Anixter International Inc. Q3 2009 Earnings Call Transcript

Oct.27.09 | About: Anixter International (AXE)

Anixter International Inc. (NYSE:AXE)

Q3 2009 Earnings Call

October 27, 2009; 10:30 am ET

Executives

Bob Eck - President & Chief Executive Officer

Dennis Letham - Chief Financial Officer

Chris Kettman - Investor Relations

Analysts

Hamzah Mazari - Credit Suisse

Sean Connor - BB&T Capital Markets

David Manthey - Robert W. Baird

Shawn Harrison - Longbow Research

Jeff Beach - Stifel Nicolaus

Kevin Sarsany - Legend Merchant Group

Brent Rakers - Morgan Keegan

Ted Wheeler - Buckingham Research

Operator

Good day and welcome to the Anixter third quarter earnings conference call. Today’s conference is being recorded. At this time I’d like to turn the conference over to Mr. Chris Kettman for opening comments and remarks. Please go ahead, sir.

Chris Kettman

Thank you. Good morning everyone and thank you for joining us today to discuss Anixter’s third quarter 2009 results. By now everyone should have received a copy of the press release, which was sent out earlier this morning. If anyone still needs a copy you can either go to Anixter’s website or call Chris Kettman at 312-553-6716 and I can resend the information. On the line today from Anixter’s management team are Bob Eck, President and CEO, and Dennis Letham, Chief Financial Officer.

After management completes their opening remarks, we’ll open the lines for Q-and-A session. Before we begin I want to remind everyone that statements on this conference call including words such as believe, expect, intend, anticipate, contemplate, estimate, plan, should, may, or similar expressions are forward-looking statements.

They are subject to a number of factors that could cause the company’s actual results to differ materially from what is indicated here. These factors include general economic condition, technology changes, and changes in supply for customer relationship, risks associated with the integration of recently acquired companies, commodity price fluctuations, exchange rate fluctuations and new or changed competitors. Please the company’s SEC filings for more information.

At this point, I’ll turn the call over to Dennis.

Dennis Letham

Thank you, Chris. Good morning everyone. I’d like to begin by comments briefly on the overall business environment before continuing on with the specifics of the third quarter results. The flat daily sales run rate we noted in our last two earnings conference call persisted throughout the third quarter and in to the early weeks of the fourth quarter.

Excluding the effects of foreign exchange rates and copper price changes, the number of holidays in a given quarter remains the biggest variant in consecutive quarter sales trends. If we look at the fact that each holiday represents one of 65 shipping days in a quarter, then we would expect a 1.5% change in sales for each holiday added or eliminated in a given quarter.

Based on our fiscal calendar, the first quarter had no holidays, the second quarter had three including Easter Memorial Day on July 4, and the third quarter had just one, Labor Day. This is just the 4.5 % drop in sales from the first to second quarter and a 3% pickup in sales from the second to the third quarter, which is generally what happened, exclusive of foreign exchange and copper.

Further, and as expected, year-on-year sales comparisons in the third quarter had been much less impacted by foreign exchange rates in copper than the first two quarters of this year, as the dollar continued to weaken through 2009 and copper has continued to strengthen. The year on year negative impact of exchange rates was $42.6 million in the third quarter as compared to $98.9 million in the first quarter and $75.1 million in the second quarter.

At the same time, the estimated effects of the year-on-year declines in copper prices on sales were $42 million in the third quarter, as compared to $37.7 million in the first quarter and $50.7 million in the second quarter. As would be expected in a period with essentially no sales growth, cash flow remains strong because there is no need for incremental working capital investments.

As we continue to bring certain of our inventories more inline with end demand, working capital was again reduced in the most cent quarter. The result was another very strong quarter of cash generation, as cash flow from operations was $134 million for the quarter, bringing in nine month total cash flow from operations to $393.6 million.

Moving now to a more detailed discussion of third quarter results, we reported a year-on-year decrease in sales of 20%. This decline reflects the $42.6 million negative foreign exchange effects and an estimate $42 million of negative copper price effects, which were offset impart by $23.4 million of incremental sales associated with acquisitions. The net result was a 16% organic decline in sales that affected all parts of our business.

Looking at the third quarter sales trends within each of our end markets, we saw the following. On a worldwide bases, enterprise cabling and security solution sales, exclusive of foreign exchange affects declined organically by 13% as compared to the third quarter of last year. Within this end market, our security sales continued to report positive year-on-year comparisons, although at lower rates than in recent quarters. Exclusive of foreign exchange effectives, security related sales increased by 1% compared to the third quarter of 2008.

Geographically our enterprise cabling security solutions sales were down 13% organically in North America, 20% in Europe and 7% in emerging markets as compared to the year ago quarter. As we evaluate where we are in the economic cycle, it’s important to note that on a sequential basis from the second to the third quarter of 2009, we saw enterprise cabling sales increase by 3% organically. This 3% increase is what would be expected given there were two days holidays in the third quarter than in the second quarter.

