艾睿電子 (ARW) 2005 Q1 法說會逐字稿

[OPERATOR INSTRUCTIONS] Good morning, ladies and gentlemen, and welcome to your Arrow Electronics first quarter 2005 earnings conference call. At this time all participants have been placed on a listen-only mode and the floor will be opened for questions following the presentation. It is now my pleasure to turn the floor over to your host, Mr. Ira Birns, Vice President and Treasurer of Arrow Electronics. Sir, the floor is yours.

Thank you, Carly. Good morning, everyone and welcome to the Arrow Electronics first quarter conference call. I am 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 webcast, with slides, and to access this webcast visit our investor relations website at www.arrow.com/investor, and click on the webcast icon. With us on the call today are Bill Mitchell, President and CEO; Paul Reilly, Vice President and CFO; Brian McNally, Germano Fanelli, President of Middle East, Africa and South America; Harriet Green, President of Arrow Asia-Pac; Mike Long, President of North American Computer Products; Jan Salsgiver Vice President of 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 of our web site, www.arrow.com. Before we get started, I would like to review Arrow's Safe Harbor Statement. Some of the comments to be made on this morning's call may include forward-looking statements, including statements addressing future financial results, that are subject to a number of risks and uncertainties that could cause actual results or facts to differ materially from such statements for a variety of reasons.

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. As a reminder to members of the press, you are in a listen-only mode on this call, but please feel free to contact us after today's call and we can set up some time to answer any questions you may have. 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 performed relatively well in what remains very competitive markets. Our consolidated sales were in excess of $2.7 billion and net income was $58.7 million, excluding search charges, which is our 9th consecutive quarter of year-over-year sales in net income growth. In computer products, we had a really impressive performance as we continued to drive to expand our customer base, utilize our broad product offerings, and create better value for our customers. The components market has been generally flat since last summer.

While the daily run rate in our European components business was up sequentially, daily run rates were down marginally in our North American and Asia-Pac components businesses, as end markets continued to send mixed signals. For the first time since we began providing earnings guidance, we missed the guidance provided to you. Our expectations for sales growth in the components businesses around the world simply were not achieved, and during the quarter gross profit margins came under competitive pressure. Each of the business unit presidents will discuss this in greater detail. And finally, during the first quarter, we recorded a provision of $5 million, which is about $0.03 a share, for one-time costs associated with a review of payroll withholding taxes, related to non-salary benefits in Germany and covering the years 2001 to 2004.

Let me review some of the key first quarter financial highlights with you. First, sales grew by 4% year-over-year. Operating expenses, excluding the impact of the Disway acquisition, the weakening U.S. dollar and the aforementioned payroll withholding tax accrual, decreased by nearly 4% year-over-year and that's $12 million. Diluted earnings per share increased from $0.44 in the first quarter of 2004 to $0.049 in this year's first quarter, excluding certain charges.

We reduced the amount of working capital required to support dollars of sales to another record low level. And we generated approximately $150 million of cash flow from operations, and that enabled us to reduce our net debt position to $843 million, which is our lowest level since 1997. Paul will now give you a more detailed review of the first quarter and then Mike, Brian, Germano and Harriet will discuss their businesses' performance in greater detail.

Thanks, Bill. As reflected in our earnings release, there are a number of items that impact the comparability of our results with those in the trailing quarter and the first 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. For a complete reconciliation between our GAAP and non-GAAP results, please refer to our earnings release which can be reviewed on our website. Sales for the first quarter were $2.73 billion, flat with the fourth quarter, and up 3.8% from the first quarter of last year. Excluding the impact of foreign exchange, the change in the business model associated with our HP business in the first quarter of 2004 and the acquisition of Disway during the third quarter of 2004, sales were flat with last year's first quarter.

Sales in our worldwide components business were $2.1 billion, which is up 5.3% sequentially, and up 3% over the first quarter of 2004. Component sales in Asia-Pacific advanced 14% year-over-year. Our components businesses in North America and Europe declined by 3.9% and 2%, respectively, when compared to the first quarter of last year, and the amount for Europe exclude the impact of foreign exchange rates and the Disway acquisition. Each of our businesses in Asia-Pac posted good improvement in sales, with the exception of China, where we did not see the same pace of business recovery after the Chinese New Year that we saw over the past several years in India. Operating income as a percentage of sales was 4.6%, which is flat with last quarter and down 80 basis points from last year. Worldwide computer product sales was $632 million, down 13.8% sequentially, but up 6.8% year-over-year.

