Anixter International (AXE) Robert J. Eck on Q4 2015 Results - Earnings Call Transcript

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Anixter International, Inc. (NYSE:AXE)

Q4 2015 Earnings Call

February 02, 2016 10:30 am ET

Executives

Lisa Micou Meers - Vice President-Investor Relations

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

Theodore A. Dosch - Chief Financial Officer & Executive VP-Finance

Analysts

Steven Fox - Cross Research LLC

Shawn M. Harrison - Longbow Research LLC

David J. Manthey - Robert W. Baird & Co., Inc. (Broker)

Charles Edgerton Redding - BB&T Capital Markets

Gary A. Farber - C.L. King & Associates, Inc.

Operator

Good day, everyone, and welcome to the Anixter Fourth Quarter 2015 Earnings Call. Today's conference is being recorded.

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

Lisa Micou Meers - Vice President-Investor Relations

Great. Thank you, Deanna. Good morning and thank you all for joining us for Anixter's fourth quarter 2015 earnings call. Today, I'm joined by Bob Eck, President and CEO; and Ted Dosch, Executive Vice President and CFO, to discuss our fourth quarter financial results. After their remarks, we'll open the line to take your questions.

Before we begin, I want to remind everybody that we will be making forward-looking statements in this presentation, which are subject to a number of factors that could cause Anixter's actual results to differ materially from what is indicated here. We do not undertake to update these statements, and refer you to our SEC filings for more information.

In conjunction with today's call, please find the supplemental slide presentation that further details the quarter available on our Investor Relations website, anixter.com/investor. Today's earnings announcement includes both GAAP and non-GAAP financial results, the reconciliation of which is detailed in our earnings release and in the slides posted on our website.

Now, I'll turn the call over to Bob.

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

Good morning and thank you for joining us for today's fourth quarter 2015 earnings call. This morning, I will start with some overall comments on the macro environment, our fourth quarter and full year, and provide thoughts on 2016. I will then turn the call to Ted to detail our fourth quarter financial performance and provide detail on our outlook for both the first quarter and the full year of 2016.

Before reviewing our results, I'd like to briefly address the macro environment. It was a difficult quarter and we were directly impacted by many of the headwinds facing the industrial sector. We faced an unprecedented decline in commodity prices, including both oil and copper, sharp slowdowns in certain geographies including Latin America and Canada in connection with declines in oil, gas and mining markets, and the impact of the much stronger U.S. dollar which affected many of our U.S. industrial customers as well as our profitability in countries with significant currency volatility.

Exiting the fourth quarter, most macroeconomic data points to continuing weakness in 2016. Our view is that we have executed well as it relates to the areas that are within our control, and as I will discuss shortly, we believe we have maintained or gained share in most segments and geographies. Our restructurings will generate an estimated incremental $10 million in savings in operating expense in 2016. In addition, this quarter marks a milestone as we completed the acquisition and began the process of integrating the Power Solutions business.

As you saw from this morning's press release, we delivered adjusted earnings per diluted share of $0.88 per share and quarterly sales of $1.8 billion. Excluding the impact of the higher tax rate from the first nine months of the year, our adjusted EPS would have been $1.03 a share. Further, excluding the negative impact of copper and currency, our core adjusted earnings per diluted share would have been $1.19 per share.

After adjusting total sales for the favorable impact of the Power Solutions acquisition and the unfavorable year-over-year impacts of the stronger U.S. dollar and lower average copper prices, organic sales decreased by 0.5%. This was lower than the growth rate we expected going into the quarter, reflecting the weak macroeconomic environment which softened as the quarter progressed.

For the full year, organic growth rate was 1.3%, which included organic growth in all three geographic regions.

Before I discuss sales further, recall that following the closing of the Power Solutions acquisition, we renamed our historical ECS segment, Network & Security Solutions, which more clearly describes the business. As we said previously, there are no other changes to this segment other than the new name at this time.

As part of the acquisition and integration process, the low-voltage business of Power Solutions was combined into our historical Wire & Cable segment and renamed Electrical & Electronic Solutions, which combines the broad portfolio of low-voltage products from Power Solutions with the cable and related products from our legacy Wire & Cable business, serving both industrial and OEM customers.

Finally, the high-voltage business of Power Solutions forms the Utility Power Solutions segment, which includes all of Anixter's utility business going forward.

Let me now discuss sales in the quarter, starting with our Network & Security Solutions segment. NSS quarterly sales of $972 million increased 1%, reflecting organic sales growth of 4%. We experienced growth in both the network and security markets with organic growth in our North America and EMEA geographies. Looking at specific customer verticals, we saw strength with technology customers that we expect to continue in the first quarter of this year as well as with financial institutions and service providers in certain geographies.

Security sales of $385 million represented approximately 43% of segment sales. Adjusting for the $15.1 million of unfavorable foreign exchange, NSS security sales increased 4.5% on an organic basis. Not surprisingly, the global growth rate was negatively impacted by weak markets in both Canada and Latin America. Based on conversations with suppliers and market survey data, our view is that we likely maintained or gain share in all of our geographic regions.

Our North American business, which represents approximately 77% of NSS sales and 40% of total Anixter sales, increased 3.6% on an organic basis, led by strength in the U.S. business partially offset by continued weakness in Canada.

With positive backlog trends, solid book-to-bill ratio and continued growth in our pipeline of large customers, we're optimistic that the current momentum in the largest portion of the business will continue as we move into 2016.

