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Anixter International (NYSE:AXE)

Q4 2010 Earnings Call

February 01, 2011 10:30 am ET

Executives

Chris Kettmann - Senior Vice President

Ted Dosch - Senior Vice President of Global Finance

Robert Eck - Chief Executive Officer, President, Director, Chief Executive Officer of Anixter Inc. and President of Anixter Inc

Dennis Letham - Chief Financial Officer and Executive Vice President of Finance

Analysts

Hamzah Mazari - Crédit Suisse AG

Ted Wheeler - Buckingham Research

Ryan Merkel - William Blair

Shawn Harrison

Anthony Kure - KeyBanc Capital Markets Inc.

Glenn Wortman - Sidoti & Company, LLC

Jeffrey Beach - Stifel, Nicolaus & Co., Inc.

David Manthey - Robert W. Baird & Co. Incorporated

Matthew McCall - BB&T Capital Markets

Brent Rakers - Morgan Keegan & Company, Inc.

Operator

Good day, ladies and gentlemen. Welcome to this Anixter International's Fourth Quarter Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Chris Kettmann for opening remarks. Please go ahead, sir.

Chris Kettmann

Thank you. Good morning, and thank you, all, for joining us today to discuss Anixter's Fourth Quarter and Full Year 2010 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 go to Anixter's website or call Chris Kettmann 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; Dennis Letham, Chief Financial Officer; and Ted Dosch, Senior VP of Finance. After management completes their opening remarks, we will open the line for Q&A session.

Before we begin, I want to remind everyone that statements on this conference call including words such as believe, expect, intend, anticipate, contemplate, estimate, plan, 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 suppliers, 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 differ materially from 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, and thank you for joining us. Before going into the details on the drivers behind our fourth quarter operating performance, I think it's important to note that as we progress through the recent recession, our longer-term historical seasonality patterns for sequential quarter performance have often not applied. The volatility of demand on both ends of the business cycle made it very difficult to predict demand levels from quarter-to-quarter basis. Most recently, our longer-term historical seasonality would have suggested that Q4 sales would be down approximately 3% from Q3 levels, primarily due to the number of holidays in each quarter, as well as the normal holiday downtime that typically affects many of our OEM Supply customers.

However, for only the second time in the last decade, we saw a sequential quarter organic sales increase in the fourth quarter. It would also be helpful to explain the specific items that occurred in the quarter. First and most significantly, our fourth quarter results included $20 million operating expense related to a previously disclosed adverse arbitration award. While we continue to challenge the findings, it was appropriate to record the expense and establish a reserve pending the ultimate resolution of this event. In addition, an after-tax gain of $300,000 was realized on the early retirement of debt, while the $1.3 million benefit from prior year foreign taxes contributed to a lower tax provision in the current quarter.

These three items net to a negative $0.31 per diluted share impact, which when excluded from the as reported EPS of $0.88 per diluted share, results in an adjusted EPS of $1.19 per diluted share. In comparison, fourth quarter 2009 items increased the as reported earnings per diluted share of $0.35 to an adjusted $0.50 per diluted share.

As a reminder, the prior year adjustment was primarily related to the significant devaluation of the Venezuelan bolivar that we've discussed in previous quarters, resulting in an adjusted earnings per diluted share improvement of 138% year-on-year.

Looking at our overall quarterly performance, we're very pleased with the strong 150 basis point improvement in year-on-year operating margins, as well as the sequential 20 basis point improvement, excluding the impact of the items just previously discussed. We delivered our third consecutive quarter of incremental operating margin leverage of more than 14%, as well as another quarter of excellent cash flow performance.

In the fourth quarter of 2010, we were very pleased with the significant progress that we made on our path to return to our prerecession levels of sales and earnings. Now let's begin with a more detailed discussion of fourth quarter sales results. In the fourth quarter, we reported an 18% increase in year-on-year sales. After adjusting for an estimated $19 million of favorable copper prices, $17.3 million of unfavorable effects stemming from our decision to exit the Alcatel-Lucent contract in late 2009 and $1.7 million of unfavorable foreign exchange impacts, organic sales still grew by 18% over the prior-year period.

All three of our end markets, as well as each of our three geographic segments, delivered strong year-on-year growth during the quarter. Sales increased 2% sequentially despite the fourth quarter having two less shipping days than the third quarter. As I mentioned, this type of sequential quarter sales growth runs counter to what is normally experienced in North America and Europe. In Emerging Markets, however, we typically experienced sequential revenue growth from the third to fourth quarter and did so, again, in 2010 with 11% sequential growth. We believe our positive sales results reflected combined impact of improving macroeconomic factors and our strategic growth initiatives across the world, which Bob will discuss in more detail later in the call.

Looking at the fourth quarter sales trends within each of our end markets, we experienced the following. On a worldwide basis, Enterprise Cabling and Security Solutions sales increased organically by 16% as compared to the fourth quarter of last year, exclusive of foreign currency in the previously mentioned exit of a major customer contract within this end market. Security sales grew at an estimated 19% compared with the fourth quarter of 2009, exclusive of foreign exchange effects. Geographically, our Enterprise Cabling and Security Solution sales reflected organic sales growth of 18% in North America, 12% in Europe and 13% in Emerging Markets as compared to the year-ago quarter.

Despite the previously mentioned seasonality from the third and fourth quarter, with the two additional holidays in the fourth quarter, it is important to note that on a sequential basis from the third quarter to the fourth quarter, Enterprise Cabling and Security sales still increased by 2% organically.