Operating income as a percentage of sales was 5.6%, which was down ten basis points from last quarter, but up 210 basis points from last year. Our consolidated gross profit margin of 15.9% was up 20 basis points from the fourth quarter, principally due to product mix as our lower margin and lower-cost computer products business represented a smaller portion of our total sales in the first quarter. Gross profit margins in our components businesses are also under pressure, more pressure than we anticipated, and we are responding as necessary to remain competitive. Our gross profit margin was down 30 basis points year-over-year. Both the European and Asia-Pacific components businesses saw their gross profit margins decline sequentially from last year's first quarter.

Our North American gross profit margin was flat sequentially in year-over-year. Operating expenses as a percentage of sales were 11.8%, up ten basis points from the fourth quarter, but down 30 basis points from last year. The increase in operating expense dollars over last year's first quarter is principally due to the impact of foreign exchange rate fluctuations of $4.1 million, the acquisition of Disway and the payroll -- payroll withholding tax accrual. As you're aware, during the first quarter we announced that we'd be taking several actions to better optimize the use of our mainframe, reduce our real estate cost, be more efficient in our distribution centers, and to be more productive. These actions are expected to further reduce costs by approximately $50 million, with $40 million being realized in 2005. We already achieved the $7 million of savings anticipated in the first quarter. We are on track to achieve the savings anticipated for the balance of the year.

Operating income was $110.9 million, flat sequentially but up 4% over last year's first quarter. Operating income as a percentage of sales was up ten basis points from the fourth quarter, and flat with last year. Net interest expense was $24.1 million, up marginally from the fourth quarter, but down from $30.7 million in last year's first quarter. Our effective tax rate for the quarter was 33%, For modeling purposes, you should assume that our tax rate for the remainder of 2005 will also be approximately 33%. Net income was $58.7 million, down 2% from the fourth quarter, but up 17% from last year's $50.2 million in the first quarter.

Earnings per share were $0.50 and $0.49 on a basic and diluted basis, respectively, compared to earnings per share of $0.52 and $0.50 on a basic and diluted basis, respectively, in the fourth quarter and $0.47 cents and $0.44 cents on a basic and diluted basis, respectively, in last year's first quarter. Our operating performance, which continued to outpace the competition, and improved working capital management, contributed to our fifth consecutive quarter in which our return invested capital exceeded our [cost] capital. And we remain committed to maintaining our industry-leading performance. We generated approximately $150 million of cash flow from operations in the first quarter of 2005. You may recall that last year's first quarter we used $122 million of cash. And we expect to be cash positive for the remainder of the year.

Each of our businesses showed progress in more effectively managing their investments in working capital, reducing our consolidated working capital as a percentage of sales to another record low level. We continue to make significant progress in strengthening our balance sheet. Net debt to capital was down to 28%, an improvement of 33% over last year, with net debt at its lowest level since 1997. In addition, we continue to maintain $1 billion in available liquidity under our banking facility and asset securization programs. Depreciation and amortization for the quarter was $14.6 million. And non-cash interest expense related to the zero coupon convertible to benches was $2.8 million. And finally, our number of actual shares outstanding at the end of the quarter was 116,679,000.

As I mentioned earlier, for comparability purposes, and more importantly, to give you a better sense of our operating results, I have excluded some one-off items from my comments. The difference between our reported GAAP basis numbers and the numbers I have been discussing are due to the following items. During the first quarter of the year, we repurchased an additional $13.2 million, accretive value, of our zero coupon convertible to benches, due in 2021, which could have been initially put to us in February of 2006. The related loss on the repurchase, including the premium paid and a write-off of the related deferred financing cost, was approximately $400,000, and that's $200,000 net of related taxes.

During the first quarter of 2005, in connection with our previously announced restructurings, we recorded additional restructuring charges of $4 million. That's $2.5 million net of related taxes, or $0.02 per share. During the first quarter of 2005, our French subsidiary, Tekelec SA, entered into a settlement agreement with [Airtronics], which paid us EUR 1.5 million. Accordingly, we recorded an acquisition indemnification credit of $1.7 million. That's $1.3 million net of related taxes, or a penny per share on a basic basis.

As always, the operating information we provide to you should be used as a complement to our GAAP numbers, and once again, our earnings reconciliation for all related periods are included in our earnings release and are available on our website. Each of our business presidents will discuss their results for the first quarter. First, Mike Long will discuss our North American Computer Product business.

