艾睿電子 (ARW) 2003 Q4 法說會逐字稿

Good morning and welcome to the Arrow Electronics 2003 year end results conference call.

At this time, all parties have been placed in a listen-only mode and the floor will be open for your questions on the presentation.

At this time, it is my pleasure to turn the call over to your host, Ms. Eileen O'Connor.

Ma'am, you may begin.

Thank you, (inaudible).

Good morning, everyone, welcome to the Arrow Electronics fourth quarter conference call.

I'm Eileen O'Connor, Vice President of Investor Relations, and I will be serving as moderator on today's call.

With us on the call today are Bill Mitchell, President and Chief Executive Officer, Germano Fanelli, our newly appointed President of Arrow Europe, Middle East Asia and South America. Mike Long, President of North American Computer Products, Jan Salsgiver, President North American Component, Paul Reilly, Chief Financial Officer and Peter Brown, Senior Vice President and General Counsel.

By now, you should have received a copy of our earnings release. If not, please contact me and I'll get you a copy. Alternatively, you can access the release on our web site, which is www.arrow.com.

Let me remind everyone that some of the comments made on today's call may contain forward-looking statements. They are subject to risks and uncertainties as described in our SEC filings. Rather than read the entire disclaimer contained in those filings, please remember that they do apply to this call.

We'll begin with several minutes of prepared remarks which will then be followed by question and answer period.

At this time, I would like to introduce Bill Mitchell, our President and CEO.

Thanks, Eileen, and thanks to all of you on the call for taking the time to hear about our quarter.

We have quite a bit to review today so our prepared remarks will be a little longer but we'll ensure to leave enough time to answer your questions.

I am very pleased to report that fourth quarter net income on an operating basis was [inaudible] million dollars, 33 cents and 34 cents on a basic and diluted basis. I'm also pleased with the strong performance in this quarter. We have noted in previous announcements, these results exclude the impact of our previously announced restructuring charges and the small loss on the prepayment of debt.

Let me comment on some of the highlights of the fourth quarter before asking Paul, Jan, Germano and Mike to get into the details.

Our consolidated sales of $2.5 billion in the fourth quarter were up 18% sequentially and 31% over last year's fourth fourth quarter. Excluding the impact of foreign exchange and the sale of the Nordic Computer products business in the third quarter of this year, sales advanced a healthy 17% sequentially and 27% over last year.

Our worldwide components business have strong sales growth in our North American business and in Asia Pacific. In Europe, where the macro economic environment remains weak, we posted nice sales growth.

As you heard us discuss in our third quarter call, the fourth quarter is always very strong in our computer products business. That was especially true this year. North America, sales advanced by nearly 42% sequentially and 33% year-over-year. This was our tenth consecutive quarter of year-over-year growth in earnings in this business.

We experienced outstanding sales growth in our mid-range computing product businesses and we are truly pleased by the exceptional growth in software and storage. Jan, Germano and Mike will get into the details of each of their businesses shortly.

Operating income dollars were $81.9 million, up 45% from last quarter and up 83% over last year. Operating income as a percent of sales at 3.3% was up 60 basis points from last quarter and up 90 basis points from last year. We're truly encouraged by the impact of the efficiency initiatives that we have implemented. In 2003 alone, we took out over $75 million dollars in annual costs from the business.

We're also encouraged by the ability of the organization to capitalize upon our operating leverage to drive higher operating income at significantly faster pace than the increase in sales.

Worldwide component revenues were $1.8 billion, up 13% over the third quarter of this year and up 35% over last year. With operating income as a percentage of sales at 4.0%, that's a 10 basis point increase over the third quarter and 100 basis points over last year's fourth quarter.

Sales in our North America Components Group, which Jan will discuss in detail later on, were up 9% compared to our third quarter and up 43% over last year. Operating income dollars were up 66% sequentially and up five fold from last year's level. This increase in operating income dollars is the fourth consecutive quarterly increase and the highest in the North American Components Group has seen since the first quarter of 2001.

Our strategies are delivering results. The acquisition of Pioneer Standard's IEB business has been accretive to earnings and we continue to make good progress towards putting a cost structure in place that meets today's business realities without sacrificing our future. We fully expect this business growth and operating income to outpace growth in sales in 2004.

On a macro economic basis, the European economy continues to be generally weak and trailing North America. Our sales of $717 million were up 12% sequentially and up 13% over last year in reported dollars. Excluding foreign exchange and the sale of the Nordic Computer Products Group, sales were up 8% sequentially and 4% over the last year. Despite this general economic weakness, our European business continues to post operating margins well ahead of our European competitors.

Our sales in Asia increased by 27% sequentially to $248 million, and that's a 45% increase over the fourth quarter of last year in our core business. As I mentioned before, this is an area in which we are focusing a significant amount of time, effort and resources to ensure that we can effectively and efficiently meet the developing needs of suppliers and customers.

Worldwide Computer Products revenues were $705 million, up 37% sequentially and up 23% over last year. Excluding the impact of the computer-related businesses we divested in northern Europe, sales increased by 39% from the third quarter.