Worldwide Electrical Wire and Cable sales exclusive of foreign currency and estimated copper price effects experienced year-on-year organic sales improvement of 24% globally, with North America and Europe showing increases of 25% and 21%, respectively. In addition, sales were up 26% in the much smaller but strategically important Emerging Markets. In addition to the improvements in the day-to-day business, the recovery of Project business continued to strengthen. On a sequential basis from the third quarter to the fourth quarter, worldwide Electrical Wire and Cable sales increased by 2% organically, again, reflecting positive growth despite two less shipping days.

After a very challenging two years in 2008 and 2009, our worldwide OEM Supply business delivered the strongest organic sales growth for full year 2010 of our three end markets. The very positive sales trends that we experienced in the first three quarters of this year continued through the fourth quarter, with the current order delivering a 15% increase on an organic basis as compared with the year-ago quarter.

In North America, we experienced an organic sales increase of 2% year-on-year, while Europe was up 37% and Emerging Markets was up 13%. The OEM Supply has benefited not only from the higher production levels of our OEM customers and almost every customer vertical, but we have also achieved market share gains by adding new customers and new parts sets to existing customers.

Sequentially, worldwide OEM Supply sales were down 1% organically from a very strong third quarter level, driven by our customers normal seasonal scheduled plant shutdowns in the fourth quarter. We believe this end market has begun to benefit from gradually improving corporate and consumer confidence levels as spending on capital industrial goods and durable consumer goods drive demand in this business.

Bob will discuss current business trends and the implications for the future in greater detail in a few moments. Turning next to gross margins. We reported fourth quarter gross margin of 23.3%. Excluding the exchange rate driven lower of cost through market inventory adjustment in Venezuela from the prior year's quarter, the gross margin percentage reflects a 60 basis point improvement year-on-year and a sequential improvement of 10 basis points. We continue to be pleased with the quarterly trend of gross margin improvement we've been experiencing as it reflects the improving sales mix in our overall business, coupled with our various margin improvement initiatives.

Looking next to the operating expenses. Excluding the expense associated with the arbitration award in the current quarter, we reported a year-on-year increase of approximately 12% from $225.7 million in the year-ago quarter to $252.2 million in the current quarter. Foreign currency did not significantly affect operating expenses in the fourth quarter, so the increase of 12% compares favorably with the 18% year-on-year increase in organic sales, exclusive of the previously mentioned terminated Alcatel-Lucent contract. As expected, operating expenses increased sequentially by 1%. Both the year-on-year and sequential quarter increase in operating expense are due to higher variable compensation and other costs associated with the increase in sales and earnings.

To summarize from an operating income perspective, excluding the impact of the arbitration award in the current quarter and the inventory valuation adjustment in the prior-year quarter, operating income was $81.6 million in the fourth quarter, a 60% improvement compared to the prior year's quarter of $51.1 million. The 5.7% operating margin in the current quarter is 150 basis point improvement compared to the 4.2% margin in the year-ago quarter. The improved gross margin combined with lower operating expense run rates contributed to the strong fourth quarter performance, while further positioning us to benefit from a continued macroeconomic recovery.

As we move further down the income statement, interest expense of $12.3 million was down $4.6 million from the year-ago quarter. The decrease was driven by a lower average cost of debt than in the year-ago quarter.

The 5.6% average cost of debt in the fourth quarter of 2010 compares favorably with the 6.1% level in the third quarter of 2010 and the 7.8% rate in year-ago quarter. The reduction in this metric was primarily due to the early retirement of high cost debt. At the end of the current quarter, approximately 67% of our outstanding debt has fixed interest rates either by the terms of the debt or through hedging contracts.

Current quarter repurchases of the 3 1/4% zero coupon convertible notes resulted in a reduction of $30.2 million of accretive value for these notes and the recognition of a $500,000 pretax gain. Other expense of $1.8 million was primarily due to foreign exchange losses and compares favorably to the prior-year quarter of $15.9 million of expense. Last year's expense primarily related to the $13.8 million foreign exchange loss related to repatriation of cash from Venezuela and a revaluation of the Venezuelan balance sheet.

During the current quarter, an effective tax rate of 34.5% resulted in income tax expense of $16.5 million compared to a benefit of $900,000 in the year-ago quarter. Excluding the specific items previously discussed that impacted each quarter's results, the current quarter effective tax rate was 37.5% compared to 42.9% in the year-ago quarter.

The 2010 full year effective tax rate of 39.6% compares to the 2009 full year effective rate of 43.9%, both exclusive of the specific items that we've outlined in 2010 and 2009 earnings releases that impacted quarterly results. The decrease in the effective tax rate for the full year 2010 reflects improved earnings from our foreign operations.

The volatility experienced in the tax rate during the fourth quarter and the full year is primarily driven by income dispersion by geography. For the fourth quarter, the company reported net income of $31.5 million or $0.88 per diluted share, compared to $12.7 million or $0.35 per diluted share reported in the year-ago period. After adjusting for the arbitration award, the gain, on repurchase of debt and prior year tax benefit, the current year net income would be $42.2 million or $1.19 per diluted share. This represents a significant increase of 131% from the net income of $18.3 million or an adjusted $0.50 per diluted share in the prior-year period.

Moving on, we were pleased with another quarter of strong cash flow performance. During the quarter, we generated $29.7 million in cash from operations as compared to $47 million in the year-ago quarter. This quarter's positive cash flow was achieved despite the working capital requirements to support the higher level of sales this year. This brings our cash flow from operations for the full year of 2010 to $195.2 million. We're pleased with our excellent cash flow management considering the year-on-year increase in revenue of almost $500 million.

Capital expenditures were $4.2 million in the quarter compared to $4.4 million in the year-ago quarter. We anticipate continued positive cash flow generation in the coming quarters with cash from earnings exceeding the cash required to support working capital requirements associated with further increases in sales.

