Anixter International Management Discusses Q3 2012 Results - Earnings Call Transcript

Oct.23.12 | About: Anixter International (AXE)

Anixter International (NYSE:AXE)

Q3 2012 Earnings Call

October 23, 2012 10:30 am ET

Executives

Lisa Meers

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

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

Analysts

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

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

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

Steven Bryant Fox - Cross Research LLC

Hamzah Mazari - Crédit Suisse AG, Research Division

Shawn M. Harrison - Longbow Research LLC

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

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

Ted Wheeler

Operator

Good day, everyone, and welcome to the Anixter International's Third Quarter 2012 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over to Mr. Lisa Meers for opening comments and remarks. Please go ahead.

Lisa Meers

Okay. Thank you, Danielle. Good morning, everybody, and thank you for joining us in today's third quarter 2012 earnings call. Today, Bob Eck, President and CEO; and Ted Dosch, EVP and CFO, will discuss our third quarter 2012 financial results. After the remarks, we'll open up the line to take your questions.

Before we begin, I want to remind everyone that we'll be making forward-looking statements in this presentation, which are subject to a number of factors that could cause Anixter's actual results to differ materially from what is indicated here. We do not undertake to update these statements and refer you to our SEC filings for more information. In conjunction with today's earnings announcement, please find a supplemental slide deck that can be accessed on the Investor Relations portion of our website at www.anixter.com that will further detail the quarter. Today's earnings announcement includes both GAAP and non-GAAP financial results, the reconciliation of which is further detailed in both our earnings release and in the aforementioned slide posted on our website.

Now I'll turn the call over to Bob.

Robert J. Eck

Good morning, and thank you all for joining us. I want to welcome you to our discussion of our operating and financial results for the third quarter of 2012. Today, I will give an overview of the quarter, update you on our end markets and share our thoughts on the macro environment. Then I'll turn the call to Ted, who will provide a detailed review of our financial performance, which will be followed by Q&A.

As you well know, from a global macro perspective, this was a challenging period, and I think it's important to offer a balanced perspective on both our successes and challenges in the quarter. We delivered record revenue in North America in the third quarter, and we continue to feel good about our overall results, as well as the underlying health of our business.

Let me start with some highlights of our financial results. First, our Electrical and Electronic Wire & Cable end market turned in a very strong performance, with organic sales up 8% year-over-year, which was driven by our exposure to global natural resource development and power generation markets. Our strength in Wire & Cable was truly global, including North America, where our Canadian Wire & Cable business turned in a record quarter, as well as Latin America and the Middle East. Second, our investments in the Emerging Markets, coupled with excellent sales execution, resulted in strong organic growth of 29% and our Wire & Cable end market within our Emerging Markets segment.

Our Enterprise Cabling & Security Solutions end market was impacted by continued weakness in the data infrastructure market in North America and Europe that we discussed in our second quarter call. On a positive front, within that end market, we continue to benefit from strong secular trends in Security.

Our OEM Supply end market continues to be affected by reductions in production in North America and Europe as we discussed on the prior quarter call. And as you know, reflecting the broad-based weakness in the region, our European segment was a drag on the business. Based on our outlook for this segment, in light of the weaker European economic forecast, our third quarter included noncash impairment and inventory adjustment charges related to our European segment, which Ted will provide greater detail on in his comments.

Responding to the ongoing uncertainty in the macro environment, we remained focused on carefully managing our cost structure, delivering strong expense management in the quarter. Our operating expenses in the third quarter declined from the second quarter, which is a real testament to our ability to respond quickly to marketplace changes, as well as a result of a lot of hard work from the entire team.

Finally, through effective management of working capital, combined with our operating results, we generated $67 million in cash flow from operations during the quarter.

Consistent with our long-standing practice of returning excess capital to shareholders, we returned $57 million to our shareholders through share repurchases while still exiting the quarter with substantial liquidity in the form of cash and borrowing capacity.

Now let me update you on our sales mix in our 3 end markets. In the third quarter, 71% of our sales were generated in North America, 16% in EMEA and 13% in Emerging Markets; while by end market, 52% of sales were in Enterprise Cabling & Security Solutions, 35% in Electrical and Electronic Wire & Cable and 13% in OEM Supply.

Looking more closely at our end markets, our ECS end market experienced a year-over-year decline of 1% organically as we continue to see subdued trends in data, partially offset by growth in our Security business. By geography, the modest organic growth in both our Emerging Markets and North America ECS business was offset by a decline in our Europe ECS business.

As we noted in our last 2 earnings call, the data infrastructure market in the overall North American industry declined in each of the first 2 quarters of the year in the high single to low double digits. This trend continued into the third quarter. While the market is more difficult to track in EMEA, we believe that the recessionary pressure in Europe is causing the market to decline there as well.

In the Emerging Markets, the story is somewhat mixed for us, as our business in Asia, particularly, is dependent on IT capital spending by Western multinational companies. We believe the spending pattern by multinationals in Asia is similar to what we are seeing in North America, while Latin America is seeing stronger demand. The continued slow investment in IT infrastructure is likely creating pent-up demand that should improve the trends at some point in the coming year. Given this challenging environment, it is our view that we are continuing to gain modest share in our addressable data infrastructure market. Recall from our Investor Day that we have multiple growth initiatives in place that are keys to the success of our ECS business. These include supply chain services, data centers, security and in-building wireless, all of which showed year-over-year growth in the quarter and a testament to focusing our resources on the right opportunities and executing very well in difficult market conditions.