By geographic we saw sales on a sequential basis, exclusive of foreign exchange effects increase by 27% in emerging markets, which was encouraging, while North America was flat and Europe declined by 2%. Worldwide electrical wire and cable sales exclusive of foreign currency, estimated copper price effects and the elimination of sales from business acquired in late 2008, experienced an organic decline of 19% in the quarter. Specifically the organic sales decline was 17% in North America and 27% in Europe.

On a sequential basis from the second to the third quarter of 2009, worldwide electrical wire and cable sales increased by 2%. In North America, the organic sequential increase was 5% and in Europe it was down 12%. Sales in our worldwide OEM supply business in the third quarter, exclusive of foreign exchange affects and sales from businesses acquired in the second half of 2008 were down 21% on an organic basis, as compared to the third quarter of 2008.

In Europe, we saw an organic sales decline of 34% year-over-year. Despite the size of the year-on-year decline it marks an improvement from the first six months of this year, when we experienced a 39% organic decline in sales in this market. In North America, OEM supply sales were down 8% organically, while the current quarter sales continued to reflect year-on-year volume declines in our aerospace market.

We did see a small year-on-year increase in sales to industrial customers as these customers moved from a finish goods inventory reduction phase into production rates more inline with end market demands for their products. Sequentially worldwide OEM supply sales were up 3% organically. As we look forward to the final quarter of 2009, we expect the primary factor affecting companywide year-on-year reported sales excluding foreign exchange rates on copper will be the number of holidays in the fourth quarter.

The holiday factor is expected to result in a sequential decline of approximately 3% to 4%. The other factor affecting fourth quarter sales will be the previously announced mid quarter phase-out of our contract with Alcatel-Lucent. From the third to fourth quarter this is expected to reduce sales by approximately $19 million. Assuming the dollar and spot market copper continue to trade at approximately the same levels as they have for the past few months, we would expect the fourth quarter impact on sales from these factors to be less than what we experienced in the third quarter.

In the fourth quarter, the exchange rate impact assuming rates remain at current levels should turn positive as we hit the anniversary of the correction in dollar valuation that happened in late 2008. Current soft market conditions, which are created a noticeable lag between spot market copper price changes and product price, are expected persist.

With the passage of time, product prices will retire and slowly reduce the year-on-year impact of spot market copper price changes. Bob will discuss current business trends and the implications for the future in greater detail in a few minutes.

Turning next to gross margins. In the third quarter we reported gross margins of 22.6%, as compared to the 23.4% reported in the year ago quarter. This decline is due largely to mix as we saw our highest gross margin end market, OEM supply report year-on-year organic sales declines of 21% as compared to the companywide organic sales decline of 16%. At the same time, lower gross margin end markets such as enterprise cabling and security reported a much lower worldwide organic sales decline of 13%.

In addition, sales in Europe, which is our highest gross margin segment, were down 28% organically, as compared to our 16% companywide organic decline in sales, further pressuring overall gross margins. Importantly, gross margin trends appear to be stabilizing during the past two quarters with just a 10 basis point difference between the margins reported in the most recent quarter and those reported in the second quarter.

Looking for a moment at operating expenses, we reported approximately a 10% year-on-year decrease in expenses from $254.8 million in the year ago quarter to $229.8 million in the most recent quarter. Acquisitions completed in the past year added $6.7 million to current quarter expenses, while foreign exchange FX reduced expenses by $9.1 million. Just as important as the year-over-year decline in expenses is the consecutive quarter expense trend.

After adjusting second quarter operating expenses for the $5.7 million of severance cost, on a consecutive quarter basis, operating expenses from the second to third quarter were essentially flatted. However, once third quarter expenses are adjusted for the decline in the dollar from the second to the third quarter, expenses were down on a consecutive quarter basis by $3.5 million, as anticipated due to the restructuring actions taken in the second quarter.

So, to summarize, from an operating income perspective, operating profits fell from $117.9 million in the year ago period to $58.4 million in the most recent quarter. Looking at this $59.5 million decline in operating profits and excluding the impact of lower copper prices, foreign exchange and the losses from 2008 acquisitions, the remaining decline in operating profits was $50.2 million.

This adjusted decline reflects the combined affects of the 16% organic decline in sales, and the 80 basis point decline in gross margins caused by an unfavorable sales mix, which were partially offset by a 9% adjusted decrease in operating expenses. As a result, operating margins fell 4.6% in the third quarter, as compared to 7.4% in the year ago quarter.

As we move further down any net income statement, interest expense as adjusted to reflect the new accounting treatment for convertible bonds required by FASB Staff Position 14-1 increased from $15.1 million in the prior year quarter, to $17.4 million in the current quarter due to the higher cost of borrowings. Since year end, we have used our strong cash flow generation to reduce borrowings by $227.2 million and increased our invested cash balances by $92 million.

However, in the current quarter our average cost of borrowings rose to 7.7% versus 5.3% in the year ago quarter due to the higher cost associated with the new senior note offering completed in March of 2009 and lower average short term borrowings, which have a lower interest rate. At the end of the third quarter, approximately 99% of our outstanding debt had fixed interest rates, either by the terms of the debt or through hedging contracts.

