7% decline from Q4 of last year. So I think it would be reasonable to use a similar estimate of the impact of copper in Q4 as what we saw in Q3.

Operator

And we'll take our next question from Steve Fox from Cross Research.

Steven Bryant Fox - Cross Research LLC

Just a couple of big-picture questions. First of all, with regard to the environment you just described, it sounds like the push-outs were not related to Europe given the numbers you just went over. If you could just sort of talk about that, the European environment? And then secondly, Bob, as we look at some of the push-outs and some of the causes behind it, I'm not sure if you specifically were saying that some of the U.S. government budget issues had something to do with it or if that's changing confidence. But if you could just sort of talk about why you think this is -- things are going to improve from here, that you can get into a consistent environment as opposed to sort of the fits and starts that we've had all year?

Robert J. Eck

Thanks, Steve. I'll go through this. And if I miss parts of your question, come back with a follow-up. We're having a little bit of breakup on our end here. So I'll go with what I think I've got here. Basically, the push-out is very much, I think, driven by a couple of things, the main factor being customers not necessarily needing the capacity right now. That gives the customer the flexibility to say, "I'm going to delay this project for a while, and I'm going to create some pressure on the suppliers and see if I can get this project for a little bit lower cost than maybe I had budgeted for the project." The reason I think customers feel like they don't need the capacity right now is that, frankly, there's a lack of confidence broadly across the economy. And I'm not going to go into sort of a political speech, but I think we're all very familiar with a lot of disruption, certainly, in the U.S. I think there's still questions about the trend in Europe from a macro perspective. And I think that's creating some challenge and some competence. In Latin America, I think specifically, we're bouncing out of a more recessionary environment in Brazil. We've got some challenges in Mexico, similarly. And I think that also has caused a little bit of a lack of confidence. And that's what's caused the delays in these projects. The reason we're optimistic as we look out -- by the way, you had one point, I think it was about the government shutdown specifically impact us, and the answer is no. We had no measurable impacts at all from the government shutdown. Our view as we look out is that, look, we actually won these projects, so -- and this means an important headline for this quarter. When we went -- when we had our July earnings call and we talked about what we were expecting, we had projects that were awarded to us, won, I'll say in effect, ready to go, based on what we knew at the time. And because of the amount of delays and the multiple levels of decision-making process at the customers, the construction sites weren't ready. And that's why we're confident that these won projects are -- actually is going to build substantially, some of them substantially in Q4. Some will leak in to the beginning of next year that are particularly large projects, especially in Latin America. So we -- our confidence in the near term is that we actually have these numbers. These are projects that we've been awarded. They're in hand, so to speak. The further-out outlook, basically, in my view, is we've got an upward trend in PMI, we have an upward trend in ABI and we will hit capacity constraints. And I think both of those things bode well for, at some point, a pickup. But certainly, confidence has to come back. We've said in many times in the past that one of the things that creates variability in our business is customers' willingness to spend capital. And if customers aren't spending capital, then we have lower project activity. And the products in our OEM supply business are substantially capital-related. And so that impact disrupts that business. If confidence comes back at any level, I think capital spending comes back, and we'll see that as a lift in the business.

Steven Bryant Fox - Cross Research LLC

Yes, that hit on basically all of the points in my question that I was getting at, except I just want to clarify one thing, which is around Europe. So relative to Europe, are you saying that, that's still under pressure? Because the growth rate you've highlighted in Europe was pretty good. So was there any signs of sort of that lack of confidence, or would you call it more of a recovery scenario?

Robert J. Eck

Yes, Steve, I think the issue in Europe was weak comps, a tough quarter last year. And so we had some growth across all the businesses, as we indicated. But we just really had a crummy quarter last year in Europe. And again, I think some of that's pent-up demand, and some of it in the OEM business is new contracts that we've won that are ramping up, as well as some of our customers having products that, in the segments or the markets they're in, are pretty successful right now. And that's driving volume of those customers as well.

Operator

Our next question comes from Ryan Merkel with William Blair.

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

So can you quantify for us how much in awarded sales got pushed from 3Q to potentially 4Q and early next year?

