Anixter Q4 2007 Earnings Call Transcript

| About: Anixter International (AXE)
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Anixter (NYSE:AXE) Q4 2007 Earnings Call January 29, 2007 10:30 AM ET


Chris Kettmann - Senior Vice President, Ashton Partners

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

Robert W. Grubbs, Jr. - President and Chief Executive Officer


Celeste Santangelo - Merrill Lynch

David Manthey – Robert W. Baird

Ted Wheeler - Buckingham Research

Jeff Beach - Stifel Nicolaus

Nat Kellogg - Next Generation Equity Research


Good day everyone and welcome to our Anixter fourth quarter earnings conference call. As a reminder, today’s call is being recorded and at this time for opening remarks and introductions, I would like to turn the call over to Mr. Chris Kettmann.

Chris Kettmann

Thank you. Good morning and thank you all for joining us today to discuss Anixter’s fourth quarter and year-end 2007 results. By now everyone should have received a copy of the press release, which was sent out earlier this morning. If anyone still needs a copy, you can either go to Anixter’s website or call Chris Kettmann at 312-553-6716 and I can resend the information.

On the line with us today from Anixter’s management are Bob Grubbs, President and CEO, and Dennis Letham, Senior Vice President of Finance and CFO. After management completes their opening remarks, we will open the lines for Q&A session.

Before we begin, I want to remind everyone that statements on this conference call, including words such as believe, expect, intend, anticipate, contemplate, estimate, plan, should, may, or similar expressions are forward-looking statements. They are subject to a number of factors that could cause the company’s actual results to differ materially from what is indicated here.

These factors include general economic conditions; technology changes; changes in supply or customer relationships; risks associated with the integration of recently acquired companies; commodity price fluctuations; exchange rate fluctuations; and new or changed competitors. Please see the company’s SEC filings for more information.

At this point, I’ll turn the call over to Dennis.

Dennis J. Letham

Thanks Chris. Good morning everyone and thank you for joining us. As you’ll hear in the next few minutes, as Bob and I review the results for the fourth quarter, this was an interesting quarter in terms of the disconnect between the broader markets, negative economic moves, and the fact that our business performed so strongly in the period.

This disconnect continues into 2008, as early indications of our 2008 business activity continue to support a continuation of recent solid trends for our business despite the economic uncertainties in other parts of the economy.

With that considered, let’s turn to the actual financial results for the fourth quarter which included sales of $1.49 billion were up 15% from the $1.30 billion reported in the year ago quarter. Operating income of $114.4 million increased 27% from the $90.4 million in last year’s fourth quarter.

Net income in the quarter inclusive of a benefit of $9.7 million primarily related to foreign tax benefits and the finalization of prior year tax returns increased 34% to $70.5 million from $52.4 million in the prior year quarter, when we reported a benefit of $4.2 million generated from tax benefits associated with our foreign operations.

Diluted earnings per share increased 41% to $1.69 as compared to $1.20 in the year ago quarter. The current year quarter includes $0.23 per share and the prior year includes $0.10 per share related to the previously mentioned tax items.

Now let’s take a few minutes and look at the major components of our fourth quarter financial results. The 15% sales growth achieved in the fourth quarter includes $20.5 million from acquisitions completed over the past year.

At the same time favorable foreign exchange rates possibly affected sales by adding $50.5 million in the period compared to the prior year. After adjusting for the acquisitions and exchange rate differences, we still achieved 9% organic sales growth as compared to the year ago quarter.

In evaluating the fourth quarter year-on-year growth, I believe it’s important to note that we achieved the growth without any benefit from copper prices which have been an area of investor focus for the past few quarters.

For the fourth quarter average spot market prices of copper were $3.26 per pound as compared to $3.20 per pound in the year-ago period and $3.48 per pound in the third quarter of 2007.

Overall end market demand remained healthy across all markets. Larger project demand generally remained robust and we continue to have good success with our strategic initiatives.

