Good morning. My name is James, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Anixter International Fourth Quarter 2018 Financial Results Conference Call. [Operator Instructions]. Thank you. I'd now like to turn the call over to the Vice President of Investor Relations, Lisa Gregory. Please go ahead.

Great. Thank you, James, and welcome to Anixter's Fourth Quarter 2018 Earnings Call. With me today to review our financial results are Bill Galvin, President and CEO; Ted Dosch, Executive Vice President and CFO; and Kevin Burns, Senior Vice President, Investor Relations and Treasurer. Following our prepared remarks, we will take your questions. Today's presentation includes both GAAP and non-GAAP financial results, which are reconciled in our earnings release and accompanying slide presentation posted on our Investor Relations website. Before we begin, I want to remind everyone that we will be making forward-looking statements, 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. With that, I will turn the call over to Bill.

Good morning, everyone, and thank you for joining our fourth quarter 2018 earnings call. This morning, I will begin with an overview of our fourth quarter financial performance, including sales and gross margin trends as well as discuss the investments we are making in innovation and business transformation. I will then turn the call to Ted to review our financial performance in more detail and provide additional thoughts on our outlook for 2019. During our comments, we will reference the Q4 slide presentation posted on our Investor Relations website. As you saw from this morning's release, sales in the quarter increased 5.2% to $2.1 billion, which is the highest fourth quarter sales in our history. Our strong sales performance included organic growth in all segments as well as record fourth quarter sales in both our NSS and UPS segments. Adjusting for the favorable impact of the security acquisitions in Australia and New Zealand completed in the second quarter of 2018 and the unfavorable impact of lower average copper prices and generally weaker foreign currencies, organic sales increased 5.1%. Sales growth was above the midpoint of our outlook range of 4.5% to 5.5%, driven by the UPS segment, complex and global accounts customers and our security business. In addition to strong sales growth, we were pleased to deliver meaningful improvement in gross margin driven by actions we have implemented across the business. This reflected excellent sales execution and is evidence of getting paid for the value we continue to provide to our customers. Overall, fourth quarter 2018 GAAP earnings per diluted share was $1.22 and adjusted earnings per diluted share increased 9% from previous year to $1.53. During the quarter, we accelerated investments in innovation and business transformation with a focus on customer-facing technologies that will continue to enhance our digital…

Thanks, Bill, and good morning, everyone. As a reminder, today's earnings release includes non-GAAP measures, which are reconciled to the GAAP measures in the financial tables that accompany our release and are in the appendix of our accompanying slide presentation. We believe the non-GAAP measures we disclose provide the best representation of our ongoing operational performance. Bill covered our strong sales and gross margin performance, so I will begin with operating expense. Looking at Slide 10, fourth quarter operating expense of $342.7 million compares to prior year operating expense of $317.8 million. Excluding the non-GAAP operating expense items detailed on Page 11 of our release, adjusted operating expense increased 10.7% or $32.2 million to $333.8 million. As a percentage of sales, current quarter adjusted operating expense of 15.8% compares to 15.0%. In addition to higher volume, the primary drivers of the increase in adjusted operating expense were $7.4 million related to the acquired companies, $7.2 million related to our innovation and business transformation initiatives and inflationary impacts, including higher freight and employee expenses. While we have taken actions to help mitigate the impact, freight expense remains a year-over-year headwind. Adjusted EBITDA was flat at $109 million. Adjusted EBITDA increased in all 3 business segments, offset by investment in innovation and business transformation expenses at corporate. Adjusted EBITDA margin of 5.1% compares to 5.4% in the prior year. Let me now review the adjusted EBITDA trends by segment. Beginning with NSS, as shown on Slide 13, adjusted EBITDA increased 5.2% to $84 million. The resulting adjusted EBITDA margin of 7.5% compares to 7.6%. The change reflects gross margin improvement, offset by higher operating expense, including freight increases and incentive compensation. On a sequential basis, NSS adjusted EBITDA increased by 30 basis points, driven by gross margin improvement. EES adjusted EBITDA increased…

[Operator Instructions]. And your first question comes from the line of Shawn Harrison from Longbow Research.

I wanted to delve into the, I guess, slowing in the legacy in NSS business as well as kind of the industrial business within EES. And whether this was a function of just tough comps or was there something in terms of timing or something else going on in the market, particularly, as we look forward into 2019?

Yes. Shawn, it's Bill. The industrial one, as we said, was a really tough comps on the Q4 of last year. If you remember that EES business really started to accelerate in the Q4 of 2017. So to us, it was actually fairly decent performance on the stack basis. On the NSS side, I believe that, that's been consistently improving since the fourth quarter of '17, which was soft, if you remember.