During the quarter, we utilized funds from our long-term revolving credit facility to reduce debt through repurchase as previously mentioned. The cumulative effect of the debt repurchases, the payment of a special dividend and the acquisition of Clark has resulted in a debt-to-capital ratio of 46.9% at the end of 2010, up from 44.8% at the end of 2009. This leverage ratio is within our targeted range of 45% to 50% debt to total capital.

At year end, we had $259.8 million in available committed to unused credit lines, $200 million of outstanding borrowings under our $200 million accounts receivable facility and invested cash balances of $46 million. We continue to regard our strong financial position and significant liquidity as important differentiators from many companies in today's still volatile market.

Our position regarding strategic acquisitions remains the same, and our strong capital structure allow us to make the strategic acquisition of flex security products in the fourth quarter. We continue to evaluate the optimal use of cash. If additional near-term acquisition opportunities do not materialize, we may from time to time repurchase outstanding common shares for further reduce borrowings including the 3 1/4% convertible notes.

Our current leverage on the balance sheet and other favorable financial characteristics provide us with the flexibility to adjust quickly to new market realities, fund investments in crucial long-term growth initiatives and allow us to efficiently capitalize on an improved yet uncertain global economic environment. Our payment of the $3.25 per share special dividend in the fourth quarter is an example of our willingness to take advantage of that flexibility to enhance shareholder returns, while maintaining our ability to respond to changing market requirements.

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

Robert Eck

Thanks, Dennis. Thanks, everyone, for joining us today. The fourth quarter generated surprisingly strong sales across all of our reporting segments and end markets. As we said in the last call, we normally expect the sequential decline in sales due to the number of holidays and extended plant closures with our OEM customers during the quarter. However, this year, we saw a continued strength in our business in both OEM and project-related sales during the fourth quarter. Some of this growth is attributable to the acceleration in project billings in our Wire and Cable end market, consistent with the later cycle nature of that business.

Expenses continue to be well controlled in light of the increase in volume that we are experiencing, and we were able to deliver good operating leverage. Throughout the year, the team has focused on tight working capital management and that continued in the quarter, enabling us to generate good positive cash flow in spite of the strong sales growth. Finally, positive operating results and cash flow during the year resulted in our being able to return $111 million in cash to our shareholders in an extraordinary dividend.

The Enterprise Cabling and Security Solution end market experienced strength in data-related projects as well as double-digit growth in security during the fourth quarter in all geographic segments. The recent project trends that we have seen globally in the Enterprise Market reflect ongoing investment in new IT infrastructure, particularly continued growth in data centers. Project activity was healthy in all geographies with the particular acceleration in the Emerging Markets.

Our new business development initiative, global accounts program and channel development program all continued to yield good results across all geographies for the Enterprise Cabling and Security Solutions end market. Leveraging our technical and supply chain expertise, along with our global platform, we've been able to deliver a service offering that is proven valuable to customers with complex requirements. Many of our suppliers have announced price increases for copper data cables and related connectivity taking effect in the first quarter of 2011. However, we are continuing to see competitive pricing for large projects and very large customers.

With that said, we do expect the price increases to take hold over the next several months as copper and various compound costs have increased. It is important to remember that copper cabling is only one of many products that's in our Enterprise Cabling and Solutions end market. Security sales were approximately 10% worldwide for the year, with all markets showing acceleration to a 19% year-on-year growth rate in the fourth quarter.

We were very pleased to complete the acquisition of Clark Security Products during the quarter. Clark brings to Anixter a leading position in lock and access control products in the U.S. market. We believe this presents two opportunities: first, the ability to extend Clark's reach to the dealer market in cities around the country in which Anixter has a presence and where Clark does not; second, Clark's market-leading position in access control and IP door systems, those are gap in our security offering and is highly leverageable across the Anixter customer base, initially in the U.S. but ultimately around the world.

The trends toward Internet protocol base security systems continue to create growth opportunities in both video surveillance and access control. The technology shift towards IP has further raised the focus on the importance of infrastructure capable of supporting the IP-centric, higher bandwidth applications increasingly being deployed. This technology trend is playing out similarly around the world. Our long-standing strength in IP infrastructure recommendation and design enables us to be key resource for customers evaluating security technology.

Moving now to the Electrical and Electronic Wire & Cable end market, the fourth quarter saw a copper increases at about 1.3% to year-on-year growth, similar to the effect it had in the first three quarters of the year. In addition, we experienced project billing increases in line with the increased booking activity over the past few quarters and our expectation that, at this point in the cycle, we would see a ramp up in the longer cycle industrial, energy and mining projects.

We have seen ongoing strength in engineering activity for larger industrial projects, the lowest project awards being released along with good project backlogs at the engineering, procurement and construction customers. Global trends in industrial production, natural resource development and energy generation continue then we would expect the healthy sales in our Wire & Cable end market to continue as well.

While copper is up significantly from last year, the impact in sales continues to lag the change in the spot price of copper. This is due to both continued excess cable manufacturing capacity, as well as lower price inventory in the supply chain. If the cost of copper remains at or near its current levels, we will realize some price inflation in the coming quarters. However, as we have said in the past, the prices of some future project shipments we'll bill out at will reflect the lower cost committed by our suppliers at the time of the project award. These factors will cause a lag in realization of the copper cost increase.

Our initiatives in the Wire & Cable end market continue to include focusing on a new business development, geographic and product expansion and enhancing our support for global customers, including the EPC companies. We are making progress with our expansion in Latin America recently winning several large projects. We also continue to enlarge projects in mining, power generation and oil and gas with both end users and the global EPC companies around the world.

Project pipeline in 2011 show signs of continued strength. However, much of that project activity will occur outside the U.S. Our ability to support U.S.-based engineering and purchasing teams, as well as in-country project management organizations, positions us well to participate in this project activity.

