艾睿電子 (ARW) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Arrow Electronics fourth quarter 2004 year end earnings conference call. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation. It is now my pleasure to turn the floor over to your host, Vice President and Treasurer, Mr. Ira Birns.

Sir, you may begin. Thank you , Holly. Good morning everyone and welcome to the Arrow Electronics fourth quarter conference call. I'm Ira Birns, Vice President and Treasurer and I will be serving as the moderator on this morning's call. This call is also available via audio webcast. To assess this webcast or future webcasts, please visit our investor relations web site at www.arrow.com/investor and click on the webcast icon.

With us on the call today are Bill Mitchell, President and Chief Executive Officer, Paul Reilly, Vice President and CFO, Brian McNally, President North American Components, Germano Fanelli, President of Arrow Europe, Middle East, Africa and South American, Harriet Green, President of Arrow Asia Pac, Mike Long, President of our North American Computer Products Business, Jan Salsgiver, Vice President Global Strategy and Operations, and Peter Brown, Senior Vice President and General Counsel.

By now you all should have received a copy of our earnings release. If not, you can access our release on the investor relations section of our website. Before we get started, I would like to review Arrow's Safe Harbor statement. Comments to made on today's call contain certain forward looking statements, including statements addressing future results at Arrow. These statements are based upon the company's current expectations and are subject to risks and uncertainties which which could cause actual results to vary materially from the expectations contained in the forward looking statements.

Detailed information about these risks is included in Arrow's SEC filings. We will begin with several minutes of prepared remarks, which will then be followed by a question and answer period. At this time, I would like to introduce our President and CEO, Bill Mitchell.

Thanks, Ira and thanks to all of you, for taking the time to hear about our quarter. We delivered another very solid quarter in what remains a relatively stable components business marked with limited visibility. Our consolidated sales were $2.72 billion, and net income was $59.9 million, which excludes certain charges, credits and losses.

There's a 12 % year-over-year increase in sales and an 83 % increase in net income, representing our eighth consecutive quarter of year-over-year sales and net income growth. We achieved these results in the face of a components market that remains choppy and customers that remain cautious. Our strategic focus on growth initiatives and operational efficiencies, has helped us continue to grow faster than the markets we serve and to grow our profits faster than sales.

Year-over-year our profits grew at a pace seven times greater than our growth in sales, and sequentially sales were up four percent and net income was up seven percent. We made significant progress in 2004 and I'd like to review some of those key highlights with you. We grew our sales by 25 % over 2003. Operating income grew to $449 million, excluding certain charges, credits and losses that impact comparability, and 85 % increase compared to our 2003 results. 2004 operating income exceeded our operating income for 2002 and 2003 combined.

Diluted earnings per share increased from $0.74 per share to $1.97 in 2004, again excluding certain charges, credits and losses that impact comparability. We reduced the amount of working capital required to support a dollar of sales to the lowest level in company history. We generated in excess of $165 million of cash flow from operations in a year where sales grew significantly. And we utilized that cash flow, plus the the proceeds from our equity offering in early 2004, to prepay $570 million in debt, bringing net debt to its lowest level since 1998. We continue to increase market share in all of our businesses.

Let me now give you a brief overview of the fourth quarter at the business unit level. Our North America Computer Products Business delivered another record quarter for sales, operating income and operating income as a percentage of sales. As you are aware, the fourth quarter is always very strong in our computer products business, and this year was no exception. Mike Long and his team continue to do an outstanding job in a highly competitive market place. Our components businesses around the world posted relatively strong sales.

World wide component sales for the fourth quarter were $2 billion, which is flat sequentially, but up 12 % from last year's fourth quarter, with operating income as a percentage of sales at four point six percent. Business conditions remain choppy, but pricing and lead times have been relatively stable.

For the full year, North America, Europe and Asia all posted year-over-year increases in sales, with the strongest growth coming from Asia. World-wide component sales grew by 23 %, while operating income grew by 77 % in local currencies and this excludes the impact of the Disway acquisition. I remain very pleased with this group's performance. Overall, our revenue levels continue to out pace the levels of a year-ago and we continue to grow earnings faster than sales.

Our strong earnings performance and improved working capital management drove our cash adjusted return on invested capital to its highest level in seven years. We remain focused on delivering returns on invested capital, significantly greater than our cost of capital by driving profitable growth, further cost efficiencies and improvements in working capital management.

And despite the continued cautiousness in the market, we delivered another very solid quarter. Paul will now give you a more detailed review of the fourth quarter and Brian, Germano and Harriet will discuss businesses performance in greater detail. Mike Long is with us on the call, but down with the flu, so I will give his group summary. Mike will be available for questions in the Q&A period. Paul?

Thanks, Bill. As you've seen in our press release, the company undertook a review of its business and accounting related to the sale of service contracts in our North American Computer Products Business. Based upon this review, we came to the determination that the most appropriate method of classifying these revenues is on a net or agency basis. The in effect, we are only recording as revenue, our gross profits on these sales.

While this change impacts reported revenue and cost of sales, the change has no impact on gross profit, operating income, cash flow, or the balance sheet. We are re-classifying these amounts for each quarter in the past three years, and to insure that there is no impact in comparability when reviewing our revenue numbers, all periods are reflected on a net basis. Sales and cost of sales for the three months and year ended December 31, 2003 have been reduced by $47.3 million, $151 million respectively.