The other income expense line shows income of $700,000 in the current quarter, as compared to $5.2 million expense in the year ago quarter. The prior year expense was primarily due to foreign exchange losses associated with extracting the US dollar particularly relative to emerging market currencies. The company’s updated full year effective tax rate as 45% from the 43.6% calculated at the end of the second quarter.

As a result of this increase in the estimated full year effective tax rate, the third quarter tax provision of $19.6 million reflects an effective rate of 47.1% as compared to the year ago quarter when the provision reflected an effective rate of 38.8%. This current year tax rate reflects the larger affects of permanent differences in taxable income versus reported income on a smaller pre-tax income base and significant changes in country level profitability with high cost tax countries such as the United States accounting for substantially larger portion of consolidated pre-tax earnings.

Due to uncertain market conditions, it is likely that the mix of earnings by country will remain volatile in the near term, making predictability of your tax rate difficult. For the quarter the company reported net income of $22.1 million, compared to $59.7 million reported in the year ago period. Net income for the quarter was $0.61 per diluted share as compared to $1.53 per diluted share in the year ago quarter.

The current quarter’s fully diluted net income per share benefited from an approximately 7% drop in the fully diluted share count due to recent share repurchases and less dilution associated with convertible bonds due to lower average share price in the current quarter as compared to the year ago quarter. As noted at the beginning of this call, we generated a $134 million in cash from operations during the quarter as compared to the $8.3 million used by operations in the year ago quarter.

This increase in cash flow reflects $96.9 million of working capital reductions in the quarter from continued inventory reductions to better align certain inventories with current demand levels and an increase in trade payables, as normal inventory buying has resumed on certain other inventories. The strong third quarter cash flow from operations brings the year-to-date total cash flow from operations to $393.6 million.

Through the first nine months 2009, capital expenditures were $17.8 million as compared to $25.6 million in the first nine months of 2008. This brings year-to-date free cash flow, defined from cash from operations less capital expenditures, to $375.8 million or over $10 per share for the first nine months of the year.

Through the first nine months of 2009, this cash flow has been used to reduce outstanding borrowings by $227.2 million, including the repurchase of $14.6 million of created value of 3.25% zero coupon convertible notes during the most recent quarter and the repurchase of 1 million shares of our common stock at a cost of $35 million.

With an expectation of continued positive cash flow, we may from time-to-time, continue to repurchase shares of common stock a 3.25% zero convertible notes or other outstanding debt obligations. At this time there continues to be a shortage of good strategic acquisitions available in the market. At the same time until there is a more definitive pattern of economic recovery in place its management opinion this premature to aggressively pursue acquisitions that are not being actively marketed.

We have approximately $312.7 million in available committed unused credit lines, only $5 million of borrowings under our $200 million accounts receivables securitization facility and invested cash balance of $98 million. We continue to regard our strong financial position and significant liquidity as important differentiators from many companies in today’s still difficult market.

As they provide Anixter with financial flexibility to adjust quickly to new market realities, fund investment and crucial long term growth initiative and allow us to capitalize quickly on the eventual market rebound when that occurs. While there were some positive trends noted in the quarter, we continue to manage this business prudently and with a focus on the company’s long term goals and strategies.

At this point let me turn the call over to Bob to discuss strategic initiative, current business trends and near term outlook.

Bob Eck

Thanks, Dennis. Thanks everyone for joining us today. We continue to struggle through the very difficult economic environment that is impacting so many businesses. Our customers are challenged by a lack of sales growth in their market and that is reflected in our sales growth. As Dennis noted we continue to see the relatively flat daily sales pattern that we have experienced out there this year.

Our expense controls have been effective in managing our cost down inline with our stated objective of driving near term expense reductions while continuing to maintain the technical and supply chain support and operational infrastructure that positions us well for the economic recovery. Our operating results, combined with our focus on managing working capital inline with the business environment enabled us to again generate significant cash flow in the quarter.

Meanwhile the length and depth of the recession has caused some competitive pricing pressure in certain markets. While sales in the enterprise cabling and securities solutions end market, again showed a year-over-year decline, the sequential trend from the second quarter was more positive. The emerging markets segment experienced strong sequential growth driven by early signs of recovery in Latin America particularly Brazil.

Growth was driven by both increased data network spending and positive security growth. North American enterprise sales were flat sequentially; EMEA enterprise sales declined year-over-year as well as sequentially reflecting the continued difficult project environment in Europe. Pricing in the enterprise market has been somewhat softer over the past two quarters primarily in category five and six cables.

Year-to-date through the third quarter, security sales have increased over 4% with stronger growth in EMEA and the emerging markets. The trend towards digital surveillance continues to drive security projects spending around the world. A key challenge for these new projects is ensuring that the cabling infrastructure can support the data traffic generated by high resolution video. To assist our customers in evaluating infrastructural alternatives, we recently announced the Anixter IP assured program.