Please keep in mind that the third quarter is seasonally weak and the fourth quarter is seasonally very strong. So the comparisons to Q3 in absolute terms are probably not good ones. With that said, a significant improvement year-over-year is very heartening.

Sales in our North American Computer Products Group experienced year-over-year sales growth for the fourth sequential quarter. Notably, the group experienced year-over-year growth in operating income dollars for the tenth sequential quarter.

And now I'd like to ask Paul Reilly, our Chief Financial Officer, to review our financials in greater detail.

Thanks, Bill.

As you have seen in our press release there are a number of items that impact the compatibility of our results with those in the trailing quarter and Q4 of last year. I'll start by reviewing our results, excluding these items, and then at the end of my comments, I will go through them in detail.

Sales for the fourth quarter were $2.5 billion, that's up 18% over the third quarter and up 31% from Q4 of last year. Sales, excluding the impact of foreign exchange and the sales of Nordic Computer parts business, were up 17% sequentially and up over 27% over last year. As Bill mentioned, sales in our worldwide components businesses were $1.8 billion, up 14% over Q3 and 35% over Q4 of 2002, driven by strong sales gains across all regions.

Worldwide Computer were $705 million, up 37% sequentially from 23% year-over-year. That's a 39% sequential increase when you exclude the computer products businesses we sold in the Nordic region in Q3.

Our North American computer products business saw exceptional growth sequentially. Our gross profit margin of 15.6% was 80 basis points below the Q3 result, principally due to a change in mix resulting from the traditionally strong computer products business, which grew by nearly 40% sequentially in Q4.

The accelerated growth in our Asia Pacific business. We still see margin pressure in our components business, but it is in the 10 to 20 basis point range in the core customer base. We've spoken about the inflection point in the cycle where we are squeezed by the customers for lower pricing but the suppliers are not willing to grant us as much in the way of price release. Looking to the future, that appears to be a phenomenon that will only be with us for a short period of time.

Compared with last year, our gross profit margin was 120 basis points lower, principally as a result of margin pressures and our components businesses around the world, this is fairly consistent with what we saw earlier in the year when we did year-on-year comparison. But as we've demonstrated, our improved operating leverage more than offsets the decline in gross profit percent.

Operating expenses as a percentage of sales were 12.3%, down 140 basis points from Q3 and 210 basis points from last year. The decrease in operating expenses versus Q3 is a result of our continued focus on operating efficiencies, our ability to better size our structure to meet the needs of our business model, levering our cost structure to meet our growing sales volumes, also.

As we've been saying for sometime now, we have the ability to lever our cost structure to drive significant increases in operating income with even modest sales increases. We continue to believe that we have considerable operating leverage that will enable us to capitalize on increases in future sales activity.

Operating income dollars were up 83% over last year and 45% over Q3. Operating income, as a percentage of sales, was 3.3%. That's up 60 basis points over Q3 and 90 basis points over last year's fourth quarter.

Net interest expense was $33.7 million dollars, down from $36.2 million in the third quarter but up from $32.1 million last year. We've paid off $206 million in debt, in Q4. The increase in interest over last year is principally due to much lower yield on our short-term investment.

Cash flow from operations for the quarter was $151 million. That brings the total for the year to more than $291 million. And since December 31st of 2000, we've generated over $2.6 billion in cash flow from operation.

As you know, we've worked hard at managing our balance sheet over the past 12 months, and now our working capital per sales dollar in Q4 was 19 cents for every dollar of sales. That's the lowest in the history of our company.

Our effective tax rate for the quarter was 34.1%, versus 36.5% for all of 2002. Our full-year rate was 32.9%. The increase in our rate in Q4 versus the full-year rate was due to our exceptionally strong performance driving much higher taxable earnings. The principal drive is in the rate decline over 2002, despite our significant increase in earnings, our changes in geographical mix of our earnings and the tax-free organizations which were completed at the end of 2002, which better match certain costs with the profits they generate.

Net income for the quarter was $32.6 million compared with $15.1 million last quarter and $8.9 million last year. Net income was at its highest level since the first quarter 2001 and reflects solid sales growth. Our continued focus on operational and organizational efficiencies reducing our cost structure, our ability to lever our cost structure as increasing sales with a minimal increase in costs and the on-going efforts to reduce our capital costs by delevering our balance sheet.

Earnings per share was 33 cents in the fourth quarter as compared to 15 cents in Q3 and 9 cents in Q4 of last year. Depreciation, amortization for the quarter was $16.4 million dollars and non-cash interest expense related to the zero coupon convertible to benches was $6.1 million.

Lastly, the actual number of shares outstanding was $1,517,000. As I mentioned earlier, for comparability purposes and, more importantly, to give you a better sense of our operating results, I've excluded a number of (inaudible) items from my remarks.

The difference is between our reported GAP basis numbers and the numbers I have been discussing are due to the following items. As you may remember from our prior calls through September 30, we've executed numerous actions implemented an order operational and organizational efficiency. The net results of these actions was a $75 million reduction in our cost structure on an annual basis.