Sales and cost of sales for the nine months ended September 30, 2004, have been reduced by $171 million. And as a point of clarity, if we had continued classifying revenue on a gross basis in the fourth quarter, sales and cost of sales would have been higher by approximately $80 million. In addition, there are a number of items that impact the comparability of our results with those in the trailing quarter and the fourth quarter of last year. I'll start by reviewing our results, excluding these items and then at the end of my comments, I will review the excluded items. Sales for the fourth quarter were $2.72 billion. That's up four percent from the third quarter and up 11.9 % from the fourth quarter of last year.

Excluding the impact of foreign exchange, the change our business model associated with our HP business and the acquisition of Disway during the third quarter of 2004, sales were up three point two percent sequentially and up nine point five percent over last year's fourth quarter. Sales in our worldwide components business were $2 billion, which is flat sequentially, but up 12 % over the fourth quarter of 2003.

Each business around the world posts the year-over-year increase in sales. Operating income as a percentage of sales is four point six percent, that's down 30 basis points from last quarter, but up 60 basis points from last year. Worldwide computer products sales was $733 million, up 16.8% sequentially and up 11.5% year-over-year. Operating income as a percentage of sales was five point seven percent, which was up 80 basis points from last quarter, up 110 basis points from last year.

Our consolidated gross profit margin of 15.7% was down 30 basis points from the third quarter, due entirely to product mix, as our lower margin and lower cost computer prog business represented a greater portion of our total sales in the fourth quarter. Our gross profit margin was flat year-over-year after adjusting for the change in our business model with HP. Operating expenses as a percentage of sales were 11.7%, down 80 basis points from last year. The entire increase in operating expense dollars over last year's fourth quarter is due to the impact of foreign exchange and the acquisition of Disway.

In effect, operating expense dollars were flat on a 10 % increase in sales. Our ability to drive a 10 % increase in sales, without increasing our expenses, is a result of our focus on continuous process improvement and operational efficiencies. Our ability to better size our structure and meet the needs of our business model, and our ability to lever our cost structure to meet growing sales volume. Operating income was $19.7 million, up four percent sequentially and up 34% over last year's fourth quarter. Operating income as a percentage of sales was flat to the third quarter and up 60 basis points over last year.

Net interest expense was $23.6 million, down from $24.4 million in the third quarter, and down from $33.6 million last year. That represents a 30 % reduction from last year, and is principally the impact of $570 million in debt prepayments we made during 2004. Our effective tax rate was 31.1 %, down from 32.5 % in the third quarter. As we continue to drive for greater efficiency in our tracks structure. For modeling purposes, you should assume our affective tax rate in 2005 will be between 31 and 31.5 %. Net income was $59.9 million. That's up seven percent from $55.8 million in the third quarter and up 83 % from last year's $32.6 million.

Earnings per share were $0.52 , and $0.50 on a basic and diluted basis, respectively, compared to earnings per share of $0.48 and 46 on a basic and diluted basis respectively in the third quarter, and $0.33 and $0.31 for last year's fourth quarter. We generated in excess of $270 million of cash from operations in the fourth quarter. We expect to again be cash positive in 2005. We made significant progress in strengthening our balance sheet in 2004.

By continuing to focus our efforts on managing working capital, we reduced working capital annually as a percentage of sales to the lowest level in the company's history. Through the issuance of over $300 million of equity and the prepayment of $570 million of debt, we were able reduce our net debt to $1 billion. That's the lowest level since 1998. Net debt to capital down to 32 %, that's an improvement of 35 % over last year. In addition, we have $1 billion in available liquidity under our banking facility and asset securitization program.

And, we just recently expanded and extended our asset securitization program through 2008. Depreciation and amortization for the quarter was $12.8 million, non- cash interest expense related to the zeros, was $3.4 million. And finally, the number of actual shares outstanding at the end the quarter was 115,938,000. As I mentioned earlier, for comparability purposes, more perform to give you a better sense of our operating results, I I excluded some one off items from my remarks.

The difference between our reported GAAP basis numbers and the numbers I have been discussing are due to the following items. During the fourth quarter of this year, we repurchased an additional $66.4 million accreted value of our zero coupon convertible debentures due in 2021 which could have been initially put to us in February, 2006.

The related loss on the repurchase, including the premium paid and the write-off are related to financing cost, was approximately $2.3 million. That's $1.3 million net of related taxes or a penny per share. During the fourth quarter of 2004, in connection with our previously announced restructurings, we recorded additional of restructuring charges of $3.4 million. That's $2.2 million net of related taxes, or $0.02 per share. In addition, our efforts to integrate certain of our businesses has cost us less than anticipated. Accordingly, we also have an integration credit of $2.3 million. That's $1.4 million net of related tax or a penny per share. These savings principally relate to real estate, but we were able to negotiate more favorable exit buyouts for which we were able to get more sub- lease income than originally planned.

In connection with our annual impairment test, the company recorded an impairment charge related to cost in excess of net assets of company required, that's good will, of $10 million. That's $0.10 per share and $0.08 per share on a basic and diluted basis respectively, in the fourth quarter of 2004. This non-cash charge principally relates to the company's operations in Latin America.

