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Anixter International Inc  (NYSE:AXE)
Q3 2018 Earnings Conference Call
Oct. 23, 2018, 10:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Lisa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Anixter Third Quarter 2018 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session.

(Operator Instructions) Lisa Gregory, Vice President of Investor Relations, you may begin your conference.

Lisa M. Gregory -- Vice President of Investor Relations

Thank you. Good morning and welcome to Anixter's third quarter 2018 earnings conference call. With me here today to discuss our financial results are Bill Galvin, President and Chief Executive Officer; and Ted Dosch, Executive Vice President and CFO. Following their prepared remarks, we will open the line to take your questions.

Before we begin, I want to remind everyone that we will be making forward-looking statements in today's 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 presentation includes both GAAP and non-GAAP financial results, the reconciliation of which is detailed in our earnings release and in the accompanying slide presentation that is posted on our Investor Relations website.

Now, I will turn the call over to Bill.

Bill A. Galvin -- President and Chief Executive Officer

Thank you, Lisa. Good morning and thank you for joining today's call. This morning, I will provide an overview of our third quarter financial performance including sales and gross margin trends. I will then turn the call over to Ted to review our financial performance in more detail and provide additional thoughts on our outlook for the rest of the year.

Following our prepared remarks, we will take your questions. During our comments, we will reference the accompanying slide presentation for the third quarter posted out on our Investor Relations website. As you saw from this morning's release, we had a strong sales performance achieving record third quarter sales in all segments and delivering organic growth in all segments and geographies. This reflect an excellent sales execution and is a testament to our value and the value we provide our customers on a daily basis. Let's look more closely at our results beginning with sales. As you see on Slide 5, sales in the quarter increased 8.1% to $2.2 billion which is the highest quarterly sales in our history. Adjusting for the impacts from the lower average price of copper, currency fluctuations and acquisitions, organic sales increased 7.4%. This was above our outlook range of 4% to 5% and was the highest organic sales growth in seven years. Sales growth was broad-based driven by an acceleration in our complex services and global projects business, our security acquisitions and strategic initiatives in each of the businesses.

Our strong sales performance drove solid earnings. Third quarter 2018 GAAP earnings per diluted share was $1.40 and adjusted earnings per diluted share increased 23.8% from prior year to $1.61. Let me now review our sales results by segment beginning with NSS. As shown on Slide 6, record NSS quarterly sales of $1.1 billion increased 8.5%. Current quarter sales included the $31 million favorable impact from the security acquisitions completed in the second quarter of 2018 and the $11 million unfavorable impact from current fluctuations.On an organic basis NSS sales increased 6.4%. Growth was broad-based with organic growth of 5.9% in the network infrastructure business which represents approximately 57% of NSS sales.

Turning to our NSS security results. Sales of $490 million or approximately 43% of segment sales increased 12.3% driven by the security acquisitions and organic growth. Additionally, we experienced growth in all geographies and all sales initiatives including global accounts, wireless and professional audio video.

By region, NSS North American sales of $854 million increased 4.8% on an organic basis driven by a pickup in large project business. We experienced strong performance with technology and wireless customers and in government business. Growth in Canada accelerated well and was across a broad market segment and growth initiatives. In EMEA, NSS sales of $101 million increased 13.2% on an organic basis driven by projects across the business including in the UK, Continental Europe, Russia and the Middle East. Growth was driven by technology and financial services customers. Finally, emerging market sales of $183 million increased 10.5% on an organic basis driven by both our Asia-Pacific and CALA businesses. Strength in APAC was driven by projects in Australia and Japan. In Latin America, we continue to build sales in a new complex integrated supply program with an existing large customer as we have discussed on recent calls.

This five year $50 million per year program began to ship late in the second quarter and is on track to reach the annual run rate by the end of the year.