During the fourth quarter, we recorded $7.6 million and restructuring costs related to these items. In connection with repurchasing of bonds due in 2005 and 2006 in this year's fourth quarter, we incurred a loss of $200,000 after taxes. In last year's fourth quarter we incurred a loss of $2.1 million after taxes. That's a penny a share on the repurchase of bonds.

Again, the operating information we provide to you to be used as a complement to, and not a substitute for, our GAP numbers.

Today we've also announced a series of initiatives that will further reduce our operating cost structure by $15 million annually. That's $9 million after taxes. We estimate that we should get approximately $12 million of this cost reduction in 2004 with it being 100% in 2005.

We estimate the restructuring costs associated with these efforts to be approximately $2-$5 million. These restructuring costs will be spread out throughout 2004 and we will remain focused on operational and organizational efficiency.

As a result of our efforts in driving to improve operational, organizational efficiencies, we've identified over $90 million in annual cost savings. We've delivered on $75 million and I'm very confident we'll deliver on the next $15 million.

Now I'll ask Jan to discuss our North American components business.

Thanks, Paul.

As Bill mentioned, in the fourth quarter, our North American components businesses generated sales of $888 million, up 9% from Q3 and 43% versus Q4 of last year. Our operating income dollars were up almost five times versus last year. And our operating margin more than tripled. This is the highest level of operating income dollars and percents that we've seen since the first quarter of 2001.

The sales increases broad based across product categories and customer segments. Our semi conductor and (inaudible) electromechanical product categories were both up over 10% sequentially. Sales to our core, small- to medium-sized OEMs and contract manufacturers were up over 10% sequentially.

We also saw a healthy sales growth of over 10% in our selling group that supports the largest, most complex OEM in contract manufacturers. Within this group, the large CM's had the highest growth rate as one of our large OEMs made the decision to out-source more of its manufacturing to contract manufacturers.

Order patterns remain consistent with prior quarters. We did, however, see customers start to give us a little more visibility as our in-customer backlogs increase by more than 10% quarter-on-quarter.

Turning to price and availability, in general, we continue to see lead times stretch. What used to be 8- to 10-week lead times are now 10 to 12 weeks. Some high end analog devices are now out to 16 weeks. And power (inaudible) and small signal devices in (inaudible) 23 packages are out over 20 weeks. Also, some flash devices have gone on allocation.

Looking at pricing, we see things stabilizing. (Inaudible) ASPs were up slightly and units were up in the mid-single digits. Connector ASPs were up about 5% and our units grew over 10%. Prices were essentially flat for electromechanical products with units also up over 10%. For semi conductors, our units were up 14% sequentially while ASPs stabilized.

Unlike Q3 where most product categories behaved differently, in Q4, analog, logic, discreet and non-volatile memory all behaved in line with our overall results with units up in the low teens and ASPs down slightly. We saw a slight increase in ASPs for indebted processors based on a higher mix of 32-bit processors while units were up about 10%.

And finally, the programmables, our units were up over 20% and ASP settled by more than 5%.

Thanks, Jan.

I am very pleased to introduce our new President of Europe, Germano Fanelli, who will review our European business.

Some of you may have met Germano, or know of him, but let me give you a brief introduction.

Germano came to Arrow in 1991 when we acquired Silver Star, Italy's leading distributor. Germano was Managing Director and had built a very successful business. Since then, Germano has done an outstanding job not only in Italy, but also throughout our entire southern Europe region which includes France, Spain, Israel and several other countries surrounding the Mediterranean. He has been the Managing Director there since 1996.

His efforts have resulted in greater market penetration, closer relationships with customers and suppliers alike, and efficient operating structure and significant profitability. We're fortunate to have Germano focusing on our long-term strategies and tactical opportunities for all of Europe.

Germano?

Thank you, Bill, for the very kind words. Europe continues to be a difficult market because of the weak economic environment though our European operations continue to perform profitably.

Sales in December quarter, which as you know is [ inaudible ] increased by 12% from the third quarter and 13% from last year to [ inaudible ]. Excluding the impact of foreign exchange and the sale of the Nordic Computer business, sales were up 8% sequentially and 4% over last year. Sales in (inaudible) in Europe, excluding the impact of foreign exchange, were flat with a third quarter and last year. For us, car components exclude sales of microprocessors and our (inaudible) business. Let me give you some more detail on the different regions that make up our European business.

Sales in central Europe were down 4% sequentially. Additionally, our central European region experiences a declining business in mid-December due to the business and (inaudible) base. They do not experience the same (inaudible) roll down as seen in southern Europe so the decline was not unexpected. Though the rate of decline was somewhat lesser than what we have expected, and is in line with the change (inaudible).

Sales in northern Europe, which consists of United Kingdom and Nordic area, were up 7% sequentially. A gain excluding the (inaudible) computer (inaudible) business. And sales in our core component business were up 11%.

Sales in southern Europe increased by 20% from September, but remember that southern Europe is the region that is most effective by the summer in the third quarter. When compared with last year's fourth quarter, sales in southern Europe were down 3% primarily because of France. (Inaudible) condition, France deteriorate since 2002 and our business there is showing the effective of this.