Moving now to the Electrical and Electronic Wire & Cable end market. In the third quarter, we experienced continued organic growth across all geographies, with nearly 29% organic growth in Emerging Markets. Wire & Cable increased by nearly 9% in North America, which included a record quarter in Canada, as I mentioned earlier. Also, Wire & Cable organic sales increased modestly in EMEA. Our expansion earlier this year into Saudi Arabia, along with our presence for more than a decade in the GCC region, has been a significant contributor to EMEA in the quarter and year-to-date. We continue to experience solid project activity in power generation, industrial, oil and gas and mining sectors. The continued global infrastructure investment in industrial plants, natural resource development and power generation should continue to drive sales growth in our Electrical Wire & Cable end market. We see strong quoting activity and increased opportunity to leverage our global platform in this end market, and we continue to take share in this business. Initiative to expand our industrial automation has continued to strengthen the share across North America, and we will expand this initiative into other geographies in 2013 and beyond. In addition, the acquisition of Jorvex, which I'll discuss in more depth shortly, added nearly $32 million to total Electrical Wire & Cable revenues during the quarter.

Turning to our third end market. Our OEM Supply sales declined by 12% organically, reflecting third quarter production cuts by many of our large OEM Supply customers. These reductions were both specific to individual customer issues, as well as softer demand for our customers' products. Importantly, we are not losing customers and continue to have an active pipeline of new business opportunities. What we have experienced in our OEM Supply business is consistent with widely reported industrial production statistics and PMI data in the U.S. and Europe. Upon confirming these trends, management moved quickly to take cost out of our business and reduced inbound inventory in line with sales. Additional measures are being taken to further reduce cost and working capital, while at the same, we are gearing up to support a sizable contract for one of our major customers in Turkey.

Looking to the next several quarters, we believe we have strategies in place to win new business, but we will be comparing to strong year-ago trends in North America as the heavy truck volume returns to more normalized levels in the fourth quarter. In addition, we expect continued pressure in the European market due to continued recessionary pressures in that market.

Looking at the business in total, third quarter sales increased by 2% sequentially, which is below what we would typically experience. In addition to the European macroeconomic environment, uncertainty around U.S. elections and fiscal policy are contributing to a delay in Enterprise spending, along with reduced capital spending, which impacts our OEM customers.

Moving on, I'd like to say a few words about some specific challenges we are facing, the biggest of which is Europe, and the aggressive actions we are taking in response. First, despite its current challenges, I want to emphasize that Europe is important to Anixter as it is to any truly global business because it is important to our customers. For perspective, 2/3 of our top 100 customers have operations in Europe. Of those customers, 77% spent more than $100,000 with us in Europe last year. Frankly, we are margin in customer loyalty in North America in part due to our ability to be a single source provider of solutions globally. The ability to manage global complexity to our business platform is a meaningful differentiator for Anixter in the marketplace. With respect to Europe, we are working aggressively to improve the sales and profitability of the business and believe that from our current base, we are well-positioned for growth when the economy begins to recover. Recall that we recorded a $5.3 million restructuring charge in the first quarter of 2011 related to rightsizing the cost base of our European operations. As we said at that time, the restructuring will not be fully completed until the middle of 2013. Annualized savings from those actions are estimated to be $5 million. In addition, further actions to adjust to a weaker macro environment in Europe are underway.

Let me turn for a minute to Anixter's value proposition and why, especially in economies like this, we believe we can provide enormous value within the supply chain, leading to strong customer retention, as well as opportunities to take market share. Companies are under enormous pressure to take cost out of their supply chain, minimize inventory on hand, manage complex projects and manufacturing environments, all operating within an increasingly global footprint. Our value proposition is based largely on 3 capabilities, which together take risk and cost out of our customer's business: first, our global capabilities. Consistent operational discipline, quality and ability to work face-to-face with customers across multiple geographies and transact business in local currency and language; second, our technical value add. Providing product recommendations, developing solutions for specific applications, managing quality control; and third, our supply chain services, which help customers manage their cost, working capital and take risk out of their business. Despite the challenging external environment, we believe we have attractive growth opportunities that we can capitalize on through our current business model and existing strategies and initiatives.

We are constantly seeking growth from product and service expansion, share gains, geographic expansion, continued excellence and execution and acquisitions. A recent acquisition of Jorvex is a good example of how we have tied together multiple initiatives. Jorvex is a leading distributor in the Electrical Wire & Cable business in the rapidly growing Andean region of South America, with a strong presence in mining and construction. Jorvex brings to our business additional expertise, local market knowledge and customer and supplier relationships. With its strength in the mining and construction industries, its broad array of products and support services and its critical supplier relationships, coupled with our supply chain and technical expertise, Jorvex will enable us to provide broader solutions to both new and existing customers across the Andean region.

As we look forward to the last quarter of 2012, the environment remains uncertain, but we are confident in our ability to manage through the cycle, grow through the current economic environment and emerge a stronger global competitor when the economy recovers. We remain cautious on Europe, but we are committed to the market and have a strategy in place to improve our profitability from current levels. We also believe that the underlying drivers of our core end markets remain strong and that we benefit from the broad diversity in our end markets and customer verticals. Our differentiated position as a value-added global distributor provides us with unique opportunities. In this environment, as well as when economic growth improves, we will aggressively manage expenses and work to capitalize on maximizing operating profit and return on capital. We have significant liquidity and will continue to seek opportunities to invest in growth, to expand the markets we serve and the solutions we can provide to our customers. And as we have demonstrated in the past, we will constantly evaluate alternative uses of capital, and we'll return excess capital to shareholders when we think that is the right use of funds.