In our EMEA geography, which represents about 9% of NSS sales, we delivered 12.5% growth on an organic basis, driven by security solutions, strength in global accounts in Europe, and strength in our Middle East business.

Finally, our emerging markets NSS sales, which account for approximately 14% of segment sales, were flat year-over-year on an organic basis. Within our emerging markets geographies, we experienced strength in our Asia Pacific markets, driven primarily by U.S.-based multinational companies which was completely offset by weakness in Latin American markets, especially Brazil.

We continue to have success with multinationals in all markets and we are increasingly winning with EMEA and emerging markets-based multinationals as a result of the unique value we provide to our customers. We remain positive on our opportunity to grow and gain share at all three geographies going forward and are pleased that we achieved organic growth in all three regions for the full year of 2015.

Moving to Electrical & Electronic Solutions, our fourth quarter sales of $528 million increased by 9%, with the growth attributable to the acquisition, reflecting the combination of the low-voltage portion of the Power Solutions business with our legacy Wire & Cable business. As we detailed on our acquisition announcement, the strategic benefits of the Power Solutions acquisition include broadening the electrical products and solutions offering and expanding our opportunities with small and midsized customers.

Looking at EES organic sales, currency and copper combined had a $45 million or nearly 8% negative impact on the business. Adjusting for copper and currency as well as for $138 million of pro forma acquisition-related low-voltage sales, EES sales declined by 8% on an organic basis.

By geography, North America sales of $420 million compared to $348 million in the prior year quarter. After adjusting both pro forma Power Solutions low-voltage sales and currency and copper headwinds, organic sales in North America decreased by 6%.

Our EES business continues to be impacted by the slowdown in business with our industrial customers caused by weakness in oil and other commodities, the broader industrial economy and emerging markets. While we achieved growth in the OEM portion of the business for the quarter, the weakness in the broader industrial segment resulted in declining sales for our OEM customers as the quarter progressed. Overall, with respect to share, our analysis indicates that we gained modest share in the U.S. but lost some share in Canada.

Turning to EMEA, our EES sales of $60 million decreased by 7% on an organic basis, reflecting a decline with both industrial and OEM customers in Europe, somewhat offset by growth in the Middle East and in our security business. In our EMEA business, we experienced more prolonged holiday shutdowns by some manufacturing customers impacting our OEM business.

Lastly, EES emerging market sales of $48 million decreased by 22% on an organic basis, reflecting lower construction and industrial capital spending in Latin America. However, we experienced solid results in our OEM business in Mexico and Asia.

Based on current sales trends, as well as key economic indicators we track, we expect a difficult global macro environment and headwinds from the price of copper will persist in the near term. Our focus is on driving sales through initiatives, including synergy opportunities with the low-voltage product set, automation, and complex global customers. We will also focus on additional initiatives that drive profitability, working capital efficiencies, and cost structure which Ted will detail.

Finally, our newly created Utility Power Solutions segment achieved sales of $336 million in the quarter, which compares to Q4 2014 pro forma sales of $342 million, with an organic sales growth of 1%. Sales in the UPS segment were adversely impacted by the oil and gas industry caused by utility customers deferring investment based on lower power consumption.

Finally, I wanted to respond to some questions that arose recently regarding customer retention in our utility business. It is common in certain parts of our business, including the newly acquired Utility Power Solutions business, to have multiyear customer contracts that may involve ongoing MRO support and/or support for a major capital project. By the nature of these agreements, contracts can be renewed or cancelled based on a variety of reasons, including acquisitions, project completion or other competitive reasons.

By practice, we do not comment on specific customer agreements. However, importantly, by the end of 2015, the net effect of competitive wins and losses is positive for 2016. In addition, we recently signed a 10-year contract renewal with one of our largest customers. Over the life of the Power Solutions business, the team has an extremely strong record in terms of customer retention.

As we enter 2016, we anticipate a difficult industrial and construction environment with continued headwinds from copper and currency. We believe there will be targeted growth opportunities in data, security, and the synergies we are pursuing from our recent acquisitions. We are planning for continued strong growth, low inflation environment, with the most predictable and steadiest performance coming from our NSS segment.

From a geographical perspective, we expect North America to be the stronger region, with growth in the U.S. offsetting weaker trends in Canada. The actions we took in 2015 should position us for reasonable profitability in the environment we are expecting.

With that, let me turn the call over to Ted for a more detailed analysis of our results and actions on the cost side of the business.

Theodore A. Dosch - Chief Financial Officer & Executive VP-Finance

Thanks, Bob, and good morning, everyone. Today's earnings release includes a schedule which reconciles the GAAP financial results with the non-GAAP financial results. We believe these non-GAAP measures provide the best representation of our ongoing operational performance. As we do each quarter, a presentation has been posted to our website with more details to explain our results. All of the following comments this morning, including year-over-year and sequential comparisons, are based on continuing operations only.

Also, two weeks ago, we provided pro forma information for prior periods from Q1 of 2013 through Q3 of 2015, so that historical results are comparable to results from continuing operations as we go forward as a result of the acquisitions of both Tri-Ed and Power Solutions.

As a reminder, we acquired Tri-Ed at the end of the third quarter of 2014, so it is now embedded in our run rate numbers. The Power Solutions acquisition closed on October 5, 2015, so the fourth quarter of 2015 includes a full quarter of operations of this business.

As Bob highlighted, our Q4 2015 adjusted earnings per diluted share of $0.88 compares to prior year adjusted EPS of $1.10. I want to first summarize the non-core items that we had excluded from our non-GAAP adjusted EPS. These charges fall into one of three categories and are detailed and scheduled on page 11 of our earnings release, and in the appendix of the accompanying slides on our investor page on our website.

