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Anixter International (NYSE:AXE)

Q4 2011 Earnings Call

January 31, 2012 10:30 am ET

Executives

Chris Kettmann - Senior Vice President

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

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

Analysts

Jack C. Stimac - BB&T Capital Markets, Research Division

Hamzah Mazari - Crédit Suisse AG, Research Division

Shawn M. Harrison - Longbow Research LLC

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

Jeffrey L. Beach - Stifel, Nicolaus & Co., Inc., Research Division

Anthony C. Kure - KeyBanc Capital Markets Inc., Research Division

Anjali R. Voria - Morgan Keegan & Company, Inc., Research Division

Operator

Good day, and welcome to the Anixter Fourth Quarter 2011 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Chris Kettmann. Please go ahead.

Chris Kettmann

Thank you. And good morning and thank you, all, for joining us today to discuss Anixter's fourth quarter and full year 2011 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 the Anixter's management team are Bob Eck, President and CEO; and Ted Dosch, Executive Vice President and 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 in this conference call, including words such as believe, expect, intend, anticipate, contemplate, estimate, plan, project, should, may, will or similar expressions, are forward-looking statements. They are subject to a number of factors that could cause the company's actual results to differ materially from what is indicated here. These factors include general economic conditions, including the severity of current economic and financial market conditions; the level of customer demand, particularly for capital projects in the markets we serve; changes in supplier sales strategies or financial viability; political, economic or currency risks related to foreign operations; inventory obsolescence; copper price fluctuations; customer viability; risks associated with accounts receivable; the impact of regulation and regulatory, investigative and legal proceedings and legal compliance risks; potential impairment of goodwill; and risks associated with the integration of acquired companies. These uncertainties may cause our actual results to be materially different than those expressed in any forward-looking statements. We do not undertake to update any forward-looking statements. Please see the company's SEC filings for more information.

At this point, I'll turn the call over to Ted.

Theodore A. Dosch

Thank you, Chris. Good morning, and thank you, everyone, for joining us today. Before we discuss the current period operating results, I want to remind everyone of the divestiture of our Aerospace Hardware division in August of this past year and the impact that had on how we report. Our third quarter of 2011 results, along with prior periods, were restated to reflect the Aerospace business as discontinued operations. All performance results included in this morning's fourth quarter earnings release and in our commentary to follow is based on results from continuing operations.

With that, we are pleased to report another quarter of strong performance in which the company delivered a 40 basis point operating margin improvement compared to the very strong sales growth and operating margin in the fourth quarter of 2010. In addition, we delivered our eighth consecutive quarter of double-digit leverage with a 12% incremental operating profit on increased sales. Due to strong working capital management, we also had very strong cash flow performance during the quarter with $113 million of cash provided by operating activities. In the fourth quarter, we reported an 8% increase in year-on-year sales. After adjusting for $30 million of sales from the acquisition of Clark Security Products in the fourth quarter of 2010, an estimated $16 million favorable effect of copper prices and $4 million of unfavorable foreign exchange effects, organic sales grew by 5% over the prior year period.

Before discussing our end market and geographic segment performance, I want to take a moment to elaborate on the estimated impact of copper on the price of cable products. Our estimate of the favorable impact on sales from copper pricing may appear high based on the reduction in the average copper price in the fourth quarter of 2011 compared to the fourth quarter of 2010. As you know, copper is just one of many cost inputs to the manufacture of cable, while normal marketplace supply and demand factors also play a major part in the determination of prices. However, you should also factor in the normal lag between when the spot market price changes and when it works its way through the supply chain. The methodology that we have continued to use for many years to estimate the impact of copper requires numerous assumptions of the various factors that influence the pricing of copper cabling, and is further complicated in recent periods since copper prices fell so rapidly in the fourth quarter of 2011 compared to a dramatic rise in the fourth quarter of 2010. Considering these many variables, our estimate of the impact of copper price could be overstated in either direction during periods like this with rapid price changes.

Returning to the discussion of our results, all 3 of our end markets, as well as each of our 3 geographic regions, continued to deliver year-on-year growth during the quarter. The 7% sequential drop in sales was primarily attributed to normal seasonality, combined with weaker foreign currency versus U.S. dollar, less favorable copper effects and somewhat softer project business. As in recent quarters, our positive sales results, which are well in excess of broader GDP growth rates, reflect the combined impact of relatively minimal improvement in macroeconomic factors, combined with the success of our global strategic growth initiatives, which Bob will discuss in more detail later on in the call.