Moving to electrical and electronic solutions on Slide 7, our record third quarter sales of $597 million increased 7.6%. Adjusted for the unfavorable impacts from lower average copper prices and foreign currency fluctuations, organic sales increased 9%. Looking at EES by region, North American sales of $476 million increased 11.2% on an organic basis. We experienced strong growth on both the industrial and OEM side of the business with notable strength in the US industrial project business. Natural resources including oil and gas and mining were among the strongest end markets.In our EMEA geography, EES sales of $60 million declined 10.2% on an organic basis with modest growth in our OEM business partially offsetting lower sales in our industrial business. The prior year quarter was very difficult comparions with several large projects in the quarter. We will continue to have typical comps in the fourth quarter due to the same large projects in the Middle East last year. However, we expect growth in the remaining European geographies. In our EMEA markets geography, EES -- I'm sorry -- in our emerging markets geography, EES sales of $61 million increased 15.3% on an organic basis driven by industrial project strength in Latin America. Our sales growth strategy remains focused on complex and global supply chain projects, cross-selling opportunities and organic initiatives in fast growing and strategic areas of the business. Finally, our Utility Power Solutions segment achieved sales of $444 million in the quarter resulting in 8.1% growth on an organic basis shown on Slide 8. Growth was driven by our US IOU and public power customers with flat sales in our Canadian business. Our strategy to broaden customer penetration in North America is providing us with both a broad-base and strong position with utility customers.

Let me now turn to gross margin on Slide 9 of our presentation. Third quarter gross profit increased 6.8% to $424.1 million resulting in gross margin of 19.5%, a decline of 20 basis points which Ted will explain in more detail later.

Now, let me get you on our perspective on tariffs. As you know in July and August, list one and list two tariffs were implemented on 50 billion (ph) of products imported from China and in September, list three tariffs were implemented on an additional 200 billion (ph) of products which were phased in at 10% in September and are expected to increase to 25% in January. We expect the direct impact on tariffs on our business will be minimal given the small amount of product that we import directly from China. We will experience a more significant impact directly through supplier price increases, the majority of which we expect to be able to pass through to our customers.

In addition to tariffs, we continue to face broader inflationary pressures in some of our markets including increases in freight and employee benefit costs. In the face of these headwinds, our top priority remains improving profitability through gross margin initiatives combined with the focus on our cost structure as we balance expense, discipline with growth investments in the business. We are beginning to see evidence that our ongoing gross margin initiatives are delivering positive results in our NSS and EES businesses and we are optimistic that our gross margin performance will improve in the fourth quarter. To summarize, our third quarter sales performance exceeded expectations driven by the continued recovery in projects business in both NSS and EES. As we look to the fourth quarter, the demand backdrop remains favorable in most of our geographies. With favorable economic conditions and strong year-over-year backlog trends in all segments somewhat negatively -- and negated by macro uncertainties, we are optimistic that growth trends will continue through the fourth quarter and into early 2019. Reflecting year-to-date organic growth of 4.7%, we are increasing our outlook for the full year 2018 organic growth to the 4.5% to 5% range which is 100% -- 100 basis point increase from the low end of the range that we provided on our Q2 earnings call.

With that, let me turn the call over to Ted for a more detailed analysis of our results and outlook for the fourth quarter.

Theodore A. Dosch -- Executive Vice President, Chief Financial Officer

Thanks Bill and good morning, everyone.

Before we move into the details, I do want to remind you that today's earnings release includes non-GAAP measures which are reconciled to GAAP measures in the financial tables that accompany our release and are in the appendix of our accompanying slide presentation. We believe the non-GAAP measures we disclose provide the best representation of our ongoing operational performance. Expanding on Bill's overview of our third quarter record sales performance, our operating expense leverage also contributed to our strong bottom line growth.Operating expense of $335 million compares to prior year operating expense of $316 million. Excluding the non-GAAP operating expense items detailed on Page 11 of our release, adjusted operating expense increased 5.8% with nearly half of the increase in spend, a result of the approximately $8 million in operating expenses of the acquired companies. Current quarter adjusted operating expense of 14.9% of sales, a 30 basis point improvement from prior year. In addition to the acquired companies operating expense, the increase in operating expense was driven by approximately $3 million in variable expense directly related to the higher volume as well as $4 million from inflationary impacts which was primarily higher freight and medical costs and an additional $3 million from investments in our growth initiatives including our ongoing investment in technology.

