Anixter International Inc. Q4 2009 Earnings Call Transcript

Feb. 2.10 | About: Anixter International (AXE)

Anixter International Inc. (NYSE:AXE)

Q4 2009 Earnings Call Transcript

February 2, 2010 10:30 am ET

Executives

Chris Kettman – IR

Dennis Letham – EVP, Finance and CFO

Bob Eck – President and CEO

Analysts

Shawn Harrison – Longbow Research

Hamzah Mazari – Credit Suisse

David Manthey – Robert W. Baird

Matt McCall – BB&T Capital Markets

Nat Kellogg – Next Generation Equity Research

Kevin Sarsany – Legend Merchant Group

Jeff Beach – Stifel Nicolaus

Brent Rakers – Morgan Keegan

Ted Wheeler – Buckingham Research

Operator

Good day and welcome to the Anixter International’s fourth quarter earnings conference call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Chris Kettman for opening comments and remarks. Please begin when you are ready.

Chris Kettman

Thank you. Good morning and thank you, everyone, for joining us today to discuss Anixter’s fourth 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 will open the lines for Q&A session. Before we begin, I want to remind everyone that statements in this conference call, including words such as believe, expect, intend, anticipate, contemplate, estimate, plan, project, should, may, will 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 conditions, including the severity of current economic and financial market conditions, the level of customer demand particularly for capital projects in the markets we serve, changes in supplier sales strategies or financial viability, political, economic or currency risks related to foreign operations, inventory obsolescence, copper price fluctuations, customer viability, risks associated with accounts receivable, the impact of regulation and regulatory, investigative and legal proceedings and legal compliance risks, potential impairment of goodwill and risks associated with the integration of acquired companies.

These uncertainties may cause our actual results to be materially different than those expressed in any forward looking statements. We do not undertake to update any forward looking statements. Please see 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. I’d like to begin by acknowledging that due to the number of significant unusual items in both the current and prior year fourth quarter, the earnings results issued in this morning’s press release may be more challenging and typical to follow. As a result, our goal this morning is to sort out the unusual items in order to help you understand what we believe was a good quarter from an operating performance standpoint in the context of the current macroeconomic environment.

Our comments will also highlight what we believe are clear signs of the bottoming of the economic cycle based on the past couple of quarters of operating results. In addition to the large number of unusual items, it is also important to note that in an environment where there is little, if any, change in the daily sales run rates, divergence in the number of shipping days due to holidays or the timing of our fiscal calendar to become meaning to period-to-period comparisons.

Let’s take a moment and focus on the effect of holidays. As is always the case, the fourth quarter has the largest number of major holidays, including Thanksgiving and Christmas, and depending on the timing of our fiscal year end, possibly new years. This year, we had all three holidays fall within the fourth quarter, and as we have discussed in the past, daily sales on both Christmas Eve and New Year’s Eve, as well as the Friday after Thanksgiving, run about half the average daily rates throughout the quarter.

This means that on a consecutive quarter basis, we had approximately 3.5 more holidays in the fourth quarter than in the third when the only holiday for that period was Labor Day. Keep in mind that on the basis of 65 days in a full quarter, each holiday has a 1.5% effect on sales comparisons.

Next, let’s take a minute to refresh the timing issues surrounding our fiscal calendar. Our fiscal year ends on the Friday closest to December 31st, which added an extra week to the fourth quarter and full year of 2008. The effect of this is to add an extra week of operating expenses to the fourth quarter of 2008 along with some extra sales. However, the extra sales impact was muted by the fact that the Christmas and New Year holidays occurred on Thursday.

This meant that not only did we see sales at approximately half the daily average rate on the eve of those holidays, but the Friday following the holidays were also slow as well. And of course the extra week occurred within the peak period of the financial uncertainty of late 2008.

As a last comment I want to make before transitioning into the details of the current year fourth quarter, it’s with respect to the overall business environment during the quarter. Generally, the flat daily sales run rates we have noted in our last three earnings calls persisted throughout the fourth quarter with the variation in the number of holidays between quarters serving as the primary contributor to consecutive quarter sales trends.

Further and as expected, year-on-year sales comparisons in the fourth quarter saw a reversal of foreign exchange rates, which added year-over-year sales as opposed to the negative impacts experienced in the first three quarters of the year. Specifically, exchange rates added $35.5 million to sales in the fourth quarter as compared to sales reductions of $216.6 million through the first three quarters of the year. The negative impact of copper prices on year-on-year sales comparisons diminished with the prolonged run-up in copper prices.

Importantly though, in the current environment where product demand remains comparatively weak, there remains an estimated five to six-month lag between spot market copper price changes and product price changes. Copper prices had a negative impact on sales comparisons in the fourth quarter of just $16.6 million as compared to a negative of impact of $130.4 million through the first three quarters of the year.

As would be expected in a period with no sales growth, cash flow remained strong because there is no need for incremental working capital investments. We remain focused on tight working capital management that resulted in another very strong quarter of cash generation. For the quarter, cash flow from operations was $47 million, bringing the 2009 full year total cash flow from operations to $440.9 million.

Moving now to a more detailed discussion of the fourth quarter results, Anixter reported a year-on-year decrease in sales of 17%. After eliminating the recently mentioned effects of exchange rates in copper prices, the net result was an 18% organic decline in sales that can be traced to all parts of our business.

Looking at fourth quarter sales trends within each of our end markets, we experienced the following. On a worldwide basis, enterprise cabling and security solutions sales, exclusive of foreign exchange effects, declined organically by 15% as compared to the fourth quarter of last year. Within this end market, we saw security sales growth, again exclusive of foreign exchange effects, of 9% compared to the fourth quarter of 2008.

Geographically, our enterprise cabling and security solutions sales were down 16% organically in North America, 13% in Europe, and 15% in emerging markets, as compared to the year-ago quarter. A portion of the year-on-year decline is attributable to the fewer number of days in this year’s fourth quarter as compared to the prior year when, as previously discussed, we had extra shipping days due to the timing of our fiscal calendar.

As we evaluate where we are in this economic cycle, it is important to note on a sequential basis from the third to fourth quarter of 2009, we saw enterprise cabling sales decrease by 5%. This decrease is primarily due to the combination of the previously discussed consecutive quarter effects of the number of holidays as well as the previously announced ending of our contractual relationship with Alcatel-Lucent in the middle of the fourth quarter.

By geography, we saw sales on a sequential basis, exclusive of foreign exchange effects, decrease by 10% in North America, of which about a fourth is due to the ending of the Alcatel-Lucent contract. In Europe, we saw an increase of 9%, largely around the timing of some projects and solid security sales growth. Emerging markets had 4% sequential growth, largely reflecting normal seasonal patterns in Latin America.

Electrical wire and cable sales, exclusive of foreign currency and estimated copper price effects, experienced year-on-year organic sales declines of 25% in North America and 27% in Europe. On a sequential basis from the third to the fourth quarter of 2009, worldwide electrical wire and cable sales decreased by 9% within North America and Europe, with both experiencing similar decreases.

Typically the fourth quarter sales in our worldwide OEM supply business not only reflects the effects of more holidays, but the added impact of many customers having extended factory shutdowns over the last couple of weeks of the year. Sales in the fourth quarter, exclusive of foreign exchange effects, were down 16% on an organic basis as compared to the year-ago quarter.