Looking at fourth quarter sales trends within each of our end markets, we experienced the following: On a worldwide basis, Enterprise Cabling and Security Solutions sales increased organically by 2% compared to the fourth quarter of last year, exclusive of foreign currency effects and the Clark Security acquisition. Continuing with the very strong trends of recent quarters, total security sales grew 22% compared with the fourth quarter of 2010 and 8% on an organic basis. On a sequential basis from the third to the fourth quarter of 2011, Enterprise Cabling and Security sales declined 4% organically. With the continued strong year-on-year organic growth in security sales plus our strategic addition of Clark, sales from security products accounted for 24% of our worldwide Enterprise Cabling and Security end market for full year of 2011.

Worldwide Electrical Wire & Cable sales grew by 8% compared to the fourth quarter of last year. Excluding foreign currency and estimated copper price effects, we experienced a year-on-year organic sales improvement of 5% globally with our fast-growing emerging markets business up 67% organically. Our continued investments in emerging markets are paying off as our project business remains strong, while the day-to-day business continues to grow as well. On a sequential basis from the third to the fourth quarter of 2011, worldwide Electrical Wire & Cable sales decreased by 9% organically.

Worldwide OEM Supply sales continue to show excellent results, reporting 17% organic sales growth compared to the year-ago quarter. This end market is the only 1 of the 3 that has delivered double-digit year-on-year growth each of the last 7 quarters, averaging 23% organic growth during that time. Organic sales in the North America increased 15% year-on-year, while Europe was up 16% and emerging markets were up 51%. Our global OEM Supply business continues to benefit from improving demand for capital industrial goods and durable consumer goods, combined with market share gains through the addition of new customers and new part sets to existing customers. Sequentially, worldwide OEM sales were down 3% organically in the fourth quarter due to seasonally normal holiday shutdowns.

Turning next to gross margin. We reported fourth quarter gross margin of 23.3%, which was up 10 basis points year-on-year and 80 basis points sequentially. We continue to be pleased with our overall gross margin management in a very volatile pricing environment.

Looking next at operating expenses. We reported a year-on-year increase of approximately 2% from $243 million in the year-ago quarter to $249 million in the current quarter, excluding the impact of expenses associated with Clark Security and currency. This 2% increase compares favorably with the 5% year-on-year increase in organic sales, which also excludes Clark, foreign exchange and copper pricing impact.

To summarize, operating income was $91.6 million in the fourth quarter, representing a 17% improvement from the $78.5 million reported in the prior year quarter. Full year operating income increased by 36% to $362.8 million. The 6.1% operating margin in the current quarter and 5.9% operating margin for the full year are up 40 basis points and 80 basis points from their prior year comparable periods.

As we move further down the income statement, interest expense of $12 million was down from $12.3 million in the year ago quarter. The 5.1% average cost of debt in the fourth quarter of 2011 compares favorably with the 5.6% in the year ago quarter. At the end of the current quarter, approximately 66% of our outstanding debt had fixed interest rates, either by the terms of the debt or through hedging contracts. Excluding the net tax benefits of $10.8 million recorded during the year, the effective tax rate in the fourth quarter was 38% and the full year 2011 tax rate was 37.4%. This compares to a tax rate of 37.3% in the fourth quarter of the prior year and 40% for the full year of 2010, both also excluding favorable tax adjustments. These tax adjustments were primarily driven by improved profitability in certain foreign entities and other factors resulting in the reversal of deferred income tax valuation allowances.

For the fourth quarter, the company reported net income from continuing operations of $49.8 million or $1.49 per diluted share, up 19% compared to $42.1 million or $1.18 per diluted share reported in the year ago period. Excluding the impact of the net tax benefit in both periods and the gain on early retirement of debt in the prior year's quarter, net income per diluted share would have been $1.43 in the current period and $1.14 in the prior year's quarter, representing an increase of 25%.