Program is designed to help customers consider their infrastructure and fiscal security needs over the life expectancy of their facilities. IP security systems like rapidly changing neck working technologies will continue to evolve and our goal is to help customers build a robust infrastructure that will support multiple generations of technology without the added expense of upgrading their cabling plan.

In addition, in the enterprise market, our new business development initiatives continue to add new customers for ECS offerings in every geographic business. Along with this initiative, we have been working to expand our base of customers. While we having success in this area, we are also seeing project delays in the US as state and local government agencies apply for stimulus funding for their projects.

Finally, enterprise cabling and security product inventories are inline with sales volumes in all business segments. The electrical and electronic wire and cable end market experienced the continued impact of lower price copper versus prior year, as well as lower project and OEM demand. Year-over-year sales were again down, but as Dennis noted in North America organic sales increased sequentially compared to the second quarter.

Bidding activity on modest sized projects has picked up and those projects are being released. Drivers continue to be oil and gas, power generation including alternative energy and some modest mining activity. Importantly as we look at the trend in spot copper pricing, we need to be cognizant of both the inventory and the supply chain and demand environment.

In the 2006 copper price, project demand was exceptionally strong and capacity was tight enabling manufactures and distributor to quote new projects and day to date orders based on the spot price of copper. In the current environment, demand is substantially weaker, leading to significant excess capacity. The effect is that quotes for near term deliveries are based on average inventory cost, which given normal term is lower than the spot market. As the inventory cost basis gradually increases assuming the spot pricing of copper stay high pricing will increase accordingly.

We continue to work on our key initiatives in this end market focused on building our automation business, new customer acquisition and continuing to build our global accounts program, with large energy, mining and engineering and construction companies. Along with these programs we are expanding our sales team in the emerging market segment where we believe our unique offerings coupled with the size of these markets presents a great opportunity for growth in the coming years.

We continue to a balance our inventory investment with current demand, lead times and our need to provide outstanding service. Turing to the OEM supply market. We continue to experience sales declines compared to the prior year. The very challenging manufacturing environment continues to impact this end market. As Dennis noted, organically sequential sales increase 3%, reflecting a mix of factors including less holidays, some increase in production at certain customers, offset by typical summer plant shutdowns.

In North America improvement at some industrial customers reflects some restocking of their finished goods inventories inline with their current demand. This offset by continued weakness in the aerospace market. We are pleased however in the progress the OEM team continues to make acquiring new customers and contracts. We are having success in new business development across the US, Mexico, Europe, and China. As the global economy recovers we should see significant pickup and volume on the exciting customer based as well as with newly added customers.

In addition, we continue to work on improving our inventory turns in the OEM supply end market. As we have described before, this is a significant challenge as we face lead times from our suppliers late last year, ranging from 16 to up to 52 weeks. As we purchased to our customers demand forecasts, we committed to inbound inventory based on those forecasts for delivery in 2009. As demand collapsed we have been working with our suppliers to cancel orders, adjust forecasts, and return inventory when possible.

We have made progress in this regard and continue to work on further inventory reduction. Our outlook for the balance of the year remains cautious. Although there have been signs of the globe recession abating there are number of issues that will impact our business in the fourth quarter. While we have seen some modest pickup in ordering activity in some end markets in some countries, we will have the normal fourth quarter seasonal effect of the increase in holidays compared to the third quarter.

In addition, some OEM supply customers have already indicated that they will have extended plant shutdowns in December. While there maybe positive GDP numbers reported for Q3, signaling and end to the recession we need to be mindful of two key attributes of our business. The first is that our European revenue is skewed towards the United Kingdom, which has reported negative GDP growth for Q3 indicating that back country is still firmly in recession.

Secondly, much of the variability in project activity for both the enterprise cabling and security market and the electrical wire and cable market is dependent on capital expenditures. Similarly demand for the end products of our customers in the OEM supply market is generally dependent on capital spending. It is our view that we will have to see at least a couple of quarters of positive GDP growth before we will see a meaningful pickup in capital spending. Accordingly we will continue to manage expenses and inventory inline with the level of sales activity we have seen so far this year.

We will now open the call to questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Hamzah Mazari – Credit Suisse.

Hamzah Mazari – Credit Suisse

Could you update us on how much of your cost takeout so far, has been permanent or structural, and how much is going to come back, when sort of volumes come back, following a couple of quarters of positive GDP as you are expecting?

Dennis Letham

I guess we had answer that, Hamza, is basically that a lot of the costs we have taken out are variable or volume related type costs that will eventually come back, but where we sit today is over the last couple of quarters with year-on-year organic revenue declines in the high teens. We’ve taken out about 10% of the workforce.

So, we think the Delta between the 10% reduction in workforce versus the probably 17%, 18% that we have been averaging on organic revenue declines gives us a fair amount of headroom in the organization today, which would support several quarters of decent organic growth before we would start to have to bleed costs back in to the organization.