First, we had excluded $5.3 million of costs related to our acquisitions and subsequent integration. The second category is a restructuring charge of $2.9 million, which had a payback less than one year. The third category is a result of significant negative CALA macroeconomic events, which include the recent Argentina currency devaluation, the write-off of certain accounts receivables primarily in Brazil and Venezuela, and the establishment of a deferred income tax valuation also in Brazil.

This last category includes $12 million of pre-tax expense plus an $11.8 million tax expense primarily associated with a valuation allowance. We believe the exclusion of these items gives a much clearer picture of the performance of the business.

Now, let me review the key drivers of the decline in our adjusted earnings performance year-over-year. Unfortunately, two big negative drivers have impacted Anixter, our industry, and broad sections of the general economy throughout 2015.

First, copper prices dropped 26% year-over-year in the quarter to a fourth quarter average price of $2.20 per pound. This represented a sequential drop of 8% from the third quarter, putting further pressure on earnings as the quarter progressed.

Second, currency continued to create challenges with the strong dollar create pressure on demand in addition to the translation of foreign results. The combination of these two items negatively impacted EPS by $0.16.

In addition to these two items, weaker earnings in Canada and around the world resulted in a higher percentage of our consolidated pre-tax income coming from the U.S. The resulting 40.5% effective tax rate not only negatively impacted Q4 results by $0.05 per share, but also reduced earnings by $0.15 per share related to the true-up of income taxes for the first three quarters of the year.

To summarize, excluding the prior quarter's tax true-up of $0.15 per share, adjusted EPS would have been $1.03. Further adjusting for the $0.16 from the negative impact of copper and currency, core operating performance would have resulted in $1.19 per share compared to the prior year of $1.10.

While the macro environment was challenging, we are aggressively addressing these challenges and positioning ourselves to deliver the best possible leverage in any sector of the economy as demand improves.

Now, I will go into more detail on our results. As Bob discussed, our quarterly sales of $1.8 billion increased 26% compared to a year ago, driven by the Power Solutions acquisition. We calculate our organic sales growth by adjusting for the impact of copper price changes, currency, and when applicable, acquisitions and divestitures. So after adjusting for the $479.6 million favorable impact from the Power Solutions acquisition, $57.6 million negative impact from currency, and $27.8 million negative impact from lower average copper prices, our organic sales decreased by 0.5% year-over-year, which was the softest quarter of organic sales growth of 2015.

Gross margin of 20.2% in the quarter compares to 22.1% in the year ago quarter, and 22.2% in the third quarter. Approximately 170 basis points of the decline is attributable to the Power Solutions acquisition. These gross margins within Power Solutions are largely offset by a lower operating expense model. The remainder of the margin decline is due to segment mix, reflecting EES becoming a smaller percentage of our consolidated results.

Operating expense of $305.6 million compares to $241.1 million in the prior year quarter. Adjusted operating expense of $289.5 million excludes the $16.1 million of expense I highlighted in my opening. Prior year adjusted operating expense of $239.6 million includes $1.5 million – excludes $1.5 million of acquisition and integration costs associated with the Tri-Ed acquisition.

Further, adjusting the current year for $9.6 million of favorable foreign exchange, and the prior year for $59.8 million of pro forma Power Solutions expense, our adjusted operating expense was flat. This adjusted operating expense level of $289.5 million, or 15.8% of sales, reflects a 60-basis-point improvement versus third quarter and a 70-basis-point improvement versus prior year.

Regarding our ongoing focus on our cost structure, recall that in the second quarter, we took a $5.3 million restructuring charge that will result in annualized savings of approximately $13 million, which we began to realize a portion of these benefits in the latter half of Q3. These actions resulted in a reduction of 1.5% of our global head count and will fully eliminate the impact of the stranded costs resulting from sale of the Fasteners segment. All of these actions have been implemented and we are on track to achieve the full run rate savings beginning with the first quarter of 2016.

In light of the ongoing macroeconomic headwinds and the current disinflationary environment, we will continue to search for opportunities to improve our competitive cost structure. As evidence of this, we took an additional $2.9 million restructuring charge in the fourth quarter. This action has resulted in a further reduction of 1% of our head count and an additional $4 million of annualized savings. The cumulative 2.5% structural reduction in positions within our fixed cost base, combined with reductions directly related to lower volume levels, has resulted in a total reduction in head count year-over-year by 4.5%, excluding the addition of the Power Solutions employees.

Adjusted EBITDA of $101.8 million, or 5.5% of sales, compares to $95.9 million, or 6.6% sales, in the prior year period. 50 basis points of the decline in the EBITDA margin reflects the consolidation of the Power Solutions business into our results, with the other 50 basis points primarily a function of copper and other macro factors pressuring our EES margin.

By segment, NSS adjusted EBITDA of $67.5 million, or 6.9% of sales, compares to $63.5 million, or 6.6% of sales, in the prior year quarter. EES adjusted EBITDA of $20.8 million, or 3.9% of sales, compares to $35.3 million, or 7.3% of sales, in the prior year period. On a pro forma basis, the 3.9% of sales compares to 6.3% in the prior year, with the low-voltage Power Solutions business consolidated with the legacy Wire & Cable segment.

The 240 basis points decline in margin versus the pro forma prior quarter was caused by the unfavorable impact of lower copper prices and currency headwinds combined with the overall weaker macro environment, all resulting in significant negative operating expense leverage.

