AXE
#Hi, <UNK>.
So, I think, <UNK>, the success we have experienced so far has been largely in the switch gear 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 to contractor market from legacy Anixter into legacy Power Solutions.
And that we thought would be the quickest cross pollinating that we would do and that has, in fact, turned out to be the case.
Where I think we have opportunity to accelerate and where we are probably a little bit ---+ we are not completely thrilled with where we are 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 utility Power Solutions business.
We have had a number of successes there.
We have been in front of tens of customers with proposals and discussion 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 and utilities have longer decision cycles and they are still working through meeting some of their [NERC] assessment requirements from which the security opportunity will get created.
I think, <UNK>, that as we talked at the gross margin level, we've had a reset with the inclusion of that low-voltage business into that segment bars.
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 is what was the biggest driver of our EES margin improvement bottom line performance in this quarter, and as this business continues to recover, both US, Canada, and elsewhere will get even greater operating expense leverage there, and a large part of that, the majority of that, will close on the bottom line.
<UNK>, we are 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 the total business.
So to say specifically where the pipeline is coming from, it is 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 six [A cable] is growing as a percent of the total market.
We are seeing the same thing in our product mix and that is 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.
And, as I comment, we are seeing strong backlog in EES in the complex OEMs, which we have won some incremental 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 it is pretty broad-based.
Yes, great question.
We consider that Latin America.
It has operating characteristics more like Latin America than like the US and Canada and there is 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.
It has been historically.
It's a little bit soft this year.
We have seen a slowdown in industrial project spend there.
And if you think about Pemex, Pemex went into 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.
On the other side though, in the OEM space, we are having growth in Mexico and some of that is automotive driven as well as export into the US.
But there has been a lot of automotive investment in Mexico both in the north around Monterey and into Baheo, the midland section, and we are benefiting from some of that.
The other thing we have seen though, is a bit of a slowdown in the IT spend in Mexico and I think it is sort of an absorption phase.
Some go through these IT spend surges.
They get absorbed and then you go into a lull and we think that is a bit of what we are seeing right now.
We had some pretty strong project spend in network infrastructure in the past couple of years and so we are in a bit of a lull there.
The security spend is going reasonably well.
I would be a little cautious about saying we are expecting a bump up out of oil and gas CapEx in the second half of this year.
I'm sure, <UNK>, 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 come.
It's one of the most expensive recovery areas.
The Bakken shale is more expensive than Eagle Ford and Permian Basin to recovery.
As you look across those, there has been more talk about drilling rigs being brought back online and Eagle Ford and Permian Basin.
If that happens, we would expect to benefit somewhat from it.
But that is not what we are thinking about on our backlog right now.
We are still cautious about that.
Yes, so as I 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 have a mix of early wins, we've got a couple of IOUs that we have been deeply embedded with that we have won some security that are self integrators.
And it is more of a supply chain story.
In the public power space we have 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 are not as complex.
They don't have as many substations to deal with.
And so, that is why we have split our focus, to have an IOU orientation and a public power orientation and we are driving very specific sales management discipline around how we develop the opportunity and run those opportunities through to conclusion.
And as we have said before, we leverage the resources from our network and security solutions business in those opportunities, so we are not asking utility people with no experience and security to sell that.
We are asking them to kick the door open, drag in their counterpart from NSF to help them make the sale.
And then to ensure 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 will see a surge in Q3 because that would be misleading.
But we will see improvement as we go forward over the next several quarters.
Just to clarify, what <UNK> was referring to may 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 a relates to the security sales 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 will even be close to having something that can be translated into a bill of material and then talk about specific (inaudible) [RFEs] and so forth.
So with that, we've got time for one last question.
Hi <UNK>.
Yes, I think that's right.
We would've expected utility business to be a little bit more positive.
Yes.
Particularly around Latin America softness and Asia for EES.
Europe actually is probably may be marginally in-line or slightly ahead of where we thought it might be.
Yes, Dave, sure.
Partly because as <UNK> referenced earlier, we're talking about a handful of customers with pretty unique circumstances, tied more to these much more recent, for lack of a better word, political turmoil; the corruption in Brazil that's resulted in the President of one of our customers in jail, and business shutting down and type of thing.
The Venezuelan situation that I referenced before, that we have a different business model as to how we are 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 in this charge, are a result of anything that is happened in the business in these last couple of years.
The bulk of this goes back at least 18 months and some of it as much as 3 years.
Which might beg the question, why didn't you reserve for this before.
We had a very sound rational to not reserve for it earlier based on the steps we were taking with these individual customers and so for all these reasons, this does not feel like something that is an ongoing part of our [cattle] business.
The oil and gas is predominantly in the Canadian exposure in that business.
And in the projects, there is an ebb and flow of small project activity along with the MRO spend in utilities.
And there's also larger projects like transmission line projects that are largely ---+ the product is largely supplied by the manufacturer direct and what we are typically providing is a supply chain management service around the [lay down cards] and it is a capability that was very well developed in the Power Solutions business and that is one of the areas where we are 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 are just delaying the initiation of the project and so that is pushing out some of those opportunities and it is a smaller scale project, and again, this is largely around two customers.
Maybe to add to that, from an industry perspective, Dave, it supports the fact that our view is consistent across the industry is we are hearing from all of our large suppliers in this utility space about a fairly significant slowdown in industry spend, Q2 versus Q1.
That they don't anticipate being ---+ continuing through the full-year and the folks that put out industry forecast, like Edison Electric Institute, etc.
commented how they were surprised also and took down their outlook based on spend reduction in the quarter.
It doesn't change the number, but just suggests that it is industry, not a market share issue for us.
And I guess, Dave, the last piece of color I would add to that is 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 bit more heavily because of the amount of spend to these couple of specific customers last year.
But there was generally a softening in industry spend, we believe.
Thank you 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 <UNK> or <UNK> and as always, thank you for your interest in Anixter.