Those initiatives include adding new customers; enhancing our supply chain services offering; growing our security business; enlarging the geographic coverage of our Electrical Wire and Cable business; and expanding the base of customers that are being supported on multiple continents.

At a time when the broader economy was subject to concerns regarding its near-term health, our total North American sales of $1.04 billion reflect an increase of 13% versus the year ago quarter. Sales in North America reflected solid end market demand in all three primary end markets: Enterprise Cabling and Security Solutions, Electrical Wire and Cable, and the OEM supply market.

Now for a break down by end market in North America. Enterprise Cabling and Security Solutions sales in North America reported a $70 million increase translating to a 16% year-on-year sales gain.

Growth in the quarter was aided by strong growth in the security market and expanded supply chain services offering and product line expansion. Favorable foreign exchange rates on Canadian sales accounted for $7.7 million of the sales growth versus the fourth quarter of last year.

North American Electrical Wire and Cable sales grew by $36.6 million translating to an 11% year-on-year increase as larger project sales continued at a very solid pace during the quarter. Day-to-day demand from both new and existing customers also remained strong. Favorable foreign exchange rates on Canadian sales accounted for $14.6 million of the year-on-year sales growth.

Our sales in the North American OEM supply market grew by $7.8 million or approximately 8% versus the year ago quarter. Sales growth to aerospace and defense customers was again especially strong on solid fundamentals in that end market and helped to offset certain customers in the industrial portion of this market, who experienced production slowdowns that negatively impacted our year-on-year sales.

European fourth quarter sales of $321.1 million reflect a 16% increase as compared to the year ago quarter. Acquisitions added $20.5 million to sales and exchange rate differences added $23.9 million as compared to the year ago quarter.

Excluding acquisitions and foreign exchange effects, year-on-year sales in Europe were flat compared to the unusually strong sales reported in the year ago fourth quarter. In the year ago quarter, we not only saw a 23% year-on-year growth in sales, exclusive of acquisitions and foreign exchange, but we also saw 6% consecutive quarter growth from the third quarter to the fourth quarter of last year.

The consecutive quarter growth experienced in the year ago fourth quarter was contrary to the traditional patterns in Europe where the year-end holidays typically result in a reduction in sales in the fourth quarter as compared to the third quarter. As a result, we were presented with the challenging year-on-year comparison in Europe.

Our business activity levels in Europe remains strong, although they are not experiencing the same exceptional rates of acceleration that they were in the second half of 2006. As a result the return to more traditional holiday related sales trends at the end of 2007 has produced the less favorable year-on-year comparison.

We remain optimistic however that an increasing base of global account projects, continued progress in expanding the geographic scope of our Electrical Wire and Cable business, and the growth of our mid-Eastern market presence will all add to growth in Europe in the coming quarters.

In the emerging markets of Latin America and Asia Pacific sales of $131.4 million reflected 27% increase in year-on-year sales with foreign exchange accounting for $3.5 million of the total sales increase of $27.9 million.

Excluding the impact of foreign exchange, emerging market sales were up 24%. An expanding base of global account business and larger projects were significant factors in our growth throughout the emerging markets.

Turning to gross margins, we reported fourth quarter gross margins of 24.4% versus 24.2% in the year ago quarter. For the full year 2007 gross margins were 24.1% as compared to 24.3% in 2006, when they were aided sharply rising copper prices during that year. Overall, gross margins continued to be in a relatively tight range near 24%.

Moving down the income statement, operating expenses in the fourth quarter showed a year-on-year increase of approximately 12%. The current quarter operating expenses include an incremental $5 million related to acquisitions made in the past year. The weaker U.S. dollar also caused reported expenses to increase by approximately $8.3 million as compared to the year ago quarter.

Excluding operating expenses related to the acquired businesses and the affect of foreign exchange rates, current quarter operating expenses were only 6% higher than the year ago period. This expense growth is comfortably below the 9% organic sales growth.

Operating expenses remain well controlled relative to sales growth and as a result we are continuing to generate improved operating leverage.