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

Theodore A. Dosch

Thanks, Bob, and good morning, everyone. Before detailing our quarterly results, I want to first discuss the impairment and inventory charges that we recorded in the third quarter. As a result of the continued downturn in global economic conditions, our European reporting segment has experienced a decline in sales, margin and profitability as compared to the prior year, and we have lowered our projections for the near-term outlook. Due to these challenging market and economic conditions, we recognize that the indicated fair value of the reporting unit is less than its carrying amount and, therefore, required a more detailed evaluation. That analysis indicated that there would no longer be an implied value attributable to the goodwill on the balance sheet. Therefore, we recorded a noncash impairment charge related to the write-off of the remaining goodwill of $10.8 million associated with this reporting unit. Also, this action triggered the need to analyze the valuation of long-lived assets. This analysis indicated that there would no longer be an implied value attributable to a portion of our intangible assets and other fixed assets in Europe. Accordingly, we recorded a noncash impairment charge related to the write-down of long-lived assets of $16.4 million. In addition to the long-lived asset impairment, we recorded an inventory lower of cost through market adjustment of $1.2 million in Europe. Please note that all references to adjusted numbers in the remainder of my comments exclude these noncash impairment and inventory charges totaling $28.4 million pretax and $27.4 million net of tax.

As you read in this morning's release, we reported third quarter sales of $1.6 billion, relatively flat compared to a year ago. Results from continuing operations before adjusting for the impairment and inventory charges were operating income of $67 million, net income of $19.8 million and diluted earnings per share of $0.59. Excluding the impact of these charges, our operating income was $95.7 million. Further adjusting for the $3.8 million of unfavorable copper pricing and $200,000 of favorable foreign exchange effects, our operating income was $99.3 million for the quarter.

Net income was $47.2 million, and diluted earnings were -- per share was $1.41, again, all from continuing operations on an adjusted basis. Recall that last year's $1.78 included $0.25 per share net tax benefit, so on an adjusted basis, this quarter's EPS of $1.41 per diluted share compares to $1.53 a year ago. Both this year's and last year's third quarter had 63 billing days.

Looking at third quarter total organic sales. Our growth of 0.4% excludes the positive impact of $32 million from the Jorvex acquisition and the continued negative impact from both currency and copper, which, you recall, were both negative last quarter as well. In this year's third quarter, currency had a $23 million unfavorable impact, and copper had an $18 million unfavorable impact, together, totaling 3% of sales.

Bob already reviewed each of our end markets in detail, so I will just summarize our organic sales by end market. First, our Electrical and Electronic Wire & Cable business was the strongest performer, with over 8% organic growth, largely fueled by the strength of the global natural resource development and power generation markets. Our ECS end market declined by 1% organically as it continues to be impacted by delays in Enterprise spending, and our OEM Supply end market declined by 12% organically, impacted by both the slowdown in truck production and its relatively larger exposure to Europe.

Turning to geography. Organic sales in North America increased by 2% to a quarterly record level of $1.2 billion, reflecting the strength of our Electrical Wire & Cable end market and our Security initiative within our ECS end market. ECS, overall, continues to be impacted by project delays in this market. Organic sales in Emerging Markets also increased by 2% as we continue to invest in growth initiatives to increase market penetration and expand product lines in selected countries within that segment. Organic sales in Europe declined by 7.5%, driven by the weak economy throughout the region. As Bob mentioned in his comments regarding end markets, the decline in OEM sales in the region reflected production level reductions by many large customers. However, our expansion into Saudi Arabia earlier this year had helped to partially offset weaker sales on the continent. So we acknowledge that coming out of the second quarter, we expected our organic sales growth to be more in line with the first half of the year.

Our performance during the quarter was impacted primarily by a relatively weak macroeconomic environment in most parts of the world, particularly in Europe. Based on our conversations with customers and suppliers, we do not believe we have experienced any deterioration of our market share across our end markets.

Finally, please remember that we are comparing against very strong results from a year ago when sales increased by 20% versus the prior year and our operating margin in the third quarter was the highest of that year.

As I previously mentioned, when you look at our third quarter P&L in total compared to the prior year, we recorded flat sales of $1.6 billion, adjusted gross profit of $360 million versus $362 million in the year-ago quarter and operating expenses of $264 million versus $260 million in the prior year quarter. This then resulted in adjusted operating income of $96 million compared to $102 million in the year-ago quarter.

Our adjusted gross margin of 22.4% was down 10 basis points from a year ago. The primary driver of our lower margin was mix as follows: first, in OEM Supply, our highest-growing -- our highest gross margin end market was a smaller portion of our total and in the year-ago quarter; second, product mix put downward pressure on gross margin as lower margin security products outpaced the growth rate of the rest of the ECS end markets. In addition, pricing pressure in Europe continued to have a negative impact on gross margin. Sequentially, gross margin was down 30 basis points, excluding the inventory charge, which is consistent with the seasonality of the business, primarily due to the impact of production shutdowns in our OEM Supply end market that typically occur in the third quarter.

Our third quarter operating expenses of $264 million, declined by $3.8 million versus the second quarter, and as a percent of sales, operating expenses were 16.4%, marking the third consecutive quarter of improvement in this metric. Recall that in the first quarter, our expense ratio was 17.2%, and in the second quarter, it was 17% of sales.

Keeping in mind that approximately 60% of our operating expenses relate to people costs, we are managing our productivity very carefully. Our disciplined cost management, while still investing in our growth initiatives such as Emerging Markets, Security Solution strategies, demonstrates our ability to balance both short-term and long-term priorities. In light of higher expenses related to pension costs in the U.S. and higher IT expense due to strategic project spending, we feel very good about these operating expense trends.

