Lisa Micou Meers - Vice President-Investor Relations Robert J. Eck - President, Chief Executive Officer & Director Theodore A. Dosch - Chief Financial Officer & Executive VP-Finance.

Shawn M. Harrison - Longbow Research LLC Steven Fox - Cross Research LLC Charles Edgerton Redding - BB&T Capital Markets Jeffrey Ted Kessler - Imperial Capital LLC David J. Manthey - Robert W. Baird & Co., Inc. (Broker).

Good day and welcome to the Anixter Second Quarter 2016 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..

Sure. Thank you, Jennifer. Good morning, and thank you for joining us today for Anixter's second quarter 2016 earnings call. This morning Bob Eck, President and CEO; and Ted Dosch, Executive Vice President and CFO will review and discuss our second quarter financial results. After their remarks, we will open the line to take your questions.

Before we begin, I want to remind everyone that we'll 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.

Today's earnings announcement includes both GAAP and non-GAAP financial results, the reconciliation of which is detailed in our earnings release and in the slides posted on our website.

In conjunction with today's call, please find a supplemental slide presentation that further details the quarter available on our Investor Relations site, anixter.com/investor. Now, I'll turn the call over to Bob..

Good morning, and thank you for joining us today for our second quarter 2016 earnings call. This morning I will discuss our second quarter performance, share my perspective on our end markets, update our progress with the Power Solutions integration and provide our outlook for the third quarter and full year 2016.

I will then turn the call to Ted to detail our second quarter financial performance, and provide more detail on our outlook. As you saw from this morning's press release, we delivered earnings per diluted share of $0.62 on an adjusted basis which excludes $33.7 million of operating expense items that Ted will detail in his remarks.

Earnings per diluted share of $1.32 compared to prior year adjusted earnings per share of $1.24, a 6.5% increase. Second quarter sales of $2 billion increased 32% versus prior year driven by the Power Solutions acquisition. Adjusted for the favorable impact of the Power Solutions acquisition and the unfavorable impacts of the stronger U.S.

dollar and lower average copper prices, year-over-year organic sales declined by 0.6% compared to our outlook range of negative 2% to positive 2%. We delivered strong cash flow from operations in the quarter, bringing our year-to-date cash flow from operations to $149 million.

This is consistent with our plans to return to our strategic target levels of leverage and debt-to-total capital by late 2017. Before turning to a discussion of sales by segment, let me make a few additional overview comments on the quarter to provide context for our performance.

We continue to see diverging macroeconomic trends with pockets of notable strength, including our Network Infrastructure and Security business in all geographies except Latin America. In fact, excluding Latin America, year-over-year organic sales growth would have been up 0.6% instead of down 0.6%.

As a result of the weaker trend in Latin America, we incurred a $7.6 million expense related to Latin American bad debt affecting both our NSS and EES segments. While driven by weaker economies, the bad debt provision was primarily due to deterioration at five customers.

We continue to be impacted by weak industrial markets in both the EES and UPS segments. In response to the economic conditions, we have taken aggressive action to improve the profitability of both segments, which led to the $5.6 million restructuring charge that Ted will further detail.

Finally, on the topic of Brexit, it is still too early to quantify any financial impact on the business other than the potential for project deferrals, which can occur in an uncertain environment. Based on conversations with customers, we do not expect any significant near-term impact.

We are reviewing our currency risks and working with both customers and suppliers to mitigate currency impact moving forward. Because the Brexit vote occurred near the end of the quarter, the Q2 impact was minimal. With that, let me now discuss sales in the quarter by segment, starting with Network & Security Solutions.

NSS quarterly sales of $1 billion increased 3% reflecting organic sales growth of 4%. We experienced broad-based growth in both the network and security markets, delivering strong organic growth in North America, EMEA and Asia Pacific. This is the 11th consecutive quarter of year-over-year growth in NSS quarterly sales.

As in recent quarters, we continue to see strength in global accounts including technology customers, retailers, financial institutions, and service providers. By geography, our North American business which represents approximately 80% of NSS sales increased by 5% on an organic basis driven by broad-based strength in the U.S.

Our emerging markets business, which represents approximately 12% of NSS sales, decreased by 1.8% on an organic basis. Within those geographies, we experienced solid growth in our Asia Pacific market driven primarily by multinational companies, partially offsetting challenging Latin America markets, especially in Brazil.

Finally, our EMEA geography representing the remaining 8% of segment sales grew nearly 4% in the quarter on an organic basis with strong sales driven by projects with multinational companies.

We continue to win business with multinationals in all markets and are increasingly gaining non-US based multinational customers as a result of the unique global support capability we provide.

Based on conversations with suppliers and market survey data, we believe we maintained or gained share in our network infrastructure business in all geographies. Looking at the security portion of the business, NSS security sales of $410 million or approximately 39% of segment sales increased 4% from the prior year.

Adjusting for $3 million of unfavorable foreign exchange, NSS security sales increased 5% on an organic basis. Overall, we're pleased with our security sales performance and believe we maintained or gained share in our major geographies.

