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Anixter International (NYSE:AXE)

Q4 2013 Earnings Call

February 04, 2014 10:30 am ET

Executives

Lisa Meers

Robert J. Eck - Chief Executive Officer, President and Director

Theodore A. Dosch - Chief Financial Officer and Executive Vice President of Finance

Analysts

Steven Bryant Fox - Cross Research LLC

Matthew Schon McCall - BB&T Capital Markets, Research Division

Ryan Merkel - William Blair & Company L.L.C., Research Division

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

Shawn M. Harrison - Longbow Research LLC

Gary Farber - CL King & Associates, Inc., Research Division

Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division

Brent D. Rakers - Wunderlich Securities Inc., Research Division

Operator

Good day, and welcome to the Anixter International's Fourth Quarter 2013 Year-end Earnings Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Ms. Lisa Meers for opening remarks and comments. Please begin when ready, Ms. Meers.

Lisa Meers

Thank you, Cathy. Good morning, and thank you for joining us for Anixter's Fourth Quarter 2013 Earnings Call. Today, I am joined by Bob Eck, President and CEO; and Ted Dosch, Executive Vice President and CFO, to discuss our fourth quarter financial results. After their remarks, we will open up the line to take your questions.

Before we begin, I want to remind everyone that we will be making forward-looking statements in this presentation, which are subject to a number of factors that could cause Anixter's actual results to differ materially from what is indicated here. We do not undertake to update these statements and refer you to our SEC filings for more information. In conjunction with today's earnings announcement, please find a supplemental slide deck that further details the quarter available on our Investor Relations website, anixter.com/investor.

Today's earnings announcement includes both GAAP and non-GAAP financial results, the reconciliation of which is detailed in our earnings release and in the slide presentation that is posted on our website. Now, I'll turn the call over to Bob.

Robert J. Eck

Good morning, and thank you for joining us for a review of our fourth quarter and full year 2013 results. This morning, I will offer my perspective on our business and the current operating environment, update you on each of our reporting segments and discuss our strategy to grow and gain share in each of our end markets. Then I will turn the call to Ted to detail our financial performance and frame our early thoughts on 2014. Following Ted's comments, we will take your questions.

Before turning to the highlights, let me first comment on the sequential improvement in our sales. Typically, our third quarter has the highest revenues of the year, while the fourth quarter has approximately 3% to 4% lower revenues due to the number of billing days. This year, however, our business grew in the fourth quarter in all segments, which was the result of an additional week in our fourth quarter calendar combined with improvements that I will highlight when I review our 3 segments. During these comments, Ted will detail the impact of the additional week and expenses, margins and cash flow.

As you saw from this morning's press release, we delivered strong performance in the fourth quarter. All of my following comments this morning pertain to results from continuing operations and year-over-year comparisons, exclude the impact of adjustments. As a result, we achieved record fourth quarter sales of $1.6 billion, a 4% increase year-over-year, and a 3% increase versus the third quarter, operating income of $96 million, a 12% increase year-over-year and earnings per diluted share of $1.61, a 24% increase year-over-year.

Looking at our highlights, let me begin with our OEM Supply segment, which achieved a 24% increase in sales to a fourth quarter record of $248 million. This segment had a significant improvement in operating margin and operating income, and was the biggest driver of the company's sales and profit growth in the quarter. Over the past year, we have taken significant actions to restructure and reposition the business, and these actions resulted in very strong quarterly performance. As well, because over half of our OEM Supply revenues are in Europe, the strength in the OEM Supply business helped fuel double-digit sales growth and significant improvement in profitability in our European region.

Second, we saw strong recovery in our Emerging Markets geographies, with organic sales up 14% versus the prior year, reflecting strong growth in all 3 segments. I'd particularly like to highlight the strength in our Latin American ECS business and our Asia Pacific Wire & Cable business, each of which experienced double-digit organic sales growth. As in previous quarters, we had positive results in all of our segments from the gross margin initiatives that we implemented over the past several quarters, achieving sequential and year-over-year gross margin increases in all 3 segments.

From a cash flow perspective, 2013 was a strong year. We generated $137 million in the operating -- in operating cash flow in the quarter, bringing our cash flow for the year to $335 million, over double last year's cash flow. In addition to reflecting the slower sales growth, we have had a relentless focus on working capital initiatives, especially as they relate to optimizing our inventory levels. Finally, consistent with our long-standing philosophy to manage our business with leverage and opportunistically return value to shareholders, we were able to return excess capital to our shareholders through the declaration and payment of a special dividend of $5 per share in the quarter.

Looking at the mix of sales in the quarter, our Enterprise Cabling & Security Solutions segment was 51% of the total, Electrical and Electronic Wire & Cable was 34%, and OEM Supply was 15%, respectively. Geographically, 67% of our sales came from North America, 18% from Europe and the Middle East, and 15% from Emerging Markets. With that as a backdrop, let me review the trends in our end markets. Our fourth quarter Enterprise Cabling & Security Solutions sales of $811 million increased 1% year-over-year. After excluding the impact of foreign exchange, ECS sales increased by 2%. Sequentially, ECS sales increased approximately 1% from the third quarter. Looking at this business by region. Our largest market, North America, was flat. The weakness in the growth of communications infrastructure investment persists, deflecting the caution with which companies are committing capital investment. While the macro data has been mixed, we are seeing increasing indications from our customers that this market is firming.