As always, the operating information we provide to you, should be used as a compliment to GAAP numbers and the earnings reconciliations included in our earnings release. With that I'm going to turn it over to Bill, who will discuss North American Computer Products and their performance in the fourth quarter.

Thanks, Paul, I'm standing in, as I said, for Mike Long who will be on the phone with us for questions afterwards. Sales in North America Computer Products were $637 million, that's up sequentially 16 %, and up six percent from last year on an adjusted basis. Our operating income was up 27 % sequentially, and up 24 % from last year. And this is NACP's 14th consecutive quarter of year-over-year earnings growth. Strong performance was driven by the seasonal strength in our enterprise computing group, as well as continued strong execution in each of the markets we serve.

Sales in our enterprise computing group were up 19 % sequentially from the third quarter, and up six percent from last year, adjusted for the change in the HP business model. Storage sales remain strong, driven in part by continued infrastructure upgrades.

Storage sales were up eight percent from September and up 40 percent from last year and we maintained the number one position with EMC, Hitachi and Network Appliances. Software sales were up 20% from the third quarter and up 11% from last year. And we remain very pleased with our continued strength and performance over the past year.

Sales in our OEM computing group were up nine percent sequentially and up eight percent year-over-year. Our OEM customers continue to show a high level of interest in global in logistics capabilities. And we were recently recognized as Microsoft's Distributor of the Year for 2004. In conclusion, North America Computer Products had another very strong quarter, posting our 14th consecutive quarterly year-over-year increases in operating income.

For the full year we grew sales by 20 %, operating income by 46 %, and continue to deliver record returns on working capital. We continue to outgrow the market, we continue to expand our product offerings and we continue to grow operating income at a faster pace than our sales growth. I'd like to turn it over now, to Brian McNally, who will discuss our North American Components Business. Brian?

Thank you, Bill. Sales in our North American components group were down five percent sequentially to 906 million, and up two percent over last year. On a daily run rate basis, sales were down under two percent sequentially, but up four percent over last year. Operating income increased by 10 % over the fourth quarter of last year. Year-over-year operating expenses were down by nearly two percent, while sales have increased by four percent. Our gross profit margin has remained relatively flat with last year's fourth quarter. Operating income decreased by seven percent sequentially.

Fourth quarter results were impacted by continued cautiousness on the part of our customers. As product in the industry remains relatively available. The markets remain rational with limited visibility or volatility in ordering patterns. Given short lead times, customers are not placing scheduled orders as evidenced by an increased in our book ship percentage in the fourth quarter. The sequentially sales decline was not in one particular business or customer segment.

We increased market share in both semiconductor and PEMCO products in the fourth quarter. We will continue to focus our efforts on driving increased market share, without sacrificing profitability, stream lining our operations in order to be easy to do business with and managing our working capital more efficiently. Our focus on managing working capital more efficiently resulted in a $70 million reduction in inventory during the fourth quarter on a sequential basis.

Remember, inventory is the life blood of our business and we remain committed to having the right products at the right prices at the right time for our customers. Moving onto ASP trends. I'll begin with semiconductors. Blended ASPs increased in the fourth quarter, with increases in analog, volatile memory and in the communications segment. And a decrease in programmables. Semiconductor lead times remain stable with few shortages to report.

PEMCO ASPs were down slightly during the fourth quarter, a slight decrease in passive ASPs was largely offset about slight increases in connector and electromechanical ASPs. The slight increase in connector and electromechanical ASPs was principally driven by mix. Lead times in PEMCO products remain stable. While customers remain cautious and visibility remains limited, we continue to focus on our core strategies and we are executing well.

For the full year, sales grew 21 % and operating income nearly doubled. Our strategic focus improving our working capital performance has paid off. We significantly improved our working capital metrics during 2004, nearly doubling our return on working capital. We continue to outgrow the market and we are growing profits faster than sales.

Thanks, Brian. Germano Fanelli will now comment on Europe.

Thank you, Bill. The economic environment in Europe remains laggish and weak dollar in rising energy and commodity costs are continuing to have a negative effect on the manufacturing of products exported from Europe. Sales in the fourth quarter, which, as you know is impacted by the Christmas holiday, were 838 million, flat sequentially, but up seven percent year on year in local [inaudible].

Our European component business was down two percent sequentially, and up 12 % year-over-year. Excluding the impact of the Disway acquisition, component sales were down three percent sequentially, but up eight percent over last fourth quarter in local (inaudible). As Brian described for North America, product is readily available in Europe, with both lead times and pricing relatively stable. Competition remains very tough. Not only we are faced with laggish economic conditions on the micro basis, but competitors are also attacking our clear leadership position by reducing selling prices.

Yet, we continue to outperform the market, both in terms of gaining market share and continued profitability. It's important to us, not only to maintain our leadership position, but to grow it. We have initiated several programs focused on profitable growth in new market and new customer segment. And, we also have several initiatives underway that are focused on how we can be more effectually organized to better meet the needs of our customers and suppliers, and lower our costs as well.

2004 was a good year for us. In the face of this laggish market, sales advanced 11 % over 2003, and operating income was up 34 % in local currencies, excluding the impact of acquisition and divestitures.

Thank you, very much, Germano. And, Harriet Green will now discuss our Asia-Pacific business.