Similar to North America, we are beginning to see a greater price (inaudible) and limited number of instances pricing has increased. And not surprisingly, the time experienced very similar behavior to what Jan described as well.

In summary, we continue to be nicely profitable in less than an optimal conditions. (Inaudible) things are better, but its strength is limiting the level of export. And the economy's Europe is still generally weak. So there is no sufficient domestic consumption to offset the declining exports. We will continue to monitor these conditions going forward and serve the needs of our customers and suppliers as their businesses begin to grow.

One final comment.

This morning, Texas Instruments announced (inaudible) the European (inaudible) of the Year 2003 award to our Europe. We are honored to receive this award from one of the world's leading semi conductor suppliers and look forward to continuing our recognition of service excellence.

Thanks, Germano.

Turning to Asia Pacific, our fourth quarter sales were $248 million, up 27% sequentially with our core sales up 45% from last year. Operating income as a percentage of sales was up 160 basis points from September. Our sales in China, the key to the region, were also up 45% from last year and we were very pleased about that progress.

As for lead times and ASPs, keep in mind that Asia is a major production center for hand sets and consumer-related products. So we, like everyone else, are seeing certain product categories stretch out with the correlating increases in ASPs. We see this more specifically in power management and flash. But as we said last quarter, this is not widespread and product is generally readily available.

And our core component business, we have the number one position in China and Hong Kong and we continue to believe that China is the key to success in Asia. As I've mentioned in the past, this entire region is a whole area of focus for us, and we spent a lot of time studying the region as it exists and how it may develop going forward.

We originally had two concerns regarding Arrow and Asia Pacific. Was the market too complicated? Was it too fragmented? And two, were we too late, it had already coalesced? What was become crystal clear is that one, there's no one-size-fits-all strategy. But, two, the increasing complexity of the market plays to our strengths as a broad line, financially stable global distributor with a wide array of value-added services and capabilities. Remember the increasing complexity is exactly what we saw develop in both North America and Europe. And our performance in those regions speaks for itself.

And lastly, it's not too late for us to be a major player throughout the region. We believe we have strong possibilities and strong capabilities to move ahead.

Let me ask Mike Long, President of North America Computer Products to discuss his group's operating performance in the fourth quarter.

Thanks, Bill.

In the fourth quarter, sales of our North American computer products businesses were $596 million, up 42% sequentially and 33% over last year. The fourth quarter is always the strongest, but this sequential increase was above historical norms. Operating income dollars at the highest level ever recorded, doubled from the September quarter and were up year-over-year for the tenth consecutive quarter.

Sales in our Enterprise Computing Group were up 49% sequentially, driven principally by IBM's seasonality and up 33% year-on-year. Notably, our (inaudible) business, which is one of only two authorized Sun distributors in the U.S., experienced fourth quarter sales in excess of Q2, which you'll remember, is traditionally their strongest quarter.

Sales in our Enterprise Stores Solutions Group increased by 45% from the September quarter and doubled from last year. Led by EMC Network Appliance and Hitachi Data System, all of whom are very supportive of the channel. Notably, source sales were up 43% sequentially, software sales were up by 91% and service sales increased by 56%. We said that these three areas, storage, software and services, were going to be areas of focus for us going forward, so we're pleased with their fourth quarter performance.

Our OEM sales were up by 16% sequentially, and 44% from last year. As the customer base for this business is principally in the telecom, networking and medical sectors, which as you know continue to be under pressure, we're pleased to see sequential growth for the fourth consecutive quarter. The OEM market continues to improve with a firming up in all vertical segments.

As our customers focus more on their IP and core competiencies, they rely on us more for our supply chain, inventory management and logistic expertise. Overall, we had a very strong quarter attributable both to strength and enterprise computing and our OEM group.

Thanks, Mike.

Before I begin my closing remarks, I'm going to ask Paul to brief you on the proposed capital transaction we also announced today.

Thanks, Bill.

As you know, we've discussed in each of our calls over the last 12 months the considerable amount of time we've spent on evaluating our operational structure. With the end goal of having the most efficient organizational structure to meet the needs of our customers and supplies today and in the future, we've also spent time focused on developing a capital structure that will be best suited to support our long-term goals and objectives.

It is our belief that a company that has a strong equity base over the long term will have greater flexibility in accessing the capital market. (Inaudible) capital at a lower cost and in many instances as a higher PE ratio.

While we possess plenty of liquidity between our cash balances and untapped credit facilities, now is the appropriate time to strengthen our capital structure. So we've made the decision to improve our capital base by issuing 12 million shares of Arrow on the equity market.

The net proceeds will be used principally to repurchase the 8.7% senior notes due in October of 2005. The remaining proceeds will be used for general corporate purposes.

On a proforma basis, we had issued these shares October 1 and simultaneously retired the 8.7% senior notes, our earnings per share in Q4 would have been 31 cents or about 5% less than the reported 33 cents. So while we are considerably strengthening our balance sheet, we are also only having a minimal impact on our earnings.

We'll continue to use our cash to fund the growth of our business, make selective investments and as we've done in the past, opportunistically retire debt.