Turning to our market share. Based on the conversations we have with our suppliers and supported by the data we see in the market, it is our view that we maintain share on our addressable data infrastructure market in the current quarter in most of our markets. Our Emerging Markets business gained momentum over the quarter, with sales up 15% sequentially, as projects that were delayed in the third quarter shipped in the fourth quarter. Like last quarter, our backlog in Latin America is strong, increasing double digits versus a year ago. Based on the momentum we see in this business, we expect to see solid growth in this region for the year. On a year-over-year basis, sales in our ECS Emerging Markets grew by 8% overall and by 10% on an organic basis.

Finally, Europe continues to show signs of stabilizing, up 3% on a sequential basis, marking the third consecutive quarter of improvement in our Europe ECS business. On a year-over-year basis, the business was up slightly. Turning to the portfolio of growth initiatives, the results in our Security Solutions business which represented 27% of our ECS business for the year fell short of our expectations. Excluding the impact of the contract that concluded last year, which we have called out in each of our previous 3 earnings calls, our total ECS Security business grew at about 6% in 2013. We remain confident that this market is large with significant potential for further profitable growth. Consequently, we have taken the appropriate steps within our organization to reaccelerate our growth in this business. Finally, our In-Building Wireless initiative, while still a small part of our total business, continued to achieve strong double-digit growth and we expect the growth will continue in 2014.

Moving to the Electrical and Electronic Wire & Cable segment, our fourth quarter sales of $540 million increased by 2% versus the third quarter and declined by 0.8% versus the prior year. Excluding the impact of foreign exchange and lower average price of copper, organic sales increased 2% versus the prior year. By region, North America sales were up slightly, with strength in our OEM business, offset by fewer projects and slower growth in our day-to-day Industrial business. Given the headwind we face from very strong project business in 2012, we were pleased with these results and the momentum we gained over the quarter. While Canada was still down versus last year, our business strengthened sequentially as we saw a pickup in the project business, particularly with oil, gas and utility customers in Western Canada. We also saw a pickup from the third quarter with our mining customers related to the rebound associated from last summer's construction strike in Eastern Canada.

Turning to EMEA. Our Wire & Cable sales increased by 3% on a reported and organic basis, resulting in sales of $75 million. Results in this business reflect solid growth with our OEM customers and in our industrial project business, with oil, gas and alternative energy customers. Finally, sales in our Emerging Markets region's strengthened, increasing by 11% to $70 million, driven by strength in our Asia Pacific region. On an organic basis, sales in the Emerging Markets region increased by nearly 14%. Overall, we were pleased to see an increase in the number of large projects and we continue to have visibility into a strong pipeline of industrial projects. Ongoing global infrastructure investment across a broad spectrum of customer verticals and increased production rates at OEMs sets up well for continued sales growth in our Wire & Cable business. We see strong quoting activity and believe we have opportunities to further penetrate existing geographies, leveraging our global platform, and take share in both our OEM and Industrial Wire & Cable business.

Our Industrial Communications and Controls initiative, one of our key growth initiatives, achieved double-digit growth in the quarter. For the year, our ICC sales within the Wire & Cable segment were $225 million, a 19% increase over 2012. We continue to build momentum in this business with additional products and an expanded vendor base and are on track with plans to expand our focus beyond North America.

As I mentioned in my opening remarks, we were especially pleased with the performance of our OEM Supply business. By region, North America increased by 8%, reflecting increased production from our heavy truck customers against last year's weaker second half production levels. The production level increase we had expected did not fully materialize in the back half of 2013, and is now being forecast for 2014. Consequently, we expect further acceleration in the North America heavy truck portion of our business for 2014.

In our EMEA region, we achieved sales of $134 million, up 34%, driven by increases in production with existing customers and the continued ramp of a new customer contract, as we have discussed in recent calls. Finally, we continue to see very strong percentage sales growth in our Emerging Markets, as we continue to expand in those geographies. Ted will provide more detail on how to look at this business in 2014.

Let me conclude by saying we're pleased with the steady and significant progress we have made in our OEM Supply business this year. With a renewed focus on an active pipeline of new business opportunities, we believe are well positioned to grow this business with both existing and new customers in the coming year.

Let me now turn to a discussion of gross margin, which was 23.2% in the quarter, a 100 basis point increase versus the year-ago quarter and a 30 basis point increase versus our third quarter of 2013. Our strong performance in gross margin reflects year-over-year and sequential increases in all 3 segments as a result of both our relentless focus on margin realization, combined with more favorable customer and product mix. As we enter 2014, we believe we are well positioned for global growth in all of our segments. In addition to a gradually improving economy, we have strategic initiatives which we believe will enable us to gain market share and exceed market growth across our business.

While we have been surprised by the slow pace of recovery in our communications infrastructure market, the largest portion of our total business, we are seeing more indications that this business is improving in all of our geographies. We are encouraged by signs that capital spending, one of the best macro indicators of our business, may be picking up. Our Wire & Cable segment, which is comprised of steady day-to-day industrial and OEM business and an industrial project business that is more uneven on a quarter-to-quarter basis, had a solid 2013 after a record 2012. Based on our backlog and pipeline of activity, we believe we are on track for solid organic growth in this business in 2014.

Finally, our OEM Supply segment is entering 2014 energized by their 2013 results. With the anticipation of accelerating production by our heavy truck customers in North America, continued growth with existing customers in EMEA and the Emerging Markets, and an active pipeline of new business, we are confident that this business will continue to achieve solid results in 2014.

Now, let me turn the call over to Ted for a detailed analysis of our results.