In Europe, we saw an organic sales decline of 23%, while in North America we saw a sales decline of 10% year-over-year. In North America, continued weakness in aerospace-related sales were partially offset by increased sales to industrial customers.

Sequentially, worldwide OEM supply sales were up about 3% organically despite the impact of fourth quarter holidays and year-end customer factory shutdowns. We regard this as an encouraging preliminary sign of economic recovery. In the fourth quarter, customers began increasing their production levels. This increase followed a prolong period where production ran at low levels, as customers reduced the amount of their finished goods inventory on hand and in their sales channels.

How much of a precursor the fourth quarter sales gains are to further customer production increases remains to be seen, and we will obviously be depending on continued economic growth. Bob will discuss current business trends and the implications through the future in greater detail in a few moments.

Turning next to gross margins, in the fourth quarter we reported gross margins of 42.7% after eliminating the effects of a $4.2 million exchange rate-driven inventory valuation adjustment in Venezuela. While the gross margin percentage continues to reflect a year-on-year decline, more importantly, there has been a definitive stabilizing trend over the past three quarters.

Looking across the past three quarters, gross margins have been relatively constant. Specifically, the gross margin after adjusting for the Venezuela inventory write-down, was 24 – 22.7% in the fourth quarter, 22.6% in the third quarter, and 22.7% in the second quarter. We believe this trend is another clear indicator along with the flat daily sales run rates and slight uptick in OEM supply of a bottoming in the current economic cycle.

Looking for a moment at operating expenses, we reported a year-on-year decrease of approximately 21% from $286.8 million in the year-ago quarter to $225.7 million in the most recent quarter. As noted in our earnings release, comparability of the year-on-year expenses is impacted by the number of unusual items plus the fact that the fourth quarter of 2008 had an extra fiscal week, which added $6.5 million to prior year operating expenses.

Excluding these items from the prior year operating expenses and adjusting for a negative year-on-year exchange rate impact on operating expenses of $7.8 million, fourth quarter operating expenses reflected 12% decline from the prior year. More importantly, the trend in operating expenses over the past few quarters has shown downward momentum. Operating expenses declined from $235.2 million in the second quarter to $22.8 million in the third quarter to $225.7 million in the fourth quarter.

While our second quarter restructuring actions have had as much or more of a positive impact over the past three quarters, as was originally anticipated, some of this is not evident in the reported numbers since foreign operating expenses over this time period have generally been negatively affected by a weakening US dollar, which has caused the foreign expenses to be translated into a higher US dollar amount.

So to summarize from an operating income perspective, operating profits were $46.9 million as compared to the year-ago quarter of $50.7 million. However, after adjusting the current year for the exchange rate-driven inventory write-down in Venezuela, current year operating profits were $51.1 million and the adjusted operating margins were 4.2%.

In evaluating this operating margin, I think it is important to look at it in the context of what margins have been over the past couple of quarters. In the third quarter, operating margins were 4.6%. The sequential difference in margin reflects the higher sales in the third quarter due to the greater number of shipping days resulting from fewer holidays.

Even more relevant is the comparison to the second quarter when sales were roughly the same as the fourth quarter, but operating margins exclusive of goodwill impairment and severance charges were just 3.8%. We believe the 40 basis point increase in operating margins from the second to the fourth quarter on approximately the same sales volume not only reflects the positive effects of stabilizing gross margins but also the positive effects of our second quarter restructuring actions.

As we move further down the income statement, interest expense, as adjusted to reflect the new accounting treatment for convertible bonds required by FASB Staff Position 14-1, of approximately $16.9 million was essentially flat compared to interest expense in the year-ago quarter, as the higher cost of borrowings offset the lower level of borrowings.

In the current quarter, our average cost of borrowings rose to 7.8% versus 5.2% in the year-ago quarter due to the higher cost associated with the new senior note offering in March of 2009 and lower average short-term borrowings, which typically have lower interest rates.

While at the end of the year, approximately 99% of our outstanding debt had fixed rates either by the terms of the debt or through hedging contracts, we expect to begin seeing lower sequential interest expense in 2010 as a result of the debt retirement actions taken in the fourth quarter of 2009.

Going back to my opening remarks about the number of unusual items that affected both this year’s and last year’s fourth quarter, nowhere is that more evident than in the other expense line on the income statement. This year’s other expense was primarily driven by a $13.8 million foreign exchange loss related to the repatriation of cash from Venezuela and the revaluation of its balance sheet at the parallel exchange rate together with $2.3 million of net losses associated with the early retirement of debt.

In the year-ago quarter, higher than historical volatility in exchange rates throughout much of the world and significant downward pressure in the financial markets resulted in foreign exchange losses of $12 million and a reduction in cash surrender value of company-owned life insurance policies of $4.8 million.

In the current quarter, the income tax expense included favorable adjustments of $4.8 million, primarily due to the reversal of a valuation allowance. Excluding the $4.8 million and the unusual items previously discussed, the tax rate in the fourth quarter was 42.9%. Comparatively, the prior year fourth quarter effective rate was 40.7% after excluding the tax effects on the numerous unusual items in the year-ago quarter.

Year-on-year increase in the adjusted effective tax rate reflects the lower amount of pretax income in the fourth quarter of 2009 and the larger impact of non-tax deductible expenses had on the effective rate. The full year effective tax rate for 2009 of 44.5% compares to the 2008 full year effective tax rate of 39%, both exclusive of unusual items.

Anixter’s mix of earnings and losses by country and the effects of non-deductible expenses kept our 2009 effective tax rate well above the statutory rates. At the same time, uncertainty about economic recovery by country will likely mean that the effective tax rate will remain volatile in the near-term, making predictability of our rate difficult for the coming year.

For the quarter, the company reported net income of $12.7 million or $0.35 per share compared to $7.4 million or $0.20 per share in the year-ago period. Of course, both years were impacted by a significant number of unusual items. After adjusting for these unusual items, net income in the fourth quarter of 2009 would have been $18.3 million or $0.50 a share as compared to $40.6 million or $1.11 per share in the year-ago quarter. This decline, as has been the case throughout 2009, was largely driven by lower organic sales and a sales mix-driven decline in gross margins that have been partially offset by lower operating expenses.

As noted at the beginning of this call, we generated $47 million in cash from operations during the quarter as compared to $34.4 million in the year-ago quarter. Year-to-date total cash flow from operations totaled a record $440.9 million. For the year, capital expenditures were $22.2 million as compared to $32.7 million in the prior year. This brings full year free cash flow, defined as cash from operations less capital expenditures, to $418.7 million or over $11 per share. Even more encouraging is the fact that we expect further strong cash flow generation in 2010, particularly until we begin to see strong revenue growth return.

The current year cash flow was used to reduce outstanding borrowings by approximately $300 million. This includes the repurchase of $44.5 million of accreted value of our 3.25% zero coupon convertible notes and $23.5 million of our 10% senior notes during the most recent quarter. In the case of the 3.25% convertible notes, it’s important to highlight that with the 35% of that issue now retired, we have substantially reduced the shareholder dilution associated with these convertible notes, including approximately a 600,000-share favorable effect on the fully diluted share count in the fourth quarter.

For the most part, there continues to be a shortage of good strategic acquisition opportunities available in the market. While we are open to assessing acquisition opportunities, our near-term approach to evaluating opportunities will remain biased to the conservative side until we see a more definitive pattern of economic recovery firmly in place. Instead, in the near-term, we will more likely use excess capital to reduce outstanding common shares or further reduce borrowings.