Company-wide adjusted operating margin of 5.9% increased 20 basis points sequentially and declined 40 basis points from the year-ago quarter. Looking at our operating margins by region, North America operating margin of 7.3% in the current quarter increased 30 basis points sequentially due to strong cost leverage. The 20 basis points year-over-year decline was driven by increased investments in strategic projects and higher cost related to pension, partially offset by strong cost management actions.

Europe adjusted operating margin of 0.2% in the current quarter was down 10 basis points sequentially and 180 basis points from the prior year quarter. This margin decline reflects the impact of the weak economy in the region, which puts significant pressure on volume and pricing by also contributing to the unfavorable operating expense leverage.

Finally, Emerging Markets operating margin of 5.5% declined 10 basis points sequentially and 20 basis points from the year-ago quarter. Both declines were driven primarily by products and project mix.

In total, strong cost structure management partially mitigate the negative gross margin impact of end market product and customer mix. We continuously strive to maintain the discipline necessary to grow our cost structure at a slower pace than the top line. This is especially important when we have quarters like this when our top line is impacted by events outside of our control. Our sales growth in the third quarter was lower than any of the recent quarters, and therefore, it impacted our ability to generate the level of operating leverage that we have so consistently recorded over these past 30 months. However, we believe we are well-positioned to leverage our existing cost structure as economic conditions improve.

As we move further down the income statement, interest expense of $16.6 million was up from $12.5 million in the year-ago quarter. The increase of $4.1 million was driven by an incremental $4.9 million of interest related to the $350 million senior notes offering completed in April of this year. Recall that we issued these notes in anticipation of the February 2013 convertible note redemption. Other net expense in the current quarter of $3.2 million decreased by $2.7 million from the year-ago quarter, primarily due to lower foreign exchange losses and a favorable comparison in the cash value of company-owned life insurance policies.

The effective tax rate in the current quarter was 37.8%, excluding the nondeductible impairment charge, versus 26.1% in the year-ago quarter when the company recorded a net tax benefit of $8.8 million, primarily related to the reversal of deferred income tax valuation allowances in certain foreign jurisdictions. Exclusive of the special items in both periods, the full year rate for 2012 is estimated to be 36.8% compared to 37.2% in the prior year. We generated $67 million of cash from operations during the quarter compared to $19 million in the year-ago quarter. A strong cash generation equal to more than 140% of adjusted net income was primarily due to a reduction in working capital requirements compared to the prior year quarter. Capital expenditures were $7.9 million in the third quarter compared to $5.3 million in the year-ago quarter. Working capital level stood at 23.6% of sales at the end of the third quarter compared to 23.9% at the end of the previous quarter.

At the end of the third quarter, our debt-to-total-capital ratio was 52% compared to 45% at the end of 2011, and our weighted average cost of borrowed capital was 6.3% compared to 4.9% in the prior year quarter. This leverage ratio is slightly above our long-range target of 45% to 50% debt to total capital. But please keep in mind that both of these metrics are negatively impacted by our previously referenced notes offering, and we would anticipate that they will return to normalized levels when the 2013 convertible is redeemed in February next year.

Currently, our liquidity position remains excellent, $290 million of availability under revolving credit lines and no outstanding borrowings under our $300 million accounts receivable securitization facility. Combined with our invested cash position, this resulted in $635 million of available liquidity at the end of the third quarter.

Looking at our capital priorities, we have a disciplined and prudent approach to how we allocate capital. Balancing our 4 priorities, including: supporting organic growth in business; maintaining a strong balance sheet that provides us financial flexibility, especially in environments when market dynamics can shift quickly; pursuing strategic and financially attractive acquisitions; and opportunistically returning cash to shareholders.

Consistent with our approach of returning cash to shareholders through a combination of special dividends and share repurchases, we returned nearly $57 million in value to shareholders in the quarter and have returned over $200 million year-to-date, including the $4.50 per share special dividend that we paid on May 31. Of the 1 million share buyback program announced early in the third quarter, we repurchased approximately 960,000 shares in the third quarter and the remaining 40,000 shares in the first week of October.

Let me conclude with some comments on how to think about the fourth quarter in our business overall. Our current outlook for organic sales growth in the fourth quarter is approximately 1% to 2%, reflecting the opportunities that we believe exist for continued growth in Electrical Wire & Cable projects, Security and Emerging Markets, as well as other smaller but important opportunities. We remain confident in our strategy to gain market share, to extend our product and service offerings and to expand our end market and global presence. We anticipate that many of the headwinds we faced in Q3 will continue, including the uncertain global macro economy, as well as the issues around fiscal policy in the U.S. Importantly, we believe the long-term secular drivers of each of our 3 end market businesses remain strong, and that the challenges we face are more related to timing in a broader economy than any structural change in the markets we serve. Finally, we firmly believe that many opportunities exist around the world, and that our unmatched global distribution network, our broad exposure to diverse end markets and customer verticals, combined with our value-added business model position -- combined with our value-added business model, position us well to support our customers and increase sales and profits in the months and years ahead.

We will now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll hear first from Matt McCall with BB&T Capital Markets.

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

So first, the comments on natural resources and power gen, and I think, Bob, you mentioned the outlook being pretty good there. Can you talk about what that project pipeline looks like, how much visibility and, I guess, more importantly, how much visibility you have as we look out into the next year in some of those areas that tend to be more project-centric?