About (ph) still a year-over-year headwind, our initiatives to offset freight increases are beginning to mitigate the impact.In the first half of 2018, our freight expense as a percentage of sales increased by 20 basis points.In the third quarter, the year-over-year increase diminished to 10 basis points due to the actions we have taken. As we look to the fourth quarter, we expect our operating expense will increase by approximately $6 million sequentially, driven by higher employee benefits and technology investments. Adjusted EBITDA increased 8.4% to $111 million primarily driven by EEF and NSF. Adjusted EBITDA margin of 5.1% was flat with the prior year. Adjusted EBITDA includes a $2.6 million charge to establish a deferral of intercompany profit in inventory associated with the recent security acquisitions.

Let me now review adjusted EBITDA trends by segment. Beginning with NSS as shown on Slide 13 in the presentation, adjusted EBITDA increased 12.9% to $82 million. The corresponding adjusted EBITDA margin of 7.2% compares to 6.9%. The 30 basis point increase was primarily driven by volume leverage and the favorable impact of the Q2 security acquisitions. This resulted in adjusted EBITDA leverage of 1.5 times.On a sequential basis, we had a strong 7.4% increase in adjusted EBITDA resulting in a 30 basis point improvement in the adjusted EBITDA margin driven by our recovery in volume combined with operating expense discipline. EEF adjusted EBITDA increased 22.9% to $37 million resulting in a 70 basis point improvement in the adjusted EBITDA margin of 6.1%. The increase was driven by strong expense leverage associated with the volume increase, resulting in a strong adjusted EBITDA leverage of 3 times. On a sequential basis, adjusted EBITDA of $37 million compares to $40 million resulting in an adjusted EBITDA margin of 6.1% which compares to 6.7%. The change in adjusted EBITDA margin was due primarily to customer and project mix.

Finally, UPS adjusted EBIDA of $24 million compares to $25 million. The corresponding adjusted EBITDA margin of 5.4% compares to 6% in the prior year quarter. The lower EBITDA margin was caused primarily by lower vendor rebates, customer mix and inflationary pressures on product costs. We expect these pressures to diminish in the fourth quarter as we make further progress with passing these costs through to our customers.

On a sequential basis, UPS adjusted EBITDA margin increased 10 basis points. Moving down the income statement, interest expense of $19.3 million compares to $18.9 million with the increase driven by higher borrowings under our revolving lines of credit due to the recent acquisitions and the increased working capital investment to support the growth in the business, partially offset by the repayment of the Canadian term loan in full in the fourth quarter of 2017. We expect interest expense to remain approximately $19 million in the fourth quarter. Foreign exchange and other expense of $1.6 million compares to $0.5 million of income in the prior year quarter. The increase in expense was caused by the unfavorable impact of changes in foreign exchange rates primarily driven by the sharp devaluation in Argentina and other unfavorable currency moves.

Turning to taxes, our third quarter 2018 US GAAP effective tax rate of 30.6% compares to 39.7% and our adjusted ETR of 30.6% compares to 38.8%. Our year-to-date GAAP ETR of 29.9% includes $1.3 million net tax benefit primarily related to the reversal of valuation allowances. Excluding the net tax benefit, our projected full year GAAP ETR of 30.6% compares to 54.1% for the full year 2017. The projected full year 2018 non-GAAP ETR of 29.5% compares to the 2017 full year non-GAAP ETR of 37.8%. The favorable rate changes are due primarily to the impact of the Tax Cuts and Jobs Act of 2017. Our diluted share count of 34.1 million shares which should remain relatively flat over the balance of the year.

Turning to Slide 16. Our working capital ratio of 17.4% which excludes the current portion of long term debt compares to 18.2% in the prior year quarter. This 80 basis point improvement reflects our ongoing focus on working capital efficiency. We continue to drive improvements in our working capital processes to enable an even more efficient use of our balance sheet. As expected though, working capital dollars have increased to support the higher growth rate in sales. Year-to-date, we generated $103 million in cash from operations which compares $110 million in the prior period. The slight drop was due to an increase in our working capital to support growth in the business as I just mentioned. We now expect to generate cash flow from operations of $160 million to $180 million for the full year of 2018.