In light of the current trends in this business, including strong day-to-day business and a growing backlog, we're optimistic that the current momentum will continue in the second half of the year.

Moving to Electrical & Electronic Solutions, our second quarter sales of $555 million increased by 23%, reflecting the combination of the low-voltage portion of the Power Solutions business with our legacy wire and cable business. Looking at EES organic sales, currency and copper combined had a $28.5 million or 5% negative impact on EES sales.

While the persistent copper currency and broad industrial economy headwinds we had faced over the past four quarters had diminished on a sequential basis, we continue to be significantly impacted on a year-over-year basis.

Adjusting for copper and currency, as well as for $145 million of acquisition-related low-voltage sales, EES sales declined by 1.9% on an organic basis. This represented over 500 basis points of improvement from the first quarter driven by early successes from the Power Solutions acquisition.

Similar to what we saw in NSS, we experienced broad-based organic growth with the exception of Latin America. Excluding Latin America, organic sales growth was 1.6%. By geography, North America sales of $455 million which represented 82% of segment sales, compared to $315 million in the prior year quarter.

After adjusting for pro forma Power Solutions low-voltage sales and currency and copper headwinds, organic sales in North America increased by 3%. This is especially encouraging considering the improving but still weak Canadian economy.

The industrial portion of our EES business began to show improvement this quarter and the OEM side of our business with broad manufacturing exposure continued to show year-over-year growth. With strong pipeline activity and a growing backlog, we are cautiously optimistic that the improving trend will continue.

Turning to EMEA, our EES sales of $59 million were flat on an organic basis reflecting solid OEM sales. Lastly, EES emerging market sales of $41 million decreased by 37% on an organic basis, reflecting lower construction and industrial capital spending in those markets, related to lower commodity prices.

Similar to NSS, this weakness was primarily driven by Latin America. While we are prepared for the difficult global macro environment to persist in the near-term, we are turning more optimistic that some markets particularly in North America are stabilizing and momentum is building.

Until this becomes more broad-based, our focus remains on driving sales through initiatives including synergy opportunities with the low-voltage product set, automation, small- and mid-sized customers and complex global customers, and making sure our business is appropriately sized for the local market in all of our geographies.

Finally, our recently created Utility Power Solutions segment achieved sales of $356 million in the current quarter. Excluding the negative impact of copper and currency, organic sales declined by 11%.

As experienced in the first quarter of 2016, UPS sales were adversely impacted by the timing of utility customers' major project spend and utility customers deferring some investments.

While we are excited about the opportunities in the Utility business, and its strategic fit within our business, we are disappointed that utility industry spend has been softer than previous industry projections.

As we have described previously, a significant portion of our Utility sales are through contracts with large customers, and our results are directly impacted based on their level of spending. Two of our largest customers have each had lower major project investment this year than last year.

In both cases, we have maintained our market share at those customers. These types of fluctuations in investment are typical of the business and can result in somewhat lumpy quarter-to-quarter volume.

Also recall in the fourth quarter, we disclosed that one major customer contract was not renewed, however we replaced the run rate sales volume with two new customers. The new customers have had a slower sales ramp than we initially expected, so in the short term the two customers do not yet offset the loss of the larger customer.

However, they are on pace to narrow that gap in the second half. When we acquired the Power Solutions business we indicated that the acquisition was about growth and the majority of our synergies would be revenue-based. Since we have owned the business, we have also been able to identify areas with inefficiency in the cost structure.

The restructuring that we announced today address this cost in both parts of the acquired business and delivers about a six-month payback. Finally, in order to accelerate our integration process, we made a change to the leadership of the business and named Ian Clarke as the Executive Vice President of the Utility Power Solutions segment.

You may recall Ian previously, who's the head of our former Fasteners business unit that we divested last year, and we are delighted to have him back at Anixter in this role. Ian was very successful in building a robust strategic sales process in the Fasteners business.

The Utility business is similar to the Fasteners business in that both have very large customers with long sales processes, multi-year agreements and exceptionally demanding service level requirements. Ian's success in turning around the Fasteners business will translate well to accelerating growth in UPS.

Turning to our outlook for the second half of 2016, we expect the current trends and strong momentum in our NSS segment to continue. This business is set up to benefit from exposure to end markets where continued growth in data usage and demand for mobility remains a secular tailwind.

While we experienced improving trend in our EES segment overall, driven by the North American market, the industrial and construction environment remains challenging, with continued headwinds from copper and currency. We are continuing to plan for slow growth, low inflation, and an unsettled external environment.

Although we have a more positive outlook in NSS and an improving outlook in our EES and UPS segments, we continue to see some uncertainty in the macro outlook and continue to expect full-year organic sales growth in the negative 2% to positive 2% range.

Combined with the cost actions we took last year and in the second quarter of this year, we believe we are positioned for improved profitability in the current environment. With that, let me turn the call over to Ted for a more detailed analysis of our results and actions on the cost side of the business..

the construction and industrial low-voltage business, which is now part of EES, and the Utility Power Solutions business. We will be at a run rate of $2.5 million of savings per quarter beginning in Q3 of this year. In addition, we incurred $9.6 million of expense related to the settlement of one of our UK pension plans.