So, I think we should once the recovery kicks in, see some very strong earnings leverage, but eventually that will be diluted as we get closer to what I’ll call full utilization of the workforce we have today.

Hamzah Mazari – Credit Suisse

Then, you talked about sequential business trends during the quarter are any of your major business lines showing something different in October on sort of organic sequential growth basis or is it still pretty flat across the major business?

Bob Eck

It is dead flat in October its discontinuing story that we have been talking about now for a while that although there maybe little bits of puts and takes here, when you roll everything together, the aggregate daily sales numbers are running flat.

Hamzah Mazari – Credit Suisse

On acquisitions you said you’re not chasing any acquisitions which are not actively marketed. What is that mean exactly?

Dennis Letham

We’re not out looking for things, but we’ll assess things that come across our desk.

Operator

Your next question comes from Sean Connor – BB&T Capital Markets.

Sean Connor – BB&T Capital Markets

On the cost savings you guys have taken out, could you remind us what the level of savings is on a dollar basis and then how much of that you realized in Q3?

Dennis Letham

Yes, there were two restructuring charges, one that went back to the end of 2008 that was intended to generate about $15 million of annualized cost savings. I would set by the second quarter all of that was in the run rate, so the numbers. Then in the second quarter, there was a second restructuring charge that was intended to generate about $28 million of annualized savings. That’s the primary driver between the $3.5 million decrease in operating expense from Q2 to Q3 after you take out the currency impact.

So we’re somewhere in the range of maybe half of that impact having worked its way in to the numbers in Q3. We’ll pick up some more of it in Q4 and we’ll get the full $7 million per quarter affect by the time we get to the first quarter and the reason it’s taking that long is part of the costs that we’re reserved for in the coming out of related to the wind down of the solution program which will be finalized here in the middle fourth quarter.

Sean Connor – BB&T Capital Markets

Then, with respect to Lucent, I think you said that next quarter in Q4 you expect about $19 million of pressure on the top line from that relationship ending. Is that the most part that enforce that the size of the total relationship or should we see…

Dennis Letham

No it’s actually a little bit larger than that $19 million reflects the fact that we’re winding it down kind of in the middle of the quarter. I don’t have an exact date on it, but the relationship is bigger than that on an annualized basis. I think we commented in the second quarter when we first said that we were going to exit that relationship that it was -it represented about 3% of companywide sales.

Sean Connor – BB&T Capital Markets

On copper, looking forward, I know you guys said that you have got the two issues there, the spot market going higher and then you have got think I guess the demand piece that you have to listen to. How long do you think it takes before you can, I guess, capture your normalized margin on copper in to the next few quarters? Does it take six months? Does it take longer than that?

Dennis Letham

I don’t think it’s a margin issue I think it’s a selling-price issue it’s passing through the cost of the copper and if you basically assume that inventories turn somewhere in the range of across the supply chain 3.5 times to 4 times a year, it will be take you a quarter to work in the full effect and the copper price is kind of moving around in the meantime. So right now the average inventory of cost of copper is well below the sort of $3 spot price has been trading at this week. If the spot price stays at $3, sometime in the next several months you have an average supply chain cost of around $3.

Operator

Your next question comes from David Manthey - Robert W. Baird.

David Manthey - Robert W. Baird

Dennis, could you remind us of the status of your AR securitization and the odds of long term availability there and of the $312.7 million availability, does that include or exclude the AR securitization?

Dennis Letham

Those are separate numbers, Dave. The $200 million AR securitization was renewed at the end of July of this year. So it’s in place through the end of July of 2010 and we currently have $5 million outstanding against a $200 million facility. We have separate and apart from that, a $350 million revolving credit facility that runs until April of 2012, and we have $312 million of availability under that facility.

David Manthey - Robert W. Baird

With that level of available and I guess thinking about cash flow trends as we go to the other side of this, do you feel comfortable with the amount of availability of capital that you have to rebuild the balance sheet as revenues start coming back? It seems parent by the fact that you’re buying back debt and stock right now, but could you just talk about how you think about capital needs on the upslope here?

Dennis Letham

I guess the one thing I would say about the upslope is our view is that it will not be a sharply angled upslope. As the recovery comes along, it will be more gradual, which would suggest that growth rates in terms of how much additional working capital are we going to be required to put back in the business.

We anticipate that those growth rates will be low enough that we would continue to generate positive cash flow from operations, meaning there’s more cash coming from the income statement than what will be required to be put back on the balance sheet in the form of incremental working capital to support that growth and that’s our outlook through 2010 at least.

I think realistically, if we look at this business today at $5 billion annualized run rate and the type of operating margins we have at 4/6, it’s hard to envision periods of time where the organic growth rate would be so high when extended period that we would actually be in a negative cash flow from operations position for more than a very short period of time. You can’t drive the type of growth rate that it would take to do that with consistency.

David Manthey - Robert W. Baird

Then the final question, in the release, where you are talking about increased sales in all three segments, entering next year, is that too imply you are expecting positive year-on-year growth in the first half of 2010, or are you simply saying if the trends continue, GDP remains positive, and some of that CapEx starts to be released that sequentially your daily sales levels will see sequential improvement?