Robert J. Eck

Okay. So we don't call out specific numbers on our pipelines, but the visibility we have, if you think about these projects, they tend to be long engineering cycles. We get involved early in the engineering cycles so well-ahead of when the actual orders are going to be released or awarded. So we have very good visibility out more than a year into the future of what we see coming from engineering companies and the end customers. And if you look around the world, the dynamics in Canada stay very strong; the dynamics in the U.S., particularly for alternative and natural gas, energy-based power generation, are very strong; Middle East, very strong in oil and gas; and when we look at Latin America and Australia, a lot of mining. There's been a fair amount of talk about pullback in mining, but I think important to remember that the mining industry is extraordinarily large and our position in it is relatively small. So there's lots of upside opportunity for us in South America and Australia in the mining business.

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

Okay. And then, I guess, somewhat related to that, Ted, you talked about the impact of mix, end market, products, customer. Can you talk about the impact of mix on expected profitability as we look out -- is there anything we should call out or keep an eye on as we look out into '13?

Theodore A. Dosch

No, Matt. I don't think we should expect to see any significant further change. We always have a bit of mix impact comparing to any 2 periods, whether it is the product side or project mix and sometimes end market mix, like this time with the OEM Supply portion of the business being down more significantly than others. But I don't think I would point to any one thing in particular that would suggest a change in the trend going forward.

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

Okay. And I'll sneak one more in. The -- you spoke of additional actions in Europe. Can you talk about any expected savings there in addition to the $5 million you called out? And have you recognized any of that $5 million yet? And then any more detail on the SG&A adjustments that you made in the quarter. And is there further opportunity or is that more related to that -- the European actions?

Robert J. Eck

Well, I think, Matt, across the SG&A, there's steps we've taken literally across the board where we're always -- hopefully always looking at our business to make sure we're managing the productivity, improving our internal processes and shrinking cycle times, very specific focus as well as we came through the summer time, looking, again, specifically Europe and North America, where we've had our biggest challenges. Having said that, I think as we look back at the restructuring charge from 2011, we said that those improvements would come kind of ratably over the period, with the full benefit being realized in 2013 once we got into 2013. I don't want to call out specific additional cost saving numbers we expect to model into 2013 based on actions we're taking right now because we're in the midst of the fairly involved process in Europe that requires consultation with works councils or employee groups as well.

Theodore A. Dosch

And Matt, if I could just add one thing. Your last part of your question was about the S&A charge. I assume you're referring to the impairment charge that this period flowed primarily through S&A or operating expense.

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

I was actually referencing the progression of SG&A in total relative to the top line, and you did make some adjustments there downward. I was just curious about specifically what you did and if there's further opportunity there and/or is it just related to those actions that Bob's referencing in Europe.

Theodore A. Dosch

I think it's a combination of things. First off, it is reflecting the benefit of actions we took in Q1 of 2011. As Bob said, we get -- we got a little bit of that benefit last year. We get more of it this year. By the end of 2012, we will realize what we would estimate to be a little over 2/3 of that savings, with more to come next year. In addition to that, as you would hope in a period of slower top line growth, we have focused even more intently on our cost management. So the 16.4% operating expense ratio that we showed this quarter is approaching an all-time low for us in our business. So in general, I think what we're referring to in Bob's comments is rightsizing some additional parts of the organization so that as we begin to grow the business back, we'll get even more leverage on that growth.

Robert J. Eck

I think, Matt, maybe the way to finally put an end piece on this is, the actions involved, both facility consolidations or changes, as well as headcount changes, and we have steps underway now that will take effect late in Q4 and into next year as well.

Operator

We'll move next to Ryan Merkel with William Blair.

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

So I want to start in the North American OEM Supply market. Which end markets were decelerating the most? And then also, what are OEMs telling you about production levels in the fourth quarter?

Theodore A. Dosch

Well, Ryan, you'll remember from our last call that we talked about the beginning in about mid-May, that we began to see some more significant production level reductions, including some scheduled downtime in the heavy truck industry. And as you know, that's a very important customer vertical for us, both in North America and Europe. So what we have in Q3 is a full quarter of that effect as opposed to just a partial quarter in Q2. But we also have some softness in some production level reductions in some other customer verticals as well. Based on what we know today, we don't anticipate those levels going lower than where they are today. And as I think Bob commented on in his notes, that we would expect to see somewhat more normalized levels going into fourth quarter as we believe these OEMs have kind of rightsized their inventory for this new lower level of demand.

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

Okay. That's helpful. And then you put in your press release record quarter in Canadian Wire & Cable business. Is this driven primarily by energy and mining?

Robert J. Eck

Yes, definitely, energy and mining, both.

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

Okay. And I'm just curious, you talked about the pipeline, sometimes you can get visibility a year out. Do you think that this will continue in Canada? Because from my recollection, this has been strong now for a few years.

Robert J. Eck

Yes, you're right, Ryan. Canada has been strong for a few years, and right now, we don't see what the impetus is for a dramatic slowdown.

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

Okay. And then my last question is on the Enterprise side. Can you just talk about project delays? Did you see that continue? And then talk about quoting activity and the trends there.