Robert J. Eck

Yes, actually, we think it's going to account in the fourth quarter for about 1% top line growth.

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

Okay. And then just following up on that average daily sales question for the fourth quarter. I just want to make sure I understand this. So did you say it's 66 billing days, but you're looking at it as more like 65?

Robert J. Eck

Yes. What we're estimating is that we have an incremental 2.5 to 3 days over last year's 62, so call it 65 effective billing days based on the way the holidays fall.

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

Okay. So that kind of -- adjusted organic daily sales kind of down 3%-ish if I use 65. That would be similar to this current quarter, but we've got 1% top line growth kind of coming in because of the delayed projects. So it was really the disconnect, then, that it's just the seasonally softer quarter?

Robert J. Eck

Yes, absolutely, especially as we see in our OEM Supply business with a large percentage of customers that take factory shutdowns throughout that entire Christmas-New Year's week, and some of them scheduled 2 weeks down for maintenance. And then in both our Latin America and European regions, as you know, the way the holidays fall, it's very common in some of those countries to take an entire week off, not just the specific holidays of Christmas and New Year's, et cetera.

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

Okay. And then just turning to Canada. What happened in August and September because, Bob, I think as you said, the quarter started fine? And that was the way the rhetoric read in the 2Q transcript. So maybe just speak to what really changed.

Robert J. Eck

I think what happened was we -- when we talk about delays, we saw some delays in projects in Canada as well. So we do have projects there that have pushed out. But as I said earlier, we also saw a bit more overhang, frankly, in mining in Eastern Canada from this process. The part in Québécois has been going through and trying to renegotiate extraction royalties with the mining companies that has absolutely put a stop on capital investment in mining in that part of Canada. And we saw a little bit of a dip in project activity in Western Canada, but we think that was more timing than a major trend.

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

And what's the timing related to?

Robert J. Eck

Well, we just think it's delays in how the projects are getting engineered, and we'll see that activity start to come around Q4 and into next year as well.

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

So your view now in Canada is that this recent volatility is more just a temporary pause?

Robert J. Eck

Yes.

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

Okay. And last one for me. I don't know if you can do this, but I'm just curious, if I break out Canada and I break out EM, I'm just trying to get a sense, is the U.S. business tracking better or stable? And I'm really looking at all 3 of the segments.

Robert J. Eck

Yes. If breaking it into 3 helps, I'd say in ECS, fairly stable; Wire & Cable, also fairly stable; but OEM supply, gradually improving.

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

Okay. All in U.S. Okay.

Robert J. Eck

Yes.

Operator

We'll take our next question from Gary Farber of CL King.

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

Just a couple of questions. One is just on the competitive environment. Can you discuss if that's been impacted at all, given that things are pacing a little bit slower?

Robert J. Eck

Yes, I think -- Gary, this is Bob. The competitive environment is about the same as we've seen throughout the year. Frankly, lots of competition in all of the places we're in. I think we don't see that abating. We think we're -- we believe, as we look at the markets and we try to triangulate data from our suppliers and from customers, we think that in most of the markets we're in, we're either holding our position or gaining, but competition is pretty intense and continues to be. When you have these kind of subdued levels of activity, everybody's scrambling to get every opportunity that's out there.

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

Right. And then just on the gross margins, are the gross margins that you reported in the quarter, are those sustainable going forward, or you think they'll be moving around?

Robert J. Eck

Yes, I think the -- as you saw there, we had an outstanding quarter for gross margin with sequential improvement very nicely, especially in OEM Supply. I would expect to see that possibly be a little lower in Q4, but should track fairly closely. And I -- the reason why I say a little bit lower in OEM Supply is depending on the customer mix and the volume levels will have some impact there in Q4. But we believe, just like we talked about at our Investor Day, specifically in OEM Supply, the performance improvements that we're making there, combined with gradually increasing volumes, will allow us to continue to improve both gross margin and the bottom line in that business.

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

Great. So is it fair to say as you go beyond the quarter, given all the initiatives you have, you'd expect that, that number should sort of gradually tick upwards?