So, to summarize from an operating income perspective, solid sales growth, relatively consistent gross margins, and good expense control combined to generate a 27% increase in operating income versus the year ago quarter.

For the recently completed quarter, operating margins improved to 7.7% as compared to 7% in the year ago quarter, while full year operating margins improved to 7.5% from 6.8% in 2006.

As we move further down the income statement, interest expense in the fourth quarter increased by just $400,000 or approximately 4%. The cost associated with the higher level of borrowings in the current year fourth quarter was largely offset by lower cost refinancings, particularly the issuance of 300 million of 1% convertible notes in the first quarter of 2007.

Our cost of borrowings declined from 5.4% in the year ago quarter to 4.3% in the most recent quarter. At the end of the fourth quarter approximately 77% of our outstanding debt had fixed interest rates either by the terms of the debt or through hedging transactions.

Other income of $300,000 compares to other expense of $1.9 million reported in the year ago fourth quarter. The year ago fourth quarter other expense was primarily the result of foreign exchange losses largely associated with the Venezuelan bolivar and interest cost associated with a Canadian tax settlement.

The 2007 fourth quarter tax provision reflects an effective tax rate of 31.6% versus 32% in the year ago quarter. The most recent quarter included a $9.7 million reduction of tax expense related to foreign tax benefits and the finalization of prior year tax returns, while the year ago quarter included a $4.2 million benefit associated with the company’s foreign operations.

Without these tax items, the current year fourth quarter effective tax rate would have been 41% versus 38.2% in the year ago quarter. The increase in the effective tax rate year-on-year is due to a change in the mix of the company’s earnings by taxing jurisdiction.

Net income for the quarter was $70.5 million or 34% higher than the $52.4 million reported in the year ago period. If the tax items that were just discussed were excluded from each year’s results, we would have reported net income of $60.8 million in the 2007 fourth quarter versus $48.2 million in the year ago quarter or an increase of 26% in net income.

On a diluted basis, earnings per share were $1.69 in the most recent quarter as compared to $1.20 in the year ago quarter. Again, setting aside the tax items of $0.23 per share in 2007 and $0.10 per share in the 2006 fourth quarter, earnings per share rose 33% versus the year ago period.

The current quarter’s fully diluted earnings per share benefited from an approximately 5% drop in the fully diluted share count primarily as a result of share repurchases during 2007.

In the fourth quarter we generated $92.9 million in cash from operations as compared to $17 million generated in the year ago fourth quarter. Our debt-to-total capital ratio at the end of the year was 49.4% as compared to 45.7% at the end of 2006.

The increase in this ratio from 2006 largely reflects the borrowings and reduction in shareholders’ equity resulting from the repurchase of 10.8% of the company’s beginning of the year outstanding shares during 2007 that was designed to improve capital structure efficiency through higher leverage.

This slight increase in leverage combined with record earnings resulted in our second consecutive year of 20% plus returns on shareholders’ equity as we reported a record return on shareholder equity of 26% for 2007.

As of December 28, 2007, we have approximately $243 million in available committed unused credit lines to support organic growth or acquisitions should appropriate opportunities arise in the near term.

Since the end of 2007 the company has completed the share repurchase program announced on November 27, 2007. In 2008, 750,000 shares have been purchased for a total consideration of $41.7 million or an average of $55.66 per share.

At this point let me turn it over to Bob to comment further on recent business trends, strategic initiatives and the business outlook.

Robert W. Grubbs

Thanks Dennis. Thanks everybody for joining us today. We are pleased with the fourth quarter results, particularly pleased that the revenue and earnings growth was fairly broad-based as far as relates to products, markets as well geographies.

We experienced good growth in the core Enterprise Cabling business, the core Industry Wire and Cable business as well as the core Fastener business. And additionally we continue to see very strong results from our efforts in the Security products arena, not only in North America but are really starting to see it take hold in Europe, Latin America and parts of Asia, and we continue to be in a position to continue to invest in that business.