Thanks, Paul. Sales in North American Computer Products were $552 million, up 8% for last year, on an adjusted basis, and down 13% sequentially. As you know, our fourth quarter is seasonally the strongest. Our operating income was up nearly 77% from last year's first quarter. This is our 15th consecutive quarter of year-over-year earnings growth.

Our strong performance was driven by continued strong execution in our enterprise computing group. Sales in our enterprise computing group were up 19% from last year, adjusted for the change in the HP business model. This includes a 15% increase in service sales over last year's first quarter. Storage sales remain strong, driven in part by continued infrastructure upgrades. Storage sales were up 13% from last year's first quarter, and our sales of related service contracts, reported on a net basis, were up 62% year-over-year. We are very pleased with our continued strength in performance over the past year. Sales in our OEM computing group were down 17% sequentially, and 11% year-over-year, due in part to a termination of a large engagement which did not meet our financial goals.

In conclusion, we had a very strong quarter, posting our 15 consecutive year-over-year increase in operating income. We continue to execute our strategic growth framework by continuing to expand products and services we offer, capitalizing on market opportunities and focusing on cost control. This should allow us to continue to outgrow the market and grow operating income at a faster pace than our sales growth.

Thanks, Mike. Great performance. Brian McNally will now discuss our North America Components business.

Sales in our North American Components group were up 3% sequentially, to $935 million, but down 4% over last year. On a daily run rate basis, sales were down 3% sequentially. Operating income increased by 19% over the fourth quarter, and by 3% from last year's first quarter. Our gross profit margin has remained relatively flat with [inaudible] last year's first and fourth quarter, though we continue to see pricing pressure from our competitors. Our results continue to be impacted by cautiousness on the part of our customers. Their ordering patterns remain fairly consistent with the majority of the business being book-shift.

We did see improvement in our book-to-bill ratio, which was modestly positive for the quarter for the first time since the second quarter of 2004. And, there has been no change in cancellation rates. When informally surveyed, the majority of our customers feel that their inventory is at the appropriate level, and product is readily available.

Given short lead time, and relatively stable and end-market demand from our customers, we are seeing only slight increases in backlog of customer scheduled orders. We continue to focus our effort on driving increased market share, without sacrificing profitability, streamlining our operations in order to drive higher level of service and managing our working capital more efficiently. Our focus on managing our assets more efficiently resulted in a $44 million reduction in working capital during the first quarter, on a sequential basis.

While we are focused on making continued improvements in working capital management, please be reminded that inventory is the lifeblood of our business, and we remain committed to having the right product at the right price at the right time for our customers. Moving on to AFP trends, pricing remains generally flat to down marginally in both semiconductors and PEMCO. The majority of the pricing pressure being seen is a result of a very competitive marketplace, and there have been no significant changes in lead times over the past quarter. Finally, we recently entered into an agreement to sell our cable assembly business, which represented approximately $40 million of annual sales allowing us to focus exclusively on creating value for our core customer base and suppliers. We will continue to provide the franchise material in support of the manufacture of these products.

Thanks, Brian. I'd like to turn it over to Germano Fanelli, our President of Europe, and who will comment on our European business

Thank you, Bill. The economic environment in Europe remains challenging and the weak U.S. [inaudible] energy and commodity costs are continuing to have negative effects on the manufacturing of products exported from Europe. Sales in the first quarter were 909 million, up 7% sequentially, and flat year-over-year in local currencies. Excluding the impact of Disway acquisition, and the exchange rate changes, components sales were down 2% over last year's first quarter. Operating income was up 7.4% sequentially, excluding the impact of Disway and foreign exchange rate changes. As Brian described for North America, product is readily available in Europe, with both lead times and pricing relatively stable to marginally down.

Competition remains fierce. Not only we are faced with sluggish economic conditions on a micro basis, but competitors are also attacking our clear leadership position by reducing selling prices. As we are doing in other parts of the world, we are responding as necessary to remain competitive. Our profitability remains strong and we continue to maintain leadership position in Europe. It's important to ask not only maintain our leadership position but to grow it. We continue to focus our initiatives on profitable growth in new markets and new customer segments. In addition, to focusing our efforts on driving increased market share, we are also streamlining our operations to ensure we are providing the highest possible level of service to our customers. Our initiatives to manage working capital better are also paying off, as we contributed to the Company's positive cash flow results for the quarter.