Yes, Shawn, I'm not sure if you're referring to on the NSS side, slowing on the North America side, with growth rates not as high as elsewhere around the world. But that's pretty consistent with what we saw throughout the year and was not a big surprise for us. We had a couple percent growth in that North American NSS business on an organic basis. Again, we were comping a little bit tougher comparisons. Prior year Q4 of 2017 was the best quarter of the year for NSS. And we were comparing against some high project growth and so forth. So we don't feel that, that's indicative of a weakness necessarily in that North American business, though.

Shawn, I'd also say though that, if you remember, in 2017, we slowed down considerably in the global account because that was the first time we've seen that in many years. And it came back in '18. And a lot of the growth you saw internationally was with multinational customers. So it's a function of where these customers were spending investment and that's why you saw stronger growth outside of North America.

That's very helpful. As a follow-up, if you look towards the organic growth forecast for calendar '19, if you could maybe offer up NSS, EES and UPS, whether they're going to be kind of above the midpoint of that trend line or maybe a little bit below, in terms of your expectations?

Yes. Good question, Shawn. We can tell you that the UPS will probably be above. The trends in that continue to strengthen. I think, the NSS will be right in there. And I think EES, because of the strong comps of 2018, will probably be just below that. So aggregating out to that point, but that's generally how it's going to look.

Okay. And then lastly, just on -- the gross margin was extraordinary for this quarter, up 50 basis points year-over-year, particularly, given the strength in UPS and the security business. So if you could maybe just go underneath the covers a little bit in terms of what exactly happened? Because usually when you see that type of volume strength in those businesses, you don't see that type of gross margin expansion?

Yes. Shawn, we've kind of talked about it on the last call and tried to give you some view into that. It is a long-term training initiative and process to really improve a lot of different areas. It's not just one piece. And we expect this to be kind of a long-term continuous improvement process for us. And it was across the entire company and across many different aspects of where we felt we could get improvement. And look, as you're driving a global long-term strategy, sometimes you get away from the fundamentals. And I feel like we're back on that and we have a process now that we feel like we can continue to improve on. So it was a company-wide initiative and great effort by the team on all basis.

Shawn, the only thing I would add to Bill's comments there, as he referred to, what we've done here. Keep in mind that, we were doing this on the heels of the most significant inflationary trends on a material cost side that we've experienced in probably pushing nearly a decade. And so for several quarters of last year, we were constantly playing catch-up in trying to pass those costs on through to the business. And we feel that we have made substantial progress here over the course of, say, the last 4 months of 2018, and a lot of that has to do with providing better, more timely information to our sales folks as they make pricing decisions.

[Operator Instructions]. Our next question comes from the line of Allison Poliniak from Wells Fargo.

Just to keep on that gross margin and the utility impact, I mean, is there a way? It seems like it technically should have been better on the underlying despite the mix from EPS? I mean, is there any way to help us understand what that mix headwind, per se, would have been in Q4?

The mix of the three segments?

No, with UPS outgrowth rate, so there had to have been some level of mix. I think, if I go back to the other question, is there any way to quantify for that?

Yes. The thing, I would say, Allison, to keep in mind, there was definitely a negative mix impact at the gross margin line, but not a negative mix impact at the operating margin line. If you look at that business, again, because it does have a profile with significantly lower operating expense, UPS growing faster than the other businesses did not have any material -- measurable impact on the operating margin percentage. But it did have slight negative impact at the gross margin line because of the double-digit growth that we had in that business.

Great, thanks. And then on -- just your comments around tempered demand, really strong outlook for '19 despite that going on. I mean, can you maybe expand on that comment? Are you seeing project delays or just not necessarily quick execution or making decisions about future projects? Any thoughts there?

As you look at -- I think, we're not seeing and we're watching to, Allison, but we're not seeing any general slowdown of decision process. As a matter of fact, we continue to see good project activity in many aspects of the global account side and security and so on. So for us, the -- if you remember in NSS, for instance, the acceleration, we started to see in backlog and bookings at the end of '17, we kind of missed and thought it'd be sooner in '18, but it really -- you could see it come through in the last 3 quarters of '18, right? So we continue to see that activity. And you know, our exposure in China is limited. So we're not seeing any kind of headwinds there. And generally, we're still seeing activity that leaves us to believe we can get the 3% to 5% range that Ted mentioned.

And our next question comes from the line of David Manthey from Baird.

First off, looking at Slide 20, when I read things like business transformation and innovation investments, are these code words for ERP?

Dave, I would say, no. It's not code words for ERP. What we are doing, though, is very much a customer-facing business process transformation, not just to go back to those words. And so a big part of our focus is looking at our business processes, making it easier for our customers to do business with us. But as part of that, yes, there is a IT platform as part of it. As you know, we've got a very old homegrown mainframe base system, and we've been already on a journey for the last couple of years, if you will, moving towards an integrated ERP system, but that will only take place over a period of several years.