Thanks, Paul.

We worked hard as a management team over the last 12 months focusing on restoring our profitability and creating our business strategies for the future. Part of creating the road map to success is ensuring we have our resources aligned and we have the right people in the right places with the right focus. In order to take advantage of the senior management's deep knowledge and experience, today I announced the following new organization and leadership assignments.

Jan Salsgiver, currently our President of North America Components, will take on a newly-created role as Vice President, Global Strategy and Operations. In this capacity, she will focus on our business strategy and development. She will focus and manage our corporate communications and lead all of our global business operations, including global customer and supplier relationships, worldwide logistics and supply chain capabilities.

Jan has driven organic revenue growth and has led our Components Group through a series of acquisitions. She's provided leadership to this group through the most challenging cyclical downturn the industry has ever seen. Jan and her team have done terrific work getting NAC back on track. I'm truly delighted she has accepted this important new challenge working with me.

Brian McNally, who for the past four years served as the Managing Director of our northern European components business, will return to the United States as the President of our North America Component business. Brian has been instrumental in strengthening northern Europe's profitability and market position.

Brian and Jan each bring more than 20 years of Arrow experience to those roles.

Harriet Green, who has most recently served as Acting Senior Vice President of Sales for Asia Pacific while filling her role as Vice President for Worldwide Supplier Marketing, will assume the role of President of Arrow Asia Pacific.

John Tam, the founder of Arrow's business in Asia Pacific, will become Chairman of this business unit and focus his efforts on building and maintaining the external relationships so important in this region.

Harriet, John and I have worked closely together over the last year in developing our strategy and we will continue to work closely as we move forward. I could not be more pleased with the progress that we have made to date.

After 30 years with Arrow, B. J. Scheihing, our Senior Vice President of Global Operations in Human Resources, has announced her retirement. B. J. has a wonderful and active life outside of Arrow filled with charitable works and corporate boards. She's made many substantial and valuable contributions to Arrow during her distinguished career and has been instrumental in helping to shape Arrow into the successful company it is today.

Collectively, the Arrow Management Group, its employees, Board of Directors and I thank her for her dedication and commitment to Arrow. We wish her much happiness in her well-earned retirement which will take place on June the 1st.

Sue Suver will be succeeding B. J. as Vice President of Human Resources. Sue has been an integral part of the HR function since she joined the company in 2001 and she brings over 20 years of experience to this position.

Eileen O'Connor, Vice President of Investor Relations, will now report directly to Paul Reilly, our Chief Financial Officer. Together, Paul, Eileen and I will be working closely to ensure that you, the investment and financial community, have a clear and complete understanding of our company, culture and of our industry and the critical levers that make Arrow the market leader. We have a great story to tell and look forward to getting out and telling it to you.

I'm confident that this senior leadership team will continue to work together to achieve successful execution of our strategy to we continue our journey to become the clear market leader.

One of my key goals has been to build a strong management team. And I'm convinced that we now have our key resources aligned with the opportunities we have. That we do have the right people in the right places at the right time.

Let me give a few closing remarks.

The fourth quarter was an exceptional quarter for for us from an operational point of view.

Let me highlight a couple of items that I hope you'll take away with you from this call.

Over the last year we've made some tough decisions and implemented a number of restructuring initiatives designed to enhance the operational efficiencies of the corporation without sacrificing the future of the company. We've delivered on these. And that's evidenced by our results. And as we have promised, we will continue to look for additional opportunities to increase our operating efficiencies. We're well positioned to perform well throughout the cycle and given our leverage, even a small increase in sales can deliver a substantial increase in earnings as we have proven.

As I look back over the past 12 months, we've delivered significant cost savings with over $75 million promised and delivered, and another $15 million announced today. We continue to invest in the business by driving significant opportunities for growth and profits.

Let me give you an example.

We acquired the IEB business from the former pioneer standard in February, 2002, and promising that the acquisition would be 20 cents accretive. We integrated that business over the closing weekend and we have delivered on the 20 cents. We've continued investing in the fastest growing region for semiconductor consumption. That's Asia Pacific.

We delivered a 45% growth of sales over the fourth quarter of 2002 and we're encouraged by the opportunities we see in this region. We're already number one in China. We know that one size does not fit all in this region. Our strategic review of each of the specific areas of opportunity has resulted in a tailored strategy that focused our investments in people, inventory, facility and value-added service and on the needs of our customers and suppliers.

We continue to make significant headway in our North American components business, which posted its highest level of sales, operating income dollars and operating income percent in the past three years. In Europe, which is a difficult market because of the macro environment, we've grown sales and remain solidly profitable.

We're also focused on improving operational efficiency in Europe. You may remember that last quarter we announced that we lowered our logistics costs by centralizing certain distribution centers. We continue to make progress in managing working capital, driving working capital as a percent of sales to its lowest level in the history of the company. We deleveraged our balance sheet through our very significant cash flow.

We have a senior management team aligned in every market with a clear strategic plan, a road map for success tailored towards different customers and different geographies worldwide.