Turning to the OEM Supply end market. In the industrial vertical, we are continuing to experience growth of what was actually an improving fourth quarter in 2009. Growth was broad-based in EMEA and North America. Growth is coming from three sources: increased production rates, extending our programs at existing customers to include more products and new contract wins. New program implementations are underway or planned for later this year and will contribute to growth in 2011.

In addition, the pipeline of new opportunities, particularly with global customers planning to consolidated volume with fewer suppliers is promising. We indicated in discussing third quarter results, we experienced significant gross margin pressure in Europe due to suppliers seeking high price while customers resisted having those increases passed down to them. This situation arose primarily from anti-dumping duties imposed on fastener imports from China, creating pricing protection for European manufacturers. At the time we said that we were working on both resourcing to other suppliers, as well as negotiating price increases in our contracts with those customers.

Those efforts did generate some modest improvement in the fourth quarter with further improvements in pricing and margin phasing in during early 2011. The aerospace vertical market continues to show flat sales as the market broadly is not showing growth. Therefore, we anticipate ongoing challenges for the aerospace vertical market till the commercial aircraft market experiences a meaningful recovery. As noted in Dennis' comments, we did have an unfavorable outcome in a previously disclosed arbitration hearing in the fourth quarter related to an aerospace customer. While we have filed the motion to vacate the award based on both our view of the facts and the dissenting arbitrator's written opinion, we have nonetheless recorded a charge to earnings for the unfavorable award.

All end markets continue to relentlessly stride to add new customers, and we've been successful with this effort in all geographies. In addition, geographic expansion we have discussing additional progress, sales and logistics presence added in several cities in Asia and South America during 2010, along with opening our first location in Africa with the establishment of a business in Morocco during the fourth quarter. In spite of recent events, we believe North Africa presents an interesting growth opportunity for the medium to long term. The political stability, infrastructure projects and manufacturing growth in Morocco make it a good place for us to enter the region.

The only distributor in the end markets in which we participate delivering a value-added technical support and Supply Chain Service model in over 50 countries around the world continue to find success with customers by providing global reach with a local touch and cross-selling across our end market specialties. As we look forward to 2011, there's an increasing number of economic data points indicating a more sustainable economic recovery, tempered by the fact that there's still significant international sovereign and debt issues and government budgetary issues at all levels within the U.S. We believe we can generate 2011 sales growth in excess of GDP growth rates through market share gains and our growth initiatives. We will continue to invest in growth initiatives that can lead to better operational leverage of our extensive and in some cases, underutilized, global service platform.

The combination of sales growth and better operational leverage should lead to further improvements in operating margins in the coming year. Based on the level of anticipated sales growth that we expect in 2011, we also anticipate generating significant cash flow from operations. This anticipated cash flow, in combination with the existing credit facilities we have in place, provides us with ample liquidity to pursue acquisitions or capital structure actions that can enhance shareholder returns for the coming year.

We'll now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Hamzah Mazari, Credit Suisse.

Hamzah Mazari - Crédit Suisse AG

The first one, you obviously, touched on Q4 sales coming in much stronger than expected. Are you beginning to see share gains materialize within that number? And is the strength broad-based? I know you talked about 2011 as seeing some share gains. Are you beginning to see those already in your numbers?

Robert Eck

Hamzah, this is Bob. I think we are seeing share gains in our numbers, and let me just highlight, when we talk about share gains, I think the important thing to remember about all three of our end markets and all of the geographies we're in, the distribution competitor base is extensive and still somewhat fragmented. There are, of course, a couple of large players that we're all familiar with in the industry. But among the large players we don't, in effect, sort of control the markets. So I think we are taking some market share gains, and I think we're sort of in an environment where the big guys are doing well potentially at the expense of some of the smaller players in the market.

Hamzah Mazari - Crédit Suisse AG

And then could you just touch on how much excess copper manufacturing capacity is really out there in the system? And do you expect that to be absorbed over a certain time frame or is some of it just going to remain? And then what's the current lag that you're seeing in terms of passing through copper? I know you touched on that, but is the lag longer than historic? Or how should we think about that?

Robert Eck

I'll start with the manufacturing capacity. I think the best way to get numbers on that it would actually be to talk with the manufacturers themselves, and I know some of our suppliers are going to release, and I certainly wouldn't be in a position to comment on their capacity utilization. But it is our opinion that there is some excess capacity. I think that capacity does get taken up with demand over time, and the capacity situation is probably a little bit different by product, such across the cabling market. In terms of the lag and the pass-through of the spot price increase, we've talked a lot about this through the course of really, I'd say the recession and the tremendous volatility we've seen in copper over the past year and a half to two years. I don't know, Hamzah, that we can tell you how long the lag is specifically other than the fact that while demand is picking up, that would certainly suggest we'll accelerate our ability to recover some of that. If you assume that inventory turns, say, four-ish times over the course of the year that gives you some sense of how long it takes for the average cost to actually hit the inventory in the channel and when I'm describing to me, it's the full supply chain channel. So it's how does the price increase move from the broad plants into the cable manufacturers, work in process of cable manufacturers finished inventory to inventory sitting in distribution. So if you assume four turns gradually over the year, that price increase will move through that inventory. So over time, we'll expect to see it. I don't want to put a stake in the ground though and say that the average inventory cost will hit the current spot price across the channel at a certain point in time because I'd probably be misleading if I try to do that.

Hamzah Mazari - Crédit Suisse AG

Is it fair to say given the strength that you're seeing on your top line, that you're -- and greater visibility in your business that you're hungrier or your appetite is stronger for acquisitions relative to returning cash as you did in Q4?