The Wire and Cable expansion geographically continues to bring us more opportunities and continues to drive growth and if you think about that whole effort we’re still early in that process and long-term, the opportunities there are quite frankly are as good as they are in the enterprise space today.

We continue to see a movement to higher bandwidth cabling solutions as our customers continue an evolutionary process of upgrading their networks. The Data Center business continued strong.

In the last second half of the year we continued to see good progress in our Industrial products expansion effort. That has typically been exclusively a Wire and Cable business in the Electrical Wire and Cable business to Copper Wire and Cable business. We continued to see good growth in applications for industrial fiber, for tray, for lugs, connectors and accessories in that business as we look to broaden up the product set to industrials.

I think as importantly or maybe most importantly our global accounts effort that we have really worked hard on over the last few years really continues to add significantly to the growth, not only the growth outside North America and outside Europe, but inside North America because as customers look to us to service them in other parts of the world, it also presents opportunities in North America to increase the base here.

So as you think about global accounts, it’s not just about outside the U.S., it’s becoming the customers’ supplier everywhere and in a lot of cases most of their spend is here and our ability to service them elsewhere is helping us capture more of their spend here and also the supply chain services offer.

As we are more and more successful in all three of our businesses of providing customers solutions above and beyond products, showing them how to reduce their installation cost, reduce their production cost, reduce the amount of asset they have deployed, it’s enabled us to get quite frankly deeper and larger relationships with existing customers as well as attract new customers.

And lastly new customer acquisition continued to be very strong in the quarter particularly as it relates to security integrators and security installers. Our presence in the security market is, we’re no longer the new guy. People are starting to know us; we’re starting to get doors open for us, we’re starting to get a lot of support from the supplier base in that space.

With that we’re getting the opportunity to expand the products that beyond security products to these integrators and have seen really good growth with fiber and copper solutions to support those IP installations that security guys are being faced with today and quite frankly are new to them.

We can bring them a lot of value beyond just a product there between knowledge of the product set, knowledge how to install the products as well as a lot of supply chain solutions that quite frankly they’re not used to getting from the traditional security distributor base.

If we looked to kind of customer segments we saw particular strength with the A&E firms, EPCs, or major constructors out there as the infrastructure work around the world continues.

As you look at these guys, most of them have the biggest backlogs they’ve had in history and our position with them is really been strengthened by our ability to do supply chain as well as support them globally on those projects where the decision making tends to be spread out across geographies between engineering and deployment.

The fact that we can service them in all the different locations they’re at consistently has really put us in a good position. We’ve seen good growth in the healthcare industry, aerospace, power generation continues to be strong, oil and gas, mining and natural resources, technology and transportation all showed a lot of strength in the quarter and continue to show strength as we head into the next year.

So, I think the breadth of our product set, the breadth of our customers as well as the industries we served, as well as the geographic coverage we provide continued to fuel good growth and good profitability.

As we go into 2008, we really haven’t seen any changes in these trends. Activity levels are still good as it relates to product, customer, services, new customer opportunities, and in addition as we enter the year, we’re kicking off an effort in the factory automation cabling solution world.

We’re now seeing that same transition point we saw on security where more and more devices are becoming IP devices and if you get into that factory automation world, we think we bring the same value prop we brought to security, where we can show up as an IP expert; we can show up as guys that understand copper, understand fiber solutions.

We spent the last six months filling out that product set, so our efforts into the factory automation world as we begin today, are going to look a lot like the security effort and we think we’re bringing some unique to the marketplace and really gives us a door opener and as we go in and meet with those integrators, those consultants as well as the end users in that space.

So with that, I will open it up for questions.

Question-and-Answer Session


Our first question today will come from Celeste Santangelo - Merrill Lynch.

Celeste Santangelo - Merrill Lynch

Bob, if you look out over the next few quarters can you talk about how you get to organic growth of 8% to 12%? So how much do you see coming just from market growth and then how much from the initiatives that you cited?