Looking forward, I'm optimistic that we're seeing the beginning of the turn in our business. Our North America components business is showing signs of recovery, posting its fourth consecutive quarter of sequential and year-on-year sales growth. We're seeing increasing book-to-bills, increased backlog, and signs of a change in ordering pattern with customers placing slightly longer scheduled orders. Europe remains a challenging market because of the weak overall macro economic environment combined with a strong euro. Yet, we remain profitable there and expect to see sales growth at a lower pace than in North America. Asia Pacific continues to experience very strong growth in sales. And we will continue to invest in this region to ensure our long-term success.

Our computer business had an exceptional December quarter in both sales and profitability. But remember that the first quarter is always slower in this business. We continue to execute well in all markets and all regions.

We remain committed to meeting the needs of our suppliers and customers and to continue to process improvements that focus on our structure, processes and procedures. Today we are in much better shape than we were 12 months ago. We are encouraged by what we are sure the future holds for us and we remain committed to delivering value to you, our shareholders.

Operator?

(Inaudible). Thank you.

The floor is now open for questions. If you have a question, press number 1 followed by 4 on your touch tone phone. If, at any point, your question has been answered, you may remove yourself from the queue by pressing the pound key. Questions are taken in the order they are received. We do ask while you pose your question that you pick up your hand set to provide the best sound quality.

Please hold as we poll for questions.

Our first question comes from Steve Savas of Goldman Sachs.

Good morning.

Bill, I guess I wanted to follow up on some of your comments on trends in Asia.

Clearly, you saw strong revenue growth and you pointed out that's kind of consumer hand set heavy. I'm wondering, are you starting to see a change in mix in that business or are you targeting to get a change in that mix of business? What might be your kind of margin outlook or goals there, both for margins and given that its quicker turn business, your kind of returns or ROIC profile you are looking for?

First, David, it's not a simple answer. Let me go back to the one size doesn't fit all.

What we're seeing is a couple of things in Asia.

First of all, there was obviously the transfer business that moved into Asia not only from North America but also from Japan and other parts of the world, particularly Europe. That business tends to be the high volume/low mix business, tends to be relatively low profitability with very high terms that goes to it. What we have begun to see, and are very encouraged by, is a growth in local markets and growth in local markets in places like China, southeast Asia and India where the increased wealth has created discretionary income that's used for electronic products, not only consumer but other time types of electronic products.

As we've studied those markets, they showed all of the characteristics of the markets that we enjoy in North America and in Europe. That is, they demand a higher level of our more advanced services of supply chain capabilities, inventory managing, financing capabilities, et cetera. So we think that part of the market is moving toward us, and should generate higher margins and higher returns over the long haul.

As we've said previously on a number of our calls, we do expect Asia to see overall a lower margin profile than we see in North America and Europe. We, however, see that we have lower costs and a lower cost structure in the region. And we should generate higher asset velocity in the region, and we have a lower tax rate in the region. Therefore, the bottom line returns from Asia should be every bit as acceptable and accretive to the company.

Again, it's a complex market. We think complexity plays to our strength, and what we've tried to do is develop specific strategies for each of the locations, each of the marketplaces, each of the product segments that we serve.

That's helpful.

Just one follow up.

The mix that you currently have of kind of local- versus global-type customers, any rough sense where that stands and kind of directionally where that might be going?

It's still mainly the global customers. What we're seeing, though, and what we're very encouraged by, is the very rapid growth of the local customer base, particularly in places like China where we're beginning to see the small- and medium-sized customer base which is really our sweet spot, starting to develop. We're very focused on it and we think we're very well positioned to capitalize on that going forward.

Great. Thank you.

Our next question is coming from Joseph Wolf from Bank of America.

Thanks.

Could you go into a little bit of detail, going through some of the gross margin mix issues? I'm hoping you can go through components segment was down in general.

I'm wondering what the outlook for sales mix should be for that? What should we be expecting as the mixture shifts throughout the year? Have prices been getting a little bit higher and lead times extending? Should we look at the fourth quarter on the bottom of the strength of the computing business?

That's a lot of questions, Joe. Thanks.

I wanted to start off easy.

Let me try to hit the questions that I think were asked around gross profit.

You may or may not recall that we talked about what we've seen historically in the cycles that components business go through. In which seems to be an inflection point as the market begins to turn where we're stuck in the middle between customers and suppliers. Customers looking for price modifications or reductions and prices and suppliers no longer willing to do that because they feel that there's product becoming in short supply. We get squeezed in the middle.

We talked about historically that being a two to three-quarter type of event. So we saw for sure in the fourth quarter a slowdown in the type of pressure that we had been getting what what I call our core customer base and component. That's small- to medium-sized OEMs as well as the small- to medium-sized CMs,which are really, when you look at them, OEMs. So we've seen that begin to slow down.

You've heard Germano and Jan and Bill talk about availability, so availability continues to tighten and a historical trend to be (inaudible) a cycle, one would expect the average selling price to go up. That would drive -- I would see more gross profit dollars but we'd also see gross profit margins begin to recover.

I can't say whether that's going to be in Q1. We don't have that much visibility into what's happening at this point in time, so it is improved. But if you go based upon past cycles, you begin to see that happening.