Theodore A. Dosch

Thank you, Bob, and good morning, everyone. Before I begin a detailed explanation of our results, let me highlight the items that we called out. As you saw from our release, we recorded $1.75 earnings per diluted share, compared to $0.16 in the prior year quarter. Our non-GAAP adjusted earnings of $1.61 per diluted share compares to an adjusted $1.30 in the prior year quarter. Adjusted earnings in the current quarter exclude $4.8 million of lower tax expense, or $0.14 per diluted share, related to our lower full year tax rate of 33.7% applied to the first 3 quarters of the year. The lower rate is primarily driven by the change in the country mix of earnings. Our adjusted earnings for the fourth quarter of 2012 excluded impairment, pension-related and restructuring charges of $46.7 million or $1.14 per diluted share. We believe that non-GAAP earnings is more representative of our ongoing operational performance, and our release includes a schedule which reconciles the GAAP financial results with the non-GAAP adjusted results. All of my following comments this morning pertain to results from continuing operations, and year-over-year comparisons exclude the impact of the adjustments that I just described.

As Bob discussed, we reported total fourth quarter sales of $1.6 billion, a 3.5% increase compared to 1 year ago, and organic sales growth increased by 4.7%. Moving down the income statement, we reported operating income of $95.6 million, a 12% increase; net income of $53.4 million, a 25% increase; and diluted earnings per share of $1.61, a 24% increase, all compared to the prior year. We estimate that the negative earnings impact from lower average copper prices was $0.04 per diluted share.

As we described in our last earnings call, this year's fourth quarter calendar included a 14th week. Due to the holidays, we had approximately 65 billing days versus 62 billing days in the year-ago quarter. Factoring in the impact of these holidays, we estimate that the additional week only benefited sales by approximately 3.5%, it increased our operating expenses by approximately 3% and was approximately neutral to earnings. Finally, although it is more difficult to estimate, we believe the calendar also had a positive impact on our cash flow.

In our OEM Supply segment, one of our OEM customers made a decision to begin to dual source fasteners, which resulted in a one-time sale of remaining inventory. This contributed approximately 2% of the 24% of year-over-year revenue growth for this segment. Our fourth quarter operating expenses of $275.8 million increased by 7.1% versus the year-ago quarter. As a percent of sales, operating expenses were 17.3%, up 60 basis points compared to a year ago. This increase was driven by the following items: a 40 basis points increase due to the 14th week of the quarter; a 30 basis points increase due to higher employee incentive and benefit cost; a 10 basis point increase due to the impact of lower copper prices on our revenue; and all of this was partially offset by savings from our previously announced restructuring actions and pension plan changes. As of the fourth quarter of 2013, we have completed nearly all of our restructuring actions with 95% of the targeted positions reduced and have realized more than the $20 million of our anticipated annualized savings from both the restructuring actions and the pension plan changes. This will be the last quarter that we comment on these savings as we have now fully -- we have now achieved the full quarterly run rate of savings from these actions.

Consolidated operating margin of 6% increased 10 basis points sequentially and 50 basis points versus the prior year. Looking at our operating margin by segment, ECS and Wire & Cable showed the small decline both sequentially and year-over-year. Both businesses delivered strong improvement in gross margin, but this was offset by the higher operating expenses as a percent of sales for the reasons I just explained.

Turning to OEM Supply, our operating margin of 5.5% increased 690 basis points versus the prior year quarter and 180 basis points on a sequential basis. Strong revenue growth, combined with the benefits of our restructuring actions, more than offset the unfavorable expense impacts I described above. We are very pleased with the continued strong progress in the business, which resulted in over 30% operating profit leverage in the last quarter.

As we move further down the income statement, the decrease in interest expense of $5 million year-over-year reflects the redemption of the convertible notes that matured in February 2013, partially offset by the interest related to the $350 million senior notes offering completed in April of 2012. In the first quarter of 2014, interest expense is projected to remain at approximately $11.5 million. Interest expense is estimated to drop by approximately $700,000 for each of the remaining 3 quarters of 2014 due to the upcoming redemption of the 10% notes in March.

Foreign exchange and other expenses of $3.8 million increased $2 million from the prior year quarter, primarily reflecting the negative impact of a strengthening U.S. dollar in multiple foreign markets. The adjusted tax rate in the current quarter was 33.7% versus an adjusted tax rate of 36.5% in the year-ago quarter. For 2014, we are expecting our tax rate to be approximately 34% based on our estimate of the global mix of income. In the quarter, the company generated $137 million of cash from operations, bringing the year-to-date cash flow from operations to $335 million. This compares to $143 million of cash from operations for the full year 2012 and is a result of our relentless focus on improving working capital efficiency, combined with slower growth in the business. Versus 2012, we have reduced our working capital by over $100 million and have improved our working capital as a percentage of sales by an additional 60 basis points. Working capital usage averaged 23% of sales for 2013, compared to 23.6% for 2012. We believe we have further opportunities to improve our working capital efficiency in future quarters.

Finally, we invested $32.2 million in capital expenditures in 2013 versus $34.2 million in 2012. For 2014, we expect to invest approximately $40 million to $45 million in capital projects, including the combination of operational and strategic initiatives. At the end of 2013, our debt-to-total-capital ratio of 44.9% compared to 50.3% at the end of 2012, with a weighted average cost of borrowed capital of 5.4% compared to 6.3% in the prior year quarter. Despite having just paid the special dividend, our current leverage ratio is at the low end of our long-range target of 45% to 50% debt-to-capital, and currently, we expect our leverage ratio to remain near the lower end of the range in 2014. Currently, our liquidity position remains excellent with $324 million of availability under bank revolving credit lines, $145 million of outstanding borrowings under our $300 million accounts receivables securitization facility. Total available liquidity was approximately $480 million at the end of the fourth quarter.