Utility Power Solutions adjusted EBITDA was $15.8 million or 4.7% of sales. Overall, UPS adjusted EBITDA was lower than what we had expected when the quarter began as a result of the decelerating macro environment largely related to weakness in the Canadian markets.

As we move down the income statement, interest expense of $21.1 million increased by $6 million year-over-year. The increase in interest expense results from the issuance of incremental debt used to finance the Power Solutions acquisition, partially offset by the repayment of the 5.95% senior notes that matured in March of 2015.

Foreign exchange and other expenses of $8.1 million compares to $2.4 million in the prior year quarter. Excluding the $2.9 million loss related to the devaluation of the Argentina peso and $0.9 million of costs associated with the extinguishment of debt, our adjusted FX and other expense was unfavorable by $1.9 million year-over-year, primarily related to $0.8 million of additional foreign exchange losses, resulting from significant strengthening of the U.S. dollar in virtually all of our major foreign markets.

Our effective fourth quarter tax rate from continuing operations was 48.3%, bringing our full year rate to 40.5%, a 300-basis-point increase versus third quarter due to the change in the country mix of earnings. The acquisition of Power Solutions drove an expected increase of about 100 basis points to our ETR. However, continued weakness in Canada and emerging markets drove an even higher percentage of our pre-tax earnings to come from the U.S.

Looking at the overall impact of the external environment on our results, we estimate that the average price of copper, which is $2.20 in the current quarter, compared to $2.98 in the year ago quarter, negatively impacted our operating earnings by $5.8 million and our earnings per diluted share by approximately $0.10. Coupled with an additional $0.06 negative impact from currency, these two macro drivers depressed our adjusted earnings per share by $0.16 with a disproportionate impact on the EES segment.

We generated $92 million in cash from operations for the full year, which compares to $104 million in the prior year period. Our cash-to-cash conversion improved by seven days at the end of 2015, as a result of our acquisitions and divestiture, as well as other operational improvements. For the full year, we invested $28.6 million in capital investments compared to $40.3 million in 2014. The reduction primarily related to the divestiture of the Fasteners business.

At the end of the quarter, our debt-to-capital ratio was 58.4%. This compares to 51.6% at the end of 2014, reflecting the additional borrowings upon the Power Solutions acquisition. With our debt outside of our target range of 45% to 50% debt-to-capital and a leverage ratio of approximately 3.8 times the adjusted trailing pro forma 12-month EBITDA, including the full year results of Power Solutions, we will place our priority on paying down our debt with cash flow generated from operations. Our goal is to return to our target debt-to-capital range and a return to leverage ratio of below 3 times EBITDA by the end of the first half of 2017. Our weighted average cost of borrowed capital of 4.8% compares to 4.7% in the year ago quarter, reflecting the new mix of debt instruments in our structure.

Our liquidity position remained strong with total available liquidity of $346 million at the end of the quarter.

As we enter 2016, we are experiencing solid momentum in our NSS segment. Our book-to-bill ratio, backlog and project pipeline, together, give us confidence that current trends in this business will continue with security continuing to be a significant growth driver. We also continued to achieve excellent results with both U.S. and non-U.S. based multinationals investing in network infrastructure in all geographies.

In our EES segment, we faced challenging markets as our industrial customers continue to experience weakness as a result of the broader industrial slowdown. We experienced better performance in the OEM portion of the business, although it did not offset the impact from slower trends in the industrial project portion of the business.

In our utility segment, we faced similar challenging markets, driven by our general weakness in the Canadian market. In light of the softer trends in the oil, gas, and industrial end markets that impact both our EES and our UPS segments, our outlook is more cautious while we increase our focus on margin improvement, cost management, and the working capital initiatives we have in place.

As we look forward, we expect these trends to continue, and as a result, we enter 2016 with the expectation of full year organic sales growth of minus 2% to a positive 2%, which compares to 1.3% for the full year of 2015. We currently expect to invest approximately $45 million to $50 million in capital investments and to generate $100 million to $125 million in free cash flow for the full year of 2016.

As you think about 2016, I'd like to provide a framework for modeling currency, copper, and Power Solutions. The strength of the U.S. dollar that began in 2014 continued to be a significant headwind for us throughout 2015. In the fourth quarter, currency fluctuations negatively impacted sales by $58 million, at the high end of our estimated range of $50 million to $60 million. Overall for the year, currency fluctuations negatively impacted sales by $221 million.

Based on the current value of U.S. dollar against other currencies, we currently expect a 2006 (sic) [2016] headwind of $50 million to $60 million, with a very disproportionate portion of that hitting in the first half. This is estimated to have $0.15 to $0.20 negative impact on EPS for the year, with approximately 80% of that hitting in the first half of the year.

Weaker average copper prices with the price of copper averaging $2.20 in the fourth quarter versus $2.98 in the year ago quarter, negatively impacted fourth quarter sales by $27.8 million, above our previous outlook range.

Based on current copper prices slightly above $2 per pound, the copper headwind would negatively impact first quarter 2016 sales by $20 million to $25 million, and full year sales by $60 million to $75 million. The corresponding impact on EPS would be an estimated $0.08 to $0.10 for the quarter and $0.24 to $0.30 for the full year. For your reference, we have included information on the average cost of copper over the last several years in our slide presentation posted on our website.

In regards to the Power Solutions acquisition, we continue to be excited about the long-term value creation opportunities with this business despite the macro headwinds. In the fourth quarter, Power Solutions added $460 million of sales, slightly below our estimated range due to weaker currency and exposure to oil, gas and Canadian markets in the utility business, along with weaker demand, in general, in the low-voltage C&I [construction and industrial] business.