Robert J. Eck

Yes, very much the same story, Ryan. We talked about in the last quarter that the cycle time from beginning to develop a project to an award has extended in the Enterprise business, and that, I think, as we said last time, typically correlates to pressure in the data part of that business. That hasn't gotten worse, it hasn't gotten better. We continue to add opportunities into the pipeline, however. And I think, importantly, when we look at this, and I made the comment about how we think there's pent-up demand building, when you go for long periods of time with depressed investment in IT infrastructure, you hit a point where customers frankly have to start doing things, they put off these investments as long as they possibly can. And so that's why we think there's some pent-up demand that we don't see turning around in the fourth quarter for sure. I don’t think it's going to happen in the first quarter, but sometime in the course of the next year, I anticipate seeing some improvement in the Enterprise business as that pent-up demand works its way into the pipeline.

Operator

We'll move next to Tony Kure with KeyBanc.

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

Can you just talk about the progression of demand month-by-month through the quarter, maybe just -- at least some linearity around that? And then as far as the guidance of 1% to 2% organic for the fourth quarter, does that basically imply what you're seeing through October thus far or does it assume some sort of seasonal deceleration in November and December?

Theodore A. Dosch

Yes, let me comment on your last -- or part of your question first there, Tony. The 1% to 2%, again, just to clarify, was organic growth. So just like we reported organic growth last quarter, it does exclude the big addition of the Jorvex sales in that number, and that would be counter to our typical seasonality where Q4 tends to reduce in volume. What we're seeing here in Q4, I think we wouldn't comment any differently about the month of October versus the outlook for the full quarter. And the other thing to take note of is, copper pricing dropped pretty significantly last year in Q4. So current market price of copper is pretty flat with where market price was last year. So if there's no further changes, that would suggest that we wouldn't see as much of a copper impact year-over-year as we look in Q4 as well.

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

Okay. So I guess just to clarify, your organic growth definition does not include the impact of copper. Is that correct?

Theodore A. Dosch

Correct. It's the same as we show on the very last schedule of our press release. Organic growth excludes acquisition, copper and currency.

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

Okay. I just want to make sure. And then as far as the tax rate, I think you said, Ted, that the full year was estimated to be 36.8%. Did I -- 36.8%. Did I hear that correctly?

Theodore A. Dosch

Full year for this year, yes, 36.8% [ph], down slightly from last year.

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

Okay, great. And then last one is just on Europe, obviously, being helped out somewhat by the Middle East. Can you just comment, of that segment sales, how big is the -- maybe if you can scale how big outside of Europe and the U.K. is that segment now.

Robert J. Eck

Tony, we have not historically called out sub-geographies in any detail, and so we would not be calling out a specific number for the Middle East. But I guess what I can tell you is, we've been investing in that geography for a while. We newly opened in Saudi Arabia. That new opening is ramping up very quickly. So the Middle East has become a good contributor to our overall results in EMEA.

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

Okay. Maybe I'll just -- 1 more question along those lines. Is Saudi Arabia the only country or presence you have in that region then or are there other locations outside of Europe -- outside of Saudi Arabia?

Robert J. Eck

No, Tony, I think when I made my comment earlier in my prepared comments, I mentioned that we had been in the GCC region for more than a decade. We've had a warehouse in the Jebel Ali Free Zone in Dubai for many years. We have salespeople in Dubai, Abu Dhabi, Oman, Qatar and Kuwait. So we have broad coverage across the region and recently entered Saudi Arabia through a joint venture.

Operator

And we'll go to Steven Fox of Cross Research.

Steven Bryant Fox - Cross Research LLC

A couple of questions. First of all, I just want to make sure I'm understanding some of this trend you pointed out. You mentioned on the OEM side, you're seeing production slowdowns, which you think are coming to an end, but at the same time, you highlighted positive trends on -- in industrial automation, I believe. How do you sort of jive those 2 comments, given that there's pressure on some of your customer sales relative to their capital investments, that they seem to be making in other parts of your business?

Robert J. Eck

Yes, I think -- Steve, this is Bob. There are 2 different things. So the production levels at the OEM customers, basically, our OEM customers make capital goods, whether they're consumer capital or business capital. And by consumer capital, I mean things like luxury autos, recreational vehicles, white goods. And, of course, corporate capital would be things like construction equipment, ag equipment, heavy trucks, engines, drivetrains, et cetera. So that's different from industrial automation because, for us, industrial automation is a new market. It's a very large market globally. We're a new entrant in the market. We've talked a bit about it over the past couple of years. We're still small. So our acceleration in the industrial automation market has a lot more to do with us taking share in the market than there being a completely different dynamic around capital spending in that market. So we're frankly a small guy, we're coming at it with the same value-add story we bring and it's a market that's going through a transition from legacy field bus and proprietary architecture to Industrial Ethernet and a more open architecture, which sets up particularly well for us because we have technical expertise across both. So we help the customers migrate that change, and that's frankly our value proposition in that market. We're not sort of in the Rockwell device section of the market, we're in the communications components part of the market.

Steven Bryant Fox - Cross Research LLC

Got it. And then secondly, on the idea that the trucking customers may be bottoming here, is that your idea related to the specific components and products you're selling into that market? Or are they giving you an indication that their own inventories are being worked down to levels that meet demand by the end of the quarter?

Robert J. Eck

I think the big truck manufacturers themselves have made public statements about where they expected their order book to be through the fourth quarter, and they've basically called out expectations that their order book would recover somewhat. In other words, they took production down to get in line with a dip in end demand, and they would -- once they had inventory in line, would sort of reset production levels, which, frankly, the decline in production was just simply shutting down plants. Now they're running the plants, and that automatically, obviously, will pick up some production as they operate more days. So it's not -- I wouldn't call out an acceleration in demand for trucks. I would say there was an inventory adjustment period we went through in the summer.