Robert Eck

I think our appetite for acquisitions since we've been in a more recovering environment has been pretty strong. The question is always will the acquisition be additive to shareholder value, will we create value by doing an acquisition? So I don't think, as an organization, we've ever been compelled to do acquisitions or felt pressured to do acquisitions just because we were in a healthy environment. I think our mentality around acquisitions is that we're always interested in looking at things that strategically do something beneficial for the company, but they've got to be the right transaction. So if the pipeline fills up with more opportunities, hopefully, we'll be able to participate in that.

Operator

The next question comes from Shawn Harrison, Longbow Research.

Shawn Harrison

First question, just going back to your comment on I guess seasonality not being normal at this time of the year, this time in the cycle, typically the first quarter is pretty flattish. Does your commentary imply that you should see maybe because that some of the stronger trends including the projects, as well as some potential inflation from commodities growth in the quarter?

Dennis Letham

Well, let's take a second, Shawn and look at why it's typically flat from Q4 to Q1. While Q1 typically has less holiday impact than Q4, which is a positive. Weighing in the other direction is every year somewhere in the world during that time period, you're going to get some weather-related negative impact. And as it relates to project business, what you typically find is in the early weeks of the year and whether that's four weeks, six weeks or whatever, many companies are still kind of ramping up their planning and starting to execute on the bigger items in the project before they get to the components that we supply. So we don't see kind of seasonal pickup or the annual pickup in that project activity until typically sort of middle of the first quarter. I don't think there's anything different and certainly sitting here in Chicago today, I think depending on the weather front we'll typically see, and I think that pattern around when people kind of gear up and execute on capital spending I don't think is necessarily any different. So our expectation right now is that we would probably see something fairly normal, meaning fairly flat from Q4 to Q1.

Shawn Harrison

The commentary on OEM Supply regarding the aerospace market seemed to me at least to be a little bit more cautious of a view than maybe what I'm seeing in aspects of the component supply chain or from some of the aerospace companies themselves. Is there still an inventory issue? Is there something else going on regarding your cautious statements and then my other question was just the tax rate assumption for 2011.

Ted Dosch

Yes, Shawn, first on the aerospace side, I would say yes, there is still a bit of working through the inventory. Now despite a lot of the announcements we read in the press about various manufacturers taking up production rates, and we've probably been reading about some of those for six to 12 months, most of those don't actually affect their production volumes until late this year, early '12. And considering the very long lead time, usually 52 weeks or more, with the suppliers in this segment, it has taken a considerable amount of time to work inventories down, both the inventories at the manufacturers, as well as with the distributor base. So that's why we've continued to say that we wouldn't expect to see any significant uptick in that business until late this year considering or assuming there's no further delays in kind of the macroeconomics within the industry.

Robert Eck

I guess maybe one other piece of color to add to that. This is Bob, Shawn. One of the things that's important when you think about us is Airbus has announced a lot of new sales. Of course, new sales take a long time to become production in commercial aircraft. But importantly, we have very limited exposure to Airbus. So when Airbus announces that they booked a pile of orders, that's not terribly meaningful to us. On the Boeing part of the equation, the 787 has been delayed again, which means that everybody who's contributing parts and components in the 787 are sitting on work in process in inventory that's not going anyplace.

Dennis Letham

So just to complete the tag team on that answer, the last component would be there's an element of what we're doing. Its defense related to and there's budget considerations, budget discussions going on in Washington. We just want to be cautious on the defense front there.

Robert Eck

The second part of your question, Shawn, just on the effective tax rate, you might remember we started the year off projecting a rate of about 40% for the full year, which is what we booked the first two quarters. We had to take that up in the third quarter because at that time, as Dennis mentioned earlier, our projections for some of the earnings from some foreign operations had dropped, so we raised our full year projection to about 41.5%. Now with some stronger results coming from foreign operations, we ended the full year at about 39.6%. So even though it was a little bit lumpy in how we got there, the Europe finished pretty much with where we had projected it to be at the beginning of the year. So I think using that kind of full year rate of that 39.6% is probably a good projection to use going into 2011.

Operator

Matt McCall of BB&T Capital Markets has the next question.

Matthew McCall - BB&T Capital Markets

So on the project commentary, I guess first maybe can you give an idea of maybe we could talk about it from an order perspective but what was the mix of that day-to-day versus project and maybe you can talk about it relative to where it's been in the past, maybe where it troughed and where you've seen it peak in the past.

Robert Eck

Matt, what we've always said about the project versus day-to-day and the Enterprise business and in the Wire and Cable business is that in strong demand environments, project billings account for something like 20-ish percent of sales. Day-to-day accounts for about 80% when we get into sort of the trough of the recession. The project activity is 10% to high single digits in the mix. Where we are at this point in the recovery is that we're not at 20%. We're not at 10%. We're kind of moving up that sort of project mix.

Matthew McCall - BB&T Capital Markets

And so as you look out 2011, Bob, I guess more qualitatively than anything but as you break out the part of your business, I'll let you choose how to break it out but what do you see is those areas of the business that you expect to provide the most growth and maybe what parts do you expect to lag a little bit? Just approach it from any angle you want.

Robert Eck

Well, I think we're expecting reasonably good growth opportunities across all of the end markets and all the geographies. I think the only piece of business is the aerospace vertical market where we're a little more cautious still because we think the recovery is going to hit slower there. But aside from that, frankly I feel good about the opportunities across all of this. I don't know if Dennis or Ted, do you have any other color you could add to that?

Ted Dosch

The only thing I'd add to that, Matt, is you'll remember from our past conversations and kind of the cyclicality of our business, our OEM Supply business was the first really to enter the recession, the first to come out so they're now anniversary-ing -- they'll be the first to anniversary stronger numbers, ECS, the Enterprise Cabling was next and then Wire & Cable, as you might remember, really didn't experience their first down quarter until Q2 of last year. So I think based on that and the strength of what we're seeing now, you'd continue to see some -- the growth rates kind of inverse to that relationship as to how they entered and exited the recession.