Robert W. Grubbs

I think we’re seeing good market growth in a number of the industries we serve. We’ve seen good market growth in the initiatives we cited too. In addition to us taking share in the securities space, we’re seeing a lot of growth particularly in the IP side of that security space and there’s an element of taking share by new customer acquisition and with supply chain.

So, it’s hard to say what we see the market growing because I mean if you look at the growth in the industrial side with, for example, oil and gas and mining, in there it’s very good, you see good growth in the A&E sector, we’re seeing good growth in health care, we’re seeing good growth in tech.

So, while I think there is some share in there. I think if you focus on the right product offers, the right sectors in the markets we serve, as well as products, there’s also good market growth out there, Celeste.


Our next question will come from David Manthey - Robert W. Baird..

David Manthey - R.W. Baird

I was wondering if you could give us a little history lesson here in terms of the late 1990s. My date is a little hazy but there was a major run up in the service provider business and then it ran back down following the implosion of the tech bubble. Could you just give us some numbers around that; what the magnitude of that business was and what it peaked out at and where it troughed?

Dennis J. Letham

Dave that initiative around service provider business started to have meaningful revenue impact in ‘98. It peaked in 2000 with roughly a $0.5 billion in sales. In 2001 that same set of customers or that same end market dropped back to about $150 million and probably two-thirds of that came in the first half of ‘01 and really by the time we got to ‘02 in large part all of CLECs, ILECs and other acronym named alternate phone companies had ceased to exist and we had pretty much terminated our efforts in that market.

The other thing I think you have to keep in mind that was underlying the total numbers at that point in time is in the last couple of years of the 90s you had a lot of that Y2K driven spending that was I think somewhat artificial in that people were spending against the date on a calendar versus strategic business need.

Then of course we turned around at the turn of the century and we ran through another 18 month or so period when all sorts of money was thrown at e-business investment, some of it wasn’t particularly thoughtfully done either.

So, I think you have a combination of tech and service provider opportunities that created a real bubble in the numbers there and is much, much different than the profile today of the business where you’ve got a much more diversified customer base; much more diversified end market base and a much broader product offering than we had back in that timeframe.

Robert W. Grubbs

I think the other thing to add to that is that that was in a point in time where we were basically restructuring our Industry Wire and Cable effort, so there was very little momentum there.

Right now, the momentum in the industrial space continues to be good because we had been able to invest in it during that period of time. It just so happened that the downturn in tech and everything else happened at a time we were investing in the industrial space.

So, if you go into this go around, you’re not seeing that tech slowdown in every industry; the industrial market is very good right now. And we weren’t in the security business back then either. So, that period for us between the telecoms and Y2K was like the perfect storm.

David Manthey - R.W. Baird

And then just one final question, in terms of the Industrial Wire and Cable business, if internationally you’re able to achieve a similar penetration to what you have here in the U.S., what is the size of that opportunity? You mentioned that we’re early in pursuing that but just to give us an idea of how far we have to go here?

Robert W. Grubbs

Put it this way, if you look at North America today, our Industrial Wire and Cable business is pretty close to the same size as our Enterprise business. So, if you can extrapolate that and say it’s significantly smaller in the other geographies, I honestly believe that the opportunity in the Industrial Wire and Cable space over the next 5 to 10 years that market opportunity is bigger than the Enterprise market opportunity.


And we’ll now move on to Ted Wheeler - Buckingham Research.

Ted Wheeler - Buckingham Research

Couple of just various questions on a housekeeping note. Some of the distributors have talked about the placement of the holiday shutdowns as being a measurable item in the quarter, would you characterize that as a factor that had a measurable impact on your sales?

Robert W. Grubbs

I wouldn’t say measurable but I would tell you that we probably had a reduction in maybe a billing day. Because when it gets to Tuesday instead of Monday you automatically lose Monday. If it’s on a Monday you get some of Tuesday and the other thing what we saw particularly in Europe is if they get two days off, they take off five.