For the full year 2016, we expect Power Solutions to add an incremental $1.4 billion to $1.5 billion to sales in the first three quarters of the year, which reflects the macro weakness that this business is facing, very similar to our EES business.

We are estimating approximately $6 million of EBITDA synergies and incremental accretion of $0.40 to $0.45 to EPS in 2016. Synergies will be driven by product cross-selling opportunities, purchasing synergies, along with operating expense efficiencies.

Finally, you should assume our Q4 run rate for interest expense and depreciation and amortization are good estimates for these expenses going forward. In regards to our tax rate, the global dispersion of income should be somewhat more positive from an ETR standpoint, and we are estimating an effective tax rate of 39% for full year 2016. We firmly believe that the impact of a higher tax rate, as a result of more earnings in the U.S. from our recent acquisitions, is more than offset by the reduced currency exposure and the lessening of volatility for the foreseeable future. The higher tax rate, however, is certainly easier to quantify whereas the reduced risk in these other areas is much more difficult to measure.

The three strategic actions that we have taken in the past year complete the transformation of our global platform and result in a portfolio that is well positioned for a substantial and sustainable long-term growth. With our attention intensely focused on successful integration of these businesses and maximizing their synergistic value, we expect to generate free cash flow that will support our balanced capital allocation strategy.

With that, we'll now open the call for questions.

Question-and-Answer Session

Operator

Thank you. We'll go first to Steven Fox of Cross Research.

Steven Fox - Cross Research LLC

Thanks. Good morning. Just first question on the Power Systems (sic) [Power Solutions] business acquisition, I'm just trying to understand how much your outlook on the top line has changed since the acquisition was completed. And if you can, Bob, dig into one of your comments about how oil prices were negatively affecting some of that business, just maybe connect the dots a little bit, more detail, that'd be helpful. And then I had a follow-up.

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

Yeah. I think, Steve, our outlook now for the growth in Power Solutions is not so much that we had – there's any negativity in how the acquired businesses are performing. It's that we're being caught up in macro factors that I think are broadly affecting the utility market as well as the low-voltage construction and industrial part of that business. And I'll take them separately.

In the low-voltage construction and industrial piece, the factors are very much like in our legacy Wire & Cable business, and it's simply the amount of industrial capital expense is quite a bit lower than it had been, particularly in oil and gas-focused markets. So, we definitely get a little bit of drag from that, very similar to what we're seeing in the legacy Anixter Wire & Cable business.

In the utility side, the impact is mostly in Canada, and we've seen slower growth in Canada particularly in Western Canada. What's happening is, with lower power consumption by the utilities, they're spending less money on their capital improvements as well as being able to ratchet back their maintenance – their MRO expense bucket a little bit as well. So when you put those two effects together, it's created a little bit of drag in spend in utilities in Canada. Add currency to that, and that creates a little bit of hit to the business.

Steven Fox - Cross Research LLC

Okay. That's very helpful. And then just in terms of the EPS accretion, is that on target in a different manner now? Because I'm not sure I heard how much accretion you got in the first quarter from Power Systems (sic) [Power Solutions].

Theodore A. Dosch - Chief Financial Officer & Executive VP-Finance

Yeah. Steve, great question. Just to clarify, the incremental accretion for 2016 is on top of what we delivered in Q4. I know after our Q3 call, when we talked about our projections for this, based on some of the reports, there was a little bit of confusion about the 2015 Q4 versus full year 2016. So, to clarify, we delivered, in Q4, approximately $0.05 a share accretion from the acquisition. That is down from what we had projected to be $0.07 to $0.09. And that reduction is entirely due to the macro weakness disproportionately affecting the low-voltage portion which is now consolidated into the EES segment. So it was top line demand-driven flowing through operating earnings. So, in the numbers I gave for incremental 2016, that would be on top of the $0.05 that we delivered in the fourth quarter of 2015.

Steven Fox - Cross Research LLC

Great. That's very helpful. And the last question from me, just how are your payables – your receivables and payables looking at this point, relative to some of the bankruptcy risk you may be seeing at the customers? I mean, is there any reason to think that you may be facing other charge-downs as you go on through the course of this year?

Theodore A. Dosch - Chief Financial Officer & Executive VP-Finance

Yeah. Overall, Steve, we feel very good about where our receivables are with the obvious exception with this charge in the quarter in Latin America. I think we've done a really good job as we continue to monitor the economic trends and how that impacts different customers, that we would not expect anything unusual in North America, Europe or Asia Pac.

The big issue for us clearly would have been CALA, as you saw with this charge, and we certainly are not unique in that regard, in that in a few cases, our customer is actually the government, who has just stopped paying, and that's been the case both in Brazil and Venezuela. And in other cases, our customers' customer is the government. So our customer isn't being paid affecting their payment to us. So, the impact that we saw here in CALA, as I mentioned, primarily Brazil and Venezuela-related, we do not think as indicative of the health of kind of receivables elsewhere in the world.

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

And Ted's comments about CALA and the government being the customer of our customer, we had one scenario that relates very specifically to the Petrobras corruption scandal which, without going into extensive detail, drove one of our customers into bankruptcy. So, some of those we're viewing as – and in fact, there were three incidents that drove the bulk of the Latin American write-off.