This plan was acquired over ten years ago as part of one of the Fastener acquisitions.

After a detailed analysis into alternatives to reduce the risks associated with interest rate volatility, currency exposure as well as investment returns in a volatile European financial market, we chose to eliminate those risks by completing a buyout of those obligations.

Lastly, we incurred $7.6 million of expense related to an increase in bad debt provisions in our Latin America business. The macroeconomic challenges across the continent, combined with country-specific political turmoil in places such as Brazil and Venezuela, have resulted in a level of exposure that warranted additional reserves.

The charge we incurred for increased bad debt provision in Q4 of 2015 was appropriate based on conditions at that time. However, as everyone knows, economic conditions in this region have further deteriorated since that time. Now let me review the key drivers in our adjusted earnings performance year-over-year.

Unfortunately, we continue to be impacted by lower copper prices, which averaged $2.13 for the quarter or a 23% decline versus prior year, resulting in unfavorable impact of $22.2 million on sales and $0.08 on a diluted earnings per share basis. While the strength of the U.S.

dollar relative to our foreign currency exposure was a $16.5 million headwind to sales, lower costs in these respective currencies mitigated the impact on our earnings per share, which resulted in a favorable $0.01 per share impact.

Adjusting for the combined copper and currency impacts of $0.07 per share, core operating performance would have resulted in an EPS of $1.39 or a 12% increase from the prior year adjusted EPS of $1.24. Now we'll go into a little more detail on these results.

As Bob discussed, our quarterly sales of $2 billion increased 32% compared to a year ago, driven by the Power Solutions acquisition. As you know, our organic sales growth is calculated by adjusting for the impact of copper price changes, currency, and acquisitions and divestitures.

Organic sales decreased by 0.6% versus prior year within our outlook range for the quarter of a negative 2% to positive 2%. Gross margin of 20.1% in the quarter compares with 20.4% in the first quarter, primarily caused by segment and product mix. The decrease versus prior year gross margin of 22.2% is due to the Power Solutions acquisition.

Operating expense of $336.7 million or 17.2% of sales compares to prior year operating expense of $264.4 million or 17.9% of sales, reflecting the impact of the Power Solutions acquisition.

Excluding the $33.7 million of expense I just reviewed, adjusted operating expense of $303 million or 15.5% of sales compares to prior year adjusted operating expense of $245.1 million or 16.6% of sales.

Regarding our ongoing focus on our cost structure, recall that in the second quarter of 2015, we took a $5.3 million restructuring charge that resulted in annualized savings of approximately $13 million. We began to realize these savings in Q3 of 2015. So this past quarter was the last quarter that will show a year-over-year benefit.

In the fourth quarter of 2015, we took a $2.9 million restructuring charge that will result in $4 million in annualized savings. These savings began in Q1 of 2016, and will deliver $1 million of year-over-year savings for two more quarters. On a combined basis, these two initiatives delivered approximately $4.3 million of savings in Q2.

The Q4 2015 actions combined with the Q2 2016 actions will deliver an incremental $7 million of year-over-year savings in the second half of this year. The incremental year-over-year savings are shown in the schedule on page 21 of our investor presentation.

We will continue our disciplined approach to cost management, as we target other opportunities to gain efficiencies and profitability across our business. Adjusted EBITDA of $101.8 million or 5.2% of sales compares to $92.7 million or 6.3% of sales in the prior year period.

Over half of the decline in adjusted EBITDA margin is attributable to the consolidation of the Power Solutions business into our results and the impact of copper, while the remaining decline reflects the general industrial segment weakness combined with segment mix.

By segment, NSS adjusted EBITDA of $75.7 million or 7.2% of sales compares to $76.2 million or 7.5% of sales in the prior year quarter. The decline in margin is the result of both product and customer mix.

EES adjusted EBITDA of $32.3 million or 5.8% of sales compares to $37.6 million or 8.3% of sales in the prior year period, and 7.3% on a pro forma basis.

The 150 basis points decline in margin versus the pro forma prior year quarter was caused by the unfavorable impact of lower copper prices combined with the overall weaker industrial environment, resulting in negative operating expense leverage.

Compared to the first quarter of 2016, EES adjusted EBITDA margin improved 80 basis points, reflecting the stronger volumes and the improved trend in the business we have discussed. Utility Power Solutions adjusted EBITDA was $19.3 million or 5.4% of sales, which compares to $22 million or 5.5% of sales in the prior year period on a pro forma basis.

As Bob mentioned, sales in this business can be very lumpy from quarter-to-quarter based on the ramp rate for new customers, the timing of large capital projects as well as the unpredictable timing of major storms. As we move down the income statement, interest expense of $19.8 million increased by $7.1 million year-over-year.

The increase in interest expense results from the issuance of incremental debt used to finance the Power Solutions acquisition. Our second quarter effective tax rate from continuing operations was 42.4%.