Looking at our capital priorities, we have a disciplined and a prudent approach to how we allocate capital, balancing our 4 priorities, including: supporting organic growth in the business; maintaining a strong balance sheet that provides us financial flexibility, especially in environments where market dynamics can shift quickly; pursuing strategic and financially attractive acquisitions; and opportunistically returning cash to shareholders. Consistent with these priorities, we returned $165 million to shareholders in the fourth quarter via a special dividend of $5 per diluted share. In total, through a combination of share repurchases and special dividends, we have returned over $750 million to shareholders over the past 4 years, representing nearly 80% of our available cash.

Looking at 2014, consistent with my earlier comment regarding the one-time sale of product inventory in our OEM Supply business, effective January 1, we transitioned out of one facility for an existing customer, where we had been the sole source provider for many years. As a result of the customer's strategic sourcing strategy, they decided to move 2 car lines to a second supplier, leaving the remaining 9 lines with us as part of a multi-year contract. This will cause a reduction in revenues of approximately $10 million per quarter beginning in the first quarter. Based on our long-term planning with this customer, we expect to return to the 2013 run rate within 18 months. Excluding the impact of this sourcing change, we would expect our organic sales in this segment to increase in a mid- to high-single-digit range for the full year.

Overall, based on our expectations for a continued slow growth of modestly improving economy, and supported by our backlog and pipeline of new projects, we expect our organic sales growth for the full year to be in the mid-single digit range, a modest acceleration from our fourth quarter trend. We believe this will allow us to deliver high-single digit operating profit leverage. Organic revenue growth excludes currency and copper, both of which unfavorably impacted revenue growth in 2013. At current copper pricing, we would expect the unfavorable impact of copper to continue through the first quarter of 2014.

Let me conclude by emphasizing that we believe the long-term secular drivers of each of our 3 segments are strong, and that the challenges we face are more related to timing and the pace of recovery in the broader economy. From a macro perspective, some key indicators that correlate to our business are improving. In particular, we note expectations for improved capital spending by corporations, continued strength in oil and gas markets and continued significant infrastructure investments, all supporting increased investment by our customers.

With respect to our core EPS business, we believe the secular trends remain very strong. The robust growth in mobility and connectivity drives demand for bandwidth and storage, which in turn, drives demand for the products we sell. While we acknowledge the pickup in this market has been slower than we anticipated, we are seeing increasing indications of an improvement in the market.

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

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Steven Fox with Cross Research.

Steven Bryant Fox - Cross Research LLC

First question, just on the comment about leverage. Obviously, you guys have talked a while about normal operating leverage being sort of that high-singles type of growth versus the growth you're talking about. But it seems like, given some of the secular trends, that you could exceed that. I was just wondering if there's some puts and takes we should also consider within the operating leverage you just laid out for 2014?

Theodore A. Dosch

Yes, Steve, great question. As I mentioned, with 19% operating leverage in the quarter here for Q4, that was the highest operating leverage we've delivered since Q2 of 2010. And was really fueled by a disproportionately high level of growth in that OEM Supply business. As you'll remember, that's our highest gross margin business. And with the very high growth rates -- they had over 20%, they were able to leverage the OpEx in their business very significantly. So we don't expect to continue in the teens like we did here this quarter with our operating profit leverage, but we believe that if we drive at the mid-single digit revenue growth into next year, and based on what we are expecting from both product and customer mix, that we ought to be able to deliver operating profit leverage at the high-end of that single-digit range while we still continue to invest in some of our strategic growth initiatives.

Steven Bryant Fox - Cross Research LLC

Great. That's helpful. And then just secondly, as you highlighted, the security sales for the quarter was somewhat disappointing. But you also -- I think you alluded to just making some changes there to try to reaccelerate growth. Can you just sort of talk about any kind of post-mortem on why it's slowed down so much beyond that one contract, and what exactly you're doing to reaccelerate it, and how long that's going to take?

Robert J. Eck

Yes, Steve, this is Bob. What we think happened is that, as you know, in our business we tend to focus a lot of energy around large enterprise customers. And we don't think we missed much in security investment at the large enterprise customers. What we think we missed, frankly, was volume growth more in the mid-tier of the market. So what we've done is made some changes to our sales organization, which I'm not going to go through in detail on this call, but suffice to say, we made some adjustments that we believe will help us more effectively cover the mid-tier part of that market, both primarily integrators to address where we think the growth is really happening right now.

Steven Bryant Fox - Cross Research LLC

Great, that's helpful. And then just one final question from me. Relative to the overall corporate growth, like I think you said, there's a mixed bag going on within -- in terms of Enterprise spending, depending on the region. Can you just sort of talk about when you roll up Enterprise x Security, how it looks maybe higher or lower versus that mid-single digit type of growth you're talking about for the full year?

Robert J. Eck

For the whole year, we would think that the data part of the Enterprise business will be approximately around that mid-single digit range. We have seen good growth in backlog in January year-over-year. Part of that is attributed to having more days this year in January than we have last year because of the way our calendar is set up. But frankly, we think it's actually real growth in backlog in part because the other thing that impacted us in January from a revenue standpoint was weather. And that impacted sales out the door. It also slows bookings a little bit. Kind of, I think, undeniable for anybody operating across the U.S. that weather was a big impact in January. So, when we look at how much growth we had in backlog in January, year-over-year, we're pretty confident that the data part of that business is going to experience those kind of mid-single digit numbers.

Operator

And next, we'll go to Matt McCall of BB&T Capital Markets.

Matthew Schon McCall - BB&T Capital Markets, Research Division

So Ted, following up on the previous question. You said you're going to continue to invest. Can you remind us of the impact of the growth investment in '13, how much it impacted your earnings? And is that level going to be consistent in '14?