Thank you, Bill. Fourth quarter sales were 313 million. That's up four percent sequentially, and 26 % over last year. The growth we experienced in the fourth quarter was principally driven by strong growth in Taiwan and significant contributions from Korea, [inaudible], Hong Kong, Australia and New Zealand. It is certainly difficult to predict the Chinese market place at this time.

Whilst we grew market shares for the fifth consecutive quarter, sales were down seven percent sequentially, and were flat year-over-year. The Chinese government's efforts to temper what has been explosive growth is certainly working. While sales were flat year-over-year, our number one position in the broad base of customers and the full year sales growth of 39 % is very encouraging. Our year on year growth was, again, broad based across the region, with (inaudible) showing the strongest growth.

North Asian countries have continued to record strong year on year sales growth, with Korea and Taiwan recording the most significant increases. Additionally, our continued focus on PEMCO product resulted in a 45 % year-over-year increase in PEMCO sales, with strong growth in all segments, passive, EMAC and connector. Supply chain engagements and critical customer support is very strong, as we add franchises and customer services across the region. We continue to outperform the market in most Asian regions, even in mature environments like Australia and New Zealand.

We continue to make progress in this very complicated market. You have heard us talk about Asia Pac being an area of growth. Well, our investments in the region are paying off. For the full year we grew sales by 43 %, and operating income increased significantly.

We gained market share across the region, posted good levels of profitability during a period of investment, and continued to strengthen our bench in this region. Whilst more work needs to be done, and yes, that means continuing investment, I want to congratulate all of our people in the region, for a job well done.

Thank, Harriet. And it is indeed a job well down in our fast growing Asia-Pacific region. I'd like to close with a few remarks. Reflecting on the quarter, we're really proud of our achievements. We posted solid results throughout the company, and most noteworthy is that our computer products in Asia Pac business achieved record quarters. In each of our component businesses around the world, we continue to outperform the markets we serve.

The components business in North America generated strong operating performance while reducing inventory by over $70 million. In Europe, operating income dollars and operating income as a percentage of sales showed healthy improvement year on year. Asia continues to show strong growth, and we continue to strengthen our position in China as well as Taiwan and Korea, where we have traditionally been weak. Our North America Computer Products business delivered a record quarter for sales, operating income and operating income as a percentage of sales.

Our continued strong focus on working capital management helped us generate in excess of 270 million of cash in the fourth quarter, making us cash positive in a year where our sales increased by 20 % on an adjusted basis. It wasn't too long ago that a 20 % increase in sales would have resulted in a significant usage of cash. All in all, it was a very solid quarter in a difficult market.

Looking back on 2004, we've made significant progress and we've demonstrated our continued commitment to improving our balance sheet by issuing over $300 million of equity and pre-paying $570 million of debt, reducing our net debt position to its lowest level since 1998. We continue to implement on the four pillars of our business strategy.

One, to grow sales organically as a faster rate than the overall growth in the markets we serve, while selectively investing in our future. In 2004, operating income grew by 70 % on a sales increase of 20 %. An on going commitment to operational excellence and continuous process improvement, is the second pillar. For the year, operating expense dollars increased by four percent after adjusting for the Disway acquisition and foreign exchange on a sales increase of 20 %. Employee productivity is up as well.

And last month we launched a formal lien sigma continuous process improvement initiative that's aimed at driving further efficiencies in our business. We remain committed to our philosophy of shared leadership as the third pillar of our strategy. This ensures that our high performance teams around the world share the same values and the vision, and that we are working collectively towards our success.

And finally, and the fourth quarter pillar of our strategy, we are committed to delivering greater financial stability as evidenced by the significant improvement in our balance sheet in 2004. We continue to improve our management of working capital, and we prepaid 570 million of debt.

When combined with our earnings focus, this is driving continued improvement in our return on invested capital, and we are creating greater value for our shareholders. Those have been the four pillars of our strategy, they will continue to be the four pillars of our strategy.

As we continue to focus on operational excellence, we've identified additional cost savings opportunities throughout our business, totaling approximately $50 million on an annual basis. We expect to achieve 40 million of these savings during 2005, and we've already undertaken several actions to significantly improve the way in which we operate.

These include implementing efficiencies in the use of our main frame, and distribution centers, and in lowering our real estate costs. Congratulations to the whole team for the hard work involved in identifying these cost saving opportunities. These savings achievements are an indication of our commitment to be best in class in all of our business activities.

Regardless of where we are in the business cycle, we will continue to seek out ways to enable our employees to be more productive. The charge we expect to take associated with these programs, many of which have already been initiated, is $7.5 million, all of which should be incurred in 2005. As we look to the first quarter, visibility remains limited. Component customer buying patterns haven't changed much and lead times remain short.

Most customers whom we informally surveyed feel that inventory levels are about right in light of their in market demand. The technology world has made great progress in developing supply chain management tools which have provided customers greater visibility, making it easier to insure that they are carrying the right inventory at the right level.

As a result, we should reap the benefit of an increase in in market demand quickly. Based upon the information known to us today, we expect our daily average billing rate to be flat in each of our components businesses around the world. With the first quarter of 2005 having more shipping days in North America and Europe, offset in part by the low numbers in shipping days in Asia, to the Chinese new years, we expect components revenues to increase over the fourth quarter.