Steven Bryant Fox - Cross Research LLC

Got it. And then finally, just on Europe, simply because there haven't been enough questions on Europe already. As you've said, the margins are low, you're taking actions to improve them. And you also mentioned that a lot of your North American customers are dependent on you for goods and services in Europe. But it seems to me that in some ways, you're sort of subsidizing their expansion over there. So how are you having conversations with your customers around sort of their -- your relationship with them on a global basis so that you get compensated fairly across the globe as opposed to in just 1 region?

Robert J. Eck

Yes, I think part of it is that we have stronger operating margin than you typically see in our competition base in North America, and that's sort of the subsidy, perhaps, you're talking about or not getting paid enough in Europe. To me, it's not so much the price of the products going into Europe as leveraging the infrastructure in Europe. And that's where we have the challenge. And frankly, it is a pricing challenge for us in the business, but I think it's more a volume issue. If we can get the infrastructure resized a bit, which we're in the middle of, that will make us more profit but lower volume levels. But ultimately, we do think the volume recovers, and that volume recovery will help us then turn a much more profitable business in Europe.

Operator

Our next question will come from Hamzah Mazari with Crédit Suisse.

Hamzah Mazari - Crédit Suisse AG, Research Division

Just the first question, just on your security business, could you maybe comment how large that business is for you right now and then the growth that you saw maybe in the quarter that helped you guys?

Theodore A. Dosch

Yes, Hamzah, the business does continue to grow as we've talked these last several years, faster than the rest of the ECS business. It is now -- represents about 25% of the global ECS business, which puts it on track to be over $1 billion this year, approaching $1.1 billion.

Hamzah Mazari - Crédit Suisse AG, Research Division

And could you comment what growth you saw? I think, historically, you've highlighted specifically what growth you saw. Was it like high single-digits? Or are you guys not calling that out?

Theodore A. Dosch

Yes, it's a little lower than what we have experienced in the past, although it was still a 5% growth rate globally for Security in the third quarter, 8% on a year-to-date basis.

Hamzah Mazari - Crédit Suisse AG, Research Division

Okay, great. And just last question. Longer-term, as you look at M&A, are there any product lines that you may add that you're not in right now? Maybe if you could shed some light there.

Robert J. Eck

Yes, Hamzah, this is Bob. I don't know that we'd add a fourth leg on the stool, so to speak. What we are looking at are things that, I would say, are adjacent to the businesses we're in today. So additional acquisitions and security potentially, certainly, we'd look for acquisitions in the industrial automation space. And like in the case of Jorvex, more of a sort of share gain acquisition in one of our core products, I think that would be what you'd look for from us rather than us going out to some completely different end market segment and adding that to the business.

Operator

And our next question comes from Shawn Harrison with Longbow.

Shawn M. Harrison - Longbow Research LLC

A few clarifications before I get into my real question. What was the price of copper that you guys had for the third quarter?

Theodore A. Dosch

For the third quarter of this year, it was $3.79 -- or no, I'm sorry, third quarter this year was $3.52 compared to $4.07 of last year.

Hamzah Mazari - Crédit Suisse AG, Research Division

Okay. The second is just the share count you anticipate for the fourth quarter.

Theodore A. Dosch

Let me check on that. We'll respond.

Shawn M. Harrison - Longbow Research LLC

Okay. Got you. And then the final question, I guess, is, 2 parts. First off, I'm just a little confused, I want to make sure I have this correct. You expect the sequential seasonality for the fourth quarter to be muted this year. I know, typically, it's down, let's say, low to mid single digits, but you'd expect that to be muted because of the strength in Wire & Cable and kind of the OEM Supply business kind of finding a bottom here. Is that the correct way to think about it?

Robert J. Eck

Yes, I think that's the correct way to think about it. And when Ted called out a number earlier that we're anticipating sort of a 1% to 2% organic growth number, that's a year-over-year number.

Shawn M. Harrison - Longbow Research LLC

Got you. So -- but the sequential would the less -- it'd be better than seasonal because of those dynamics?

Theodore A. Dosch

Yes, I think our seasonal -- a typical seasonality would be down about 3%, Q3 to Q4. We would expect it to be less than that this year with what we have...

Shawn M. Harrison - Longbow Research LLC

Okay. And then the...

Theodore A. Dosch

I'm sorry. Let me just come back to the first part of your question on the diluted share count. We would expect the count to be in the 33 million to 33.25 million range. Again, that does depend somewhat on the stock price and what that does to the convertible -- the share count from the converts.

Shawn M. Harrison - Longbow Research LLC

Got you. And then the final is just on pricing. Do you expect any pricing to get any worse into the fourth calendar quarter? Or do you think it's kind of stabilized here, given the backup of where the end markets are, particularly price competition amongst your peers?

Robert J. Eck

Yes, I think the price market is fairly stable right now. We don't see any of the end markets experience any sort of extraordinary pressure on price discounting.

Operator

We'll hear next from Noelle Dilts with Stifel, Nicolaus.

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

So first off, on the North American market, you experienced 2.1% organic growth there. Can you give us a sense of the growth in the U.S. versus the growth in Canada?

Robert J. Eck

As I said earlier on the question about the Middle East, we don't typically call out sub-geographies in detail.

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

Okay. And then it sounds like this was kind of answered in the last question, but in Europe, you did talk a little bit about pricing pressure in the quarter. It sounded like that hit profitability a little bit. I know it's kind of difficult to extract what's happening on a pure price basis from what's going on with copper. But do you have a sense of how much lower price has impacted either profitability or sales outside of copper?