Moving on to cash flow. We generated $113 million of cash from operations during the quarter, driven by strong working capital management and a slower sales growth rate in the quarter. Capital expenditures were $6.6 million in the fourth quarter compared to $4.2 million in the year ago quarter. We ended the fourth quarter with a debt-to-total capital ratio of 43.9%, down from 46.9% at year-end 2010. This leverage ratio was slightly below our targeted range of 45% to 50% debt to capital.

We continue to have excellent liquidity. At the end of the fourth quarter, we had $313 million in available, committed, unused credit lines in our revolvers, and $175 million of outstanding borrowings under our $275 million accounts receivable facility. In addition, during the fourth quarter, we began to realize the full benefit of having repurchased 6% of our outstanding shares during the third quarter of 2011. Despite a challenging and uncertain macroeconomic environment, our continued strong operating performance puts us in an excellent position to support our growing business and provide options to refinance our near-term debt maturities, while giving us the flexibility to consider strategic acquisitions or opportunities to return capital to shareholders. Our current leverage on the balance sheet and other favorable financial characteristics provide Anixter with the flexibility to quickly adjust to new market realities and fund investments in crucial long-term growth initiatives as we efficiently capitalize on future opportunities.

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

Robert J. Eck

Thanks, Ted. Thanks, everyone, for joining us today. The fourth quarter of 2011 delivered positive sales growth against a very strong prior year quarter, which had the highest growth in 2010. The fourth quarter reflected both the more normal seasonal sequential trend we expected, along with continued strength in several of our key initiatives. Our team, again, delivered positive sales growth and earnings leverage in spite of challenges, particularly the softening macroeconomic environment in Europe. Organic sales growth was achieved across all segments as well as all end markets. Sales growth was more varied across the end markets and EMEA.

However, we, again, delivered improved operating profit in that segment due largely through expense management. Our company-wide operating margin expansion continued again in the fourth quarter, reflecting both sales growth and effective expense management. As a result of both earnings growth and aggressive working capital controls, we generated strong cash flow in an environment of growing sales. We are pleased with our performance for the quarter and we will continue to drive initiatives targeted at increasing sales growth and managing efficient use of working capital.

The Enterprise Cabling and Security Solutions end market experienced slower year-over-year growth in North America, continued high organic growth in the emerging markets and declining sales in EMEA. Activity in North America and EMEA reflected normal seasonality, coupled with a modest softening in spending and a difficult comparison to a strong prior year quarter. The softening in North America appears to be temporary given our backlog, the project pipeline and the booking pace in January. Project activity has continued to be strong in the emerging markets due to local market activity, as well as spending by multinational companies investing in IT infrastructure in the emerging markets. Activity in EMEA appears to be modestly softer due to the macroeconomic situation.

Security growth continued across all geographies, reflecting both continued investment in security and the shift to sophisticated Internet Protocol-based systems. Security growth for the full year, excluding the acquisition of Clark Security Products, increased 15% organically year-to-date, with organic growth in the emerging markets of approximately 24%.

Moving now to the Electrical and Electronic Wire & Cable end market. The fourth quarter experienced continued organic growth in North America and EMEA, and again, very significant acceleration in the emerging markets, leading to market share gains in all of those geographies. We continued to experience solid project activity in power generation, industrial, oil and gas and mining sectors. OEM demand for specialty wire continues to be positive, consistent with broader industrial production trends. The continued global investments in industrial plant, natural resource development and power generation should continue to drive sales growth in our Wire & Cable market. We see strong quoting activity and increased opportunity to leverage our global platform in this end market. The initiative to expand in industrial automation gained momentum through this year across North America. Our investments to build our global presence in this market, coupled with our supply chain management services, are enabling us to take share globally.

In the OEM Supply end market, we are continuing to experience strong sales growth compared to the already strong sales growth in Q4 of 2010. The recovery in manufacturing continues to lift production rates at our customers, translating into stronger sales. Our sales initiatives continue to drive new business wins for both part packages at existing customers, as well as new customers. Our ability to operate as a single global partner resonates well with multinational manufacturers looking to more effectively manage their supply chains.

In Europe, we continue to feel pressure on margins, as both price increases and lower cost resource material work their way into the supply chain. Through our IT conversion efforts, we have identified additional cost elements, which have been further impacting profitability. A cross-functional team has developed a highly detailed improvement plan that is in implementation now. While we work through these challenges, we have also continued to develop a strong pipeline of opportunities in the Americas, Europe and the rest of the world.