Ted Wheeler - Buckingham Research

It sounds like more than one billing day.

Robert W. Grubbs

It depends geographically where you’re at. You didn’t have the same continued flow; you never do when you have a Tuesday, Wednesday, Thursday holiday as you do a Friday, Saturday, Sunday, Monday holiday.

Ted Wheeler - Buckingham Research

A couple of other things, over time you’ve talked about security growth rates, and sporadically, but I think the last update I recall was something like 30% growth. Would you bracket the growth that you see now in the security, I know it’s a bigger base, just curious?

Robert W. Grubbs

We would expect that plus something.

Ted Wheeler - Buckingham Research

Still ripping?

Robert W. Grubbs

You think about it, we’re gaining momentum, and geographically like I said before we weren’t as quick to the start-up outside of North America as we are here and they’re starting to gain momentum and the other thing is, we’re an acknowledged participant in that marketplace now which it helps let the customers know who we are.

Ted Wheeler - Buckingham Research

I’m very interested in the industrial automation initiatives you talked about. When you discuss the Wire and Cable geographic expansion were you including that in that opportunity of being equal or better than enterprise or?

Robert W. Grubbs

Yes, we are. When we look at that, we’re looking at that as a transition from proprietary applications to IP applications and we have always sold control instrumentation cable so the other hope there is that as we go in and we support these guys on IP, you also start picking up more legacy product, which we did see also happen in the security space.

Ted Wheeler - Buckingham Research

Would you be able to separate the industrial automation factors from the Wire and Cable or will it all be kind of one conversation as you...?

Robert W. Grubbs

We’ll track it internally but probably won’t come out and come up with the particular numbers because there’s always some overlap in there, what was legacy, what would we have gotten anyway, like say, we have a control and instrumentation business now. We’ll lump all that together internally.

But we’ve seen a dramatic increase in the number of devices that are IP and more importantly we’re seeing IP get closer and closer to all the devices, so you’re seeing the backbones in the factory become IP backbones, you’re seeing those opportunities.

The unique opportunity there, like in security is, the traditional competitor does not understand IP, nor does the customer that well, so it really gives us a chance to break into that world very much like it’s the opportunity we saw to break into the security world.

Ted Wheeler - Buckingham Research

Is the sales force or is the initiative footprint in place or is this something where you’re still really getting your arms around before you officially launch it, or are you in the market now?

Robert W. Grubbs

We have added specialists and technical experts in North America and Europe today. We are adding to the technical IT organization to be able to go over and do both, much like we did in security, so the guys that are the technical experts if you will in IP cabling like they were in the security world will also go into that world.

We have historically called on these customers, selling them industrial products, so we know the customers, we have the technical support guys out there. We’re in the process of continuing to hire people that came from the industry; we’ve hired guys to lead the initiative in the geographies from the industry. We’ve gone out and we’ve picked up the suppliers who we needed to fill out the product set.

We’re in a position where we’re willing to go out and we’ve rolled it out. We’ve got all the training materials in place, the brochures are in place, everything is ready to go, the product line’s in place. So, the whole initiative’s put together; the training had begun in the fourth quarter so we’re on our feet and running now.

Ted Wheeler - Buckingham Research

Will you see some sales this year do you think from that effort or?

Robert W. Grubbs

Absolutely. We started to see some sales in the fourth quarter just from the people we put in place for the existing customers.

Ted Wheeler - Buckingham Research

Is there a ballpark, if you had a customer that did $100, would that customer now be able to do $150 or if you were successful with this?

Robert W. Grubbs

If you get into a fab plant there’s more of that then there is electrical, if you get into the upgrade process and anybody from the automotive to the steel industry, it’s probably 25% or 30% or 40% upside for us but it’s a significant market that is in a transition.

Ted Wheeler - Buckingham Research

Just lastly on it, are there in-place people supplying this need; I guess you mentioned people don’t really quite understand it but is there one particular competitor you could cite that is out there that you’re going to bump into or...?