Bob Eck

Dave, I think we’re not trying to target a point in time in the year. We think if GDP comes back solidly over the next couple of quarters, we should see some pickup in project activity, which as you know creates a lot of the variability in our business. So full year, we would anticipate that if there’s strong GDP growth, we should see some kind of growth along with that.

I think you have to look at some of the segments and say in wire and cable the project tail as longer than the enterprise business for the projects tend to engineer quicker and sell through quicker, so that will affect that as well. So if there’s positive GDP growth we should see growth on the full year, but I think to the point Dennis just made on working capital our expectation is that the growth will be modest.

Operator

Your next question comes from Shawn Harrison - Longbow Research.

Shawn Harrison - Longbow Research

Just a few kinds of clarification questions. First, the Alcatel Lucent business, the majority of that, $90 million here in the December quarter will come out the North American operations?

Dennis Letham

Yes, it’s largely North American. There’s a little bit in Europe, but it’s largely in North America.

Shawn Harrison - Longbow Research

The EBIT impact, I believe you mentioned last quarter was minimal or best?

Dennis Letham

That’s a good way to describe it.

Shawn Harrison - Longbow Research

Second, what was capital spending this quarter? What is it expected for the fourth quarter? Then if we don’t see a lot of revenue growth in 2010, should we expect it to be in the same range as 2009?

Dennis Letham

Current quarter CapEx was $5.6 million, which brought the year-to-date number to 17.8, we’ll end up the year somewhere in the low to mid-20s, and I would expect it would had same sort of ballpark for next year.

Shawn Harrison - Longbow Research

Getting back to the OEM supply business, I know a commentary was made regarding your continuing to work through those excess inventory positions, or just some of the issues with the long lead times and adjusting orders, but do you have a feeling that we maybe past this exiting the fourth quarter, is it going to continue in to early 2010 affecting demand?

Bob Eck

I think the answer is, it’s going to take us into the first half there’s differences by customer and the aerospace segment is taking longer to workout than the industrial chunk. So we will be working through this through think first half of next year.

Dennis Letham

To the question, it was on the table a couple of minutes ago would suggest cash flow coming out of working capital at least from inventory reductions in the first half of next year as well, so that would be there in terms of liquidity.

Shawn Harrison - Longbow Research

Finally, I believe you mentioned there was some pricing pressure within the enterprise business, in Cat 5 and Cat 6 cabling. It is just aggressiveness from the OEMs themselves, or is there something else going on, given that copper prices are on the rise?

Bob Eck

I think the thing to keep in mind on the data cabling is that, copper is such a small cost input to the finished cost of a thousand foot box of data cabling that. It takes very large swings in copper to affect the pricing in the data cabling market. I think what you’re seeing is a combination of some excess capacity at the manufacturing world, where folks have success plant capacity and are trying to fill plants.

I think there’s also some desire after the length of the recession that you have distributors as well looking to find places to take some volume, and so as a result you get some pricing pressure. Importantly, it’s not dramatic pricing pressure. It’s a much more discipline than we saw in the last recession, and I think that’s a key take away. We’re not seeing anything like the big kind of one-shot reductions that took place last time around.

Shawn Harrison - Longbow Research

Is there a geographic, waiting where you’re seeing more aggressiveness maybe in the U.K. versus North America or is it just kind of a general comment that you made?

Bob Eck

It’s a general comment.

Operator

Your next question comes from Jeff Beach - Stifel Nicolaus.

Jeff Beach - Stifel Nicolaus

Just expanding on the pricing and cost into the OEM supply, a lot of that business is done under contracts and steel, I think has been moving up steady. Can you talk about, what you’ve done to re-price contracts, and is there a headwind in this business?

Bob Eck

We are not seeing a headwind on steal right at the moment. I think, again, it’s sort of a capacity story. The suppliers in that market are running at very, very low plant utilization, so my sense is, they’re just absorbing some of it.

Dennis Letham

The foot side of having too much inventory in that end market it’s obviously got older price price points on it as well.

Jeff Beach - Stifel Nicolaus

Then over to the electrical cables, where you were describing again, inventory costs becoming more important in the near term than maybe the cost of production, and that’s going to turn over. I had here, in this market how would you describe the conditions? It is extremely competitive there to produce this change in the way that the pricings are occurring right now? It sounds like, as you work through and turn your inventories over, that this pricing pressure may is; is that correct?

Bob Eck

I don’t know that, it’s pricing pressure. I think, I was talking about passing through the spot price increase in copper, and the point I was trying to make there is, a contrast to the 2006 run up in the spot price of copper, where there was very high plant utilization and therefore, the ability to pass through the spot price very quickly.

We’re in a different demand environment and a different capacity utilization environment, so you can’t pass through the spot price. You basically are pricing off what your average inventory cost is. There’s not really margin compression as a result, it’s just sort of a price per fort of us specific type of cable.