To briefly recap the full year of 2011, it was a year of change and opportunity for the company. We continued our plan of geographic expansion, including opening in Morocco, establishing a joint venture in Saudi Arabia and opening new sales branches in the United States, China, Brazil and Peru to leverage our existing investment in these countries. We continued our investment to expand the presence of our Wire & Cable end market across the emerging markets segment by adding additional people and inventory, achieving full year organic sales growth of 82%.

We sold the Aerospace Hardware business, concluding that it was a noncore business for us. We integrated and then expanded the presence of Clark Security Products, acquired in December of 2010, continuing our investment in the physical security market. And finally, we bought back 2 million shares of common stock, returning $108 million to shareholders. We are pursuing multiple initiatives in all end markets and geographic segments to drive growth, including product and technology initiatives, new customer development, cross-selling and promoting the efficiency benefits our customers can achieve through our supply chain management services.

We are continuing our investment plan in the emerging markets to expand our presence across the regions and our end markets. We have shifted investment and focus in EMEA toward the stronger economies in the United Kingdom, Middle East and North Africa. We will realize additional benefits in 2012 from the restructuring actions we took in Europe in the first quarter of 2011. We will also continue to invest in our information technology infrastructure to ensure that we have leading e-business interfaces for our customers, as well as a robust operating platform to ensure that we are efficient and effective across our businesses.

While we continue to make organic investments, we are also continually evaluating acquisition candidates that will enhance our position across our end markets and geographic regions. As 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, we continue to find success with customers by providing global reach with a local touch and selling across our end market specialties.

As we look forward to 2012, we believe that we are well positioned to take advantage of the opportunities presented in the stronger economic areas around the world. We also believe that through actions taken to reduce our cost during the past year, we are well positioned to manage profitably in what may be a recessionary European market. However, we will continue to invest in growth initiatives that expand the markets we serve and can lead to better operational leverage of our existing global service platform. Operating cash flow, coupled with our available borrowing capacity, provides us with ample liquidity to pursue acquisitions or capital structure actions that can enhance shareholder returns in the coming year. This liquidity enables us to look past the short term when assessing strategies and investment opportunities.

We will now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We will take our first questions from Matt McCall from B&B&T (sic) [BB&T] Capital Markets.

Jack C. Stimac - BB&T Capital Markets, Research Division

This is actually Jack Stimac filling in for Matt today. I guess with the project delays that you saw, and it sounds like you're pretty confident that they were temporary, but were those because of people trying to time copper or year-end budgeting? Or what kind of led to those? And maybe, what specifically which end markets were those most prevalent in?

Robert J. Eck

I think it's a mix of factors. Most prevalent in the Enterprise Cabling business in Europe and North America. Less prevalent, but also present in the Wire & Cable business. In the Wire & Cable business, it primarily has to do with timing copper. When you're in a falling copper price market, buyers tend to try to sort of bet that the decline was going to continue and hold off on making purchases, so we saw a little bit of that activity. But as I said in my notes, our quoting activity, so far, has been very strong, so we expected that, that's a temporary blip. Likewise in the Enterprise business, we think there may be a little bit of softening going on sort of generally in the IT space. But we did see, on a comparative daily basis, stronger bookings in January. We have a solid backlog, left the year with a higher backlog than the year before, and we have a very strong pipeline that's growing year-over-year as well. So I think that the impact in the Enterprise business was temporary. But at the same time, I guess, I wouldn't forecast sort of double-digit growth in the upcoming year.

Jack C. Stimac - BB&T Capital Markets, Research Division

Okay. And so with the way that's played out and kind of the way that the bookings and the billings are shaping up, would you expect normal seasonality to play out in Q1? And maybe you could just kind of go through your expectations for 2012, in general, by end market, if you wouldn't mind?

Robert J. Eck

Well, as you know, we don't give guidance, so I won't provide sort of percentage numbers or targets. Our expectation is that there continues to be a strong manufacturing environment, which benefits both our Wire & Cable and OEM end markets. We also believe that there will be really continued opportunities in security, as well as IT infrastructure and data centers. While the pace may not be as great in data centers as we had seen, perhaps in the sort of middle of 2011, we still think there will be growth. So we're looking for growth across all of the end markets. I think it's important to look geographically as well. We would expect growth in North America, we would expect continued solid growth in Latin America and Asia Pacific. EMEA, particularly Continental Europe, will probably be a little more of a question mark, I think, as we all look at the macroeconomic situation there. So I think the key for us, as we look at Europe, is to continue our expense management, which has been very effective through the year. Certainly, pursue our specific initiatives. We have to remember that we have growing presence in the Middle East and North Africa, and those will create lift for us where we may potentially have softer -- a softer situation in Continental Europe.