Matthew McCall - BB&T Capital Markets

Bob, you went through that the -- where the projects are coming from a little quickly, more quickly than I could write it. But just if you go to that again, where are you seeing the strength in maybe if you could -- maybe in descending order where some of the best activity is occurring and is expected to occur?

Robert Eck

Well, I'll do it in no particular order. In Enterprise Cabling and Security Solutions, we've seen good project activity in security projects, primarily video surveillance. Certainly with the acquisition of Clark, we'll hopefully see an uptick in access control projects as well, but security has been healthy, and IT projects continue to be healthy. I think, in fact, there was an article in the Wall Street Journal this morning that was calling out after looking at EMC's results and some other companies results that IT spending was apparently strong in the fourth quarter across large companies, and I think we could typically see if earnings are strong, IT spending tends to be strong. So that's holding up well. In the Wire & Cable space, the vertical markets where we're seeing activity are power generation whether it's alternative energy or carbon-based, oil and gas and natural resources, mining, et cetera. So all those areas are strong and have opportunities.

Operator

Our next question today comes from David Manthey, Robert W. Baird.

David Manthey - Robert W. Baird & Co. Incorporated

Looking back to 2009 as we slid into the recession, you had indicated you expected low double-digit contribution margin on the next $500 million of revenues to take you back up to about $5.5 billion and now that we're there, I was wondering if you could give us your thoughts on contribution margin going forward? Do you still feel you have excess capacity or are you at a point we need to start adding incremental people or capacity or something else flex up.

Ted Dosch

Yes, David. You've kind of hit the nail on the head there. We did experience as we said three straight quarters of over 14% incremental operating margin. We've described a broader recovery period of six to eight quarters that we should average about 10% to 12% incremental operating profit margin during that time. Higher than that going in, which we did and we would expect that number to drop as the year progresses here in 2011. We do think we still have some excess capacity that we'll get some nice leverage operating cost leverage, especially here in the first half of the year. But as the year progresses and the revenue continues to ramp up, we'll have to add some costs beyond just warehouse folks to support the higher volume. At some point here this year, most likely we have to add some additional costs to support inventory management, procurement, sales, et cetera.

David Manthey - Robert W. Baird & Co. Incorporated

And then, Dennis, you had mentioned earlier that you expected flat volumes 4Q to 1Q, and I'm just trying to understand actually, I think you said flat revenues. I'm wondering was that unit volumes, was it average daily sales, was it just overall revenues how are you thinking about that flatness?

Dennis Letham

Yes, that was overall revenue, Dave.

David Manthey - Robert W. Baird & Co. Incorporated

And then how many selling days were there in the fourth quarter? And I don't know if you can give us the quarters through 2011 also.

Dennis Letham

We haven't sorted out 2011. I don't have that with me at this point. I think Q4 had 61 days, our estimation, and that's got some rounding in there for like Friday after Thanksgiving.

Ted Dosch

We expect 65 here in Q1 is with the way New Year spell in our Q4 and Easter into Q2, we won't have any holidays in Q1, so it should be the full 65 days.

Robert Eck

Then I guess, one other piece of commentary on that is that tend to have a little bit slower Q1 in the Emerging Markets. It's generally our pattern in Latin America, a little bit slower we have a strong ramp through the year with a big close out in Q4. And in Asia proper, Chinese New Year, which we had just gone through here in January 10, they have a big effect and you lose pretty much of a week in Asia for Chinese New Year. So that dampens the numbers a little bit as well. I think that's how we get to our flattish sequential growth.

Operator

William Blair's Ryan Merkel has the next question.

Ryan Merkel - William Blair

I'd like to start with the North American industrial Wire & Cable business. Results were very strong in the quarter, and I want to understand if the strength was more to the OEM market or was it large projects or was it both?

Robert Eck

It was large projects. The OEM market actually was beginning to anniversary in Q4, a healthy Q4 last year. So that picked up. The OEM market was up, but up pretty modestly. It's the project activity, the project billing kicking in.

Dennis Letham

Ryan, I think if you went back to last couple of quarters transcripts on these calls, you'd find that we were talking about or responding to questions about the fact that backlog was building faster in the electrical Wire & Cable business, than what the billings were because of the lift of the project cycles there. So to some degree, what happened in the fourth quarter there is just kind of a follow-through of bookings that came in Q2 and Q3.

Ryan Merkel - William Blair

And then on Europe, it looks like you might be mostly through the cost issues in the European OEM Supply market. Do you think Europe can return to profitability in the first quarter of '11 or might it take a little bit longer?

Ted Dosch

Yes, Ryan, first on the cost issue that you mentioned, as we said last time and I think as Bob commented on, we had expected this to take about six months before the price increases that we were able to negotiate with our customers would offset the cost increases we were getting from the supply base there in Europe. And we still believe that, that is about the right time. So in Q4, we had kind of a full quarter impact of that affecting us and still somewhat depressing the margins. Here in Q1, we begin to turn positive relative to those material cost increases in the OEM Supply business, and so we do look to be profitable this year in Europe. We'll see gradual improvement. I would expect each quarter as that goes through the year, but it could be a little lumpy quarter-by-quarter as the year progresses.

Ryan Merkel - William Blair

And then lastly on pricing, can you comment on how much the recent price increase was? And could pricing add more meaningfully to sales in 2011 or is kind of that 1%, 1.5% price still the right range at least at this point?

Robert Eck

Ryan, I'm guessing you're referring specifically to the price increases in the copper data cables?

Ryan Merkel - William Blair

Correct.