Theodore A. Dosch

Yes. I think that we should expect to see the same to slightly higher from a total dollar spend standpoint in those key initiatives. And just as a reminder, to Bob's point, we're redirecting and adding resources in the security area, one of our 5 key growth initiatives; continue to add more resources in Industrial Communication and Control and In-Building Wireless; and continuing to build out in certain geographies within Emerging Markets as we grow that Wire & Cable business, especially, in those areas. So I'd expect the dollar sales to be -- or, excuse me, the dollar spend on those strategic initiatives to be slightly up year-over-year. Probably no impact as a percent of sales of spend, though.

Matthew Schon McCall - BB&T Capital Markets, Research Division

Okay. Okay. And then you just talked about the expectation for high-single-digit in the OEM business. I assume it's going to be stronger to start the year, I think you've got easier comps. Can you talk about kind of the expectation around geographical strength? And then what end markets or segments do you expect to drive any strength in your guidance?

Theodore A. Dosch

Yes, I think that's a great question. So remember as you alluded to there, that in the OEM Supply business, we had a very weak first half and a much improved back half. So this year, you're right, we'll start with weaker comps in the first half, but I would expect us to have much stronger growth rates in the first half versus last half. From a geographic standpoint, I would expect our growth to be greater in North America, partly because that weakness in the first half was mostly in Europe, North America heavy truck. But then also because of the impact of this sourcing decision by a customer, which will result in lower growth throughout the entire year and our European OEM Supply business compared to the North American business. Having said that though, I think we will continue to see growth in other customer verticals which, over time, will continue to allow us to diversify further beyond that heavy truck customer vertical and make that a smaller percentage of the overall business.

Matthew Schon McCall - BB&T Capital Markets, Research Division

Okay, Ted. And then one more, looking at the segment margins to end the year, is that kind of -- I know you gave an indication on how to look at the incrementals, but is there anything that we should keep in mind when we talk about the starting point for '14 when looking at the Q4 segment margins? Anything that's funky there?

Theodore A. Dosch

Yes. As you know in a somewhat normal year, whatever that is these days, Q4 does tend to be a stronger quarter for us overall from an operating margin standpoint. And we've got a little bit of an anomaly there with higher-than-normal operating margin in the OEM Supply. So consistent with comments that both Bob and I made about significant improvement in that business and we're very pleased with the trajectory thereon, we would not anticipate that business to operate at a 5.5% margin for all of 2014. You'll remember, we had significant growth each quarter of this year with about a 3.7% margin in Q3. So we would expect that business on a full year basis to be operating somewhere between that Q3 and Q4 level, but for a full year delivering nice operating margin leverage, again, like in the fourth quarter. Across the other 2 businesses, ECS and Wire & Cable, within those segments, I don't think there's anything that we would say as a bit of an anomaly in the fourth quarter operating margin per se, and we would expect them to show some improvements throughout 2014 over that same performance level in Q4.

Robert J. Eck

In fact, if I can tag on, I'll say, if anything, in the Enterprise and Wire & Cable businesses, we were softer in gross margin in Q4 than you might normally expect, because we normally get a bigger vendor rebate impact in the fourth quarter, and we did not have a meaningful vendor rebate impact this year in the fourth quarter. So those gross margins should be sustainable as we roll forward. Product mix will affect that, to some degree, as will geographic mix.

Operator

And next, we'll move to Ryan Merkel of William Blair.

Ryan Merkel - William Blair & Company L.L.C., Research Division

I wanted to start off with the outlook and dig in a little bit there. First of all, the mid-single-digit organic sales outlook, is that days-adjusted?

Theodore A. Dosch

Yes, that's what -- well, actually, let me clarify that. That would be on a reported basis, but based on the days, year-over-year, we should only expect to have about a 1-day difference on a full year basis, year-over-year. So it's -- we're somewhere in that 4% to 5%, days-adjusted.

Ryan Merkel - William Blair & Company L.L.C., Research Division

Okay. And then just high level, you talked about the heavy truck and the OEM Supply. You expect that up high-single digits, you expect the heavy truck to continue to perform well. What's your assumption for U.S. heavy truck production? What's the growth rate you're assuming there?

Theodore A. Dosch

Well, if you read some of the public information from some of the other companies, there's a very broad range that some have quoted, anywhere from 0, flat, to 15% increases. So we're targeting somewhere in the middle of that range as an assumption relative to what that industry might do.

Robert J. Eck

Also again, I think -- also worth noting again that, as Ted said earlier, in the first half last year in heavy truck, we had very weak production rates out of our customers. So any improvement -- in fact, if you go up just the run rate we're at in Q4, you'd see meaningful growth.

Ryan Merkel - William Blair & Company L.L.C., Research Division

Yes, I think that make sense. Okay. And then moving to the other 2 end markets. What kind of high-level assumption, this growth assumptions, organically, are we assuming there? And then, just touch on what are you seeing in natural resources CapEx, and then also just IT CapEx? Just what are customers telling you? What is the data you're looking at telling you? And I guess we're going to assume those other 2 markets grow a little bit slower than the mid- to high-single-digits you're going to see in OEM Supply, is that fair?

Theodore A. Dosch

Well, first, Ryan, let me clarify one thing and then Bob can jump in here. The mid- to high-single-digits in OEM Supply is excluding the impact of this one contract change. So actually, on a reported basis, they would only deliver a low single-digit total revenue growth. So the other 2 businesses we would expect to grow more than OEM Supply all up.