Robert J. Eck

Yes, I think the pricing pressure was just on the Enterprise market over the last couple of quarters due to the decline in the market, but as I said a minute ago, we're expecting stable trends going forward. So there's frankly not a lot to talk about in terms of pricing because there's not a lot of movement.

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

Okay. And then do you have the average purchase price for the stock repurchases that you've undertaken in the third and fourth quarter?

Theodore A. Dosch

Yes, it's a little over $59 a share. I don't have the exact number. We'll have that in the queue, but slightly over $59.

Operator

We'll go next to David Manthey with Robert W. Baird.

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

I apologize if you've addressed this already, but in terms of the fourth quarter, do you have any days issues there with the holidays moving to Tuesday? Are you counting the Mondays before the holidays as full selling days?

Theodore A. Dosch

David, it'll be similar patterns as prior years. Officially, we'll have 63 billing days in Q4, just like we had in Q3. But based on the softness that we always experience around Friday after Thanksgiving, Christmas Eve, et cetera, that will probably equate to about 61 from an operational perspective.

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

Okay. Good. And then did you address the data center trends specifically? And if not, if you could. And then on the Enterprise side, I'm wondering, what do you need to see in order to get a reacceleration in the core mac business. And what are you watching to indicate that, that's ready to make a turn? Because it seems like the datacomm business remains kind of mired here.

Robert J. Eck

Yes, I think that, Dave -- first, on data centers. Nothing sort of shocking in terms of trends, I guess, I should say nothing new in terms of trends. We still have a number of data center projects in the pipeline, we still are winning and delivering on projects, just at a much lower pace than we did in the past, say, last year at this time. So I don't see any big change in the trends in data centers. There's certainly continued investment particularly from cloud service providers and from some of the co-location providers. Of the core mac, the mac work doesn't change much. The horizontal land business has been slow, and I think the main thing that will bring that back will be broad-based -- more broad-based recovery economically, which, again, as a result of that, tends to create some churn in real estate, not necessarily new construction, although new construction helps, churn in real estate helps. And all those things are typically driven by economic recovery. So I think we have a lot of customers sitting on their hands on capital spending broadly and particularly around IT because you can defer IT spending for a reasonable period of time. I think what happens is you eventually hit a point where you need to make some investments, and that's the pent-up demand kind of notion that I talked about earlier, that the longer this goes on, the more likely it is money starts to break loose here and there. To get a broader trend, where we see a more significant uptick, we frankly need a more solid economy in the U.S. and Europe.

Operator

[Operator Instructions] We'll go next to Ted Wheeler with Buckingham Research.

Ted Wheeler

Yes, I -- just a couple of loose ends. On the write-offs and the impairment, I assume these are such long-tailed, and I guess goodwill, of course, wasn't being amortized. So there's probably no future cost impact on that?

Robert J. Eck

No. The fact that there's a second write-off in -- from 2009 has a lot to do with how you model the discounted cash flow. And in 2009, we didn't model double dip recession in EMEA, and that's really what triggers this second write-off.

Ted Wheeler

Yes. Okay. And then just lastly, on the great job you're doing on SG&A management, should we think about when, I guess, hopefully soon, a little lift in some of the delays occurs and revenues start to go up again or faster? Should we think that incrementals might be a little muted because of the job you've done on SG&A. I mean, I think in some points, when you're going from very slow to more rapid growth, you can deliver low double-digit incrementals, and I just -- I'm wondering if that's feasible, given what you've done with cost so far.

Theodore A. Dosch

I think you hit the nail on the head. I wouldn't expect us to have high single-digit or low double-digit operating leverage at these kind of growth rates. I would expect us to continue over time and certainly as we continue these cost take-out actions to drive some nice leverage and certainly incremental to our reported operating profit. But at these kind of growth rates, I don't see us returning to low double-digit or high single-digit leverage in the upcoming few quarters.

Ted Wheeler

Okay. And I was just thinking in the event we get back to, say, 6%, 7%, maybe more organic growth, would there be some catch-up in SG&A? Therefore, you would...

Theodore A. Dosch

I'm sorry. Misunderstood your question. If we were to get back to high single-digit growth rates, then, yes, I think we ought to be able to deliver high single digit, approaching 10% incremental operating profit leverage.

Robert J. Eck

One of the things, Ted, we do as we go through these cost reductions is we do process evaluation as well, which I think makes a lot of sense, and we try to rebuild processes so that we can take some of the costs out permanently. And I think when you look at where our headcount is now versus I think it was year-end 2010, we're basically flat, and that reflects a lot of the process changes. If you don’t do the process changes, it's hard to permanently take the costs out because you have kind of a step function that just flows right along with growth. So, yes, if we get high single-digit top line growth, we should get very good operating leverage.

Theodore A. Dosch

Yes, I think to add to that, Ted, you may remember hearing us say this over the past few years as we went through this last cycle is I think we've had a pretty good discipline here at Anixter of where sales pulls through the expense as opposed to the other way around. So we aren't going to let the expense side get ahead of where we expect sales growth to be.

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

Well, it sure shows up in the last quarter's results, and I thought they're pretty good.

Operator

And there are no further questions. I'll turn the call back to our presenters for any additional or closing remarks.

Lisa Meers

Okay, Danielle. Thank you all for joining us today, and thank you everybody on the line for your interest in Anixter. Our next investor event will be Bob's presentation on November 6 at the Robert W. Baird conference, and that will be webcast through our Investor Relations portion of our website. And with that, we are done with today's call. Thank you very much. Bye-bye.

Operator

And again, ladies and gentlemen, that will conclude today's conference. Thank you for your participation. You may now disconnect.

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