In this respect, we have approximately $312 million in available, committed, unused credit lines; only $5 million of borrowings under a $200 million accounts receivable securitization; and invested cash balances of $72.5 million. We continue to regard our strong financial position and significant liquidity as important differentiators from many companies in today’s still difficult market.

These favorable financial characteristics provide us with the flexibility to adjust quickly to new market realities, fund investments in crucial long-term growth initiatives that allow us to capitalize quickly on the eventual market rebound. While there were some positive trends noted in the quarter and the signs of a bottoming of the economic cycle, we will continue to manage this business prudently and with the focus on the company’s long-term goals and strategy.

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

Bob Eck

Thanks, Dennis. Thanks, everyone, for joining us today. The activity in our business in the fourth quarter continued the trends we have seen this year. Although we saw some sequential pickup at certain OEM customers, production rates generally continued at the depressed rates we have experienced through the year. Project activity also continued to be constrained by the difficult economic environment.

The expense control steps that we initiated in late 2008 and again in the second quarter of 2009 have enabled us to size our operating structure closer to the level of activity we are seeing, while preserving the technical and supply chain capabilities that our customers requires. The combination of good expense management and tight control of working capital enabled us to generate strong cash flow and de-lever the balance sheet. As a result, we believe we are well positioned to take advantage of the eventual economic recovery.

The enterprise cabling and security solutions end market showed mixed results. North American market experienced a sequential decline from the third quarter, reflecting reduced number of billing days and normal seasonal softening in sales. Sales were also down compared to the fourth quarter of 2008.

The termination of the Alcatel-Lucent agreement resulted in approximately $13 million decline in sales sequentially from Q3. The full year effect on sales in 2010 of terminating the Alcatel-Lucent contract will be approximately $113 million. However, in both EMEA and the emerging markets, sales increased sequentially from Q3, but were below the same period last year. Some of the sales increase reflects the seasonal pattern in those regions along with the improved security sales.

Pricing in the enterprise market stabilized during the fourth quarter. While the sequential trends in EMEA and the emerging markets were positive, there is still significant uncertainty regarding the timing and impact of any economic recovery. Security sales continued to show more strength in the broader economy. Sales grew 9% in Q4 over prior year, with particular strength in EMEA and the emerging markets.

The security industry is experiencing continued demand for secure public and private places while also seeing growth in the deployment of Internet Protocol-based security systems. The continued move in the market toward IT video surveillance drives a corresponding need for very high performing infrastructure. Our unique technical capabilities in IP infrastructure and security have us well positioned to assist customers with this evolving technology.

Our new business development initiatives continued to add more customers for our enterprise cabling and security offerings across all geographies. With the goal of continuing to expand our customer base during 2010 in the emerging markets, we will look to extend our presence to more cities in countries where we are present today. We continue to monitor enterprise sales trends closely and have inventory properly sized for the current business environment.

Moving now to the electrical and electronic wire and cable end market, in the fourth quarter we experienced the continued pressures of below average copper prices compared to prior year as well as a difficult project environment. While we had seen some modest bidding activity in the third quarter, the combination of the normal seasonal slowdown coupled with the continuing economic uncertainty led to a weaker fourth quarter.

The more recent increase in the spot price of copper has led to some announced price increases. However, as we have said before, there is a lag effect before the copper price works its way through the cabling supply chain. At current soft demand, the price at which orders clear the market reflects the average inventory cost in the market. This price would gradually increase, as lower cost inventory sells through and is replaced with higher cost product. Our inventory levels are currently appropriate for the volume of business we are experiencing and manufacture lead times.

The wire and cable team has continued to focus on key initiatives, including new business development, expanding the product offering, and building our global account program with energy, mining, and engineering and construction companies. In addition, we have been successful in projects in power generation and alternative energy, and we continue to develop opportunities in those markets.

While the industrial automation industry experienced decline in volume this past year, we continued to invest in development of this market initiative. We believe that the technology migration from fieldbus communication to industrial Ethernet creates an opportunity for us to leverage both our industrial and enterprise capabilities to serve customers in this area.

In addition, we made investments in people and inventory to accelerate the growth of our wire and cable opportunity in the emerging market countries. This is one of our least penetrated geographies for wire and cable products and presents an exciting growth opportunity.

For both the enterprise and wire and cable end markets, project bidding activity will lag the broader economic recovery. The reason is that new projects arise from our customers’ capital spending plans. We would anticipate a pickup in capital spending to begin only after several quarters of positive GDP growth.

Turning to the OEM supply end market, the aerospace customer vertical continued to experience challenges in the fourth quarter, both sequentially and year-over-year. This reflects both recessionary pressures and delays in major aircraft programs. Conversely, we experienced moderate growth with industrial customers in North America, both sequentially and compared to the fourth quarter of 2008.

The combination of factors contributed to the growth, including new programs, sales of new parts packages to existing customers, and volume increases driven by buying ahead of new diesel emission regulations, would take effect in the first quarter of 2010. In Europe, the OEM supply market continues to experience depressed sales levels. We offset some of the decline of long-term customers with sales to new customers during the year as well as new parts packages.

We continue to work on managing inventories in the OEM supply market to be in line with demand. As we have previously noted, we have canceled orders, adjusted delivery dates from suppliers, and have moved some inventory to customers. We will continue to make progress on inventory reduction in the coming quarters.

Before turning to the outlook for the first quarter of 2010, I will take a minute to talk about Venezuela. Clearly, the anticipation in an actual devaluation of the Bolivar had a significant impact on our earnings this quarter. It is important to note that while the country has had challenges in the past year, we had been managing our business profitability through a combination of pricing and currency management through initially the official market and as the year progressed, the parallel currency market.

While the parallel market offered less favorable exchange rate, we were able to price transactions profitability in consideration of the exchange rate. We have experienced years of profitable business in Venezuela prior to this year and believe that there are good opportunities in that market. At the present time, however, we are reducing our activity as we evaluate how to maintain profitability in light of uncertain conditions in the country.

As we look forward to 2010, our outlook for the first quarter is cautious. While news reports indicate that the global economy is recovering, we are continuing to see flat sales trends in January compared to the fourth quarter of 2009. Although we have seen strengthening in some geographies and end markets, others remain soft.

I believe our expense structure is proper for the current environment and is balanced to participate in the recovery. As the economy recovers, I believe that our combination of technical capabilities, unmatched supply chain management service offerings, and our extensive global footprint will enable us to provide outstanding support to our customers, as they seek assistance with new projects and initiatives.

We will now open the call for questions.

Question-and-Answer Session

Operator

Thank you, gentlemen. (Operator instructions) We will take our first question from Shawn Harrison with Longbow Research.

Shawn Harrison – Longbow Research

Hi, good morning. I wanted to just maybe dig a little bit deeper into the growth forecast, both near-term and a little bit longer term. The first being – I guess how many holidays, if I missed it, will be in the fourth quarter – in the first quarter, excuse me? And then within that, kind of looking longer term, in the release it was mentioned that growth could resume in the middle of 2010. I’m assuming that’s on a year-over-year basis, and is any I guess inflation of copper prices included in that commentary.