Jeff Beach - Stifel Nicolaus

In this pricing pressure on the electrical cable side, you said a combination similar to enterprise, where it’s both the distributors after volume, as well as the producers?

Bob Eck

Again, I don’t know that it’s a price pressure as much as you’ve got a low available demand market and so folks are maintaining margins at least our perceptions margins are holding up reasonably well, and so you’re just not passing through the spot price, but there’s no kind of loss going through with that, if that makes sense.

Operator

Your next question comes from Kevin Sarsany - Legend Merchant Group...

Kevin Sarsany - Legend Merchant Group

A follow-up on a last question, this really wasn’t one of my original questions. So are you saying it’s not that the OEMs are actually holding price up for you guys? I mean, are they being pretty diligent in their pricing?

Dennis Letham

Let me try to phrase the response in a slightly different way. I think our view here on the issue of passing through rising copper prices is basically that in order to get new, higher copper prices reflected in inventory. In sales prices, you basically have to have the industry inventory turn one time, okay.

So the guy who has the last pound or last foot of a given product at the oldest price is basically going to be the guy who clears the order, okay, but as inventory on particular product sets turns on an industry wide basis, the channel and the manufacturers, then you’ve got the new higher raw material costs coming into play that affects how the manufacturer’s price the product, it affects the distributor cost, which then gets reflected in the market place.

So it really is just the time lag, which is probably a little more than a quarter, because distribution will assume on average carry about a quarter’s worth of inventory. You’ve at the manufacturer inventory behind that, so you basically have to work through a cycle that is somewhere between one to two quarters long to kind of clear out the old lower cost inventory bring through the new more current pricing.

Kevin Sarsany - Legend Merchant Group

I just seem to be a little bit of a whole and my thought process on that, and I guess your assumption is that overtime that the customers in the market are going to take that higher price because…?

Dennis Letham

Yes, definitely. Kevin, that’s definitely the case. I think the point we’re trying to make very simply is don’t assume that a rise in the spot price of copper to $3 over the past several weeks is going to immediately impact our revenue.

Kevin Sarsany - Legend Merchant Group

I understand that, in fact I think it’s a tougher environment to pass through, copper increase because demand isn’t out there. Last time, demand was out there, so it’s a heck of a lot easier. Now going back to your, I mean this is the first time, I think I ever that I can recall that you kind of given quasi guidance for the next quarter.

You’re talking about holidays, that sequential change affecting revenue by 3% to 4%, and Alcatel about 19%, which together comes to about 5% sequential decline, but then you mentioned about possible OEM supplies doing more shutdowns. Does that imply that the sequential change could be higher than the 5%?

Dennis Letham

There’s a lots of additional factors in that. You have that factor probably working a little bit from a negative standpoint, but the other comment that I made, when I was giving out the data points you just recited was that we also expect to have less currency impacting Q4 and probably less copper impacting Q4. So we didn’t put a specific number of Q4 revenue, we just through out some, we think relevant points of information as people think about what to expect in Q4.

Kevin Sarsany - Legend Merchant Group

Although that price is the most specificity that you have ever given, now I guess with the OEM supply possibly being less in the fourth quarter because of shutdowns, would that imply gross margins probably are flat to down?

Dennis Letham

I think the comment we made last quarter with respect to gross margins and the comments in this call basically, that we think the mix is more or less stabilized and to the extent that mix has been the primary driver of the year-on-year declines in gross margin, we would expect gross margins to be relatively stable here at a plus or minus, 10 to 15 basis points.

Kevin Sarsany - Legend Merchant Group

I guess looking at 2010 just from a thousand feet or going forward, the biggest driver in your mind or mathematically is more the OEM supply business coming back to get that number back to over 23%?

Dennis Letham

Well, the thing that would have to happen to get you back up to 23% or over 23%, is the mix that we had before the we recession, which was more volume out of OEM supply, and more volume out of Europe relative to the total mix has to come back.

Kevin Sarsany - Legend Merchant Group

On Europe and the profitability or lack of, scale has always kind of been a big point for you on the OEM supply business. Obviously the economic times have, brought that actually the wrong way for you. What are your thoughts on getting profitability back in Europe?

Dennis Letham

Kevin, I think in your question that was partly a statement, you really answered it and that’s that it is a volume and scale issue. As volume comes back in Europe, we have taken cost out. We’ll expect to see more profitability, but the key is there has got to be sort of Europe wide economic recovery and particularly for us in the UK.

Kevin Sarsany - Legend Merchant Group

I guess going back to the M&A and this will be my last one would Europe be on the OEM supply area of kind of top of your list of potential acquisitions if you are going to do one?

Bob Eck

The first thing has got to be, it has got to be a good strategic fit and it has got to satisfy our punch list of criteria if there’s an option of one in Europe and the US, they both meet those criteria, probably somewhat by towards Europe, but it would depend on the specifics of the opportunity we’re evaluating.

Operator

Your next question comes from Brent Rakers - Morgan Keegan

Brent Rakers - Morgan Keegan

Dennis, I apologize if you have already said this. Have you given gross margin broken down in three geographic regions?