Robert J. Eck

Yes, yes, but more so in the OEM Supply business than the other 2. Correct.

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

Right. And then one just last one. On acquisitions, if you could provide any update as far as what the marketplace looks for acquisitions?

Robert J. Eck

I don't think it's really any different than what we discussed last quarter or at Investor Day in August. We continue to work a lot of different opportunities. Our top 3 priorities, as we've discussed, have -- really haven't changed. But there's nothing that we can comment on that we'd say is imminent, and yes, which you'll see us take action on here in the short term.

Operator

[Operator Instructions] We'll take our next question from Shawn Harrison of Longbow Research.

Shawn M. Harrison - Longbow Research LLC

Two clarifications. I guess with the, sequentially, the fourth quarter being better than seasonal because of the extra days, does that mean that we should see a similar type of negative impact as we move into the March quarter of an extra 3 points of negative incremental seasonality just because of how fourth quarter shook out?

Robert J. Eck

Yes, yes. We typically would show an uptick of a couple percent, at least 2% or 3% from Q4 to Q1. I think it's a little premature, based on how volatile the business has been for all the reasons we've said, to pin that down more specifically now. But all else being equal, the drop in billing days from Q4 to Q1 will put a little downward pressure on the sequential sales performance.

Shawn M. Harrison - Longbow Research LLC

Okay. Then as we look at OEM Supply, I mean, congrats on the margins this quarter. That was the best we've seen in awhile. But as we look to '14 and your heavy truck customers forecasting better volumes, I mean, is there a way that we could think of for each dollar of revenue growth that dropped through to the EBIT line for that business now that we're kind of back on more solid footing?

Robert J. Eck

You're talking operating profit leverage?

Shawn M. Harrison - Longbow Research LLC

Operating profit leverage, just for OEM Supply now that it looks like all the cost saves are in the model and you're kind of back in the...

Robert J. Eck

Yes, that's a great question because delivery is 40%. Operating profit leverage in Q3 is not something that will be sustainable for very long. But I would expect it, assuming that the volume continues to gradually improve, I would expect this -- that business, in particular, to be the one that has the higher leverage -- highest leverage of the 3 segments and one that we should be delivering double-digit-type operating profit leverage.

Shawn M. Harrison - Longbow Research LLC

Okay. When do you -- I mean, I guess, the current momentum, we probably anniversaried that going into the March-June quarters, just on the year-over-year basis just because of the timing of the restructuring actions?

Robert J. Eck

You're talking expense standpoint, yes. But keep in mind, the first couple of quarters of this year had relatively weak volumes. And so we should be anniversary-ing against a little bit easier comp on the top line when we get into Q1 of next year. But you're right, we won't have as much incremental cost savings from our restructuring actions, that's correct.

Shawn M. Harrison - Longbow Research LLC

Okay. And then, I guess finally, on the data center portion of ECS, I think it's been talked about in the past, maybe it's just slow to update. I mean, I think it was even talked about a little bit on this call, just people looking at capacity and [indiscernible]. But are you concerned that maybe there's any secular shift going on in the business, so the upgrade cycle has just been pushed out and so what you could expect historically just no longer applies?

Robert J. Eck

I'm not sure, Shawn, I know how to answer that other than the fact that we're sitting now in the eighth quarter of basically a flat to slightly down data center market. I wouldn't have expected that, as you know, from my comments in prior quarters. So I'm not sure the driver's so much a major secular trend change in data centers as much as this confidence issue that's causing a general softness in capital spending.

Operator

We'll take our next question from Noelle Dilts of Stifel.

Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division

First, just expanding a bit on Ryan's question, a few back. Is there any way you can break out how much Canada, on the whole, was down in the quarter?

Theodore A. Dosch

Yes, as you know, Noelle, we don't report U.S. versus Canada with -- which are the 2 components of what we call North America. However, as Bob said, Canada does make up approximately a little less than 20% of the total revenue. And we can say that in the quarter, the Canadian business year-over-year revenue-wise was down in the low double digits, 10%, 11% type of decline, so kind of to size this for you, the relative magnitude of the drivers that Bob described.

Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then do you think that with some of this eastern -- some of the issues in Eastern Canada, I mean, do you there's a bit of a deferred demand in that market, or do you think it will kind of go back to just run rate levels when you see those issues resolved?

Robert J. Eck

My guess is that when those issues resolve, we'll go back to run rate issues -- run rate levels. I don't think we're expecting to see a big sudden surge when all the issues are sorted out in Québec.

Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then on the security market, 7% growth, which was nice, but obviously below the rates that you were looking at a few quarters ago. I mean, as you look forward, where do you think that security growth rate levels out?

Theodore A. Dosch

I think what's happening in security right now for us is that some of the large corporations that are deferring some of their other capital spending are deferring some of their security spending right now as well. If you look at the non-res construction, there's not a lot of new buildings going up, which would drive more security spend. So I think non-res construction has to come back, capital spending has to come back, and we'll see a bigger pickup in security. We also have an issue that's focused more on the SMB sector of the market, which is an area where we think there may be some growth opportunity for us to attain.

Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division

Okay, great, that's helpful. And just one last, if I can squeeze it in. But just trying to expand on your Emerging Markets comment. Can you talk about, if you're seeing any signs of improvement in South America, particularly in Brazil and Peru, just what you're thinking there in terms of timing of some of this activity?

Robert J. Eck

Yes, actually we are seeing improvement in both Brazil and Peru. We have project wins that were locked down during the quarter. We had expected some of them to bill in the quarter which are going to bill in Q4 and into Q1. So we're actually seeing good activity in Brazil. We're seeing reasonable activity in Peru as well. And I think they've gone through kind of a secular or a cyclical trough and will be coming back. Mexico seems to look about the same. So honestly, I'm optimistic about Latin America as we go into next year, given what really this year was an underperformance given what we had expected to see.

Operator

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

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

I apologize if I missed this from earlier. Have you given a backlog number, both for ECS and Wire & Cable?

Robert J. Eck

No, we haven't. We typically don't report those. But I think consistent -- we don't report specific dollars. But consistent with Bob's earlier comments, what we are seeing, especially in the ECS business, is a nice increase in the backlog, both from end of Q3 versus Q2 as well as at a year-over-year comparison. And I think also telling, with some of these projects being pushed out, a nice increase in the ECS backlog as we look at from the end of September to 3 weeks into the new quarter.

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

Ted, I guess one other related question to that. If you adjust for some of these deliveries slipping and pull those out of backlog, is the backlog still up year-over-year in that business?

Theodore A. Dosch

Yes.

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

Okay. And then just to get a -- kind of wrap up the whole, the prevailing bid activity, do you quantify at all the bid activity year-over-year? Is that moving consistent with your backlog trend right now as well?

Theodore A. Dosch

Yes, we think so.

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

Okay, great. And then a couple of questions on the margins. You talked a bit about gross margins. And I think in the queue, you've got a comment, I think, within North American ECS about a renewed focus on margin realization in North America Enterprise. Would you care to elaborate on that and maybe talk about what targets might be for that segment?

Robert J. Eck

I don't think we want to talk about what the targets are specifically. But the way to think about it is that we saw margin in that business deteriorate. We felt the margin deterioration was in part due to the growth of security in the mix, which tends to be a little bit lower margin than our traditional data infrastructure business. But we also felt there was a component of it that's simply sales discipline and driving to better behavior around pricing. And the initiatives have really been around driving pricing behavior. And that's where we've seen the progress in gross margin. And that -- we believe that's sustainable.

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

Okay, great. And then just a final question, and I think Ted commented earlier about maybe a tighter cost focus going forward given some of the demand trends we're seeing. Does that also reflect any change to any of your gross spending targets going forward as well?