A large portion of the 360 basis point increase from the prior year effective tax rate of 38.8% was due to the change in the country mix of earnings as many of the current year operating expense charges of $33.7 million were incurred in countries with low income tax rates or have valuation allowances recorded against deferred tax assets.

Our projected full year GAAP effective tax rate is 40.1% and our adjusted effective full year rate for non-GAAP core operating results is 37.2%. Year-to-date, we have generated $149.4 million in cash from operations which compares to $39.3 million in the prior year period, driven primarily by working capital efficiencies.

Our working capital as a percent of sales was at an all-time low of 19.2% for the quarter, which was over 200 basis points better than at year-end. This improvement is the result of our efforts to drive more efficiency and our cash-to-cash management processes as we more fully integrate the recent acquisitions.

Year-to-date, we have invested $16.4 million in capital investments. For the full year, we expect to invest $40 million to $45 million in capital expenditures, lower than our original plans, to adjust for the current business environment. We now expect to generate $180 million to $200 million in cash flow from operations for the full year.

At the end of the quarter, our debt-to-capital ratio improved to 54.8%, which compares to 58.2% at the end of 2015, reflecting the repayment of over $200 million on our additional borrowings to fund the Power Solutions acquisition.

With our debt-to-capital ratio outside of our target range of 45% to 50% and a leverage ratio of approximately 3.7 times adjusted trailing pro forma 12 month EBITDA, our priority is to pay down our debt with cash flow generated from operations with a goal of returning to our target debt-to-capital range and a leverage ratio below 3 times EBITDA by the second half of 2017.

Our weighted average cost to borrow capital of 4.7% is unchanged versus the year-ago quarter. Our liquidity position remains strong with total available liquidity under revolving lines of credit and secured accounts receivable and inventory facilities of $522.9 million at the end of the quarter.

As we enter the second half of 2016, we are experiencing solid momentum in our NSS segment. Our book-to-bill ratio, backlog and project pipeline together combined with the momentum in the business today give us reasonable confidence that current trends in this business will continue.

In our EES segment, while we face challenging markets in the industrial portion of the business, we have brought exposure to manufacturing and construction end markets, both of which experienced improving trends in the second quarter.

Based on these current trends, a solid book-to-bill ratio and a growing backlog, we are cautiously optimistic that overall segment trends will continue to improve, further helped by the ramp-up of additional synergies from the low-voltage portion of the business.

Combined with the benefits of our restructuring actions, we are positioned for improved profitability in the second half. In our Utility segment, we face similar challenging markets driven by the relative weakness in utility capital spend levels combined with the general weakness in the Canadian market and oil and gas related markets in the U.S.

In response to these challenges, as Bob indicated in his remarks, we have taken both aggressive restructuring actions and replaced our leadership in this business. We have a robust plan focused on profitable growth and margin enhancement.

With an expectation that current trends will continue through the second half, our outlook for full year organic sales growth remains in the negative 2% to positive 2% range.

In light of the continued challenging market conditions in our industrial oil and gas related end market as well as in our CALA geography, we continue to sharpen our focus on synergy capture, margin improvement, cost management and working capital initiatives through a focus on excellence in execution.

As you think about the full year 2016, I'd like to update our framework for modeling currency and copper based on current rates, as well as an update to our Power Solutions outlook. Based on the current value of the U.S. dollar against other currencies, we currently expect a 2016 sales headwind of $60 million to $70 million.

We estimate that the stronger dollar will have somewhere between $0.00 and $0.05 negative impact on EPS for the year with approximately 70% of that hitting in the first half of the year. As a result of the growth in our total business from the Power Solutions acquisition, the impact of copper on our sales has increased somewhat.

We previously disclosed that we estimate on a quarterly basis a $0.10 change in average copper prices will result in approximately a $4 million change in revenue per quarter.

Based on Q2 average copper prices, compared to third quarter 2015 average price of $2.39, we estimate the negative impact to both sales and earnings will only be about half as much in the third quarter as it was in the second quarter.

For the full year, we currently estimate lower average copper prices to have a negative sales impact of $55 million to $60 million with about $43 million of the headwind already occurring in the first half of the year.

The corresponding impact on EPS would be an estimated $0.06 to $0.08 per share for the second half and $0.22 to $0.24 per share for the full year. Turning to Power Solutions, we continue to be excited about the long-term value creation opportunities with this business, despite the macro headwinds.

In the second quarter of 2016, Power Solutions added an incremental $510.6 million to sales. Sales in the quarter were below our estimated range for the reasons previously discussed. We expect Power Solutions to add an incremental $1.45 billion to $1.5 billion to sales in the first three quarters of the year.

We are adjusting our estimate of full year incremental adjusted EPS accretion to $0.55 to $0.60 in 2016. This is a reduction of $0.10 per share from our previous estimate, driven entirely by the lower levels of utility industry spending.

As a reminder, synergies will be driven by product cross-selling opportunities, purchasing synergies and operating expense efficiencies. As previously communicated, synergies will accelerate as we move through the year with the operating expense synergies primarily driven by this quarter's restructuring actions.