Finally, in addition to investing $150 million in the acquisitions, we invested $32 million in capital expenditures year-to-date in 2018 compared to $31 million in the comparable year ago period. We now expect to invest $45 million to $50 million in CapEx in 2018 with the year-over-year increase primarily due to increased investments in systems and technology.

Turning to Slide 17, our third quarter 2018 debt to capital ratio of 44.7% compares to 46.1% at year-end 2017, slightly below our target range 45% to 50%. Our debt to adjusted EBITDA ratio of 3.1 times is flat with year end 2017 and slightly above our 3.0 target. Both of these metrics reflect the impact of the Q2 security acquisitions. Our weighted average cost of borrowed capital of 5.4% compares to 5.6% at the end of 2017 and our liquidity position remains strong with total available liquidity under revolving lines of credit and secured accounts receivable and inventory facilities of $701 million at the end of the quarter.

Turning to our outlook for sales growth. As Bill said, we have increased our outlook range for full year organic growth to the 4.5% to 5% range which is a 100 basis point increase from the low end of the range. Based on current trends in the business to the first three weeks of October and supported by continued strength in economic indicators including industrial production and PMI (ph), we are estimating fourth quarter 2018 organic growth to be in the 4.5% to 5.5% range. As Bill indicated, we expect gross margin to improve on a sequential basis as our gross margin initiatives become fully implemented across the organization.

We also expect operating expense as a percent of sales to increase slightly as we continue to invest in technology and innovation to provide customers with state-of-the-art electronic business platforms and an enhanced customer experience. To further help with your modeling, I will provide an estimate for the impact of acquisition, copper and currency on fourth quarter and full year 2018 sales as detailed on Slide 20 of today's presentation.

Based on current projections, we expect sales from the acquired businesses of $25 million to $30 million in the fourth quarter and $60 million to $70 million for the full year reflecting the seven months of ownership. Based on recent copper prices, we estimate an unfavorable sales impact of $5 million to $10 million in the fourth quarter and a favorable $5 million to $10 million sales impact for the full year. As a reminder, average copper price was $2.89 per pound in the third quarter of 2017 and $2.80 for the full year of 2017. With the current price of approximately $2.75, we project the full year average price to be approximately $2.90. Based on the current value of the US dollar against other currencies, we estimate a fourth quarter sales headwind of $10 million to $15 million. We had a favorable impact in the first half of the year but at current rates, we expect a flat to somewhat negative impact for the remainder of the year resulting in a full year benefit of $10 million to $15 million. Given the current strength in demand in our markets, we are optimistic that the majority of inflation and tariff-related price increases will ultimately make their way to the end customer such that the negative impact to our margin will be temporary.

We're continuing to monitor this issue and take actions to ensure that we are able to mitigate any unfavorable impact on our business.

Let me conclude by reiterating that we were pleased to deliver record sales growth in the quarter and we remain focused on the significant opportunity to leverage our unique set of products and innovative solutions across our global network. With actions under way to improve our gross margin, we're optimistic that our margin trend will improve in the fourth quarter and into 2019 as I just mentioned. We continue to take actions to improve our cost structure, balancing the expense discipline with inflationary pressures.

Additionally, we are incurring higher operating expense related to ongoing technology investments and expect to continue to invest in our systems and supply chain capabilities going forward to support growth and innovation in the business.

We expect this expense growth to continue into 2019 as we focus on delivering the best possible customer experience through every channel we serve. Our priorities remain focused on accelerating organic sales growth while improving profitability enabling us to deliver on the significant operating cash flow potential of our business.

With that, we will now open the call for questions.

Questions and Answers:

Operator

Thank you.

(Operator Instructions) And our first question comes from the line of Shawn Harrison from Longbow Research. Your line is open.