In our computer products business, we expect to see the traditional seasonal slowdown in the first quarter. With that said, we believe that sales in the first quarter will be between two point seven three and $2.83 billion. And we expect earnings per share on a diluted basis, excluding charges, to be in the rage of $0.52 to $0.56 per share. An increase of 18 to 27 % from last year areas first quarter. And so, in summary, we had another very solid quarter. We continue to operate well. The market remains rational. And we have limited visibility.

We are committed to driving and expanding the breadth and depth of our relationships with our suppliers and customers. We continue to raise the bar on operational excellence, continue to look for new ways to improve our processes and provide value added service to both our customers and suppliers. All of these activities support our focus on delivering a premium investment return to our shareholders.

Thanks, Bill. Holly, why don't we open up the call to questions now.

Thank you, sir. The floor is now open for questions. If you do have a question, press star one on your touch tone phone. If at the present time your questions have been answered, you may remove yourself from the queue by pressing a pound key. We do ask that when you pose your question, that you please pick up the handset to provide optimum sound quality. Once again, ladies and gentlemen, that is star one to ask a question. Our first question is coming from Patrick Parr of UBS.

Morning, guys. It's Ben Lu for Patrick. Bill, it looks like your component sales were flat quarter on quarter and ASPs were relatively flat, yet your operating margins were down about 30 basis points. Can you tell us a little bit about what happened over there?

As we said, Pat, it's not Pat, right? It is -- ?

Ben.

Ben,okay. Good. It is totally due to mix. It's the mix of products did. If we look at it on a more detailed basis on a product line by product line basis, we see no movements in margin. It's a mix issue.

If we adjust for the mix operating margins were relatively flat?

That's correct.

Well, it looks like your inventory terms clearly improved in the quarter. What What should we think about inventory going forward? Do you plan to take that down more as we head into '05 or are you happy with where your inventory levels are currently?

That's a great question, and -- you know we've talked about this quite a bit. Each and every day we're looking at custom demand, information from suppliers and we're adjusting our inventory levels up and down.

The one thing we remain committed to is having the right inventory and the right supplies, and at the right time for our customers. So, you know, where we are right now, we're happy that we improved our terms. We're committed to managing our balance sheet in total better, using all three levers. That's what we're driving for.

So, you know, we constantly evaluate and continue to evaluate what the business conditions are like and we adjust our inventory accordingly. So we're happy that we made progress. Always looking to make progress. But we don't have any grand plans at this point in time to dry inventory significantly up or down. That could change depending upon market conditions.

Great. Looking at my calculations, looks like in calendar '04 you guys had about only $0.01 working capital for ever dollar and change. And that's down significantly from the $0.25 you guys used to talk about. Is that usually -- is that a good number that we should model going forward?

Yeah. Let me tell just one point of clarity. When we talk about working capital, all we refer to is receivables, plus inventory, minus accounts payable. So, we really look at -- that's our definition of working capital and that's what we look at in evaluating as percentage of sales. There are other items, whether it's cash or accrued expenses that may impact the calculation.

I think for the year we posted twenty point one cents as our annual average. That's an improvement over last year. And we're looking to drive that down even more. And that's built around our whole philosophy of continuous process improvement. How can we be more efficient and more effective.

Great. Thanks, guys.

Our next question come from Steven Fox of Merrill Lynch.

Hi, good morning. Couple of questions. First of all, on China. If you go back to your analyst meeting in May you talked about how you thought you could overcome some of the interest rate increases and it sounds like now that's not going to be the case. What kind of growth rate could you look for and what has changed in terms of what's dragging on the business in China relative to your original expectations?

Hey, Steve, it's Paul. Let me try to answer that one question, that question on a macro basis. When we look at the impact of the tightening credit, the real consideration is how that's going to drive sales going forward. So we did see, in fact, in the fourth quarter a slowdown in the rate of growth year-over-year.

But still, 20 plus percent year on year growth is pretty robust. So, you know, much to be seen right now, the Chinese government has done an effective job in controlling their growth rates. They set targets, they're almost at those targets. It's a bit difficult right now. Visibility is limited there. No different than any other region. Plus the fact aht they're just coming off the Chinese new year.

So, we need to see how that plays out over the next, I'd say, you know, quarter to two quarters before we could make a, you know, an evaluation on what's happening. The good news for us is that our customers are living to their commitments. And honoring all the payments that they owe us. We feel positive about that. And really, when you look at the Chinese economy, you know, their growth I think was about between nine percent and 10 % in the fourth quarter. That's pretty robust growth.

Thanks a lot. Then a couple of other questions on the components business. Can you give us a relative sense of component margins by region? And secondly, the 70 million decline in inventories. Roughly what, for North America, what kind of percentage is that?

Okay. Yeah. If you give me a moment I can tell you as a percentage what is happening in the inventory area. We really don't talk about the operating income or gross margin percents around the world in detail. Steve, you know, we have talked about in the past the fact that our expectation is that gross profit as a percentage will be lower in Asia Pac but so will our operating expenses.

When you factor that along with lower interest -- lower tax rates and lower working capital demands, we should get returns on involvement comparable to what we've seen in North America and Europe. In fact, I think we've talked in the past about Europe and the fact that they inherently have a higher gross profit percent, but a higher cost to serve. And we know that when you look at salaries, well it's not that great of a difference.