Theodore A. Dosch

Yes, Jack, the only thing I would add to that is that -- to your part of the question regarding seasonality, as we have seen over the course of this past year, 2011, a return to what we would consider more normal longer-term historical seasonality. Unless there were to be some major macroeconomic event, yes, we would expect that to continue as we go into next year. Just as a reminder, though, that unlike this past Q4 to Q1 trend, you have now we're, in all likelihood, looking at negative impact of currency and negative impact of copper. As opposed to a year ago, that normal seasonality was complemented or added to from both currency and copper.

Operator

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

Hamzah Mazari - Crédit Suisse AG, Research Division

The first question is just on your incremental margins. How should we think about how those should trend? I think you had given a 12% range. Is that going to moderate or flat sequentially? How do you think about that?

Theodore A. Dosch

Yes, Hamzah. When we had talked about a 12% number, we had been talking about 10% to 12% in the earlier quarters of recovery. We actually have been quite pleased to be able to maintain the type of leverage that we did, including that 11-plus percent in Q4. But if we look out over 2012 and are able to deliver high single-digit type organic growth rates, then we expect to also have high single-digit incremental operating profit leverage as well.

Hamzah Mazari - Crédit Suisse AG, Research Division

And then just touching on Europe, maybe if you could just frame for us. I know you're taking a lot of costs out in that region -- maybe frame for us how much additional room there is. And also, does it make sense to have a local manufacturing facility there like you do in Chicago? And any update on you guys targeting lower-cost procurement and how that is progressing?

Theodore A. Dosch

On the first part of your question, Hamzah. As you will remember, we announced a restructuring to take some infrastructure cost primarily out of our warehouse and back office costs. We announced that in Q1 of 2011, with really only minimal benefits to accrue in 2011, much more significant benefits to come in 2012 and a little bit incremental in 2013. We realized about $0.5 million of benefits in 2011. We expect to realize about another $2.75 million incremental savings in 2012 versus 2011. That's the bulk of actions we have already taken, but as we continue with consolidation or system conversions and so forth in some of our entities, that will also give us further opportunity for continued cost efficiencies.

Robert J. Eck

Hamzah, I'll take the question on manufacturing. The plant in Chicago is, I think, as we have probably said in the past, targeted at supply chain infill kind of a functionality. In other words, we view it as a great way to fill gaps in the supply chain as well as maintain some regular, more long-run customer business. We get incremental gross margin out of the plant than purely functioning as a distributor. But our core focus is distribution. And with manufacturing comes additional fixed costs that are much smaller in distribution. So I would say we don't have a strong appetite to significantly expand our manufacturing presence. And as to Europe specifically, the concern would be that Europe's a fairly high-cost operating geography from a standpoint of real estate, people cost, social cost. It's also very expensive to exit. So you become -- the more you commit, the more -- let me say it this way, the more you commit, the less flexibility you have around your cost model. So we're adding some manufacturing, it might be helpful in some parts of the world, I'm not quite sure. Europe is, in fact -- let me say it differently, I'm quite sure Europe's not one of the places where it would be particularly helpful for us. On the second part of your question, the sourcing process from low-cost countries is making progress in the sense that material is starting to work its way into the supply chain. The lead times have been fairly long and we may not have called enough attention to that as we've gone through this whole process. But the lead times to get that material, first samples are tested, the PPAP process is completed, and then you kind of fall into the lead times, which right now are running at close to half a year at many of the low-cost manufacturers. So that's causing that whole effort to take a little more time. But the material is beginning to work its way into our inventory, so we should see more benefits from that as we roll through the first quarter and the second quarter of this year.

Hamzah Mazari - Crédit Suisse AG, Research Division

Great, and then just -- that's helpful, just last question on your acquisition pipeline. How are you thinking about the acquisition pipeline right here? Can we expect you to be more aggressive there, or do you sort of step back? Where is your focus at this stage, if you could update us?