David, I'd add to this too. We're focused on customers, how we service our customers, how we support them, how we integrate with them and how we provide, kind of, best-in-class service. And for us to continue that journey, we need to continue to innovate in both customer-facing digital capabilities, which we've been on that journey for many years now as well as other systems so that we can provide the data analytics and the things we need to make good proper decisions in the future. And hopefully, we painted the picture to everyone that with all the moving pieces, the margin improvement, other efficiencies that were driving, we'll continue to drive EBITDA margin improvement and accelerate that long-term by the efficiencies we know we're going to get. So it's been a strategic planning process that we've all been part of and thinking about how we get to those long-term goals that we know we can achieve, but we need to do some of this additional innovation to do that.

Okay. When we're looking at good amounts to a 5-year sort of systems project, can you give us a little more detail in terms of what this new platform is? Are you doing it in-house? Are you bringing in an integrator? And then when you look out to 2023 and you start to develop these full benefits, what are the sources of those benefits?

Yes. Good question. So to clarify, as I said, we've started on this journey a couple of years ago. We've been moving towards an oracle shop as opposed to, as I said, our in-house homegrown systems that we relied on for so long. And again, as a distributor, our lifeblood is all about order management, inventory management, warehouse management. That's the core of our integrated operating system going forward. But we also will be doing some conversions to global financial systems today, especially on the heels of the large acquisitions we've done more recently. We still have disparate systems across our company. So the savings that we anticipate driving over time will largely be back-office driven. But what that doesn't even begin to touch on is the leverage we think we can drive by having the better systems, the better data analytics and so forth, which will drive even better support for the growth that we're focused on across our business. You've heard us talk about in previous calls and investor meetings and so forth about our customer access strategy. And this is really all about hoping to support our growth goals as we look at the change in the marketplace and kind of the blurring of the lines, if you will, between different customers and different technologies.

And I'll add to that also, David, that there's innovation in the entire supply chain that's in the market today, whether it's blockchain or other types of innovation that in order to take advantage of that innovation, you have to have the capability to do that. So this allows us to then adapt very quickly to new technologies and becomes an important part of it. But again, I focus on the fact that it's -- and we call that innovation because it's so many other components. It's digital. It's other efficiencies that were driving in the company that will allow us to meet our long-term financial goals.

Okay, thanks. And then, Ted, just a couple of financial questions. First is the operating cash flow. If my notes are right here, I think last quarter your guidance was $160 million to $180 million for the full year and you came in at $138 million. And I'm just wondering, if that is the case, if I have that right, what led to that shortfall over the course of 90 days?

Yes, Dave, you absolutely got the numbers right. On the cash flow for full year -- fourth quarter and full year 2018, that was lower than what we had projected at the beginning of the quarter. But as I said, it was completely driven by the higher level of working capital. And I would tell you, across the buckets of working capital, the biggest driver that was higher levels of inventory. So even though as I said, we improved our working capital efficiency, the 18.2% working capital as a percent of sales is the lowest we've ever had at the end of a year. But having said that, with the continual uptick in the projects we have in our pipeline and in essence project inventory that we had on hand at year-end, we did come up a little bit short of that cash flow target. So we can feel good about the working capital efficiency we drove. But obviously, that's an indication of our internal targets were to drive even more efficiency out of that. The other thing that's clearly an impact for us as a company that closes our books on a 445 calendar, our December, our Q4 ended on December 28. So that hurt us a little bit also on the AR collections. Lot of companies are paying under calendar months. So our AR, where as it was also up to support the higher sales, was up a little bit higher than what we would have expected, and we attribute that to the calendar timing as well.

Okay, thanks for that. And then last one and then I'll pass it on. In light of the investments you're making and so forth, could you give us an idea of what we should think about for the unallocated corporate items in 2019? And sort of does that -- is it even or does it increase through the year? And the same thing for DNA, I would imagine that some of these things are going to be depreciated over time.

Yes. So I'd take that and reverse. The easy part is, no significant increase in DNA, because what we're developing is going to be done over a multiyear period of time. So we won't see that increase in 2019 on the depreciation side. Separately, you're right. The bulk of these expenses that we're making in innovation are flowing through our corporate OpEx, not within one of the three individual businesses. So whereas we would expect to see that gradually go up over time, keep in mind, we are -- with the rate of spend that we ramped up over the course of 2018, including through this fourth quarter, we wouldn't see that going up significantly more from the run rate that we exited the year.

And there are no further questions at this time. I'd like to turn the call back over to our presenters for some closing remarks.

Great. That concludes today's call. If you have any additional questions, please don't hesitate to reach out to Kevin or Lisa. As always, thank you for listening to the call today.

This concludes today's conference. You may now disconnect.