The benefits or what we call a burden rate, the fringe rate that goes along with that, is a lot more than in North American. We still generate more operating income as a percentage there than we do in any of the other regions. In North America we've made some good progress. There, both from being able to rationalize our cost structure. When you combine that with the reductions in working capital, we're getting good returns there also.

Now, to your question on the inventory, we took out about $70 million. So that's about a 10 % decline in inventory in North American components.

Great. Thank you very much.

Okay.

Thank you. Our next question is coming from Matt Sheerin of Thomas Weisel Partners.

Thank you. Just a couple of questions on the component business. If you look at the business by customer base, EMS, large EMS versus larger OEMs, and in your second and third tier OEMs kind of your sweet spot. Trying to get a sense of what you're seeing in terms of demand there.

Matt, this is Bill. The fundamentally what we've seen is no strong trends emerging from any one of those. Again, what we, what we see is that inventory appears to be about right in the end markets, almost irrespective of the segment you're talking and almost irrespective of the region of the world.

You know, we've been looking at where the components manufacturers have been coming in, and by around large many of them have been reported that their inventories are coming back in line, we're reasonably pleased with where we are in inventory.

So, what we look at is we see that there's a supply chain across most of the end markets and across most of the regions is reasonably well-balanced right now. And that's as we continue to see -- that drives customers saying, 'hey, lead times are short, I've got about the right amount of inventory. My end demand looks pretty good. But I'm going to keep playing it reasonably close to the vest. ' And that's what we see throughout the world.

I guess what I'm trying to get at is why pricing has held up well, in fact, was up in some spots, trying to figure out if maybe your larger customers have not been as aggressive in buying and because of your, maybe higher percent of sales in your second, and third tier OEMs.

But that doesn't look like the case because we do have supplier inventories up. So, I'm trying to figure out why pricing is old holding up and what is your -- maybe Jan or Brian, what are your expectations for pricing, let's say, if volumes do come back and customers feel like they want to build a little buffer here?

Matt, it's Jan. What we've described to you is absolutely what we're seeing, and that is, you know, it can best be described as stability throughout both semiconductors and PEMCO. And, we're seeing that, you know, basically Brian's told you that on specific technologies we saw ASPs up a little bit on analog, communication, connectors, electromechanical products.

We saw stability in most of the commodity products, where you might have said we might not have seen that and that's in passes, in the discreets and logic products. We don't see anything going forward that would change us from believing that in fact, we're going to continue right now with the limited visibility we've got, with a stable pricing and stable lead time environment.

Okay. Just lastly, a quick question on the cost cutting program you talked about $40 million coming out this year. Can you give us an idea how that unfolds through the year?

Yeah, Matt, it's Paul. In fact, what we're looking at, is we fully expect to be at the $50 million run rate by the fourth quarter of this year. So that means we post about a $12.5 million savings in that quarter. So we expect to be close to that in the third quarter. You know, I'd say probably first quarter is around $6 million savings and the second quarter's about $8 million savings.

Is that both cogs and SG&A or mostly SG&A?

It's principally SG&A. Okay. Okay, thanks a lot.

Next question from Brian Alexander of Raymond James.

Yeah, I just wanted to reconcile a couple of comments you made. It sounds like you're talking about customers that are cautious and conditions that are -- that are choppy, yet you're suggesting that demand is following normal seasonal patterns and inventory basically is matching consumption.

So I'm trying to understand what's causing the choppy conditions and why -- why might customers be cautious if that's the case?

Brian, it's Paul. I think there's a couple of factors going on here. Don't forget, we're making comments about the world and each market has a little bit different dynamics. But in fact, what we're seeing is pretty, you know, pretty similar to what we've seen in the past. The one comment I would say is that it would not be unusual to see an increase in daily shipping rate in the first quarter. So that's a little bit different from normal seasonality.

We're seeing definitely the normal seasonalities,\, no decline and more shipping days. So we've kind of done an informal survey and we don't have real visibility schematically into all our customers, but we've gone out and surveyed them and they've said, 'look, we think we've got the right amount of inventory for the level of end demand.'

And, we've actually, in fact, if you look at the some of the large CMs you'll see that four of them actually drove their inventory down in the fourth quarter. So, you know, inventory and demand seems rational and demand seems rational. So there really is nothing to say that, you know, anything is changing. The reason why we say it's choppy is that it's dependent upon the day, the week, the customer set and the region. Limited visibility. There's not a lot of large, long scheduled orders. It's still pretty much a book ship business today. Limited visibility.

There's not a lot of large long scheduled orders, it' still pretty much a book ship business today, with limited visibility. So that's why we kind of call it choppy at this point in time. There's an air of cautiousness, if you will, in the market place. I think that's, in part, a reaction to the fact that people are more sophisticated today, with supply chain management tools than they were five years ago. When the lapse time, when the market was unsettled.

And I think there's an added degree of sophistication now, where customers, distribution manufacturers are working more closely aligned to ensure that we have a -- a supplier chain that works efficiently and effectively, without anybody holding a large amount of inventory.

I guess, given those comments, Paul, how would you expect, I guess at the -- you know, if we see a return to, you know, better demand environment, how would you expect kind of the operating leverage picture to play out in your business given the supply chain seems to be a lot more streamline than this used to be?