Total synergies in the quarter including both Tri-Ed and Power Solutions were in line with our expectations. We are on track to meet or exceed our goal of delivering $17 million in cumulative EBITDA synergies in fiscal year 2016 between Tri-Ed and Power Solutions. This will result in an incremental $10 million of EBITDA synergies compared to 2015.

Let me conclude by saying that overall, we were extremely encouraged in the quarter by strong results in our NSS business and improving trends in our EES business.

These were partially offset by challenges related to the investor economy in our CALA region and we took aggressive action in the quarter that we believe will result in improved results in the back half of the year.

Overall, we remain excited and energized about the transformation of our business, and the opportunities available from our repositioned platform. We continue to believe we are well-positioned for substantial and sustainable long-term growth as a result of our leadership positions in attractive markets.

We remain relentlessly focused on the successful integration of our acquired businesses and maximizing synergistic value which we expect to result in significant free cash flow generation that will support our balanced capital allocation strategy. With that, we will now open the call for questions..

We'll go first to Shawn Harrison with Longbow Research..

Morning, everybody..

Hi, Shawn..

Morning, Shawn..

Bob, I'd like to, I guess, delve in a bit more into EES because your results of improving trends both sequentially and even kind of the commentary year-over-year runs counter to what may be considered now your more traditional industrial distribution peers, and so I was hoping you could maybe highlight where you're seeing the disconnect, obviously seeing their results versus your more positive results, particularly exiting the second quarter and into the second half?.

Yeah, Shawn, I think an important part of the improvement that we saw in the second quarter in the EES business does have to do with the Power Solutions acquisition.

We said that the relevant part of that acquisition for our legacy wire cable business was broadening out this product portfolio, so that we could compete more effectively in the mid-size project space, that by having access to lighting, switch gear, transformers, a broader range of electrical bulks (34:00), that when you took our automation product set, you took our wire cable product set, you bundled it together, you had – we put ourselves in a more solid competitive position in that mid-size space.

And that's I think exactly what's playing out in those improved results. We are definitely seeing ramp-up in sales of those products. And if I was going to call out some – a specific area where we're seeing – we're certainly seeing it in the general commercial construction space in some parts of our geography.

But in addition, we're seeing it in Power in data centers. So electrical cable, switchgear, transformers in data centers, lighting in data centers which are all incremental new opportunities for us that came through the acquisition. So I think that's driving part of it.

The other piece I don't want to lose sight of as well is our OEM business, and we think we're outperforming in OEM. And I think the right way to characterize it, we talk a lot about global accounts, and we talk about complex customers.

And we do really well when we put our capabilities alongside a complex customer that has pretty demanding requirements, multiple sites, and, in many cases, multiple countries. And so I think if you take those together, that explains a lot of why we may be performing better than would be expected in the broader industrial market..

Did you see any of the slowdown exiting the quarter that they commented on in their business, or were you able to buck that trend as well?.

I'm sorry, who commented on?.

Fastenal, Grainger, MSC, pick one of them. All of them saw slower June than May, and July hasn't started off well, but you're....

No. We've, in fact, not seen that. Our trend would move the opposite direction; in fact, we strengthened through the quarter..

if sales are unchanged for the full year forecast and you're getting a restructuring benefit, where does the $0.10 decline – where does that derive from?.

Yes. The $0.10 decline is primarily from the lower Utility sales, but recognize the other part of the business, the C&I part, for the reasons Bob just commented on, we're seeing improvements. So the revenue is still within that range of what we had said last quarter of $1.45 billion to $1.50 billion.

But it's a reduction in the projection for Utility partially offset by some improvement in the C&I low-voltage part which rolls up under EES..

That would imply there's a mix differential.

I would have thought the Utility portion of the business maybe carried a lower EBIT margin than the C&I business?.

No, that's not the case of the business we acquired, but what's now – how we're growing the C&I business, it is now performing at a higher margin..

Okay, very helpful. I'll jump back in the queue. Thanks, Ted..

Thanks..

We'll go next to Steven Fox with Cross Research..

Thanks. Good morning.

Just first off on the charges in the quarter, can you go through what the cash impact was from all of those actions? And then related to that, in terms of the bad debt expense in Latin America, you probably don't want to tell us which customer, what the names of the customers were specifically, but can you give us a sense for what types of customers they were in terms of (38:07)?.

Yeah. In fact, maybe what we'll do, Steve, is I'll start the bad debt in Latin America thing, and then Ted can talk to the cash impact of the restructuring actions.

And I have to tell you, Ted and I were both expecting you to ask us this question because in December when we had a bad debt charge in Latin America, you asked us about it, and we were pretty confident that we had taken the provision we required.

What's happened, if you look across those economies, is a broad deterioration in the macro in Latin America. So I would say, more broadly recession-oriented than we've seen in the past, that we saw coming into the year. And so if you look at the types of customers, it's actually pretty broad-based.

It ranges from alternative tel-com carriers to EPCs, where a parent has gone bankrupt and it affected the subs that were operating in Latin America. The parent is based in a different country. And some things that are probably more natural resource-driven.