Robert J. Eck

I guess, Hamzah, I'd say it this way. We'll continue to be as aggressive as I think we've tried to be for the past year, although we didn't have any transactions. We have some irons in the fire. We will hopefully add more irons to the fire as the year goes forward. But the process, frankly, just takes time. And one of the things we've said frequently is that we won't do acquisitions for the sake of doing acquisitions and that we think are bad transactions. So we've got to be at the right valuation, we've got to be the right strategic fit. And actually I feel probably as good right now about where we are on the pipeline of opportunities as I have in a while.

Operator

We will now take our next question Shawn Harrison from Longbow Research.

Shawn M. Harrison - Longbow Research LLC

Wanted a clarification just on, I guess, 2 aspects of some earlier comments heading into 2012. I guess the recovering in bookings activity, does that, in any way, suggest that you may see a little bit of a blip versus typical seasonality moving from quarter-to-quarter? And then also just a commentary on currency and copper. Was that solely tied to a year-over-year headwind? Or are we also thinking about that now as a sequential headwind?

Theodore A. Dosch

Let me touch on the last part of your question, I'll let Bob comment on the bookings. When it comes to currency and copper, my comment earlier, Shawn, was really related to year-over-year that if there's no further change from where we are now, the year-over-year comparison would result in less favorable or actually negative impact from copper and unfavorable impact on the currency side. Sequentially, if -- I don't think we know enough to say that FX would have any significant impact sequential quarters sitting here today. But we would expect copper to have a negative effect sequentially -- well, let me clarify that. That the impact in Q4, as I alluded to earlier in my comments, we saw the copper price dropped so rapidly that we still hadn't worked through the lag effect of that price decline working its way through the inventory. However, as you know, just in the last, say, 2 weeks, we've seen a significant recovery in the copper price. So copper price, it averaged about $3.45 in Q4, at the spot, is already up to $3.80. So it's kind of hard to predict what that will be for the quarter, but copper may not be a negative sequentially.

Robert J. Eck

I guess on the question about normal seasonality versus a positive bump, I think the right way to think about it is, for right now, is that we expect normal seasonality. I think the recovery in bookings -- the recovery in the pipeline to me are more important in that they give us an outlook that the little bit of a slowdown we had in Q4 is not going to be sustained.

Shawn M. Harrison - Longbow Research LLC

Okay. And just as a follow-up to that. I guess if you could comment on both -- your inventory was maybe a little bit higher than I thought it would be exiting the year, and I guess what you were seeing at a competitive level in terms of other distributors carrying inventory and what that could do to pricing one way or the other?

Robert J. Eck

I don't think there's a lot of excess of inventory in the funnel, so to speak. And you actually have to look by end market, and within the end markets look somewhat at product type. We have a little bit of inventory that we're carrying specific to projects and specific to some new implementations in our OEM Supply business, and that's created some bumps in inventory, but that's inventory that'll flush through. I don't have a sense that the sort of the pipeline of inventory and distribution is stuffed right now and that that's going to create pricing pressure. We certainly didn't see that in Q4.

Operator

We will take our next question from David Manthey from Robert W. Baird.

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

First off, when you were talking about the cost savings in 2012 versus 2011, I think you said $2.75 million, if I'm correct. Is that overall or is that just North America? I remember you took some restructuring in Europe, and I'm just trying to figure out if that's all-inclusive or separate?

Theodore A. Dosch

No, that number I quoted, David, is all Europe as a result of the Q1 2011 restructuring charge we took.

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

Got it. Okay, that's the one I remembered. I didn't remember the other one. Okay, so $2.75 million of cost savings in 2012 versus 2011.

Theodore A. Dosch

Correct.

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

Okay. And then on Europe, as it stands today, I know it's kind of a moving target over there. But as things stand today, with the restructuring you've taken and so forth, are you fairly happy with the operating and the expense structure, this trajectory, where you're headed with that? And same on the fastener tariff situation, assuming there's no further changes in the playing field, it sounds like you're still in the early innings of getting any benefit to the changes you've made there as well. So that will flow over the next 6, 12 months?