And I think that's important to appreciate is that it wasn't, broadly, tens of customers, it was three specific events that were governmental-driven or corruption-driven, and frankly very unique kind of scenarios. So from that standpoint, we'd like to think there's not a lot of contagion that grows out of there across our AR, and we do think we're actually, currently, appropriately reserved, and we don't see a lot of downside exposure in our accounts receivable from where we're at now.

Steven Fox - Cross Research LLC

Great. I appreciate all the details. Thank you very much.

Operator

Thank you. We'll take our next question from Shawn Harrison of Longbow Research.

Shawn M. Harrison - Longbow Research LLC

Hi. Morning. Wanted to just be crystal clear then on the Power business. It appears that the outlook for 2016 came down on the top line, maybe about $175 million or $200 million from the, I think, the outlook provided in the third quarter, and it's down about $0.10 in terms of kind of accretion. Am I correct that's the right range and you're tying all that toward the low-voltage business in Canada or is there something else?

Theodore A. Dosch - Chief Financial Officer & Executive VP-Finance

Let me start with the accretion. It's only – it's a low end of the range, it's down $0.05 from what we had said. I believe we had said $0.50 to $0.60, so now we're saying $0.45 to $0.50. So, we narrowed the range a little bit with what we know now that we own the business and then lowered it a little bit because of the macro.

Shawn M. Harrison - Longbow Research LLC

It was like...

Theodore A. Dosch - Chief Financial Officer & Executive VP-Finance

Is that....

Shawn M. Harrison - Longbow Research LLC

Yeah, that's okay. But – and I'm right, and it's about $175 million revenue decline from the $2 billion to $2.2 billion now is what you kind of implying?

Theodore A. Dosch - Chief Financial Officer & Executive VP-Finance

It's a low end of the range. It was the – well, if you compare the high end of the range to the low end of our new range, yes. But if you take our fourth quarter results and add them to the $1.4 billion to $1.5 billion of next year, that would put us into $1.8 billion to $1.9 billion total range. And again, with a disproportionate amount that softness flowing through the EES segment now with the low-voltage business. So, yes, we previously had said $2 billion to $2.2 billion, and that was prior to experiencing the significance of impact of the macro.

Shawn M. Harrison - Longbow Research LLC

Okay.

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

The importance, Shawn, if I can just highlight again, important to note that that decline is heavily focused in what's today our Electrical & Electronic Solution portion. It's very much the same kind of factors, as I've said earlier, that we saw flowing through the legacy Wire & Cable business.

Theodore A. Dosch - Chief Financial Officer & Executive VP-Finance

Yeah. And just to clarify, when we're putting out those kind of numbers, that would be a reported number. So, keep in mind that there's still a significant amount of Canadian FX impact on that Power Solutions number, much more so than what we had estimated back pre-acquisition.

Shawn M. Harrison - Longbow Research LLC

Okay. And then I guess just looking at EES organically in 2016 is maybe you could talk about what is included in the full year guidance in terms of organic assumptions, and how do you anticipate that organic growth rate progressing as you get through the year, understanding, at times, the comps get easier.

Theodore A. Dosch - Chief Financial Officer & Executive VP-Finance

Let me give a general comment and Bob can get a little more specific. As you know, we typically do not give growth projections by the individual segments. And I think considering the uncertainty, especially in EES, that's even more appropriate at this time. So, the minus 2% to plus 2% again is the organic number, which would then to get to reported number would be would be adjusted by the copper, currency estimates I gave as well as the incremental Power Solutions portion.

But each of those three segments are currently performing because of the macro somewhat differently not only here in North America but around the world. We would expect to see NSS continue with stronger performance, EES to be more challenged and Power Solutions to be kind of in the middle of where are those two. But because of the declining macro over the course of 2015, we would expect to see the lower or the toughest comps and therefore lower organic growth rates in these first two quarters of the year.

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

Yeah. I think, Shawn, I can add a little more color. I think as you look at the EES business and if you think about the macro backdrop and you look at what's happened with PMI over the last several months, if you look at non-defense, non-aviation CapEx, if you look at the recent trends in commercial, non-residential construction, all of those indicators are pointing more negative. If you look at things like railcar loadings and you strip out coal and agriculture, those are looking more negative.

So, what we're trying to do in our range here for the whole business is not be overly optimistic or overly pessimistic. We think in the EES business, all of these industrial kind of economic data points are pointing us to a continued pretty tough environment for industrial CapEx. And also for the OEM, if you remember, the first nine months of the year, we had very positive results in OEM. As we got into the fourth quarter, we continued in particularly emerging markets to have positive results in OEM. But we saw a deceleration in OEM through the quarter in North America and in Europe, with reasonable numbers in October and November, but declines in December. And I think that ties very closely to what you saw in PMI.

And so we're trying to be cautious in our look forward. We don't think we can swim upstream against the macro and be highly successful. And I think what we're indicating around industrial is not different materially than what you've heard from other industrial distributors who've released already. If you switch that over to NSS, we had good organic growth last year. We came out through the end of January with nice growth and backlog. We got some significant project wins. So, we're still actually pretty optimistic about the NSS business. But again, we're in a pretty, I would say, unstable macro environment and that can have a pretty quick effect, particularly on the IT spend.

So, we're still optimistic about NSS and that's why – and we do believe utility isn't set up for substantial decreases. I just talked about that customer wins and losses are net positive as we go into 2016. So, we've given this plus 2% to minus 2% range that we think is the right way to balance off all of those puts and takes.

Shawn M. Harrison - Longbow Research LLC

Okay. That's very fair. And lastly, just quickly, I got confused I guess on the $4 million of savings in a $10 million restructuring program. Is it $4 million of annualized savings, and when do those begin to benefit profitability?