Shawn Harrison -- Longbow Research -- Analyst

Morning everybody and congrats on the results.

Theodore A. Dosch -- Executive Vice President, Chief Financial Officer

Thanks Shawn.

Shawn Harrison -- Longbow Research -- Analyst

Ted, I want to go back to the last comment about just the OpEx investments. On a dollar basis, I think you highlighted $6 million into the fourth quarter sequentially. As you move into 2019, do you expect that to continue to grow on a dollar basis or will it begin to plateau and you'll see some offsets from some of the cost reduction initiatives you announced last quarter?

Theodore A. Dosch -- Executive Vice President, Chief Financial Officer

Shawn, I think, we will -- we'll definitely see the benefit of the uptake associated with restructuring initiatives and we'll get the remainder of that benefit through the first half of next year. But we will continue to invest in innovation and our technology investments to improve the customer experience as I referred to in my comments.It's a little too premature to say what we think the full impact of that will be for 2019 going forward. But I think as we continue to drive growth across each of our businesses, we ought to be able to drive operating expense leverage but from an absolute dollar standpoint, we would expect some of these investments to continue into next year.

Shawn Harrison -- Longbow Research -- Analyst

I guess in addition to the top line growth maybe -- maybe your comment and Bill's comment that we'll start to see some gross margin expansion here into the fourth quarter and into 2019. How much gross margin expansion are we talking about? Is it 5 basis points? Is it 10 basis points because you know for better or for worse it's been a while since we've seen gross margin expansion.

Theodore A. Dosch -- Executive Vice President, Chief Financial Officer

Sure and great question. Again I'd say, it's a little premature to comment on how much more for 2019 but we do expect to see improvement here in Q4. We feel, as we saw the trends across each of these three businesses, we think we clearly hit bottom in both NSS and EEF. We do so have as you saw in the numbers for UPS. We do so have a big of a challenge there with a lot of the fixed price contracts and so forth and so the live (ph) factor in passing on some of the price increases from our -- from products, takes a little bit longer in that business. But I think, we should see some gross margin improvement in the fourth quarter compared to Q3 at least in the 10 basis points to 20 basis points range.

Bill A. Galvin -- President and Chief Executive Officer

And Shawn, this is, you know, this is something we've been working on for quite a while and it's not what we would consider quick hit things, it's a long term strategy of driving improvements across a lot of facets of the business. So we're optimistic as we said in our notes that we're starting to see some of that benefit. And of course that's a big part of the strategy and the plan for next year.

Shawn Harrison -- Longbow Research -- Analyst

Okay. And then lastly the OEM business you highlighted strength this quarter, I know that business is tied to auto demand to an extent and we've seen weakening production globally. Are you seeing any weakness in that business or you're seeing some offsets with share gains and expanded relationships that would mitigate some of the lower global auto production that's occurring?

Bill A. Galvin -- President and Chief Executive Officer

Yes, good question, Shawn. We don't have -- the auto piece isn't a big mix for us in that business. The market that we've seen a little bit of weakness is more on the chip manufacturing side of that which is a typical market phenomena right now, but there's strength in so many of the other aspects and industries we're serving in that. That we're feeling pretty good about our approach and the strength in that business.

Theodore A. Dosch -- Executive Vice President, Chief Financial Officer

Yes. Just to add to that Shawn. We clearly are taking share in that segment. So whatever weakness there is relatively speaking in auto as Bill said, which is a smaller part of that OEM business and the weakness in the chip side and to clarify, when we say in the chip side, we are selling to the companies that manufacture equipment -- OEM equipment into the chip manufacturers. We are not selling directly to chip manufacturers. But the growth that we've seen in our market share across virtually every other segment in that OEM space has more than offset some weakness in a couple of those areas.

Bill A. Galvin -- President and Chief Executive Officer

And Shawn, I'd also add that as we have talked in the past, the focus on the services that we're providing to that industry is not -- is a very strong part of that value proposition to that market. So we're feeling good and will continue to look to invest and grow in that area.

Shawn Harrison -- Longbow Research -- Analyst

Perfect, and once again, congrats, guys, on the results.