Robert J. Eck

Yes, I think from a cost standpoint, I don't want to say comfortable because that would imply that we're sitting on our hands, which is not the case. But I think we feel good about where we are from an expense structure and what we think the environment is going to look like. With relation to Fasteners, I think we still have some work to do. As I mentioned, we identified through our conversion process some cost elements impacting the fastener business that we are diligently implementing operational changes that should help flush that out by the end of the quarter. So I think we have some expense improvement still to come in the fastener business as we go through the year. And we will work in some of the lower-cost -- lower-priced inbound material as we get through the year as well. So again, I don't want to like leave the impression that we're sitting on our hands at all, but I do think we've made a lot of improvements to the business that are flowing through and will continue to pick up some benefit as we go through '12.

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

Okay. And then the last question is on -- if you could give us the number of days by quarter through 2012. And I guess, a 2-part question, as you're looking at the average daily sales x currency and sort of taking out copper and currency, normally I think your average daily sales would be down sort of low-single digits from fourth quarter to first quarter. Is that -- that's what you're talking about here when you're talking about returning to more normal sequential trends?

Theodore A. Dosch

Yes, the average daily sales would drop slightly. But keep in mind the number of billing days would go up, Q4 to Q1. But we would expect to see the seasonality impact to be a positive one organically, excluding copper and FX.

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

Do you have the number of days handy there, Ted?

Theodore A. Dosch

No, I don’t. I can just tell you off the top of my head -- I can get that for you. I can tell you off the top of my head, Q1 will have one less billing day year-over-year. In that last year, there were no holidays. And this year, as you know, the New Year's holiday was celebrated in the first day of January -- Monday, that first week, so there'll be one less day. And as you know, since we're on a 4, 4, 5, calendar, one billing day would equate to about 1.5% of a quarter's sales.

Operator

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

Jeffrey L. Beach - Stifel, Nicolaus & Co., Inc., Research Division

In the discussions, I may have missed this, but you had very good OEM Supply growth in Europe, again. Can you just expand a little bit on the drivers of the OEM Supply that are producing this growth?

Robert J. Eck

Yes. I think, Jeff, what's really driving that business are 2 things that are unrelated. One is, manufacturing continues to improve globally. So -- and again, our customer base tends to be heavy equipment and consumer durables. So drivetrains, engines, various auto part suppliers, seating and things like that, wind turbines, light goods, recreational equipment. So if you think of that kind of stuff, it's consumer durables. It's heavy manufacturing kind of environment. And the production rates in those areas are up, so that immediately gets us a benefit. We kind of get dragged along with that, if you will. We'd had -- some customers have new product introductions that have taken off for them, which have also created incremental lift in revenue, and we've won new part packages. So the new part packages -- and that kind of segues into the other piece of why I think we're doing well. And it's that our model is -- basically 2 things: technical value add and supply chain services. And manufacturers are looking at the Class C parts particularly and realizing that they have lots and lots of suppliers. They have a lot of internal investment to manage quality control in those suppliers and to manage the supplier relationships, inbound material pipelines. And really a fairly complicated supply chain when you have to manage it across not 10s, but in some cases, close to 100 or hundreds of suppliers for these small value parts. So the idea of a customer looking to outsource that to somebody who can credibly pick up the quality control and manage the supply chain has a lot of value. And I think that works in our benefit, so we pick up some incremental parts, we pick up incremental customers. And along the way, we're in an environment with good production rates.

Jeffrey L. Beach - Stifel, Nicolaus & Co., Inc., Research Division

Okay, great. And then the other question I have, you may have a guess. Could you estimate the impact of all of your foreign currency fourth quarter versus third quarter on sales?

Robert J. Eck

Jeff, we're doing some scribbling?

Theodore A. Dosch

Yes, about 1.23% change between the quarters.

Jeffrey L. Beach - Stifel, Nicolaus & Co., Inc., Research Division

I'm sorry, 1.23?

Theodore A. Dosch

1.3%.

Operator

[Operator Instructions] We will now take our next question from Anthony Kure from KeyBanc.

Anthony C. Kure - KeyBanc Capital Markets Inc., Research Division

Couple of quick questions. Just looking at emerging markets. Operating margins, much higher sequentially during the fourth quarter. Can you just talk about what drove that? And are you looking at the segment sort of returning to that 7-plus operating margin profile in 2012, like, say, 2007, 2008?