Robert J. Eck

And so, then, within those other 2 businesses, if I first talk about data, what we're seeing and what we have in our backlog today is improved spend in data infrastructure, largely data center-related, that's both large enterprises, as well as what I'll call cloud-related providers. To me, cloud is a very big bucket. It includes basically any outsourced data center, as well as a more of an ASP kind of model. We are seeing improvements there. That is what's showing up in our backlog, significant backlog growth in Latin America, as well as in North America. In Wire & Cable, again, we have project wins that are already on the books in multiple geographies that are significant -- large 7- and 8-figure projects. It gives us a lot of confidence that we'll be at that mid-single-digit kind of range in that business as well. So -- and that's, by the way, coming out of mining, it's coming out of oil and gas and chemical and alternative energy, kind of broadly across all those areas.

Ryan Merkel - William Blair & Company L.L.C., Research Division

Great. And if I could just slip up one more in, I want to go to this fastener customer. Just explain the dynamics a bit more at play there. Why did they go to -- why'd they move 2 lines away from you? What's really their goal? I'm guessing it's cost savings. And then, I think you said you're going to see a reduction of $10 million a quarter, but were you hoping to gain some of that back over time? Just talk about that dynamic a bit more.

Robert J. Eck

So the reason that the customer made the decision to shift these 2 product lines away from us, the 2 product lines are in a single plant, so it makes it easy to carve off the 2 product lines. It's actually about derisking their supply chain. We were sole-sourced, had been sole-sourced for many years. The customer looked at it and basically felt like, in effect, they had too many eggs in one basket, and they wanted to make a shift to give themselves an alternative source. That's 100% what the decision is about. I can tell you, the cost savings were very, very small. And in fact, small enough that, frankly, the risk of making the change would swamp the benefit of the change. I will tell you, we're very proud of how our team performed. We worked hard to ensure that customer -- that the transition to our competitor was seamless, which may sound silly except for the fact that we have a long-term relationship with this customer. They are engaging us in growth opportunities in other countries where they, today, do not have manufacturing facilities and are adding facilities. And so, it's certainly in our long-term best interest to be professional and support this customer, as they made the transition. It's one of those things, frankly, that happens in an environment. And we understand it. We wish we could have kept all the business, but we are where we are.

Operator

And next, we have David Manthey with Robert W. Baird.

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

First off, can we talk a little bit more about this new OEM customer ramp? I'm a bit confused about the short-term benefit here. It would seem the nature of your business, you're sort of kind of supplying these products on a JIT basis. So I wouldn't expect there'll be a major channel fill, if I'm wrong, maybe you could correct me there. And why wouldn't -- if this ramped up and they were at a certain level of production, why wouldn't they, at a similar level of benefit, be extended in each of the quarters through -- at least, through the first 3 quarters of 2014?

Robert J. Eck

So, Dave, this is Bob. The issue with the ramp up is that it's a new manufacturing facility. It's not a channel fill issue. So these are -- you're quite right, this is a JIT kind of delivery. It's based on compound holes from our facility. So they aren't building inventory. But if you think about new production of a new large item, when a plant starts up, the production rates are very slow. Basically, as they work the kinks out, then the production rates accelerate. So we've been in that production acceleration rate. And that's why that sort of ramp up that we talked about doesn't continue in perpetuity, because they'll hit a production sort of level at that plant that their expected or targeted production rate, and then it will stabilize.

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

Right. But what I'm thinking is, relative to last year, so if you look at first quarter or second quarter of 2014, relative to last year, if we've hit this new production plateau, it would seem to me that -- that a higher growth rate in OEM would result from just that higher level of production relative to 1 year ago, is that not the case?

Robert J. Eck

Yes, it would be the case, but it's going to be offset again by the loss of this one plant that -- the other customer that we've been talking about.

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

And just so I'm clear on that, I thought you said the impact there was like 2%. And I'm assuming that the impact from this ramp up of this other customer is somewhat greater than that, is that not the case?

Theodore A. Dosch

No. Let me try to -- Dave, clarify a couple of things. The 2% number I threw out was in the fourth quarter that the revenue was enhanced by 2% for a one-time sale of the inventory as we wound down that -- supporting that one location. In 2014, we would estimate that the impact is going to be about $10 million a quarter, and on a quarter basis, that would be about 4% revenue and even more than that in the first couple of quarters of the year, a negative impact. So, for them to deliver, net, about a 2% year-over-year increase for the full year, they will have to deliver 7% to 7.5% organic growth on the rest of the business, and that 7% to 7.5% on the rest of the business does include the impact of this other customer that you're asking about, and Bob was commenting on, which will have much higher growth rates first, second, third quarter of the year, year-over-year, than it will in Q4.

Robert J. Eck

So in effect, it fills some of the hole left by that plant moving to a competitor. The other thing important that I'll add on is, while the loss of the plant impacts sales, in the course of transitioning that to the competitor, the facility and the people were transitioned as well. So the expense to support that went away in the mix. So don't -- don't come away with the perception we'll be overweight on expense as a result of that.

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

Okay. Last question on this, and then I'll let it go. But with the growth rate at 24%, I appreciate that you're saying you're seeing better trends in -- among trucks and better trends generally across the OEM segment. Is there any way that, in terms of this customer ramp, you can give us a magnitude of that or a rough idea of what that was in the fourth quarter? Just so we know sort of what that's going to be added to and so we can figure out what the organic growth should be in 2014?

Theodore A. Dosch

That was, in the fourth quarter alone, that was between 1% and 2% of the annual -- of the year-over-year growth in the quarter.

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

Okay, so it's not that significant.

Robert J. Eck

Yes. It was a significant part of the European part of the growth, but 1% to 2% of the total business.

Operator

And next up, we have Shawn Harrison of Longbow Research.