Theodore A. Dosch

I think it's a balancing, as we've said before, between the need to be very focused with our cost structure discipline, combined with making the -- continuing our strategic investments in the various areas that we've talked about before. So I think you will see us get -- that will translate into some very nice leverage. If we get an industry that grows, you might think of it back to like in 2010, when we, after a very tough last half of '08 and all of '09, we were able to show some very nice leverage into '010 and '011 because we maintained very strict cost discipline with headcounts and so forth, then we saw some nice revenue recovery. So that's really where I think the big opportunity is. We have an industry that is better than what we've seen recently, meaning better than flat or very slight growth. We'll be able to leverage that growth very nicely with our existing cost structure.

Operator

We'll take our final question from Hamzah Mazari with Crédit Suisse.

Hamzah Mazari - Crédit Suisse AG, Research Division

The first question is just, could you remind us or update us how much of your total portfolio currently is project business? Is it still around 20% or so? And then, generally in a normalized cycle, I realize they're projects push-outs, but in a normalized cycle, usually, when do you usually sort of book a project and then you ship? What sort of a timeframe on sort of a large project, order of magnitude versus a small -- or however you want to sort of answer that?

Robert J. Eck

So, Hamzah, this is Bob. The project mix is a little bit different between the Enterprise business and Wire & Cable. Wire & Cable tends to have a little bit lower project mix, more day-to-day, so sort of 10% to 15%-ish in the Wire & Cable business. 20% would really be a peak number. Enterprise tends to have a little more project activity, so more like, say, a 25% to 35% kind of number in that business. If you ask where we are today in the mix, we'd say we're low, on the low end like both of those businesses in terms of project mix. And the second question about when do projects typically bill, it actually depends a whole lot on the size of the project, which is probably intuitive. Smaller projects build pretty quickly. The book-to-bill timeframe is fairly quick. It may be a month or 2. For very large projects, the time period may take longer. I think the key thing when we're talking about these delays that's different is the timescale from being awarded a project until the material begins to ship to the project. And that's something we're experiencing a bigger lag in than we have in the past. That would normally be a much more compressed time period for us.

Hamzah Mazari - Crédit Suisse AG, Research Division

Got you. And then just has there been any change in the mix of your project business in terms of, are you more levered to large projects now than you were in prior cycles, or has that mix not really changed for you?

Robert J. Eck

I don't think that's really changed. We have some very large projects that we've been awarded, as well as some more small-sized projects we've been awarded. So I think the mix, in that respect, is fairly similar.

Hamzah Mazari - Crédit Suisse AG, Research Division

Got you. And just last question for me. On the copper side, in the past, you've talked about sort of the leads and lags and how that flows through the P&L, and that's been helpful. Could you maybe give us a sense of, if copper stays where it is, when do you anniversary sort of the declines or headwind related to copper? Is that more of a second half '14 event, or how do you think about that?

Robert J. Eck

It would really be probably a Q2 of 2014 because the price of copper stayed fairly constant, around $3.60 from Q2 of '12 all the way through to Q1 of '13. So if we end up with another negative impact in Q4 of this year similar to the last 2 quarters, then I would expect, again, if copper holds flat, we'd see a similar impact in Q1 before we then anniversary these copper prices in the approximately $3.30 range, which we began to experience in Q2 of this year.

Robert J. Eck

Thank you for participating in the call today. In conclusion, with leading positions in large, diverse and highly fragmented markets, we believe our differentiated platform sets us up well to drive top line growth and margin expansion. Companies are under pressure to take costs out of their supply chain, minimize inventory on hand and manage complex projects, all while operating with an increasingly global footprint. Our value proposition is based largely on 3 capabilities which, together, take risk and cost out of our customers' business. Our global capabilities, the consistent operational discipline, quality and ability to work face-to-face with customers across multiple geographies and transact business in local currency and language, our technical value ad, which entails providing product recommendations, developing solutions for specific applications, managing quality control and our supply chain solutions, which help customers manage their costs, reduce headcount, reduce working capital and take risk out of their business. We believe we have attractive growth opportunities that we can capitalize on through our current business model strategies. Finally, in the end, it comes down to people, and I'm confident that we have the right team in place to drive our strategies, as they have done through the past year of very challenging market conditions. Thank you for joining us this morning.

Operator

This does conclude today's conference call. Thank you all for your participation.

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