Robert Eck

I'd have a hard time plugging a specific top line revenue impact to that first, because of what percent copper data cables and connectivity are in our mix and secondly, we tend to be skewed towards Fortune 1000 sort of customers and institutions and larger projects and the price increases don't typically pass-through into those projects at the same rate they're sort of stated on distribution reference pricing or price into distribution. So we will get uplift in the year from it. I would have a hard time pinning down a specific number that the impact will be on the ECS growth.

Operator

Jeff Beach of Stifel, Nicolaus has the next question.

Jeffrey Beach - Stifel, Nicolaus & Co., Inc.

You talked in the Electric Wire & Cable about a strong project pipeline with much of it outside of the U.S. Could you point to some of the geographic areas and more specific, some of the end markets and maybe the type of projects you're seeing that are strong in the Emerging Markets to give us a flavor for what's driving these sales?

Robert Eck

I can give you a flavor of what's driving the pipeline that I was describing that we view as being very strong, particularly at the EPCs. Mining projects in South America and Canada are going gangbusters. There are new mines opening in China, in Northern China. There are a lot of gas projects in Australia and Indonesia right now. There are gas and oil projects in the Middle East. There's a lot of development continuing there and power gen, there's projects in the U.S., Europe, North Africa, South America and Asia. So fairly broad I guess I'd say in the Emerging Markets, the places where you typically think of resource base and oil and gas kind of projects.

Jeffrey Beach - Stifel, Nicolaus & Co., Inc.

The other thing is can you give us an idea about how much copper contributed to the fourth quarter earnings year-over-year and sequentially? Do you have even a ballpark?

Ted Dosch

Yes. If you look at the impact on revenue that we record each quarter, which was about $19 million in the quarter and about $70 million for the year positive. If you take about 20% of that number, that's what really flows through both gross margin and operating margin. So we're talking between $3 million and $4 million a quarter.

Jeffrey Beach - Stifel, Nicolaus & Co., Inc.

How about sequentially?

Ted Dosch

Sequentially, it kind of gets lost in the rounding. It probably was less than $500,000 incremental gross margin Q3 to Q4.

Operator

Our next question comes from Ted Wheeler, Buckingham Research.

Ted Wheeler - Buckingham Research

I wonder if I could get a little more color. I suspect it's aerospace but the OEM Supply in North America revenue performance, maybe you could just explain that a little bit more, the slow growth in the quarter.

Ted Dosch

Yes. A couple of things contributed to that. Ted, in that segment, if you look at that growing slower than any of the other end markets here in North America, it's affected by a couple of things. Certainly, the Aerospace business grew much less than either of other two end markets. But specifically in the industrial OEM, it was somewhat flattish 2009 Q4 to 2010 for a couple of reasons. One of which was in Q4 of 2009. You might remember we talked about a fairly significant build, pre-build in the heavy truck industry prior to the emissions standards have all changed effective 1/1/10, as well as that was a period of time again, this was the first end market of ours to begin to experience recovery, and so we had a fairly significant amount of kind of inventory replenishment where our customers, the OEMs, were building back their inventory levels and were producing at higher levels than demand at that time. On the other hand, we feel very good about the pipeline that we have in this business as we continue to do what Bob referred to earlier as not only add additional customers to this end market but also increase the number of part sets that we have with many of our existing customers.

Ted Wheeler - Buckingham Research

Would you think that the positioning of the inventory, I mean, the orders are ramping in the heavy industries, so would you think your customers are at a good position on inventory meaning, they're full up or are they beginning to scramble a little bit? I know it doesn't show in the numbers in the quarter but things are moving fast in that industry.

Ted Dosch

Yes, across many of the customer verticals we serve in the OEM Supply on the industrial side whether it's agriculture equipment, heavy truck or construction equipment, et cetera, we are hearing from many of those customers some fairly significant production rate increases as this year progresses. That should definitely be a positive for us in that end market.

Ted Wheeler - Buckingham Research

And that remains a high margin mix too, correct?

Ted Dosch

Correct.

Ted Wheeler - Buckingham Research

And on the North America market again, do you have any color on project increase? I guess the project revenues are coming from international but how do the orders look in that North America project?

Robert Eck

So project revenues are coming domestically in the U.S. across Canada as well, as well as rest of the world. So the billing increases are coming broadly across all of the geographies. The discussion around some of this big pipeline activity is forward-looking, and that's where we really see a lot of very large projects that are going to happen outside the U.S., being delivered outside the U.S. But in the quarter, we still have strong activity in North America in Wire & Cable and Enterprise, more projects, and we continue to have lots of inquiries, a lot of quoting activity in project activity in North America.

Ted Wheeler - Buckingham Research

So this international comment really sounds like it's additive to the flow that you've seen in recent quarters? You've just given aggregate sort of analysis here?

Robert Eck

That's exactly right, yes.

Ted Wheeler - Buckingham Research

You talked about positive operating cash flow. I mean, you did very well considering the revenue growth in the fourth quarter. I mean, are we looking at comparable ratios of operating cash flow to revenue growth if you look at '11 as the fourth quarter?

Dennis Letham

I think if you looked at 2010, Ted, we had some very strong focus on working capital management with $500 million roughly increase in revenue if you look at our historical measures where it takes about $0.25 of working capital per revenue dollar, that would have implied a working capital investment for the year of somewhere in the range of $125 million. But I think the actual number was somewhere in the $30 million, $40 million range. So we feel that we did a pretty good job on getting some enhanced inventory turns in certain parts of the business, getting better receivable collection in parts of the business. We certainly are going to continue that focus as we go into 2011. I'm not sure we can expect to get quite that much leverage other than that.

Ted Wheeler - Buckingham Research

Do you think that 20% per dollar has changed now with your new policies or is that just a...