Dennis Letham

In the first quarter, you have no holidays of consequence. So we should pick up in comparison to the fourth quarter probably around four days worth of sales because we had Thanksgiving, Christmas, and New Year, plus the half-day effect on the eve or the Friday afterwards. Okay? I think the next part of the question was with respect to did we include copper – were we looking for year-on-year growth by second quarter. The answer to that is, yes, that would be the first time we would think we might have a chance at year-on-year growth, assuming the recovery remains in place. Okay? And coming up against the comparison, I think it was around $1.220 billion and some change in sales, which is more or less the run rate we are at right now. So with a little bit growth [ph] should put us in a position to get some improvement. And I’d say there is no presumption of copper being, from a product pricing standpoint, any different than it is right now.

Shawn Harrison – Longbow Research

Okay. But you –

Bob Eck

Right. So I guess as you look at year-over-year, then the important thing to think about from first quarter last year, we did talk about it periodically during the past year in our conference calls, is that we had tail, so to speak, on projects in the wire and cable business running off during the first quarter, projects that have been books and started in 2008, in some cases booked in 2007. So those projects ran off. Our sell-through price on copper, particularly early in the first quarter of last year was significantly higher than the spot price of copper. And we have highlighted that there is a big delta there. So, as we look at this year and we look at copper, which has been actually fairly volatile in the last few weeks, along with the dollar, hard to predict that there would be significant tailwind from copper as we go through the quarter.

Shawn Harrison – Longbow Research

Okay. And then on that extra four days of worth of sales in the first quarter, I guess we would subtract that maybe just, say, another mid-teens type of headwind related to the Alcatel-Lucent business.

Dennis Letham

Well, you have roughly $130 million of annualized volume there that you are going to take roughly a quarter of (inaudible) first quarter.

Shawn Harrison – Longbow Research

Okay. Okay. And then my follow-up question is related to a comment in the press release regarding expenses in terms of just extra pension cost and other items. I guess how should we expect that to roll on in 2010? Is that an immediate step-up in operating expenses or is it a gradual increase through the year? I guess within – to that, there was also a comment of – you have I guess extra room within the operating expense structure, I guess extra leverage. Can you use that to offset some of these –?

Dennis Letham

The leverage that exists is around the headcount numbers that we could put more volume through without having to add additional people. The comment with respect to some of the compensation-related costs nearly highlighting the fact that while we have had things like we have extended salary increase cycles to 18 months from 12 months. We’ve had, much like everybody else, lower than longer term average pension asset performance. As those things kind of catch up with, you’ve got some inflation in the cost base that you have. And I think – we’ve talked about this, I know, in the past to some folks individually, but I mean, to get operating margins back near the historical highs, you are going to need another 1 billion of volume to get you back closer to that $6 billion run rate that we had when we peaked on there.

The challenge or question though is how long does it take you to get that volume back. If you could get it back in, say, 18 months or so, you are only fighting 18 months of cost inflation. If it takes you 36 to 48 months to get the 1 billion of volume back in business, now you are dealing with three to four years of cost inflation that will erode some of the leverage that you get from that incremental volume. So all we are highlighting in that comment really are the normal types of cost pressure that you would have on the compensation cost.

Shawn Harrison – Longbow Research

Okay. So I shouldn’t read into that that the operating expense run rate in the first quarter of 2010 will be in the 230 range versus the mid-220 range right here. It’s a gradual pressure you are facing.

Dennis Letham

It’s gradual pressure on those issues.

Shawn Harrison – Longbow Research

Okay. Thank you very much.

Dennis Letham

The actual absolute number, Shawn, obviously it’s impacted as we just discussed (inaudible) where exchange rates on what the relative strength or weakness of the dollar is and its impact on the reported foreign expenses, which in a given quarter can be significant.

Shawn Harrison – Longbow Research

Okay. That’s very helpful. Thank you.

Operator

We will take our next question from Hamzah Mazari with Credit Suisse.

Hamzah Mazari – Credit Suisse

Thank you. Just a question clarifying your 2010 outlook. You’re calling for growth in the middle of 2010 year-on-year. Is that just comps getting easier, or are you looking towards actual sequential organic pickup in any of your businesses? If so, which businesses? And then how should one think about gross margins? Obviously you highlighted that they have been stable for a couple of quarters. You are facing some negative mix with OEM being down and electric wire and cable. Should we just be thinking about flat gross margins going forward and picking up towards the second half as you see some business pickup, or how should we be thinking about all those moving parts?

Bob Eck

Hamzah, this is Bob. Why don’t I take the initial piece on revenue growth and Dennis will pick up on the gross margin piece? As we talk about revenue growth and looking forward into 2010, it’s expectation that we are at the beginning of an economic recovery based on the GDP kind of numbers that are being reported out of the US as well as Europe, certainly parts of Asia, and Latin America, for that matter. So, as you look around the world and you see economic recovery, it’s our expectation that we will begin to see pickup as a direct result of that. As we’ve said in the past, if you look at what create variability in our business in enterprise, in wire and cable, specifically it’s around projects that are capital expense driven, whether that’s IT spending related or industrial spending related.

In the OEM business, what we’ve said is that the metric is actually kind of similar and that the end products that our customers manufacture are typically capital-type goods. So they will see pickup again as CapEx comes back into the economy. So we are speculating that with the economy recovery, assuming it continues, that we will start to see pickup across most of the markets and I’ll say generally most of the geographies as the year goes on. But to sort of specify specific countries and specific end markets that we’ve identified and say here is what we think it will hit first I think would be difficult and honestly a mistake to try to do at this point.

Dennis Letham

If you look at the gross margins, they are running kind of the 22.7% sort of range over the last three quarters of this year. The biggest driver between that run rate and, say, a 24% rate, which is more of a long-term historical average here, is really around sales mix with us having experienced bigger sales declines in OEM supply and electrical wire and cable than we have in enterprise. And I think if we look at the outlook, as Bob says, we’ve got to get capital spending coming back to help all three of these. So there probably isn’t anything in the short run that would cause that mix to change materially from what it’s been running in the last few quarters. So that would kind of argue that there is not a lot of near-term upside coming off of revenue.

If you look at how some of that capital spending comes back, enterprise projects tend to be shorter life cycle than electrical, which should imply they come back a little bit quicker than electrical wire and cable. If that is indeed what happens, that actually could put a little downward pressure on margins from a mix standpoint, because you are starting to get the growth first in your lowest margin business, but that would be offset some by the fact that we’ve got this Alcatel-Lucent volume out of here now, which was at very low gross margins.

Hamzah Mazari – Credit Suisse

Okay, that’s very helpful. And just one follow-up. You guys are generating pretty strong free cash. What’s the full impact if you take out your entire convert on diluted shares outstanding, as you see that? And do you plan on taking that our or how should we think about that?

Dennis Letham

No. At this point, we probably will not take out any more of that 3.25% convert. We probably have reached a practical limit short of doing a tender for that. And tendering foreign in the money convert is a – well, I don’t think it’s ever really been done. It’s not something that really people do. So we’d probably reach the limit on the convert. We’d still be interested in retiring some more of the 10% senior notes if available. So we will – that probably would be the first priority on debt retirement.

Hamzah Mazari – Credit Suisse

Okay. Thank you very much. I appreciate it.

Operator

We’ll take our next question from David Manthey with Robert W. Baird.

David Manthey – Robert W. Baird

Hi, guys, good morning.

Dennis Letham

Good morning.