So, you know, based on historical perspective give that some thought before you build it into your models, but sure, it's something we've seen in the past.

Just a quick follow up.

Could you talk about global inventory trends because I would have expected with the continued weakness in the economies in Europe that you wouldn't be seeing prices starting to rise and lead time starting to extend, or is that you have a global inventory keeping supply and demand in check even in the economy is weak?

You have to realize that availability is driven by the suppliers who are global in nature generally speaking, so, you know, what you see in -- what we show in Q4 was a little bit different because in Asia Pac, there was a big demand around consumer products. We don't serve consumer products to the same extent in Europe or in North America as we do in Asia Pac.

But generally, suppliers are the ones driving a tightness of the market for us from a supplier (inaudible) point of view.

We also, just as a follow up to that, we've spent a very substantial amount of time over the last year in developing more advanced inventory management capabilities, so we're very much committed to buying what sells and selling what we've bought. And that's showed up in our very strong cash management in the fourth quarter and throughout the last year as we have continued to demonstrate that we can provide very good service to the marketplace while still showing very good asset (inaudible) performance. And we will continue to be focused on that.

We are willing, as we've stated in our previous call, and able and will make investments as required as we see markets develop and see market opportunities in front of us. We are looking at numbers of those right now.

Great. Thank you.

Thank you.

Our next question is coming from Gene Sean of Credit Suisse First Boston.

Good morning.

It's actually Mark Altere.

What could we expect for interest in 2004 given the pay down, absent the prospective use of proceeds?

And then, secondly, what would be the outstandings right now on the 2005 notes?

On the 2005 notes, about $209 million at this point in time.

On the interest line, you know, we've been buying bonds back throughout the year, so, and refinancing some with offing back into the June time period. You know, when I look at it, our interest expense for the year was about $135 million. So I expect to see a decline from that probably in the range of about 8% to 10%, depending upon our cash flow for the year.

But that's a net number, right?

Yes, that's right.

Do you have an idea of what was gross for the year?

You know, I don't have that piece of data with me. I can quote a number, but I don't know if it's accurate. Why don't you call us back later?

Okay.

Thank you.

Thank you.

Once again, as a reminder, it's 1 followed by 4 for any questions at this time.

Our next call is from Eric Ruble of Miller Tabak Roberts.

Thank you.

Good afternoon, gentlemen.

With the impact of Chinese New Year behind us and about 6 weeks into the quarter, can you comment on the linearity that you are seeing and, in particular, are you seeing any signs that an increase in demand given where we are in the cycle is offsetting any normal seasonal weakness that you would have in the component business?

Let me take on, first of all, the Chinese New Year question.

As you know, it came early this year and did last for ten days. We were surprised and heartened by how rapidly our business has recovered after the Chinese New Year, but obviously, taking ten days of selling out of your quarter does have some impact. But the business has remained strong in China.

I'll let Jan comment about North America.

Yeah.

I guess I would have a question in terms of the normal seasonal. I think the seasonality was one one where we see a weaker Q1, expressed in the computer product business, traditionally in the component business. So I wouldn't say that our business is characterized by a normally weaker Q1(inaudible).

Mike Long, you might comment on the computer products business.

Yes.

As you know, the end of the year is when IBM cleans the decks of all of their inventory in their business, so that has traditionally been the strongest quarter of the year for the Computer Products Group and first quarter as a result has always been sort of the start up phase, again, things are starting to get back in line. So we would expect no change in that for this year, also.

Jan, I'm sorry, I was thinking more or less in the lines of wireless and PC end markets being relatively typically down in the first quarter. I'm thinking that would flow through to your business.

What's interesting is our customer base is a very broad one. Most of the PC manufacturers are buying on a direct basis. So what we'd be seeing is that would be more of a trend you'd be seeing with suppliers.

We have an enormously broad customer base. We're in fact, PCs are a very small piece of it. Ours is a much broader industrial customer base. Yes, we do see (inaudible) communications customers, including wireless customers. And I think we're seeing what had been, you know, a real tough business start (inaudible).

I think that's the important point.

One of the real strengths we see in North America is the breadth of the market penetration. We are across many, many different segments. We have deep and wide relationships across those segments. So no single piece of it really dominates, and we have seen strengthening throughout the fourth quarter in every one of our segments which is very, very encouraging news for us.

That's great.

Just one more question just on the component side.

Jan, with the stretch out and lead times, do you have any sense you are seeing any sign of double ordering either at the EMs or OEM level?

We don't believe that we are, even though the lead times are stretching. I guess there's a couple different things.

One is the phenomena that Paul talked about. It takes the customers a little longer to really believe it's happening. They keep wanting to deny it.

Okay.

(Inaudible). And I also think that the customers continue to be under a lot of pressure themselves to manage inventory well from two fronts.

One, is their own cash management. And the other is I don't think people want to get caught again having bought the wrong inventory at the wrong price.

Okay.

So our customers appear to be using what they buy.

I have a couple of quick questions for Paul.

Paul, what was CapEx in the quarter and do you have targets for CapEx and depreciation for this year?