Theodore A. Dosch -- Executive Vice President, Chief Financial Officer

Thanks Shawn.

Operator

(Operator Instructions) Our next question comes from Allison Poliniak from Wells Fargo. Your line is open.

Mike McCain -- Wells Fargo -- Analyst

Good morning. This is Mike McCain stepping on for Allison. How are you?

Theodore A. Dosch -- Executive Vice President, Chief Financial Officer

Good morning, Mike.

Mike McCain -- Wells Fargo -- Analyst

Just couple of quick questions. You guys cited project visibility, EES segment looked really positive from a leverage standpoint. I was hoping you could touch upon maybe any product scope changes you're increasing or seeing with the tariffs either positive or negative and how that -- how that's playing out for the balance of the year and maybe into 2019?

Bill A. Galvin -- President and Chief Executive Officer

Yes, as it relates to the project stuff, Mike. I would tell you that the tariff play that we see comes from supplier impact on their products. We're not getting direct impact on it as we said in the notes. I think though that the time which we get notification from the suppliers in that business allows us to move a lot of that price into the market. There is some elasticity to that where there's a time frame when our inventory might be at a different price and what not but we're typically able to manage through that. And since we've started seeing some of that volatility and not just in tariffs but in freight costs and things like that we've been working really hard to move that into the market on a quicker time basis. So I think, we'll have that cadence down pretty well and be able to manage through that.

Theodore A. Dosch -- Executive Vice President, Chief Financial Officer

Yes, and Mike, maybe just to add another twist to that if you think about what impact might higher tariffs have on the volume of project activity. We are not seeing any noticeable impact or decline or softness in project activity due to the impact of tariffs on the input costs. Now ultimately, it could ultimately reach that at some point because who knows where the endgame is on tariffs but based on what's actually been implemented into the marketplace at this point in time, we don't see or anticipate any negative impact on the overall demand side.

Mike McCain -- Wells Fargo -- Analyst

All right. And then just second one for me and I'll hand it over. In terms of the sales guidance, great outperformance this quarter, increased the bottom end of the range for the full year. I'm just wondering, what were the big surprises and then heading into the Q4, the comp is tougher, billing days look the same but I mean is this -- are you firmly using at the top end of this full year range now considering the momentum or what are the puts and takes there?

Bill A. Galvin -- President and Chief Executive Officer

Yes Mike, I think you read it right. The tough comps from last year puts us in a pretty strong need to have good growth in the fourth quarter, right. So when you average that out and add that in, you look at it and say, OK that means the trends will continue on a similar basis and translate based on that comp from fourth quarter last year into the range that we provided.

Theodore A. Dosch -- Executive Vice President, Chief Financial Officer

Yes and I would just add to that. Yes, I think you said it right, Mike. The number of days in each quarter is identical year-over-year. So there isn't a projected impact of shipping days but Q4 from a seasonality standpoint always is a little weaker than Q3 not just because there is projected to be one less shipping day but just the seasonality within UPS, there's less project spend by the big utilities due to colder weather. And then also to a certain degree in EEF as well from a project spend standpoint. But despite that, to Bill's point, the projected growth that we're talking about here in Q4 on top of last year's Q4 growth would deliver a cumulative two year growth pretty much identical to what we had in Q3.

Bill A. Galvin -- President and Chief Executive Officer

Yes, Mike. Just one more color on that in the NSS business too, you'll see a lot of retail companies that shut down projects in the November, December time frames obviously getting ready for their -- ready for their busy season. So you'll see that kind of impact but again based on everything we're seeing in the trending of the business, we're comfortable on the range we provided.

Mike McCain -- Wells Fargo -- Analyst

Thanks.

Operator

Our next question comes from the line of David Manthey from Baird. Your line is open.