David Manthey – Robert W. Baird

I was wondering if you could – you're talking about the capital spending cycle coming back here to drive the dollars again. And I think you said you are basing that primarily on some strength you are seeing in the OEM segment. Are you seeing signs outside of that, which give you confidence that we’ll start to see a capital spending resurgence? And I’m thinking mainly in terms of the OEM business – I'm sorry, the electrical wire and cable business and the enterprise business?

Bob Eck

Dave, I think what I said was that we’d anticipate some recovery in capital spending as the economic recovery goes on. My perception, my belief is it tends to lag the initial pickup in the economic recovery. So, as that happens, we should see pickup. In the OEM supply, we talked about some sequential improvement out of some specific customers and some impact of buy ahead in the diesel market. There is a lot of puts and takes within that across specific sort of end product markets. So I wouldn’t say so much that we think the recovery is starting in OEM. I think we will see real recovery start across sort of – I would say, as the way Dennis described it, initially in the enterprise market, then wire and cable, due to the late cycle in the wire and cable business. OEM supply honestly falls somewhere either in the middle or closer to the wire and cable timing.

David Manthey – Robert W. Baird

Okay. And then, Dennis, as you’ve revalued the Venezuelan currency, and I think, Bob, you said you are taking a more cautious approach to business there, is there a – could you give us a rough estimate of, all else being equal, what the impact on your emerging markets growth rate will be next year? Is it material or is it not so much?

Dennis Letham

It’s certainly in terms of the size of that business well under 10% of the total volume of the emerging market business. So it’s – if it were to go away entirely, it’s a single-digit impact on emerging market revenue.

David Manthey – Robert W. Baird

Okay, great. And then final question, on the lag in copper prices, given that number relative to how quickly you turn your inventory, do you turn your heavy copper content inventory slower than overall or do you have an advantage there as it relates to that inventory versus your competitors?

Bob Eck

I think the answer on our turns is that we turn slower in wire and cable than we do in enterprise, for example. The OEM supply market is not impacted by this, and that’s our slowest turning inventory. As we look at the turns right now, I think what we’ve said in the past is you have to look not just at our turns, but you have to look at the full supply chain. So you have raw material that manufacturers work in process as well as finished goods inventory all at manufacturers and then you have the inventory sitting in distribution. So it takes somewhere in the range of a couple of quarters for the impact to work its way all the way through. So it inches up as we go along, but – so it’s not sort of a cliff effect, if that makes sense.

David Manthey – Robert W. Baird

Okay, thank you.

Operator

Let’s take our next question from Matt McCall with BB&T Capital Markets.

Matt McCall – BB&T Capital Markets

Thanks. Good morning.

Dennis Letham

Good morning.

Matt McCall – BB&T Capital Markets

I think you gave some color, Bob, on the inventory position. I think you said OEM, you continue to try to work there, less wire and cable. I think you said it was okay. Did you talk about – did I miss the enterprise commentary about inventory?

Bob Eck

I did mention the enterprise inventory. And the enterprise inventory is very much in line with the volume we are seeing in the market today.

Matt McCall – BB&T Capital Markets

Okay. And then as we look at the free cash flow outlook, I think, Dennis, you talked about expectations of still some strong free cash flow generation next year – this year. Is that continuing to be driven by inventory reduction, just provide a little more color on what’s going to drive that free cash flow generation?

Dennis Letham

Basically with an expectation of low levels of revenue growth, we don’t believe we have any consequential working capital investment to make. So all of the cash generated from the income statement becomes available cash. And to the extent that we still have some work to do on the OEM supply inventory, that gives us some cash coming up the balance sheet in that specific subset. But other than that, I would say that the balance sheet turns are pretty much what’s expected to play out in 2010 and we don’t expect a lot of volume-driven increases in investment.

Matt McCall – BB&T Capital Markets

Okay. And then I want to follow up on one of the questions earlier about expenses. Just to make sure I understood, I think – were there not some cost take-out efforts that were going to show up more on – or not going to show up until 2010. And your comment about increased wages, incentives and pension expenses, is that a – I just want to clarify. Is that a – are you going to have a net increase, net of the costs that are going to come out in 2010 on the SG&A line on a flat top-line?

Dennis Letham

Let me go back to the restructuring action in the second quarter and repeat what we said was going to happen and then let’s talk about what has happened and what needs [ph] to happen. When we did that second quarter restructuring, we said we thought we had about $28 million of annualized expense savings to come from that. And it would be important note that that would be at the then existing exchange rates. Okay? Now, in the third quarter, we got (inaudible) $3.5 million to $4 million of benefit against what would be a $7 million per quarter ultimate expectation. We got more than that in the fourth quarter, as we finished up the Lucent contract, released the resources around that – supporting that contract. But we had them there for a month-and-a-half in the quarter. So we won’t get the full benefit of those at $7 million per quarter run rate until we get to Q1.

But as we highlighted during the course of the discussion, keep in mind that you’ve got a big chunk of the expenses that get incurred in Canada, Europe and rest of the world, that as the dollar goes up and down, gives you a – can give you several million dollars per quarter of more or less operating expense if you are only focusing on the OpEx line. So all we were trying to do with the comment about pension cost, salary increases, et cetera is to highlight there is some inflationary pressures there, which it would be in every company, and that that will offset some of the savings from the restructuring, but the real wildcard in, do expenses go down by X million sequentially or up by X million sequential is what happens with exchange rates.

Matt McCall – BB&T Capital Markets

Okay, okay. Thank you. And then the final question is – Bob, you mentioned the price increases. I assume those price increases you referenced were maybe when copper was a little bit higher from here. And you also talked about the lag that you are experiencing in actually having to recognize those. Is that lag stabilized or is it still stretching, or is it shortening at all?

Bob Eck

I think the lag isn’t necessarily lengthening or shortening. The lag is just the nature of how much inventory in work-in-process sits in the supply chain and have to work its way through. The lag may have been longer very early in the cycle as inventories were being taken down. But right now, our expectation is that those price increases that have been announced will start to impact the market, as the lower-cost inventory works its way through. And I think the important thing is, how that works its way through depends on whose inventory is turning the slowest, because when the market clears an order, that’s going to be based on who has the cheapest average cost inventory. And that basically says that if we are turning our inventory quickly, but we have competitors who are turning it more slowly or a manufacturer who has more inventory on the floor than we might have expected could cause a little more delay there. But the good news is that there are announced price increases on the products that trade on a price list in the wire and cable market, and that ultimately will be helpful as we get through the year.

Matt McCall – BB&T Capital Markets

Okay. And then a follow-up to that, those that aren’t necessarily selling on a price list is – maybe that was a better way that I should have asked it, is – are those that you actually have to go out and get in the market, the manufacturers have to go out and get in the market, they don’t have a price list, is that lag changing at all?

Bob Eck

No, it’s not. And I think the key to that is a lot of those products are heavier cables, much higher copper content, and they tend to be very project-oriented. So the fact that there is very little project activity suggests that you won’t see a lot of impact from that until the project activity picks up.

Matt McCall – BB&T Capital Markets

Got it. Okay. Thank you all.

Operator

Our next question comes from Nat Kellogg with Next Generation Equity Research.

Nat Kellogg – Next Generation Equity Research

Hi, guys, thanks for taking my questions. Just a couple of quick ones. Just obviously given the fact that this was a down year, I mean, I assume it's safe to assume it’s safe to assume that there were no sort of fourth quarter rebates for volume targets from the manufacturers?