Robert W. Grubbs

Not in the IP; I think it’s going to be much like the security space, we’re going to bump into the guys that traditionally sold the legacy product and sold the proprietary products and they’ve got a learning curve to go through. I mean you see the other security distributors talking about IP, but the fact is there’s a transition for them, we’re already there.

Ted Wheeler - Buckingham Research

Just one last one, I know I’ve taken a long time here. The operating organic OpEx growth of 6%, what would you say would be a bare minimum? I know you’re not seeing a downturn but let’s say perhaps it occurs and you’re looking at mid single-digits or low single-digit revenue growth, can you take OpEx down in line with that or do you think you need to run it in the high single-digits to do what you want to do as a company?

Dennis J. Letham

High single-digits. You’ve got probably 55% of the cost structure that’s based around the cost of people. So, you’re going to have some inflation and that is going to naturally occur. I think you can probably scale it back to some where in the 3% to 4% range, in pace with inflation, particularly wage inflation in there.

Robert W. Grubbs

And I think you can do that and drive growth above that number.

Ted Wheeler - Buckingham Research

Thank you for your color. I wanted to just to get your thoughts on it. Great progress.


We will now hear from Jeff Beach - Stifel Nicolaus.

Jeff Beach - Stifel Nicolaus

Two things: a little bit of noise in Europe from the fourth quarter last year and I was looking back at previous growth here and I think it’s been running let’s call it right around high single-digits, low double-digits. When you step back and look at the underlying growth you see that level of growth in that let’s say 9% to 11% range continuing ahead here in Europe and then Asia Pacific, Latin America little slower growth.

We’ve seen some stronger quarters in the past and I guess it jumps around, but you see the same kind of underlying growth and at least over the next several quarters in the emerging countries as you’ve been seeing over the last year?

Robert W. Grubbs

As I said in the call, we have not seen anything really as we’re going into this year changing. So, to answer your question about Europe, we’re still comfortable driving the kind of growth we’ve driven. Last year, fourth quarter there was some stuff moved into the third quarter a bunch of projects, that’s not so unique.

Now, I think you’ll see in the emerging markets you see very, very strong growth. Do you have a slow tick down percentage wise cause the numbers get bigger? Yes probably, but you’re going to still see well above I believe the overall growth rate coming out of those emerging markets.

Jeff Beach - Stifel Nicolaus

All right and the second question I have is can you expand a little bit more on moving into in the industrial automation, I know I heard you refer to fiber cables, connectors other things like that, any decent size connectors I’m not aware off in that area. So this seems to be a huge opportunity. Can you talk about when you started this initiative to expand into the industrial and where it is and what kind of an opportunity this is?

Robert W. Grubbs

We’ve spent the last three quarters of last year putting the product set together, hiring outside guys, laying up the strategy, putting together all the training material, putting together all the collateral, starting the training programs with our folks.

So, what’s the opportunity? The opportunity is every device that sits in any kind of a factory whether it’s monitoring, control, I think it also leads us into more industrial security opportunities. If you think out, where we’re going with this is Enterprise IP solutions.

So, we started with, in essence, office buildings, desktop to storage to server to data centers, then you expand that to security, which we started with the video surveillance side of that and are early in the process there with access control and if you follow that, enterprise network the next steps into the factory.

Our knowledge and our relationships with the IP people, our industrial experience on that floor with the electrical guys and the facility guys, we think we’re in a unique position to bridge that.

So, the opportunity is every connectivity point, every piece of cable, every piece of tie wrap device, panel, closet, rack, cabinet that resides in a factory application which goes anywhere from fab plants to pharmaceuticals to food processing to power gen plants is an opportunity for us. So, it’s very, very broad based and I can’t think of a geography where it doesn’t ultimately apply.

Jeff Beach - Stifel Nicolaus

And you take this new market you’re addressing is it as big as the cable market you’re currently serving and have a good position in?