I think that's a good question for us all to consider. You know, the good news is that inventory levels are reasonable at our customers. If their end demand picks up, that means there'll be a need for them to buy more product. And that's good for us who has the product at the right prices and the right quantities. And that also means that because lead times are short, that if we didn't have that, we'd be able access our supply partners relatively quickly to be sure that we got as much --- many as these sales as possible.

So I think it really provides opportunity both in the up side, and if there's a down side for that matter. You know, there's not an excess amount of inventory at customers. So, if demand picks up for their customer base, that bodes well for the whole industry. If there's a slippage in demand, there's not an excess supply inventory, there's not going to be, I don't think, a big pressure on cutting supplies, and we'll be more rational and we'll be able to operate in a more effective way then. So I think it provides down side protection and tremendous up side potential for us.

And then, just a clarification on the guidance, Paul, when you, just trying to parts what you said about components versus computer products, are we to assume that components will be up in the high single digits and computer products would be down high single digits, sequentially?

That's -- that's about the range that we talked about from a seasonal point of view.

Thank you.

Thank you. Our next question is come from Bernie Mahon from Morgan Stanley.

Hi, good morning. Couple of questions. With the -- could you give us the turns business in the quarter and then also what you're kind of expecting for the March quarter?

Bernie, it's Bill. In terms of the turns business in North America, it's still very much in the normal range. It may range from a low of 35 to 40 % to a high of 65 %, running right, right smack in the middle of it. No real change. Perhaps a little bit on the -- higher than average. But -- but very much in the normal range. Asia business is almost all turns business. And so that hasn't changed and that will continue to be. The European business is fundamentally all scheduled business. And that's running very much in the -- in the normal range. That typically runs the 20 to 30 % range. And that's running pretty much in the normal range also.

Okay. And then, could you also talk about the trend for the gross margins in components business overall? Is it, you know, kind of decelerating or, you know, has it been flat the last couple of quarters?

Yeah, it's Bernie. What we're seeing -- once again, you have to look at each of the regions and understand that each one has different dynamics around business cycles. But, you know, looking at it in North American Components, in fact, our margins have been relatively stable or flat. So, that -- that's something we feel very positive about. You know, if you look at different parts of Europe, in fact we see some up, we see some down. Overall I'd say it's about flat.

And in Asia Pac, it's down a bit, but that's a change in mix where we're expanding our business in Korea and Taiwan, where they have lower gross profit but lower cost to serve, also. So, you know, when you look at it overall, you know, we're not seeing tremendous pressure on our gross profit margins at this point in time. I'd call them relatively stable.

Okay. And then the restructuring benefits, do they mostly benefit the components business, or how do we split that out?

That's a good question. Generally, most of the savings will be in North America and a large piece of it will be to components, but the other large piece will be things that corporate has been incurring. Really what we're looking at is how we can be more efficient and effective, so our actually, what I'll call our corporate headquarters type costs will go down also.

Okay. All right, great. Thanks.

Thank you. Our next question is coming from Scott Craig with Bank of America.

Good morning. Paul, just some clarification. On the components, I believe in North America the statements were that while sales were down the operating income was up sequentially, correct?

No, I think Brian, I'm sorry, Scott, round numbers I'll use now, we were down about two percent in sales, sequentially, and our operating income was down about five percent sequentially.

That makes more sense. And, can you discuss a little bit around the trends that we saw on an operating profit basis in Europe and in Asia? I don't think you mentioned those as a percent of increasing or decreasing on the quarter.

Okay. Yeah. What we saw in Asia Pac was a increase over the third quarter in our operating income performance there. And then in Europe we saw a bit of a slide compared to the third quarter. That's not unusual in the fact that when you think about Europe in total, I'm not just talking about components business, we see a bigger increase in the computer products business there. So that has an impact of driving down our gross profit and operating performance.

Okay. And then a question around the inventory side. It's pretty evident in the channel that, you know, inventories are pretty low at the MS companies and the OEMs themselves, but, you know, the component inventory is still pretty high at the semiconductor companies. How do you guys look at that high inventory level at the semiconductor companies affecting your business going forward?

It's interesting, Scott. We tried to track track as much as possible reported results from suppliers and manufacturers. And it's interesting, when you look at the data, we're seeing the same type of trend we saw in the last quarter, some down, some up. So, you know, the way I look at it is, it's probably, you know, people have been making noise about working down the supplier levels.

That's probably happening. I can't really tell you what they're doing. But we've seen no real pressure at this point in time in average selling price or in margins. So, you know, if business stays at it is right now, I don't think we see any change going forward in -- in margins.

Okay, thank you

At the gross profit level.

Once again, ladies and gentlemen, to ask a question, please press star one on your touch tone phone at this time. Our next question is coming from Joanie Jensen McMann Securities (ph).

Hi. Could you just discuss with respect to your convertible debt, what is the current accreted amount, and also are you considering buying back additional amounts before the put date?

Right now the accreted value is just a bit under $300 million. And as we've said pretty consistently now for, probably about a year to 15 months, is that we'll be opportunistic if the economics are right for Arrow, to retire that before the put date. And, we've been opportunistic in buying back all of our debt. To effectively utilize the cash that we've generated and to insure that we're getting a return for our shareholders and stakeholders. We'll continue to be opportunistic.

Okay, thank you.