Bob Eck

There is only some amount of rebates. But as I think we’ve said on many of the calls so far in relation to 2009, the volume rebates were lower than prior years because we had lower volumes.

Nat Kellogg – Next Generation Equity Research

Sure. And if you look out to 2010, I mean, I think I’ve asked this question before. But I mean, do the targets get reset to lower levels given the fact that there is lower – there is less business out there? I mean, so does that sort of maybe increase especially, as you guys talked about, maybe seeing some organic growth year-over-year in the back half? Does that increase the chances that you might get some benefit from that towards the end of the next year?

Bob Eck

Yes, I think that is the right way to look at it. The rebates do get renegotiated, but it is a negotiation. It’s not sort of a mathematical function. So while we are starting off a lower base and that would argue that there is more rebate opportunity. It has a lot to do with how the year actually plays out and how the negotiations develop. So could there be some rebate upside as we get through the backend of the year if volume grows in organic terms – again, not currency terms, but in organic –

Dennis Letham

More than expected when the rebate program was agreed to.

Bob Eck

Exactly. Exactly.

Dennis Letham

That’s the key things It’s not a – it's relative to what the expectation was on the program we’ve set. It’s not an issue of relative to the prior year necessarily.

Bob Eck

Yes.

Nat Kellogg – Next Generation Equity Research

Okay. Okay, that’s helpful. And then obviously you guys had another small operating loss in Europe again. Just curious to know as far as – do you guys – I mean, is it OEM supply needed to turn around, is it just pure volume needed to turn around, or are there some additional cost cuts that are going to flow through that that should help that business out?

Bob Eck

There is actually – I guess the answer is some of the above. I do think that given what we’ve seen in our European business in the past, we do have the operating expense structure properly sized. One of the things we’ve talked about is that it’s harder to leverage the structure in Europe just simply because we are in 22 countries. We believe that by being in 22 countries, we gained contracted relationships with customers and win business that we otherwise would not have an opportunity to win. And there are cases of that across all three of those end markets. So I think the expense structure is appropriate if we saw a double-dip sort of recession start to play out, clearly we will take new expense actions as a result of that.

When you look then at the businesses and ask the question, well, so what are you doing about it? The answer is, we are doing a variety of things, first, introducing new products and suppliers in the enterprise and the wire and cable market. We have a very active new business development program in the OEM supply market. We have won new contracts. Contracts in the OEM supply market tend to implement with a lag effect so that the winning of a contract and the recognition of revenue on that contract are a little bit disconnected and that there is typically inventory on the floor, there is an incumbent relationship that has to be worked off. So we’ve won some contracts. We know we have sort of new business in the pipeline.

Obviously how that plays into the actual reported revenue numbers will have a lot to do with how the total base of customers perform. In addition, we opened a re-distribution business, which has enabled us to help some of our core suppliers serve the many small distributors scattered across Continental Europe in a more efficient way. So that too will bring opportunities for us. So I’ve run through all these details to point out that the concern, as I think many of you are, in terms of what’s happening in Europe and do we have a strategy, believe me, we are more concerned and more concerned about having a productive, profitable business there. So we have taken a lot of steps through the course of 2009, and we will see how those play out as we get deeper into 2010.

Nat Kellogg – Next Generation Equity Research

Okay, that’s helpful. And then just last one. On the acquisition front, can you guys just give me a little bit more color there? I’m just sort of curious whether it’s because you guys are seeing less businesses that are interesting or whether given the fact that the cost of debt is a little higher and stuff that just – the internal measures for cash are more attractive, your hurdle rates may be – would be a little bit higher than they had been previously and as a result, that’s what makes use of cash look more attractive or that you are actually just seeing less opportunities? I will hop back in queue, thanks.

Bob Eck

I think it’s actually some of both. Certainly we want to be careful in that environment that’s somewhat uncertain economically that we don’t, in effect, over-extend ourselves chasing acquisitions that aren’t immediately accretive to the organization. So there is a sort of use of capital component to it. But the truth is if we saw good opportunities, we have a lot of borrowing capacity right now. And if we saw what we thought were accretive opportunities to the organization that we would see fairly quick benefit on the operating line, we would certainly consider those opportunities. And that’s the other part of the equation. We are not seeing what we would have anticipated, which would have been sort of interesting distressed deals hit the market. Dennis, do you want to add any other color to that?

Dennis Letham

No, I just – I mean, there just really isn’t much activity out there in the smaller-sized deals. But certainly we all see the paper every day and we’ve seen the bigger deals that they have gotten done recently, but there does seem to be dearth of small deals in the market that fit with our strategy and our business model.

Nat Kellogg – Next Generation Equity Research

Okay. Well, thanks guys. I’ll hop back in the queue again. Thanks for taking my questions.

Operator

Our next question comes from Kevin Sarsany from Legend.

Kevin Sarsany – Legend Merchant Group

Hey, guys.

Dennis Letham

Kevin.

Bob Eck

Hi, Kevin.

Kevin Sarsany – Legend Merchant Group

Quick bookkeeping. You mentioned the Venezuela $4.2 million, where do you account for that? Is that in the emerging markets?

Dennis Letham

That’s in emerging markets and it’s part of cost of goods, which means that it impacted operating profitability in emerging markets.

Kevin Sarsany – Legend Merchant Group

All right. And when I look at the other expense, the repatriation of early extinguishment, that’s a one-time item. Now if I exclude that, could you help me out thinking about bringing that to the bottom line? I mean, back of the envelope it’s about $0.25.

Dennis Letham

Those couple of things are negative, but then we had the adjustment to the valuation reserve on taxes that was positive by about $4.5 million. So if you put together the loss on early extinguishment of debt, the total loss on Venezuela offset that by the $4.5 million. I think it was a favorable tax adjustment that gets you to the $0.15 that’s in the sub-heading on the earnings release. So our view would be ex unusual items in the current quarter, we were at earnings of $0.50 a share.

Kevin Sarsany – Legend Merchant Group

Okay, all right. I wasn’t [ph] sure about the other offset. And I guess looking at the enterprise business, security and industrial Ethernet, how fast are those growing? Or is security growing? And what’s the size of those?

Bob Eck

We mentioned that security organically grew 9% in the fourth quarter over prior year fourth quarter.

Kevin Sarsany – Legend Merchant Group

Was that up sequentially?

Dennis Letham

Yes.

Bob Eck

Yes. Yes, it was up sequentially as well. In terms of total size, actually the comparison to last year is going to be a little bit challenging because of the currency impact. I think last year we quoted a number of around 6.45 in last year’s currency and this year – in this year’s currency, again these are nominal as-reported kind of numbers. I believe the number is around 6.50. If you did the currency adjustment, you’d get to your 9% organic growth. So significant contributor of the overall company, and again an area, I think as I highlighted, that we expect healthy growth in. The automation initiative, we are not breaking out numbers for. It’s very early in that initiative for us. So it’s a small contributor revenue. We are highlighting it because it’s an area that we think is a good investment, a good growth opportunity for us, a very logical extension to our industrial piece of the wire and cable business.

Kevin Sarsany – Legend Merchant Group

Okay. And the other pieces of enterprise that I’ve just heard over and over, cloud computing, data center, data center activity. What’s going on when I look at enterprise on the ads, the CapEx, and then the data center? I mean, the data center is probably doing pretty well and other two might be lagging a little bit.