Theodore A. Dosch - Chief Financial Officer & Executive VP-Finance

Yeah. Let me clarify the two. In Q2, we announced we're spending $5.3 million to save $13 million. We began to realize some of those savings in Q3. So, incrementally, year-over-year, 2015 versus 2016, that restructuring will generate somewhere between $6 million and $7 million of incremental savings. The restructuring that we announced here in Q4 was a $2.9 million charge and $4 million of annualized savings, which will begin – which has begun here in Q1. So, if you take that $4 million from the second restructuring plus, call it, a little over $6 million from the Q2 restructuring, that's how you get to an incremental year-over-year $10 million savings.

Shawn M. Harrison - Longbow Research LLC

Very helpful, Ted. Thanks so much.

Theodore A. Dosch - Chief Financial Officer & Executive VP-Finance

Okay.

Operator

Thank you. We'll take our next question from David Manthey of Robert W. Baird.

David J. Manthey - Robert W. Baird & Co., Inc. (Broker)

Thanks. Good morning. Yeah. Ted, on that last question, so the $4 million, when would you anticipate hitting the full run rate on that particular piece?

Theodore A. Dosch - Chief Financial Officer & Executive VP-Finance

Q2 of this year

David J. Manthey - Robert W. Baird & Co., Inc. (Broker)

Okay. And then, looking at your guidance for the Power Solutions acquisition revenue estimate, that $1.8 billion to $1.9 billion that you referenced, how much of that is organic growth and how much of it is assumed sales synergies?

Theodore A. Dosch - Chief Financial Officer & Executive VP-Finance

That was intended to be kind of a reported number, which would have taken into considerations of negative copper and currency offset by synergies. So, in the revenue number, we would expect in this first year to have over $50 million of revenue synergies across the two portions of the Power Solutions business.

David J. Manthey - Robert W. Baird & Co., Inc. (Broker)

Okay. And in terms of just apple-to-apples organic growth, it sounded like you believe that you could see actual growth next year. Is that the case? Or are you assuming kind of flattish for this business also?

Theodore A. Dosch - Chief Financial Officer & Executive VP-Finance

We think we will see some growth. Here in the fourth quarter, it was only 0.9% on an organic basis. But we believe – I've got to clarify it – it was 0.9% on an organic basis for utility. It was actually negative 6% or 7% in the low-voltage portion of that business. And not to be confusing, guys, but as we have already started this integration, it would get increasingly more difficult to calculate just specifically what those two portions of the legacy Power Solutions business delivers. So, not trying to confuse.

But in utility portion of Power Solutions, we would expect to see positive organic growth, low single-digits. And in the low-voltage part of the business that is now part of the EES, we would expect it to perform more like our EES business, and actually more flattish to slightly down on an organic basis when you take into consideration copper.

David J. Manthey - Robert W. Baird & Co., Inc. (Broker)

Okay. So along those lines also, is there any issue, structurally, having that low-voltage Electrical business in a different segment from your Networking business? I know as you go out to the market with kind of a One Anixter look, is there any issue? And also thinking back to the initial acquisition, I think you were talking about including that in the UPS segment. Could you just talk about where that landed, why that landed where it did?

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

No. I don't think we ever talked about including the low-voltage part in the UPS segment. We've always intended to split that off and include it with Wire & Cable and form, in effect, kind of a new segment. The reason being that the customers are very similar. And what the low-voltage part of legacy Power Solutions brought to us was this broader product offering, in things like switchgear transformers and lighting, that enable us to compete more effectively in the mid-market and frankly in some of the larger projects as well.

And I guess the only other point I'd make, Dave, is as we launched our synergy planning and then actually hit the ground running – and this will go a little bit to your second point – we're actually seeing really good progress in the now combined EES business in terms of cross-sell of Wire & Cable into the legacy low-voltage business and some electrical gear sales into the legacy Wire & Cable customer base.

So, we've hit the ground running on that. We actually feel good about where we're at. We're seeing a lot of new opportunities opening up for us in the Utility segment by bringing across the security and Wire & Cable products as we had said. And in NSS, the opportunity, as I think you're alluding to, would be partly security products going into utilities, but it will also be the ability to bring this broader electrical product set into the customer base of NSS and some of their larger projects.

And in terms of how we feel about it or how the One Anixter initiative's working out, again, early indications are very positive. We've managed through compensation programs, how we reinforced the One Anixter initiative. And our sales teams are probably pulling together better on this at the current time, than I've seen them in our history. So, I feel very good about where we're headed with NSS taking advantage of the broader product set as well as EES and UPS.

David J. Manthey - Robert W. Baird & Co., Inc. (Broker)

Okay. And just one more quick one, if I could. You gave guidance for cash flow – operating cash flow of $125 million to $150 million. Is that outlook based on constant working capital metrics or are you assuming movement one way or the other? And maybe you could talk about the addition of the UPS business and what that does to those metrics.

Theodore A. Dosch - Chief Financial Officer & Executive VP-Finance

Yes. So, when you say constant metrics, yeah, the metrics will remain the same but we would expect to continue to make improvements in working capital efficiency. But the bulk of that cash flow number is an earnings-driven conversion as opposed to significant reduction in working capital. We continue to work our working capital initiatives and we expect that to hopefully be some upside to that.