Thank you. Our next question is coming from Carter Shoop with Deutsche Bank.

Great, thanks. I had a couple of questions in regards to Asia. There's a 8K that you guys published early in the quarter and it suggested that total sales in Asia were at $1.2 billion and you're hoping to grow that to $1.6 billion in 2005. I was wondering if that is guidance that we can use to measure the company or is it more internal guidance just for Arrow?

Carter, in fact, it was not guidance for the full year for anybody to follow. You know, every company has their internal targets that their managing to, driving their business. Everybody has stretch goal to insure that they can deliver value for the company. So we really look at Asia Pac no different than North America or Europe or the computer products business, well, there's maybe a little bit more visibility.

But there's limited visibility fight now, in the over the market place. So, we're really, you know, sticking to our first quarter. And we know, now everybody knows the stretch goals for our the Asia Pac team.

Okay. Great, thanks. And also, when we look at Asia, how should we be measuring your success in Asia? Should it be solely on a sales basis, on a year-over-year sales basis or when should we start looking at the profitability of that region? Clearly you guys have suggested that we're in an investment time period, but, you know, if sales are going up by 43 % and profitability only 66 %, when are we going to see the payoff here in investments?

Carter, it's Bill. We are beginning to -- to see the returns on that investment, 2005 will continue to be an investment year. But we fully expect to be delivering good returns to our shareholders beyond 2005. We're very, very pleased with the results to date. We've made the investments, the team in Asia now very much is focused on continuing to drive the sales growth, continuing to drive growth in market share.

But also to increase profitability as well as increase our return on working capital. So we've got some investment ahead of us in 2005. We -- we see those returns starting to come in beyond that.

Is there any way we can get a target maybe for 2005 in regards to a return on invested capital and maybe operating margin for that region?

Carter, we're not prepared to disclose that information at this point in time.

Okay. Fair enough. That's all I have. Thanks.

Great, thanks.

Once again, ladies and gentlemen, to ask a question, please press star one on your touch tone phone at this time. Our next question is coming from Wayne Cline of AIG Global Investments

Good morning, thanks for taking my call. I was wondering if you could tell me what Cap Ex was for the year.

For the year. Okay, now you've fooled me because I figured you'd ask me for the quarter, so you'll have to give me a moment.

Well, the quarter, the quarter will do, also.

It's about I would say right now about 25, 26 million bucks for this year.

Okay, and that's gross Cap Ex?

Yes. That is gross Cap Ex.

Okay. And, I mean it will looks like the cash generation in the fourth quarter was, you know, very strong. I mean, just looking at the change in cash from 3Q to 4Q and the amount of debt that you purchased. Were there additional asset sales or anything else that generated cash in the fourth quarter, or was that just --

No, that was just standard operating procedure, driving for improved management of the balance sheet along with the profitability.

Okay. That's great. And then just finally, can you tell us when you've had discussions with S&P recently or is there some kind of year-end review that you expect to have with them at some at any point?

That's a good question. And in fact, what we do, Wayne, is we actually speak to the rating agencies, both of them, S&P and Moody's, on a regular basis. We believe that transparency is a positive thing with our shareholders and stake holders, and rating agencies we include is part of that.

So we have a continuous on going dialogue with them, letting them know what is happening in the business and what's happening at Arrow specifically. So, we don't have anything formally scheduled at this point. But I can tell you we talk to them on a regular basis.

Okay, thanks, very much.

You're welcome.

Next question is come from Tony Agnos-Beckett (ph) of Group

Thanks. Hey, guys. I have two questions. One is, I just want to ask what normal linearity usually looks like and what the linearity in this quarter normally looks like and -- versus what you're seeing so far this quarter in the components business? And, the second question is, Avnet, on their call on their guidance is implying an average daily sales growth of, like, five percent versus the fourth, the calendar fourth quarter,

and I'm curious if you have an opinion on why your sales average daily sales would be flat while they would be up 5 percent, which is a pretty significant difference in that business, the components business. Thanks.

Okay. Yeah, let me try to answer them in order, first. We're not really -- we don't really talk about linearity as the quarter unfolds. That's not something we've talked about. You know, in fact, when we look at it, the fact of the matter is that this business has surges at the end of every month. And it has surges at the end of the quarter. And, it's probably been like that 25 or 30 years. And, greater minds than I have tried to crack, to understand why that happens.

So, quite a bit does happens between now and the end of February for the month of February and then quite a bit happens in the second half of March. So, it's tough to say well, this is what has happened and this is what's going to happen going forward. It also changes depending upon what region of the world you're in. In fact, I think last year in Asia Pac the Chinese new year was early. It was in January. This year it was in February. That impacts some of the things that we'd look at.

So, we really don't get into that level of detail at this point in time. As relates to Avnet. I don't really know what they're seeing. We're talking about what we're seeing. You know, I think they're probably better able answer their thoughts. Maybe they're, it's just because they're at a different point in the quarter when they talked about this. I really don't know.

Okay. Thanks.

Ladies and gentlemen, there are no further questions. I would like to turn the floor back over to Mr. Birns for any closing comments.

Thank you, Holly. I'd like to thank everyone for taking the time to participate in our call this morning. If you have questions at all about the information presented today, feel free to contact either Paul or me. Have a nice day. Thank you.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Have a great day. Thank you