Robert J. Eck

We're certainly looking for improved operating margins out of the emerging markets. Tony, one of the things that we talked about earlier in the year when we had a dip in operating and gross margins is that there is a mix element in the emerging markets that's different for us than anywhere else in the world. And that is that we do distribute voice and data hardware in Latin America, so that tends to go at lower gross profit margin than our Enterprise Cabling, Security or Wire & Cable products. So that mix can affect us. By the way, it's a business, I think as I described then, that we like the business. It operates at higher gross margins than that business typically operates globally due to some of the complexities of operating in multiple countries across Latin America. So what you saw in the fourth quarter was a surge in project activity in the emerging markets. And frankly, probably a better mix, in that mix included more cabling products, more supply chain services and security products as well.

Theodore A. Dosch

The other thing I would add, Tony, Q4 historically is the strongest quarter in emerging markets, especially in our Latin American business. So that high operating margin in Q4, I wouldn't expect us to continue that at a full year run rate because, as you can imagine, we get some really good operating expense leverage with that much of an increase in revenue. But to Bob's point, we think we've got the emerging markets on a much better trajectory exiting 2011 than when we exited 2010.

Robert J. Eck

Yes, and if I can just go back to one of the things we talked about in 2010, we said then that we were making investments in the emerging markets that we had started in 2009, late 2009 that we thought wouldn't pay off until we got into 2011, and that, that was creating a little bit of drag. And I think that's absolutely played out and you see it in the really very large growth we've gotten in our Wire & Cable business in 2011 in the emerging markets.

Anthony C. Kure - KeyBanc Capital Markets Inc., Research Division

Good, that's helpful color. If I look at the gross margins in the fourth quarter sequentially, also up stronger than the third on lower revenues. Was there -- I mean, is there any catch-ups there on vendor incentive programs that could have helped aid that margin, or was that mostly mix? Could just talk about the gross margin improvement?

Theodore A. Dosch

Yes. Tony, as you pointed out, we had a pretty significant improvement in gross margin as we went from Q3 to Q4. A part of that, certainly, is the mix of the business. As you will remember, the OEM Supply business is, by far and away, our highest gross margin business. And with the growth rates that we quoted earlier, both sequentially as well as year-over-year, that was a big driver of that. Now was there some impact from vendor rebates? There's always a little bit of that in Q4, but that wasn't the biggest driver.

Operator

We will take our next question from Brent Rakers from Morgan Keegan.

Anjali R. Voria - Morgan Keegan & Company, Inc., Research Division

This is Anjali Voria in for Brent Rakers this morning. I just wanted to expand a little bit further on the North American Enterprise and Wire & Cable business volume. I know you mentioned project activity and timing reduced Enterprise sales. First, does this mean that these sales will return in the first quarter, ultimately leading to some -- like a boost in sales? And secondly, what is your exposure to data centers versus other products within that segment?

Theodore A. Dosch

Anjali, I think we already answered the question about the boost. And what we said we expect is normal seasonality. What we're really trying to characterize, I think, is that the recovery, the backlog that we exited, the recovery in the pipeline, the recovery in the booking rates gives us confidence that the softness we experienced in Q4 is not sort of the new normal, if you will, but we expect a normal seasonality. And it's very hard for us to piece off data centers versus other aspects of our Enterprise Cabling business in the mix. So honestly, I won't endeavor to segment it that way.

Anjali R. Voria - Morgan Keegan & Company, Inc., Research Division

Okay. With regards to Wire & Cable in North America, could you further expand on what factors laid here? I know you said that project issues were less prevalent in this area, would you care to expand in that space?

Robert J. Eck

Sure. In Wire & Cable, we have less impact from the project slowdown. We think some of it may have been copper timing by buyers in a market with declining spot copper. We've seen, again, recovery in the Wire & Cable market as well. So I think it was temporary, it was small and we don't expect to see that recur as we go through 2012.

Operator

As there are no further questions in the queue, that will conclude today's Q&A session. I would now like to turn the conference back to Mr. Bob Eck for any additional or closing remarks.

Robert J. Eck

Thank you. Thanks for joining us today. While we face a year with some economic uncertainty, we believe that there are many opportunities around the world and that our diverse global reach, strategic initiatives and value-added business model position us well to support our customers and increase sales in the months and years ahead. Thank you.

Operator

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen.

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