Having said that, as I quoted in my comments, we had a very substantial seven-day reduction in our cash-to-cash days, and that is very much a function of this kind of restructuring of our business, without the Fastener business in there, which obviously was in our business at the end of 2014, and with the addition of Tri-ED and Power Solutions, both of which had a lower C2C days than our legacy Anixter business mix of the businesses drove the bulk of that seven-day improvement. And I really wanted to highlight that as we looked at acquiring a couple businesses with a little bit lower operating margin, but both of which have better asset efficiency to help the overall return on tangible capital of the business.

David J. Manthey - Robert W. Baird & Co., Inc. (Broker)

Got it. Thank you very much.

Theodore A. Dosch - Chief Financial Officer & Executive VP-Finance

Okay.

Operator

We'll take our next question from Charles Redding of BB&T Capital Markets.

Charles Edgerton Redding - BB&T Capital Markets

Hi. Good morning, gentlemen. Just a brief follow-up. Kind of if you think about some of the higher-growth segments within network infrastructure, the wireless, the power and cooling, how does the current environment impact your ability to gain market share here, and has this outlook here changed year-to-date?

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

Yeah. I don't think there's anything in the market environment that changes our outlook on our ability to gain share in wireless or the power and cooling parts or the horizontal LAN or hyperscale data center. So, I think what's enabled us to gain share has been a combination of our global footprint which has helped us, as I had said in my prepared comments, substantially with multinationals, that continues. And again, our differentiation around supply chain services is helping us win some large projects. So, I don't see anything in the macro environment or anything in the competitive environment that changes in terms of our ability to continue to maintain or gain share in that market.

Charles Edgerton Redding - BB&T Capital Markets

Okay. Great. And you mentioned the run rate on interest. Could you speak briefly to the maybe expected pace of leverage reduction here over the coming quarters? And just given where the shares are trading now, how seriously do you consider repurchasing shares at some point?

Theodore A. Dosch - Chief Financial Officer & Executive VP-Finance

Yes. As we've said, going back to our Investor Day, I'll repeat that, is we will continue to take a very balanced look at our capital allocation strategy and where our stock is in the market is obviously a factor to that. Having said that though, our number one priority is still debt reduction. We had said that we would get our debt-to-total cap down below 50% and get our leverage down below 3 times within 18 months, and that would put us there in the first half of 2017. So, the priority will be to translate or to convert cash from operations primarily into debt reduction. However, we'll continue to revisit what is the most strategic use of our cash as we go forward.

Charles Edgerton Redding - BB&T Capital Markets

Great. Thanks for the time.

Operator

Thank you. We'll take our next question from Gary Farber of C.L. King.

Gary A. Farber - C.L. King & Associates, Inc.

Yeah. Good morning. Just a couple of questions. Could you walk through – just give us your thoughts on the competitive environment in the three reporting segments, what it's sort of been like and what you expect in 2016 given your guidance.

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

Yeah. I think I'll take them in – or from largest to smallest, we start with NSS, I think in a competitive environment. I think sometimes there's a mistaken view that it's sort of a binary market with two competitors in security space and two competitors in the data comm space, but they're actually very fragmented markets still across all the geographies that we participate in.

So the byproduct of the fragmentation is that it certainly creates pressure on margin, which puts some limit on our ability to increase margin. But, again, we think we have a differentiated model. And so, using that differentiated model, we're quite confident we can perform like we have in the past year where, again, based on the market survey data and confidential discussions with our suppliers, lead us to believe that we've taken share in most of our markets with NSS.

Turning to EES, I think we're in a stronger competitive position due to the combination of the Wire & Cable and the legacy Power Solutions low-voltage business. So, I like how we set up there in terms of opportunity to take some share. And then, when we look at UPS competitively, it's a more consolidated market. There are still a number of players, but in North America, it's a little more consolidated. What I like about the business model there is that it's very much like the historical Anixter business model with a lot of focus on supply chain and working capital and cost reduction for customers. So, I think our ability to maintain or gain in that market is also meaningful for us.

Gary A. Farber - C.L. King & Associates, Inc.

Okay. And just to clarify, we were at sort of a $2 billion to $2.2 billion run rate for Power Solutions and now it's more $1.8 billion to $1.9 billion, and we were at $0.50 to $0.60 of earnings and now we're at $0.45 to $0.50. That's it?

Theodore A. Dosch - Chief Financial Officer & Executive VP-Finance

No. Let me clarify, Gary, so as we think about that revenue number. When I said in my comments, $1.4 billion to $1.5 billion, that would equate to an annual run rate of $1.9 billion to $2 billion. If I said $1.80 billion to $1.9 billion, I apologize, I misspoke. But we're about $1.9 billion to $2 billion. Yes, that would be lower than the $2 billion to $2.2 billion, which is entirely due to the weakness in the macro, combined with further Canadian currency weakness versus what we had assumed at the time we developed those initial numbers.

Relative to the accretion, when you take the $0.05 from Q4 plus the $0.40 to $0.45 for 2016, that would give a cumulative annualized EPS accretion of $0.45 to $0.50. And yes, that is a little below the $0.50 to $0.60 we said before. So, $0.05 to $0.10 below our previous estimate, again, directly related to that lower revenue from the macro.

Gary A. Farber - C.L. King & Associates, Inc.

Okay. Thank you for clarifying.

Operator

Thank you. With no further questions, I'd like to turn the conference back over for any additional or closing remarks.

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

So with that, we'll wrap up the call. Thank you very much for joining us today. If you have further questions, certainly reach out to Ted and Lisa.

Operator

Thank you for your participation. That does conclude today's conference. You may now disconnect.

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