Robert W. Grubbs

No, it’s not as big. I mean if you just look at the amount of devices, there’s more people sitting in PCs than there are factory devices. I think the opportunity going forward is as big as the security opportunity was.


[Operator Instructions]. And we’ll now hear from Nat Kellogg - Next Generation Equity.

Nat Kellogg - Next Generation Equity

On the tax rate, I know you had just a sense of what it’ll be like going forward especially considering as you have increased foreign earnings I would assume would be a little bit lower and tick down and is that a good way to look at it?

Dennis J. Letham

The full year effective rate for last year if you take out the noise was about 39.1%. If you looked at the prior year and you took the noise from where we were in the mid-38 range. I think that generally is the area that we should think about in the near term over the next year or two.

Nat Kellogg - Next Generation Equity

Okay and until overseas becomes a bigger number it will all be in that 38% to 39% range?

Dennis J. Letham


Nat Kellogg - Next Generation Equity

And then just on the acquisition front, I was wondering if you can give us any color on what you’re seeing out there as some people having more issues pertaining to credit, you see prices becoming more attractive, just curious of what the environment looks like and how attractive it might be for you?

Dennis J. Letham

Probably the biggest thing it’s been noticeable in the last few months has been a reduction in the number of opportunities or the number of things that seem to be in the market and I don’t know if that’s from a sellers perspective, a view that there is a lack of credit to support deals or whatever, but that that’s probably been more noticeable than anything.

Nat Kellogg - Next Generation Equity

But not so much pricing coming down and going up, but just guys sort of moving away from looking to sell?

Dennis J. Letham

On the assumption it was like probably no different from if you have a non-compulsory decision to sell your house. Now you’re going to put it on the market right now? No. I think that’s part of what we we’re seeing.

This stuff we’ve tended to do tends to be either owned by founding families or smaller private equity shops and unless there’s a pressure point there to sell, you’re kind of sailing into a headwind there at the moment.

Robert W. Grubbs

I think one of the trends that we are seeing and I don’t know if it plays out over the next 12, 24, 36 months is customers are becoming a little more nervous about the size of the supplier that services them.

So, we’re seeing opportunities where in the past a smaller guy would have been given an equal shot but right now there’s been some hesitancy to putting that supplier in a key role because of his size. Is he sustainable?

So I think sometime over the next year, two years, three years that plays to our advantage both from organic growth as well as the opportunity to do acquisitions.

Dennis J. Letham

And it gets particularly true when you’ve got the supply chain service offering as part of what the customers looking for, because if you’re going to streamline that supply chain you put a lot more reliance on the vendor or supplier to be there on an uninterrupted basis, so the credit decision becomes more important.

Nat Kellogg - Next Generation Equity

And then just correlative to that would be if acquisitions are less in the market or are less appealing opportunities coming down the pipeline, I assume that it takes buybacks maybe a step up and what your decisions are for use of free cash flow over 2008?

Robert W. Grubbs

We’re going to continue on a regular basis to explore what the best use of that capital is and as market conditions change growth rate here, where it’s at, we’re going to continue to keep all options open.


And gentlemen, there appear to be no further questions. I’d like to turn the call back to you for any additional or closing remarks.

Robert W. Grubbs

Again, we appreciate everybody by taking the time being on the call. As we look forward, the opportunities here with IP upgrade and expansion, the Wire and Cable global reach, the continued opportunities in security which, while we’ve been successful, there are more opportunities there in front of us than there was anywhere near behind us.

Our ability to continue to expand the product set. New customer acquisition as well as the breadth of our customer base and the markets we serve really provides us with ample opportunity to continue to have solid revenue growth and that revenue growth should continue to provide operating leverage.

We’re going to continue to stay very focused and very driven on those efforts as well as the core and if we continue to implement well we continue to be real optimistic about the future. We appreciate everything and we look forward to updating you at the end of the first quarter.


Thank you everyone for your participation. That does conclude today’s conference. Everyone have a great day.

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