So, some – and I would say, and more disappointingly, some of those customers are continuing to operate. They're just refusing to pay their bills. So we have a lot of litigation going on right now in Latin America in geographies where we think it's effective. Frankly, in some of the geographies, we don't think it's an effective strategy.

And we are exercising rights to collect collateral as well. So – and I guess finally, I'll say, Steve, we've changed how we're managing credit, and how we're dealing with collateralization of payment obligations in Latin America as well. We have, frankly, been selective about business this year.

Due to credit risk, we've actually chosen not to quote a number of projects that were available to be quoted in Latin America this year. So we're – I don't want you to view this call-out as indicating any complacence on our part.

We're very focused on how we recover some of what we've actually written off, and how we continue to manage the credit going forward..

Yeah, as far as, Steve, as your question about the cash, as you might guess, the cash impact is minimal, probably $5 million or less. There's obviously the amortization of intangibles is zero cash. The bad debt provision is zero cash. The restructuring charge is zero cash in the quarter. Most of that will be a cash outlay in Q3.

The acquisition and integration cost is a cash outlay in the quarter. Then you come back to the UK pension settlement and probably half or so of that was cash. Part of that was actually paid in prior quarters, so maybe $5 million or so would be a good estimate of the cash impact in the quarter..

Great. That's helpful. And then just, Bob, in terms of what you just talked about with Latin America, how does this sort of change your strategic view of the region? Especially given how the company has kind of moved to reduce its international exposure in the last year or so..

Yeah, so Steve, let me take that in kind of two parts, and I'll start with whether we've strategically moved to reduce international exposure. I don't want to say we've done that. The Power Solutions acquisition and the Tri-Ed acquisition were North America-focused businesses.

We're leveraging some of those capabilities outside North America, and I would say slowly, but we are leveraging those capabilities outside North America. So I would say it's more a byproduct of where the right acquisition targets were.

We still think that strategically for us because the scale and scope of our global footprint and how we manage it is different than most of our competitors, we still view it as a strategic advantage, and I think frankly if you look at the growth in NSS in Europe, that's a clear example.

I don't think anybody would be looking at organic growth in Europe and in, frankly, much of any business right now. And by the way, in fact, in the EES business being flat organically over that time period as well.

So we aren't really trying to deemphasize the globe, but I will say in Latin America, we are looking at some of the smaller countries we've been in. We've actually pulled out of here in the last quarter.

And from a revenue standpoint they're probably a rounding error in the scheme of things, but the intent is actually to take some cost structure out of the business as opposed to de-risking the business.

If you look at our investment in Latin America over a longer time period, if you look over the last few years, we've been very profitable in Latin America. We had very strong return on capital.

And I think as we go through this recessionary dip or drop deterioration in the market, when we come out of it on the other side, we'll again be profitable, but frankly more profitable because we'll have made some cost structure adjustments. I think we talked last year about some cost reduction we took that was focused in Brazil, in our NSS business.

And so we've been sort of redefining the cost structure to be more appropriate for the size of the market opportunity. But again, we've been profitable over a reasonable time period in that geography and we expect to be profitable going forward and we aren't looking to pull out of Latin America..

Steve, if I can just add one little additional bit of color there. Bob mentioned that this additional provision was primarily related to a handful of customers. 70% of the dollars and three of the customers are Brazil and Venezuela, two countries that not only have significant economic turmoil, but also political turmoil.

And I will tell you that this is absolutely the last write-off we will have in Venezuela, because if you will remember that several years ago we changed our business model to shift our sales into that country on an export basis out of Miami, US dollar denominator letter of credit, et cetera.

The only reason we had not previously written off this particular receivable because it was with the government. And we thought based on conversations that it would still be partially collectible. So now we've written that off to zero, and to Bob's earlier point, still working to try to make recovery.

But again, those are two countries that I think have had the most extreme amount of change, both economically and politically in the CALA region..

Great. I appreciate all the color. It's very helpful. Thank you..

We'll go next to Charles Redding with BB&T Capital Markets..

Hi, good morning. Thanks for taking my call..

Good morning, Charles..

Just a brief follow-up on the synergies within Power Solutions that you're set to escalate, what's been the biggest positive just over the last couple of quarters in terms of product integration and then what do you guys feel is the most significant remaining challenge here over the next couple of quarters?.

So I think, Charles, the success we've experienced so far has been largely in the switchgear, transformer, electrical bulk space as well as bringing more wire and cable with some of our contractor service supply chain, basically supply chain services targeted at the contractor market from legacy Anixter into legacy Power Solutions.

And that we thought would be the quickest kind of cross-pollinating that we would do and that's in fact turned out to be the case.

Where I think we have opportunity to accelerate and where we're probably a little bit – we're not completely thrilled with where we're at and you see that we made a leadership change in the business is that we should be doing a little bit more in Security and the Utility Power Solutions business. We have had a number of successes there.

We've been in front of tens of customers with proposals and discussions about technology, and so we expect to see that accelerate as we go forward, but that's probably been the weaker synergy right now.