Bob Eck

Yes. It’s actually hard for us to break that out specifically, and so we don’t do that. There is lots of talk about cloud computing. If a lot of cloud computing happens, it will create lots of data center builds. So as a trend, generally speaking, that’s probably positive for us. I think the bigger issue though is, our customers, the end users of those IT systems, are they confident enough about where their own business is headed that they are stepping up their IT spend, particularly capital spend around hardware. And that’s the – I think the open question right now is where is it actually headed.

Kevin Sarsany – Legend Merchant Group

Right. If your business model is moving to a SaaS kind of model, I would think that you almost have to spend on data centers if you are even going to try to execute on your model.

Bob Eck

I hope you are right.

Kevin Sarsany – Legend Merchant Group

All right. And then the last one, industrial wire and cable, it took a pretty good step down. I assume some is seasonality. Is non-res and tougher lending standards and any other thing kind of moving things further down?

Bob Eck

I don’t think there is any further sort of new negative pressure. And one of the things we try to highlight is that we don’t have as direct or non-res construction linkage in that business because we are not a big player in the building wire business, which is the main part of the wire and cable industry that tends to more closely follow non-res construction. We are more involved in industrial projects, power generation, alternative energy, oil and gas. So again, if you look at those markets, it’s a question of where is the capital spending.

Kevin Sarsany – Legend Merchant Group

Right. Perfect. All right. Thank you.

Bob Eck

Thanks.

Operator

We will take our next question from Jeff Beach with Stifel Nicolaus.

Jeff Beach – Stifel Nicolaus

Yes. Good morning, Bob and Dennis.

Dennis Letham

Good morning, Jeff.

Jeff Beach – Stifel Nicolaus

Alcatel-Lucent, that relationship ended at the end of 2009. Is that correct?

Dennis Letham

Ended in the middle of fourth quarter of 2009.

Jeff Beach – Stifel Nicolaus

Was there – in ending that relationship, was there any charges that you haven’t quantified or impact on your profitability from that?

Dennis Letham

Not in the fourth quarter, Jeff. There were severance costs related to that that were part of the second quarter of 2009 restructuring charge. At that point, we knew we were relieving [ph] the contract before the end of the year.

Jeff Beach – Stifel Nicolaus

All right. And just one more time a little bit of information on copper. I don’t remember you saying this, but do you have an estimate of how much copper impacted your fourth quarter sequentially versus third quarter sales?

Dennis Letham

Sequentially I don’t have it. We just don’t – because this is all an estimation process of running sales history files against prior period sales history files and then analyzing the products inside of there. So what we did say was year-on-year it had a negative impact on volume of 16-point some million, and the profit impact of that I think was about $3.8 million.

Jeff Beach – Stifel Nicolaus

Okay. And again, did I hear you say you didn't expect much of a tailwind from copper in this first quarter?

Bob Eck

That is what I said [ph].

Jeff Beach – Stifel Nicolaus

And just looking back at the move that copper had July and August of last year, if you are looking through this quarter, you are talking about seven, eight, nine months of lag. You would think that during this first quarter, there would be some pass-through of those FIFO layers of some of our competitors. Is this likely to happen and you are just being conservative, or is the lag really more on the eight to nine-month level than two quarters?

Dennis Letham

Keep in mind, one of the issues is that the spot prices over the last year, year-and-a-half have been a lot more volatile than the product prices. Okay? So when we saw that big price correction in the spot market late ’08, early ’09, the bottom of that price chart never got into product pricing. By the time people had worked off their older, higher cost inventory, we were somewhere on the rebound side of that spot market curve. So you can slice off some amount that’s unquantifiable exactly where it’s at. But clearly we didn’t have that.

I think when you look at the run-up in price over the summer months and early fall in spot market prices, again now the pull-back, kind of the 3 to 3.10-type range in the last few days, we may look back as we get further down the road and say, there was a point on the high end of that spot curve that never got reflected in product prices either because of this time lag issue of how the inventory turns in the totality of the distribution channel and manufacturing end of the business. And exactly how much of that peak does or doesn’t get captured in pricing is basically impossible to predict.

Bob Eck

And I know we’ve talked in the past, maybe a year ago, about this one. We were discussing the big swings in copper, but – and I mentioned something a couple of questions back on this, but it’s important to remember that a chunk of the products have a list price, so to speak, and a chunk of the products trade more day-to-day based on the copper content, the sort of the size of the cables, if you will. So the products that are trading on list price don’t fluctuate with the spot market. And those are the type of products where we saw price increases because it’s frankly the only products where there are prices to reference as increases. So that’s an important part of how you think about this as well that causes some of the peaks and some of the valleys to not run through the price in the market.

Jeff Beach – Stifel Nicolaus

Okay. And lastly, looking across all of the products that you sell, is there – where are areas where you are seeing competitive pricing pressure where it's difficult for you to earn the margin that you would like to earn on your products, outside of volume?

Bob Eck

I don’t think we are seeing so much margin pressure within individual end markets or product set, but – and I said it is a broad statement. On any given day, you price an order and there is a competitor chasing that same order and perhaps margin fluctuates. But on another order at the same day or another day, you are able to earn more margins. So when you sweep it all together, I think the key point is what Dennis has highlighted on the margin trend is that we’ve been pretty flat here for the last three quarters, which I think reflects not only the current mix in our business, which is a very important part of what it reflects, but it also reflects that there is not margin pricing pressure, so to speak, having a significant adverse impact on the business.

Jeff Beach – Stifel Nicolaus

All right. Thank you.

Operator

We’ll take our next question from Brent Rakers with Morgan Keegan.

Brent Rakers – Morgan Keegan

Good morning. Just wanted to clarify some comments you made earlier, and I think in the release, about the guidance. There is a comment in the press release that says some growth in sales by mid-year. You are not referencing year-over-year, correct? You are referencing a sequential trend?

Dennis Letham

No, we are referencing year-over-year. When you get to the second quarter of 2009, you’ve got a comp that’s $1.220 billion and some change in revenue. And so basically the same level we’re at in Q4, right?

Brent Rakers – Morgan Keegan

Okay.

Dennis Letham

So what we’re saying there is, if you get this extended recovery by the time you get to the middle of 2010, we should start to see some pickup in volume that should put us in a position where we start to get some favorable year-on-year comparisons.

Brent Rakers – Morgan Keegan

Okay. Then I guess, Dennis, in light of those comments, and I guess I'm confused about the first quarter guidance, you are talking about flattish trends. I'm guessing on a sales-per-day basis. Given the advantage of the days in the first quarter versus Q4, that would actually put your first quarter number up a couple percentage points year-over-year. What am I missing in that?

Dennis Letham

Well, you’re taking out Lucent volume in both of the forward quarters too. Right? That's going to cost you the equivalent of about two days worth of volume per quarter.

Brent Rakers – Morgan Keegan

Okay. And in terms of just understanding traditionally how the seasonality would work for Anixter, particularly from I guess Q1 to Q2, how should we view that?

Dennis Letham

I guess we’d say over an extended period of time historically, we would expect to see kind of a mid digit – mid-single digit increase in revenue Q1 to Q2.

Bob Eck

But that’s –

Dennis Letham

(inaudible).

Bob Eck

Yes, that’s a seasonality that’s based on a healthy capital spending market and the seasonality gets driven by budget cycles and weather. And in an environment like we’ve been in, I don’t know that we would count on those impacts being the same. In fact, I would say we would not count on those impacts being the same as they are in a strong growing economy.