David Manthey -- Baird -- Analyst

Hi, good morning. First question, the third quarter OpEx being flat quarter-to-quarter despite adding $8 million from acquisitions was a pretty good outcome, I think. But I'm a little surprised by you saying that you think SG&A now is going to be up by $6 million into the fourth quarter. I assume that includes $2 million of benefits from the restructuring. That just seemed like a trend that we haven't seen historically. Normally it seems like the pattern is flat to down slightly on the weaker revenue quarter. Can you talk a little bit about why you think operating expenses are going to be up in the fourth quarter.

Theodore A. Dosch -- Executive Vice President, Chief Financial Officer

Sure Dave. Certainly a valid question. First off the medical expense will be up even further in the fourth quarter. So we've got not only the trend continuing here of what we saw in Q3 but on a year-over-year basis we will be up a couple of million dollars more and that's a reflection of the broader inflation from a medical expense standpoint and again despite all the initiatives that we have and I think we do a pretty good job in managing the structure of our programs and plans. This is the broader medical cost inflation. In addition to that as we mentioned just a moment ago, we do expect to continue our investments in driving innovation and technology and that might sound like a little bit different terminology than what we've said in past years. We've been referring to our digital marketing initiative which we said would be many year investments in platforms and so forth but it's really broader than that as we look at trying to further improve the customer experience, whether it's the online experience, whether it's mobile apps et cetera that we believe are so critical in enabling us to provide the value add services that we do for our customers.

Bill A. Galvin -- President and Chief Executive Officer

David, I'll add another piece to that. As you saw in our notes, the EES business has had tremendous expense control if you will but at this point you see the type of growth we're experiencing there we need to invest more in that growth and we see that as a positive for us long term but it's definitely an area that we've got to put some focus on to continue the trend.

David Manthey -- Baird -- Analyst

So as you think about these investments, do you view them as the cost of playing the game or do you view them as you're getting out in front and they're going to translate to faster sales growth or more profitable growth. It sounds like some of these things you're talking about, I am not clear that they're going to drive incremental profitable growth for you, am I hearing that wrong?

Bill A. Galvin -- President and Chief Executive Officer

Yes I would tell you if you want to be in this game you have to provide better tools to the customer. So we are looking at this as necessary to get the type of experience that customers are requiring in the market we're in today. And I think it's a common shift you see in the distribution business anyways. Everyone's looking at more efficient ways to do that and we have to invest in technology to do that. We think long term that puts us in a growth position as well as long term, David, we talk about getting more expense leverage. And part of that is also using systems to allow that to happen but that happens over time. So I think, it's a combination of those things.

David Manthey -- Baird -- Analyst

Okay and Bill, you mentioned expense leverage and earnings leverage and when you look at the current quarter there wasn't a whole lot of it and I'm just wondering as you think about the outlook for 2019, are you going to hit an inflection point here that if you continue to grow mid-single digits, you can start to see that 1.5 times to 2 times leverage again or is there some reason with the tariffs and some of these investments and things that you won't be able to achieve that level?

Theodore A. Dosch -- Executive Vice President, Chief Financial Officer

Yes, Dave. Let me take a shot at that. So in the quarter, we did have about a 30 basis points improvement in the operating expense as a percent of sales. Going forward, with these kind of investments we're talking about, I don't think we're going to be in the 1.5 times to 2 times (ph) range. I think, we'll be more in at single-digits top line growth. I think will be more in the 1.5 times type of range but not pushing 2 times.

David Manthey -- Baird -- Analyst

Okay. Thanks very much guys.

Operator

We have no further questions in queue. I'll turn the call back to the presenters for closing remarks.

Bill A. Galvin -- President and Chief Executive Officer

Great, that concludes today's call. If you have additional questions, please do not hesitate to reach out to Ted or Lisa. As always,, thank you for listening to today's call.

Operator

This concludes today's conference call, you may now disconnect.

Duration: 39 minutes

Call participants:

Lisa M. Gregory -- Vice President of Investor Relations

Bill A. Galvin -- President and Chief Executive Officer

Theodore A. Dosch -- Executive Vice President, Chief Financial Officer

Shawn Harrison -- Longbow Research -- Analyst

Mike McCain -- Wells Fargo -- Analyst

David Manthey -- Baird -- Analyst

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