And I think it's partly caught up in the fact that the investor in utilities have longer decision cycles and they're still working through meeting some of their NERC assessment requirements from which the Security opportunity will get created..

Got it.

In terms of the growing backlog in Electrical, how should we think broadly about the margin profile here relative to the current 4%-plus?.

Yeah. I think, Charles, that as we've talked in the last several quarters, at the gross margin level, we've had kind of a reset with the inclusion of the low-voltage business in that segment of ours. I would not expect to see any significant change to the gross margin as we move forward.

The opportunity to grow the bottom line will come from even better operating expense leverage.

That's what was the biggest driver of our EES margin improvement bottom line performance in this quarter and as this business continues to recover, both U.S., Canada and elsewhere will get even greater operating expense leverage there, and a large part of that, the majority of that will flow to the bottom line..

Great. Thanks, Ted..

We'll go next to Jeff Kessler with Imperial Capital..

Hi, guys. You talked about a pipeline that looked, and that sounded like it was improving.

Could you go through where the pipeline does appear to be improving, and what the margin mix for that is? You've just obviously talked a little bit about one area, but if you could give a broader spectrum of what is going on with your discussions, and where you think you have the best chance of improving your close rates, and where those areas would impact margin?.

So, Jeff, we're seeing improving pipeline across all three businesses in North America, and for NSS and EES to some degree, seeing continued good pipeline in Europe, and in NSS Asia Pacific. Latin America we think will continue to be soft for a while. And EES Asia Pacific is a little bit soft right now as well.

But it's a very small part of total business. So to say specifically where the pipeline is coming from, it's coming from data infrastructure both in the horizontal land space as well as data centers.

And one of the things you probably heard in earlier calls in this earnings go-around is that Category 6A cable is growing as a percent of the total market. We're seeing the same thing in our product mix. And that's being driven a lot by wireless, and we think there is an increasing legs up in that for both wireless as well as PoE-based LED lighting.

Security continues to have a strong backlog for us as kind of we're seeing strong backlog in EES in the complex OEMs which we've won some incremental of significant project volume there as well as in the Electrical business, the more construction-oriented part of the business in North America.

So I guess when you sum all that up, actually it's pretty broad-based..

Okay.

Just a housekeeping item, Mexico, is that considered Latin America or North America?.

Yes, great question. We consider that Latin America..

Okay..

It has operating characteristics more like Latin America than like the U.S. and Canada and there's also by the way a lot of supplier commonality and customer commonality across Latin America that causes us to manage it in that way and not manage it as part of North America..

Okay.

So, that's been a more stable part of the Latin American business?.

It has been historically. It's a little bit soft this year. We've seen a slowdown in industrial projects spend there. And if you think about PEMEX, PEMEX went in the market a year or two ago looking for outside investment for the first time, and they had four or five packages that they put out to bid for outside investors.

And most of the packages got actually no response and got a response that they felt was inadequate on one of the packages. So PEMEX continues to be a drag on the Mexican economy. The other side though, is that in the OEM space, we're having actually growth in Mexico and some of that's automotive-driven as well as export into the U.S.

But there's been a lot of automotive investment in Mexico, both in the north around Monterrey and also in the Bajío midland section and we're benefiting from some of that. The other thing we've seen though is a bit of a slowdown in the IT spend in Mexico and I think it's sort of an absorption phase.

You kind of go through these IT spend surges that get absorbed and then you go into a lull and we think that's a bit of what we're seeing right now. We had some pretty strong project spend in network infrastructure in the past couple years and so we're in a bit of a lull there. The Security spend is going reasonably well..

Okay. And finally, Canadian oil and gas or oil and gas in general in North America, capital spending has obviously been down. But there seems to be talk about having the back half of this year show a better comparison than we've seen particularly in the first half of this year, year-over-year, which has been down or flat to down second half.

Our analysts are talking about it being a little bit better.

Are you having more discussions, and again, I get back to this pipeline discussion, having more discussions with oil and gas companies about what they are doing in the second half of this year?.

I'd be a little cautious about saying we're expecting a bump-up out of oil and gas CapEx in the second half of this year. As I'm sure, Jeff, you appreciate the oil and gas regions in North America aren't all created equal. I think Western Canada will continue to be soft for a while to commence one of the most expensive recovery areas.

The Bakken Shale is more expensive than the Eagle Ford and Permian basement to do recovery. So as you look across those there has been more talk about drilling rigs being brought back online in Eagle Ford and Permian Basin. If that happens, we would expect to benefit somewhat from it. But that's not what we're thinking about on our backlog right now.

We're still cautious about that..

Okay. And last question, as you know I always want to ask a Security question. Of the integration of Security or the use of Security in cross-selling into particularly into the Utility space, into this Power space, as you've noted several times it's been behind schedule.

What are the things you're doing to get Security, besides impetus from NERC, to get Security to start ramping up a little bit quicker?.

Yes. So as I've referred to a couple of times, we made a leadership change in that business, and one of the things Ian is doing is driving a very specific strategy across IOU and separately across public power. The buying cycles are different, and some of our early wins – we actually have a mix of the early wins.