The CapEx, for the quarter was a little in excess of $10million. When you look at our depreciation for the full year, it's running right around $75 million dollars. Our target would be fairly consistent with what we saw this year in CapEx, so that would put us right around $35 million.

Paul, with respect to the repurchase for the notes that you just discussed, are you going to tender for the notes? I don't believe they're callable?

Yeah, they are callable to make (inaudible) division.

Okay.

Thanks very much.

Thank you.

Our next question is coming from Brian Alexander of Raymond James.

Thanks.

Just wanted to touch on the strength you saw in the components business. Up very nicely, 12.5% sequentially and I think you said it was pretty broad based. And, obviously, grew a lot faster than your main competitor this quarter. And I guess what I'm getting at is I can't remember the last quarter where there was such a big growth disparity.

How should we interpret that disparity in terms of differences and mix and maybe you were a little more aggressive in pricing this quarter? How should we think about that?

Well, Brian, what I can say about that is brilliant execution on the part of our management team. But seriously, we certainly have tried to focus on the business. I think Jan and her team have done a truly remarkable job of going and doing a terrific job of penetrating our real core, which is our small- and medium-sized customers. We think that's a real strength to us.

That market, those markets and those customers very much strengthen during the quarter. That is the bread and butter. That's the sweet spot that we have, and I think it showed up this quarter. They came back strongly. That's where we are strongest and we absolutely think we're doing a terrific job with them.

On the pricing front, is it fair for us to assume that you have become more aggressive in recent quarters just given the gross margin pressure that you've seen in the components business?

You know, I really don't think so. I would only ask you to look at the comparable profit abilities.

I think we have continued to demonstrate that we can both generate increased sales and better profitability.

And then how much should we expect gross margins to improve once they begin to improve to the peak of the next cycle? In a normal cycle, Paul, how much would you expect to see the gross margins expand in a components business?

You know, Brian, that's a tough question to answer because there's lots of moving pieces, as Jan mentioned before, with 150,000 customers around the world. It is impacted by mix in customers, mix in product set, mixed geography-wise. You know, we talked about Europe has a higher gross profit percent. So there's a lot of moving factors to be considered when you look at that.

So really, it's's tough to call that, and the other thing that's a factor that's tough to call is, what's price availability going to be over the long term? So we're seeing some tightness today, but is that going to be tightness that's going to get worse and at what pace and how long? It's tough to call what's going to happen at gross profits.

That's why we have to focus on continued (inaudible) improvement. To be as efficient as possible so we don't have to rely upon up cycles and gross profit. We can build a business model that guarantees financial success by really leveraging our cost structure.

Okay, then the final question.

I know you are not giving guidance for the next quarter, for the March quarter, but I guess with demand accelerating and lead times extending and prices improving and over all IT spending is improving, is there any reason to believe why the revenues shouldn't be up sequentially in the first quarter given they were up last year even if you adjust for the acquisition of Pioneer? Or is there something unusual about the fourth quarter where you may have pulled forward some revenue or some other reason why you may not grow sequentially?

Well, our business is one that we don't pull forward revenue. That's not what we do.

But as we mentioned, certainly in the fourth quarter, we saw the book-to-bill ratio strengthen. Backlogs increase. We saw that the amount of turns business started to move back towards a more normal level and we certainly have seen those trends.

And so that's certainly gives you a bit of a thought as to how -- now, the other side of that is we have Europe, which is continues to be weak. And we have Mike Long's business, the computer products business, which sequentially is down, and so let's just make sure that we have all of that factored in. And we also did have the impact of the Chinese New Year where we took ten selling days out of our very strong Asia Pacific business.

So there are a lot of ups and downs in there. And as we say, we haven't given guidance but I tried to give you some indications of the world as we see it.

And I guess maybe this will be the final question.

On Europe, what are you seeing specifically that makes you concerned? I mean, you were up 12% sequentially which is pretty good given that the components businesses is seasonally stronger in the March quarter, not the December quarter.

Have you seen weakness since the end of last year? Or what is it about Europe that gives you some pause?

The concern we have in Europe primarily is around the macro economic conditions.

We continue to see weak economic conditions in many of the largest economies in Europe, and we also see some pressures to transfer business into other parts, either within Europe or into Asia. So that gives us some cause for concern.

We under a strong position in Europe and as we've said, it is solidly profitable for us. We simply have not seen the same signs of an up turn in Europe that we have seen in North America and Asia. That's not surprising to us. It's Europe typically lags North America by anywhere from two to four quarters so the fact that we're seeing strength in North America and not seeing strength in Europe is not surprising given where we are in the cycle.

Okay.

Thanks a lot.

Thank you.

Once again, it's 1 followed by 4 for any questions at this time.

Thank you.

I'm showing no questions at this time.

I will now turn the call back over to the speakers for any further or closing comments.

I think that's all we have for today.

I would like to thank everyone for taking the time to participate on our call.

If you have any questions, please feel free to contact Paul Reilly or myself.

Thank you.

This does conclude this morning's teleconference.

You may disconnect your lines and have a wonderful day.