Dennis Letham

We did not, no.

Brent Rakers - Morgan Keegan

Dennis, would you mind providing that information?

Dennis Letham

Typically we don’t.

Brent Rakers - Morgan Keegan

Then in terms of the tax rate outlook, I know you talked a little bit around it, but 45% kind of a good number for Q4 and then maybe dropping in to 2010?

Dennis Letham

Well, as far as the data that we have right now, based on nine months of actual results in our most recent internal forecast for Q4, 45% is the number we believe is correct for this year, obviously if the fourth quarter place out with a different mix of earnings by country with tax rate differences that can affect that some. For next year, I think it’s too early to predict. Hopefully the trend is downward because of improved profitability which should have a favorable impact on earnings, but I don’t have a number or even a rage at this point. In time to give you, Brent.

Brent Rakers - Morgan Keegan

Any more details or any ability to try to quantify what the impact to your business or what the impact to even your industry would be from stimulus dollars and then one other question, again same thing with more specifics tied to the separation within North American OEM supply between aerospace and industrial any degree in terms of performance between the two in the quarter?

Bob Eck

Let me start on the stimulus issue. That the stimulus issue in practice if you are selling anything other than asphalt has been a bit of de-stimulus program. As I mentioned governmental agencies that had projects plan have delayed projects while they applied for stimulus funding.

So is there potential pop from stimulus at some point in time. I would imagine the risk, but it’s clearly not happen the other delay that we’ve seen is that the by American provision has absolutely put certain projects on hold where or not U.S. manufactures that make the products specified for the customers application. So we’ve experienced project delays for that reason as well.

Since the delays that obviously they come through at some point in time, governmental projects are highly visible, so they’re highly competed for. So I wouldn’t want to create any expectation and how much of this stimulus we manage to capture ourselves, but like all of our competitors we are certainly trying to chase as where the stimulus dollars are going, but it has not been a positive impact on the business at this point. Performance between aerospace and industrial, we do not split out the aerospace performance versus industrial in our OEM supply business in North America.

Operator

Your final question comes from Ted Wheeler - Buckingham Research.

Ted Wheeler - Buckingham Research

I was just trying to parse a little bit one of the comments you made. I think it was on the industrial wire business, where you talked about moderate sized projects are starting to pipeline is growing, and these projects are being released. Is that enough to bring the overall, once we get by some of the external factors, I mean is that enough to start thinking about growth in that business as you look out a couple of quarters?

Dennis Letham

I wouldn’t start thinking about year-over-year growth with the activity we’ve seen. One of the comments I didn’t make that, I think got lost in one of the long copper questions, was that there’s a longer lag in getting wire and cable projects sort of to the point where we’re shipping and billing, and that’s because they take longer to engineer.

So large scale wire and cable projects need CapEx to comeback first, then they need engineering work, then typically other construction happens in the wire and cable ends up being sort of the one of the later things that goes in to the project. So this little up ticks we’re seeing will not create year-over-year growth in themselves.

Ted Wheeler - Buckingham Research

Well, at some point, they will. I guess you’re saying…?

Dennis Letham

At some point, yes.

Ted Wheeler - Buckingham Research

It’s just pretty far out?

Dennis Letham

Yes, exactly. As we peel off good quarters and get in to bad quarters at some point it does have a positive impact.

Ted Wheeler - Buckingham Research

I think lastly on the restructuring, I think you answered it that the $3.5 million represents half of a $7 million objective per quarter cost takeout?

Dennis Letham

Yes.

Ted Wheeler - Buckingham Research

So if we looked at this third quarter, put that back in and normalized the tax rate, and I think it just a little bit for copper, even though there’s a lag, we have a pretty good handle on, I guess it’s a little larger seasonal quarter, but would we have a pretty handle on a roadmap for next year, sort of as a starting point?

Dennis Letham

I think it’s a starting point. Obviously, how robust the GDP numbers are here for the next couple of quarters, and in particular what happens in the U.K. in the next couple of quarters are big issues in terms of the type of strength that we see next year, because the point that Bob as made a couple of times.

I think it’s going to take a couple of very solid quarters of GDP growth to get either the confidence or the need in the customer base to spend some more capital dollars and I’m not sure that comes as early as Q1, but should happen, hopefully by the time we get in to 2010, but how steep the slope is off of that startling point, I don’t have a view on right now?

Ted Wheeler - Buckingham Research

Yes, the way I just described as a starting point, and then if those issues occur or don’t occur, you have the dynamics of change beyond that.

Dennis Letham

Yes, that’s fair.

Bob Eck

Okay. I think we’re done with questions, so I’ll quickly wrap it up. Thanks, everyone for joining us today. While we continue to struggle through a long and deep recession, I’m confident that we are taking the necessary steps to balance the short and long term needs of the company. We believe that our value added distribution model provides unique benefits to our customers and suppliers and we will manage profitability into the eventually recovery. Thank you.

Operator

That does conclude today’s conference. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!