Shawn M. Harrison - Longbow Research LLC

Just wanted to, I guess, first, touch on your Emerging Markets performance. It's substantially better than, I guess, what the rest of the world is seeing right now. So maybe if you could comment in terms of just the success you're seeing in Emerging Markets, it sounds like a lot of that is tied to success in Enterprise projects, where I know you'd struggle, let's say, in the third quarter and the latter part of the second quarter?

Robert J. Eck

Yes. So, Shawn, it's Bob. We've talked, I think, in some of the other calls, about a large Wire & Cable project in Asia Pac, which continued. That was a contributor to it. In addition, I would say the biggest change we saw was acceleration in Latin America. We had -- our impression with Latin America was recessionary in the first half of last year and moving into the third quarter as well. And we think that has turned around. We experienced it in the fourth quarter. And in fact, I was just in Brazil and Peru last week, and I can tell you, from meeting with customers, as well as doing business reviews for our businesses there, looking at pipelines, we don't have a sense that it's as bad as the sort of press headlines would indicate. There are certainly some individual countries with challenges. But when we look across the broad base of business that we have in Latin America, we're actually seeing pretty strong recovery, lots of project activity. And I'm hearing the same thing from EPCs and large construction companies in Latin America, as well as large data integrators. So, we're comfortable that we're on a rebound. We don't see it evaporating any time soon. And I frankly think some of the headlines have been very focused more on currency movement and very focused on Argentina, Venezuela. And when you look at the underlying strength with some of these countries, it's actually still pretty meaningful.

Shawn M. Harrison - Longbow Research LLC

Very helpful. And then 2 brief follow-ups. If I look at Enterprise, at Cabling & Security in aggregate. Security is 27%, but how do we break down the remainder? In between, I'm looking at more non-res-based, LAN cabling versus the data center side, how is that split? And then the other thing, I guess this question is probably more for Ted. How much now is on the available funds basket entering the year? And your comment on leverage staying at the lower end of the range as well was I guess a bit surprising to me. I know, typically, when it gets low, you like to do something, if you can maybe just talk about the thinking on leverage for 2014?

Theodore A. Dosch

Yes, let me take the first part on the leverage basket. At the end of the year, we have about $65 million available in the restricted payment basket after the payment of the special dividend in Q4.

Robert J. Eck

So moving on to the split between horizontal LAN versus data center. Shawn, we get asked this question a lot and we tend not to answer it, because it's fairly hard for us to carve off when we sell through and then look back into our numbers in a methodical way. What really is data center and what's horizontal LAN. So anything we tell you is going to be purely anecdotal and not based on hard analysis. And our sense is that our project variability right now is largely data center driven. Mainly because there's not much non-res construction in most of the geographies we're in. If there's a lot of non-res construction, you get horizontal LAN business, horizontal LAN projects. So in our day-to-day mix, it's basically everything. It's LAN and data center. In the project business today, it would be weighted towards data center, pretty heavily, mainly because there's not a lot of refresh or non-res construction going on.

Shawn M. Harrison - Longbow Research LLC

Okay. And then just, Ted, is the leverage aspect holding it toward the lower end of the range for 2014, just the thinking on that?

Theodore A. Dosch

My comment there was, as always, assuming no additional return of capital to shareholders and no acquisitions, but obviously, we continue to work our acquisition pipeline and we'll continue to evaluate whether or not it's appropriate to return additional value to shareholders over the course of the year. So the comment, assuming we'd be at the low end was assuming status quo that neither of those special actions would take place. Doesn't mean that they won't, it just means that based on our forecast, we haven't assumed either of those.

Operator

And our next question will come from Gary Farber of CL King.

Gary Farber - CL King & Associates, Inc., Research Division

Just 2 questions. Just on the gross margins. Can you give a sense of how you're thinking about them after this strong quarter? And will they be weighted more so to the first half versus second half, or slightly different?

Robert J. Eck

I think the comments we've already made in the Q&A session on gross margin is that, we think the gross margin in OEM Supply was probably a little higher than we would expect to sustain. So there may be a little bit of softening in the gross margin in OEM Supply. In Enterprise and Wire & Cable, we think the gross margin improvement we've been working on through the year is sustainable.

Theodore A. Dosch

Yes. So, maybe just to add to that, Gary, we delivered 23.2% gross margin in the quarter, which was our highest for the year. With about a 22.8% for the full year number. I would expect us to be able to maintain the 22.8% with some improvement on a consolidated basis going into next year. But not quite get to -- but not achieve 23.2% for the full year of 2014.

Gary Farber - CL King & Associates, Inc., Research Division

And then just one more, just on the interest expense. I think you were saying it was going to come down about $700,000 sequentially. Do you mean $700,000 sequentially into the second quarter then flat for the rest of the year? Or each quarter it's going to come down $700,000?

Theodore A. Dosch

The former. Q2 should be about $700,000 less than Q1, and then maintain that level through the balance of the year.

Operator

And next, we have Noelle Dilts of Stifel.

Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division

First question -- I just had a housekeeping question actually. I noticed in your income statement there was a $1.7 million impairment of goodwill and long-lived assets and I was hoping you could just comment on that and why you elected not to kind of call that out as a one-time item?

Theodore A. Dosch

Yes. Noelle, that $1.7 million was related to the write-off of some capitalized software development cost internally. When we called out impairment in the past they've been a part of our annual goodwill review, and looking at impairment of goodwill associated with prior acquisitions, et cetera. This really was an internally -- this really was capitalized development cost associated with the project we had internally that we decided to go a different direction, with one part of the project, and so these things happen. And so the proper accounting for it was a write-off of an impairment of a long-lived asset. But we did feel it was appropriate to call it out as an unusual item.

Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And I know this isn't huge for you, but your commentary on Europe was obviously kind of dominated by the trends you saw in OEM Supply. Maybe, could you talk a little bit more about what you're seeing in Europe, just in kind of core ECS and Wire & Cable?

Robert J. Eck

Yes. The -- I think what we said in the prepared comments is that the Enterprise business seems to have stabilized. In other words, it's not declining further. We had a weak start last year so we would hope to see some year-over-year growth as we come into the first half of this year. But, honestly, we aren't seeing any kind of hockey-stick growth trend in EMEA. And frankly, wouldn't expect to. We do expect to see some contribution from Saudi Arabia as we get into the year. Wire & Cable, honestly, very similar comments. The OEM part of that business is strengthening in the U.K. Project business in rest of Europe's a little soft. But again, good project opportunities in the Middle East. So -- but we aren't expecting really high-growth out of Europe, given the overall situation in that part of the world. But we don't see a leg down as well.

Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division

Okay, that's helpful. And just one last quick question. Could you touch on just your e-commerce business? What you're -- I know you -- I think you ended the first half with about $400 million in sales. Could you talk about the second half, and then your thoughts on 2014?

Theodore A. Dosch

Yes, I -- Noelle, I don't have a hard number on the second half sales through electronic means which by the way, we include EDI or rebook punch outs, custom integrations, as well as website sales in that bucket, as they're all electronically conducted. And included by the way are some of our electronic JIT programs with customers, JIT programs with customers. So no deterioration, and actually we saw improvement in our new customer development as we went through the second half of the year. We're finding that our digital marketing initiative is helping us reach a large number of new customers. We're very pleased with how it's unfolding, and expect to see more contribution from that in '14.

Operator

And we'll go then next to Brent Rakers of Wunderlich Securities.

Brent D. Rakers - Wunderlich Securities Inc., Research Division

A lot of questions this morning about gross margins in the different categories. Was hoping maybe you can put more specifics to the year-over-year change by -- in each of the 3 categories gross margins please?

Theodore A. Dosch

Yes. As you know, Brent, we don't report out through our disclosures on gross margin by business segment. We're trying to give some color so that you get a sense of how the business is performing on a relative basis and from a trajectory standpoint. So I think our earlier comments about how we performed in Q4, as well as expectations for next year is how we get to my previous comment that I don't think that we would deliver -- we would continue to deliver the Q4 gross margin of 23.2% for our full year. But I would expect us to exceed our 22.8% that we achieved full year 2013 throughout next year.

Brent D. Rakers - Wunderlich Securities Inc., Research Division

Okay. That's great. And then, I guess another question on margins. You talked about the inventory sale in the OEM Supply business. And then also wanted to go back to maybe the shift in some of the project business from Q3 to Q4. I just wanted to see if there was any -- whether it be unusual gross margin or SG&A impact on the quarter from those revenue streams?

Theodore A. Dosch

No. Other than with the sale of that inventory that I referenced in OEM Supply, that really doesn't drag along or that doesn't really create any significant SG&A. So that bit of revenue delivered very nice leverage then helped contribute to the high leverage within that business. But as far as the other projects that we talked about at the end of Q3 that were delayed, I don't think there's anything else unusual relative to the type of projects or their margin or OpEx support for them.

Brent D. Rakers - Wunderlich Securities Inc., Research Division

Okay, great. And then just a final question, you talked a little bit about weather conditions in January. I'm not sure if you quantified maybe what that potential impact has been for you? And then, also, just maybe if you can provide some clarity on the Q1 outlook in the slides, just what the reference point is when you compare -- talk about sequential trends there?

Theodore A. Dosch

The -- what we said in the slide was giving direction to -- for full year 2014 growth year-over-year. But I think as you could tell from some of our comments here, we would expect to have, relatively speaking, higher growth rates year-over-year, top line and bottom line, compared to Q1, which was a relatively weak quarter for us starting out 2013.

Brent D. Rakers - Wunderlich Securities Inc., Research Division

And then, I'm sorry, just the January month impact from weather?

Theodore A. Dosch

We -- as you know, unlike some of the other industrial distributors, we don't typically report out on monthly sales. But as Bob said, we did have a fairly significant and measurable impact on January, primarily in the U.S., not just because of the multiple snowstorms, but as recently as last week with Atlanta and large parts of the southeast being shut down, we have many locations that were down for 1 day to 2 days in that as well. So, we haven't yet been able to quantify. We're just closing the books for January, what that relative impact would be on January. But if it will soften the start to Q1, though, a little bit.

Robert J. Eck

Yes and I think it's important to note that because we have different holiday timing this year than the last year, because of when our fiscal 2013 ended. So, we wouldn't want you to go into the first quarter with an expectation that there will be extra days of sales because of the different calendar this year than last year. We think the weather swamped the effect of the extra days of sales. But we did, again, the improvement in backlog in Enterprise and Wire & Cable as we look at those businesses.

Operator

And that does conclude today's question-and-answer session. I'd like to turn the conference back over to our speakers for any additional or closing comments.

Robert J. Eck

Thank you. As we exit 2013, we believe our differentiated platform continues to be valued by our customers, by providing a true global footprint, technical and engineering expertise, and highly customized supply chain solutions, we help our customers take complexity, risk and cost out of their supply chains. With leading positions in large, diverse and highly fragmented markets, we have attractive opportunities for profitable growth in all of our segments and geographies.

Finally, in the end, it comes down to people, and I am confident that we have the right team in place to drive our strategies, as they have done in the past year of very challenging market conditions. Thank you for joining us this morning.

Operator

And with that, ladies and gentlemen, that does conclude our conference call. We'd like to thank you again for your participation.

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