Dennis Letham

The scheme of things as big as the numbers are and then one of the things, obviously, plays into that is where does the sales growth come from? If it comes internationally, it typically carries a heavier working capital investment on it than it becomes in the U.S. that sort of thing. So I think we're within $0.01 or so of that historical number of $0.25 per revenue dollar in the aggregate. It's just what the incremental sales mix and what does it take to support that.

Operator

Next up we'll hear from Anthony Kure, KeyBanc.

Anthony Kure - KeyBanc Capital Markets Inc.

Could you just talk about the environment in Venezuela, how that's been progressing recently over the past several months? Is it stabilized there or maybe just your thoughts on Venezuela?

Ted Dosch

Tony, the best way for us to answer that is how has our business stabilized it. I think we all agree it's pretty difficult to speak to Venezuela and use stabilization in the same sentence. But as we talked earlier in the year, we have significantly shifted our business model away from what was a combination of exports out of the U.S. and locally based inventory sales to predominantly now export sales out of Miami, U.S. dollar-denominated and significantly reduced our exposure in country, both with inventory levels, as well as the size of our staff. We're still aggressively pursuing projects in the day-to-day business there, but to a large degree, demand and the type of projects and so forth that are actually taking place there is down significantly than say, 12 or 18 months ago. So we think we have derisked our business model significantly, not taken out all risks considering the environment there. But what we have this year is a business that has a little lower margin above the operating margin line, but also significantly less FX exposure, which, as you remember, hit us below the line last year.

Anthony Kure - KeyBanc Capital Markets Inc.

And then just maybe if you could talk cadence through the quarter by month, I mean, given that it was sort of an outlier from a historical seasonality, did you see demand actually improve into December? And maybe how would that compare to January?

Dennis Letham

I think, Tony, if you look at how the fourth quarter would typically play out, October for us is usually one of our better months of the year. Again, it was this year and then really when you get to the middle of November is when you start to see things slow down, particularly in North America. We have Thanksgiving holiday period and through the Christmas and New Year holiday period. And what we saw this year was the slowdown from middle of November through the end of the year was less than what we would have historically seen, still down but less than normal.

Anthony Kure - KeyBanc Capital Markets Inc.

Just want to make sure I have the numbers right. Did you say security or I just want to clarify, security was up around 19% year-over-year and was that 10% growth? Maybe just if you could go through those numbers again.

Ted Dosch

19% in the quarter, 10% for full year, year-over-year.

Operator

Next up we'll hear from Glenn Wortman, Sidoti & Company.

Glenn Wortman - Sidoti & Company, LLC

Just back to your first quarter expectation for flat revenue sequentially, does that exclude the impact from Clark?

Ted Dosch

Yes. As we mentioned earlier in our release, with Clark a little over $100 million of sales, that would obviously not be in our Q4 base as a starting point.

Glenn Wortman - Sidoti & Company, LLC

And then just looking at Europe, which was very strong in the quarter along with your other geographies, was there anything unusual or onetime in Europe that drove your sales higher?

Ted Dosch

No.

Glenn Wortman - Sidoti & Company, LLC

And then lastly just the tax rate that we should be using for 2011?

Ted Dosch

Yes. I think our full year rate for 2010 of 39.6% is probably a good estimate to use for 2011.

Operator

Our final question today comes from Brent Rakers, Morgan Keegan.

Brent Rakers - Morgan Keegan & Company, Inc.

I guess first and I think, Bob, I think you commented specifically about it, but if you could talk about the contract awards within OEM Supply, just wondered if that was more kind of a regular pattern of share gain or if that was more similar to some of the wins I think you had back in mid-2008.

Robert Eck

I think the new contract win activity is probably a little bit lower than it was preceding the recession. However, we had a lot of new part number additions into those existing customers as well, and I think what I called out was a strong pipeline of large consolidation opportunities as we go into 2011.

Brent Rakers - Morgan Keegan & Company, Inc.

And then maybe if you could give some perspective on maybe on an overall basis if pricing and mix were to remain constant, how much potential gross margin recovery could you have over the next several years on a percentage basis?

Ted Dosch

Well, if you remember prerecession to kind of the late '08, early '09 to middle of '09, prerecession to middle of '09, our gross margins dropped from close to 24% down to around 23%. Actually trough was in the high 22s. And we had said to get back up to that 24% level, we would need to see not only a recovery of total our business up and about $6 billion, but a mix of business comparable to what we had before because of the much higher gross margins realized in the OEM Supply business. So...

Dennis Letham

As well as geographic.

Ted Dosch

As well as the geographic mix, which obviously Europe helps that. So our OEM Supply business highest gross margin market was down the most. Europe, our highest gross margin region, was down the most. So it makes a big difference the rate of growth in each of those as we grow back. So we ended 2010 Q4 here at 23.3% gross margin, the fourth straight quarter of either 10 or 20 basis points of margin improvement sequentially each quarter. If we continue to see the growth at the top line and a large percentage of that growth coming in both Europe and OEM Supply, we should continue to see the gross margin tick up a little bit as we progress through the quarters of this year.

Brent Rakers - Morgan Keegan & Company, Inc.

And then last question maybe a quick one in response I think to maybe Dennis' last answer, regarding the kind of the healthier levels of business in second half of November and December and then maybe what's going on in January, is there any chance that some of that is pulled forward of revenue surrounding pricing increases in the Enterprise segment?

Robert Eck

No, I think that's very unlikely.

Chris Kettmann

Thanks. At this point, we'll close the call. So thank you for joining us today. We believe that the global economy is undergoing a modest recovery and our global reach, strategic initiatives and value-added business model position us well to support our customers in an improving economic environment. Thank you.

Operator

Ladies and gentlemen, that does conclude today's conference. Thank you, all, for your participation.

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