Brent Rakers – Morgan Keegan

Great. And then just one I guess maybe last question or two related to the emerging market segment and the relevancy of Venezuela. I guess first, was there any – what was the currency impact to revenues as a result of the Venezuelan currency in emerging markets?

Dennis Letham

There was no impact on the revenue or earnings numbers other than what happened at the end of the year was we brought back cash in anticipation of a devaluation that had an FX loss on it. And then that caused us to, at year-end, look at and reassess the balance sheet and say, should we be translating this at official exchange rates or at the parallel market rates. The conclusion was that it should be at the parallel market rates. That resulted in I think about a $9 million adjustment – negative adjustment that combined with the loss on repatriating the cash gives us about $13.8 million of losses in the other income and expense line. All of that then carries on to raise a question about the inventory that’s on hand for that business, which was valued in dollars in country, and could we realize normal margins on that post devaluation. And the conclusion was, no, there was lower of cost through market valuation question. And that led to the $4.2 million inventory adjustment that’s reflected in cost of goods and operating profitability.

Brent Rakers – Morgan Keegan

Great. And then just one final question on emerging markets. If you could just remind us – you commented about the relative size of Venezuela to that category. Could you maybe remind what the top three to five country exposures are in that business?

Dennis Letham

Well, it would be – Mexico would be the largest. The next largest – and I know the native Australians would take exception to being called an emerging market, but we do this by geography. So Australia would be the next biggest country in there, and then probably Brazil.

Brent Rakers – Morgan Keegan

Okay. Great. Thank you.

Operator

We will take our final question from Ted Wheeler with Buckingham Research.

Ted Wheeler – Buckingham Research

Hi, long call. Thank you for taking my call. Hi, everyone.

Dennis Letham

Hi.

Ted Wheeler – Buckingham Research

A couple of just – circling back on copper real quickly, what rough order of magnitude would these list price increases work out to, if you have a guess or if you could share that?

Bob Eck

Ted, I don’t have a guess. It varies by specific product type.

Ted Wheeler – Buckingham Research

And on the absence of benefit in the current quarter, first quarter, on copper, would you say there would be no headwind as well or would you say there still would be a headwind as you had in the fourth quarter?

Dennis Letham

First quarter may still have a headwind in it because we had projects in Q1 of last year that were priced in the second half of the previous year – second half of 2008 that would have reflected pre-correction copper prices in them at that time. So there were still some contracts clearing out in Q1 that would have had comparatively high copper price in them.

Ted Wheeler – Buckingham Research

Okay. And just one other, on the free cash flow and working capital, what would be the – if you could remind me, I know you have discussed this before – the revenue growth number that would sort of start to trigger a requirement for working capital investment? I know when you are up in the teens you are consuming but –

Dennis Letham

Well, the most immediate thing would be a receivable investment. I mean, obviously a percent increase in sales should translate to a percent increase in the receivable investment. I think the inventory has got probably a little more play in it. And of course, to the extent that you start to add some inventory, at the same time you are going to be adding an offsetting payable because you won’t pay for it the day you bring it in. So that gives you a little bit of cushion in there as well. So probably the most immediate impact would come from receivables.

Ted Wheeler – Buckingham Research

Okay. I guess my thought was you indicated you didn't think any working capital investment was likely this year.

Dennis Letham

Of any consequence on the basis that the growth rates would be comparatively low. And that’s got included in there, as we said. The fact that we know or we have acknowledged, we still have too much OEM supply inventory around that needs to be reduced during the course of 2010.

Ted Wheeler – Buckingham Research

Okay. And the point at which I guess the working capital – I think I forgot. What was it, 20, 21, something like that [ph]?

Dennis Letham

Yes, it would probably in the aggregate run, somewhere in the range of close to $0.25 of working capital per revenue dollar.

Ted Wheeler – Buckingham Research

Okay. And that you expect to be linear as you go up from no growth or negative growth, or do you think that it – it picks up right away –?

Dennis Letham

No, I think there is little bit of opportunity to improve that because – I'll use an extreme example. If you go to one of the smaller emerging market countries, you’ve got to have a certain inventory profile on the shelf to be in business. Right? To have that – that profile doesn't change materially if you are doing $5 million or $10 million in volume there. So the inventory on the outer edges of the model by geography just doesn’t lever up and down as well. So much like you’ve got headcount in those countries that you can’t adjust that much by volume because they are small. As you get growth returning to the model, you’ll get operating leverage off of the headcount that’s there. And you should get some improved inventory turns on that base of inventory.

Ted Wheeler – Buckingham Research

Well, without much working capital or no working capital investment, you will have another pretty strong cash flow year. You ticked off all the sources of liquidity that you have, and you have kind of diminished, I think, the magnitude of likely debt reduction as we go forward. So wouldn't we be prudent in thinking of share count reduction? I mean you have historically –

Dennis Letham

Those are the things that we – I acknowledged in my comments were that absent acquisition opportunities, there would be share repurchases and/or some debt reductions.

Ted Wheeler – Buckingham Research

Okay. But are you approaching the balance sheet with a – at some point, you used to think, I think, in terms of a plus-40% percent debt ratio. Do you think the circumstances we have been through dictate a change in your optimal capital structure, as you move forward?

Dennis Letham

No, we typically look for 45% to 50% debt-to-total cap. That number has been inching down and ended the year at 44-point some percent. So we are below the lower end of the target range, which by the historical guidance we’ve given should suggest that we’ve got little bit too much conservatism in the capital structure right now. And there is nothing about what we have been through that we change our view on the amount of leverage we can carry. In fact, if anything, I would say once again in this cycle the model proved to work the way it should work, which is while you’ll get deleveraging on earnings, you’ll get a lot of cash flow if you manage the working capital effectively, which is going to give you a chance to de-lever the balance sheet and kind of reload it for the recovery. And I think that’s worked out just the way we would have anticipated or hoped it would have through the course of ’09.

Ted Wheeler – Buckingham Research

But it sort of suggests all the free cash flow will be used this year, incremental to debt change. I mean, it just mathematically seems that it might be the way to think about it?

Dennis Letham

I’ll go back to my comment –

Ted Wheeler – Buckingham Research

All right.

Dennis Letham

– before, which is, to the extent that we don’t see acquisition opportunities, then we are likely to use free cash flow for some share repurchase and further debt reduction.

Ted Wheeler – Buckingham Research

And if I could, just one more. I know the tax rates are variable. But would you have a ballpark guesstimate of what you think it looks like?

Dennis Letham

I’m going to go to my comment before, which is the fact that we are likely through a recovery period to have some volatility in country-level earnings. And that’s a big variable in what the aggregate effective tax rate is, which makes it hard to predict, without saying it’s right or wrong, the current year effective rate without unusual items, and it was around 44%, that’s probably the starting point for thinking about 2010.

Ted Wheeler – Buckingham Research

Great. Thanks.

Operator

And gentlemen, that does conclude today’s question-and-answer session. I’d like to turn the call back over to you for any closing remarks.

Bob Eck

Thank you. Thanks, everybody, for joining us today. As the business trends of the past several quarters appear to be continuing in the near-term, we will continue to focus on controlling expenses and working capital while pursuing product and geographic expansion opportunities. We believe our unique value-add and global reach positions us well for the recovery. Thank you.

Operator

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

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