We've got a couple of IOUs that we've been deeply embedded with that we've won some Security that are self-integrators. And it's more of a supply chain story.

In the public power space, we've had a couple of wins now for substations that are sort of the model that would come out of those NERC regulations and actually ahead of the regulatory requirement. It's just utilities want to get ahead of it.

And the public power sales cycle tends to be shorter than the IOU sales cycle, and part of it is they're not as complex. They don't have as many substations to deal with.

And so that's why we've split our focus to have an IOU orientation and a public power orientation, and we're driving very specific sales management discipline around how we develop the opportunities and run those opportunities through to conclusion.

And as we've said before, we've leveraged the resources from our Network & Security Solutions business in those opportunities. So we're not asking Utility people with no experience in Security to sell that. We're asking them to kick the door open, drag in their counterpart from NSS to help them make the sale.

And then to ensure that we get the right behavior, we pay both sales teams on that award. And so with all that in place and the new leadership, I don't want to say we'll see a surge in Q3 because that would be misleading. But we'll see improvement as we go forward over the next several quarters..

Yes. And if I could just add to that, just to clarify what Bob was referring to, maybe being a little behind in improvement is more about the pipeline. We did not expect to have much in the way of billings in this entire year. And we certainly didn't expect to be driving billings in the first half as it relates to the Security sales to utilities.

This June 27 date that NERC required utilities to provide a plan; it was just that, a plan.

They've got another 90 days to go out and develop the more detailed plan and it won't be until that step is completed before they'll even be close to having something that could be translated into a bill of material, and then talk about specific RFPs and so forth. So with that, we've got time for one last question..

And we'll go next to David Manthey with Robert W. Baird..

Hi. Good morning, guys..

Hi, David..

Hi, David..

First off, as it relates to the organic growth range for the year of minus 2% to plus 2%. It seems like since the last quarter, NSS fairly steady, ESS maybe gaining a little momentum, and PS might be worse than you thought.

Is that the right assessment relative to your view last quarter?.

Yes, I think that's right. We would have expected the Utility business to be a little bit more positive..

Okay. And then the same thing by geography. I mean it seems like North America continues to be okay, and Europe kind of flattish, with rest of the world down.

Relative to your expectations last quarter, is it safe to say that rest of the world is really the delta here on the downside and then just minor variances on the upside?.

Yeah, particularly around Latin America softness, and Asia for EES. Europe actually is probably maybe marginally in line or maybe slightly ahead of where we thought it might be..

Okay. And then as it relates to the Latin America bad debt provisions, why do you see that as an adjustment to the financials rather than an ongoing risk to the business? I mean, it seems like you mentioned you'd seen growth in the past, you expect to see growth in the future. Some of these customers are customers you've done business with before.

And you remain in the geo.

Could you talk about why you think that should be excluded from your results?.

Yes, Dave, sure. Partly because, as Bob referenced earlier, we're talking about a handful of customers with some pretty unique circumstances tied more to these much more recent, for lack of a better word, kind of political turmoil.

The corruption in Brazil that's resulted in a president of one of our customers in jail, and the business shutting down, and that type of thing. The Venezuelan situation that I referenced before, that we have a different business model as to how we're doing business in that country.

And I think from the standpoint that none of these -- I don't believe any of these that were components of this charge are a result of really anything that's happened in the business in these last couple years. The bulk of this goes back at least 18 months, and some of it as much as three years.

Which might beg the question why didn't you reserve for this before? We had a very sound rationale to not reserve for it earlier based on the steps we were taking with these individual customers. And so for all those reasons, this does not at all feel like something that is an ongoing part of our CALA business..

Okay. And then last question on the Utility, where you mentioned the Utility projects being delayed -- and I'm not asking for customer names here, but could you talk about the types of projects.

When you say a project is delayed, what would that be? And then when you talk about oil and gas impacting that business, is it purely due to the Canadian exposure there, or is it something else?.

Yes. The oil and gas is predominantly in the Canadian exposure in that business, and then the projects, there's ebb and flow of small kind of project activity along with the MRO spend in Utilities.

And then there's also larger projects like transmission line projects that are largely, the product is largely supplied by the manufacturer direct and what we're typically providing is a supply chain management service around the lay down yards.

And it's a capability that was very well-developed in the Power Solutions business and that's one of the areas where we're seeing some project delays. We've got transmission line projects that are on the books from a planning standpoint with some of these customers.

They're just delaying the initiation of the project and so that's pushing out some of those opportunities. And then it is the smaller scale projects and again this is largely around two customers..

Yeah. And I guess, Dave, the last piece of color I would add to that is that we don't want to suggest that the industry was down year-over-year the same rate we were down. We may have been impacted a little more heavily because of the amount of spend of these couple of specific customers last year.

But there was generally a softening in industry spend, we believe..

Thank you..

Thanks very much. That concludes today's call. Thanks for all your questions and for listening to the call. If you have additional questions, please do not hesitate to reach out to Ted or Lisa, and as always, thank you for your interest in Anixter..

This does conclude today's conference. We thank you for your participation..