Thanks Germano, and let me turn it over to Harriet Green, who will discuss our Asia-Pac business.

Thank you very much, Bill. First quarter were $304million, down 3% sequentially, but up 14% over last year. Each of our businesses in the region posted sales gains sequentially, except for China and India. We simply did not see the same type of business rebound after the Chinese New Year that we've seen in the past few years. And weakness was seen primarily in the large customer accounts that have closely aligned with the telecom and mobile markets. In China, medium sized customers are also now being impacted, though to a lesser extent than large customers, by the government-imposed credit restrictions. Sales in China declined 6% sequentially, and 11% from last year areas first quarter.

Driven in -- in part by our successful customer segmentation strategy in Hong Kong, China, Korea, [Azian], Australia and New Zealand, we have experienced year-over-year growth in all of these regions, as we have better penetrated the small and medium size customer base. Additionally, our continued focus on PEMCO product has resulted in a 21% increase in PEMCO sales over last year's first quarter. Supply chain engagement continue to grow, as we add customer services throughout the region.

Also, our investment in our global transferring business has been paying off, as we've been increasingly successful in capturing business as it transitions to Asia. While the overall Asia-Pac market is somewhat weaker than anticipated, we continue to outperform the market, making progress throughout the region. We remain committed to our long-term strategy in Asia-Pac, and we still believe that this region will continue to play a very important role in the supply chain, and we expect to be the clear number one in this region as we are in North America and Europe.

Thanks, Harriet. I'd like to add just a few closing comments and then we will get on the Q&A. Reflecting on the quarter, we performed well. Our North American Computer Products business once again delivered strong year-over-year increases in sales, operating income, and operating income as a percentage of sales, as a result of better market penetration, product expansions and cost containment. In our components business, the worldwide components operating performance continues to outpace the competition in a very challenging market environment, and our initiatives to better manage working capital resulted in strong cash flow performance.

We continue to make progress in our drive to be more efficiently organized with ongoing operating expenses down by $12 million year-over-year. We reduced the amount of working capital to supply dollars of sales to another record low level. On a consolidated basis, we generated approximately $150 million of cash in the first quarter, further strengthening our balance sheet, and reducing net debt to the lowest level in eight years. For the fifth consecutive quarter we had a return on invested capital in excess of our weighted average cost of capital. We continue to outperform the competition, but there is clearly more work to be done throughout all of our businesses.

As we look to the second quarter, visibility remains limited, and the signals we are getting about the components business are mixed. Component customer buying patterns remain generally stable, and there's been no meaningful change in cancellation rates. Lead times remain short, and product is readily available. Most customers whom we informally surveyed feel that inventory levels are about right in light of their own end-market demand.

Our book-to-bill ratio in our North American business was at its strongest level since the second quarter of 2004. But we'll see fewer shipping -- number of shipping days in North America and Europe, which will impact our components business in these regions. We expect our North America Computer Products business to post good results in the seasonally strong second quarter. Based on the information known to us today, we expect our daily average billing rate to be flat to marginally down in each of our components businesses around the world. We thus expect components revenue to be flat with the first quarter. In our computer products business, we expect to see the traditional seasonal growth in the second quarter. With that said, we believe that sales in the second quarter will be between $2.7 and $2.8 billion.

And we expect earnings per share on a diluted basis, excluding any charges, to be in the range of $0.49 cents to $0.53 per share. I want to emphasize that we remain committed to our strategic framework of executing on our growth strategies to ensure we continue to outgrow the market, on operational excellence where we will continue to focus on new ways to improve processes and drive higher levels of customer service, on shared leadership to make sure we have the best possible team in place, and on financial stability we remain focused on improving our management of working capital and growing profits faster than sales. All of these activities support our continued focus on delivering a premium investment return to our shareholders.

Thank you, Carly, let's open up the floor to questions at this time.

The floor is now open for questions. [OPERATOR INSTRUCTIONS.]

Your first question is coming from Brian Alexander from Raymond James.

Thanks. Good morning. Just -- can you go into a little bit more detail about the pricing environment as it exists today, and what your expectations and assumptions are embedded in your Q2 guidance with respect to pricing, and whether you expect it to further deteriorate? I just want to better understand, given that your guiding operating margin is up subsequently, whether that factors in an improvement or is that just due to mix?

Brian, I'd like to ask Jan Salsgiver, our Global Strategy and Operations head, to pick up on that one and several of other folks may also chime in.

Thanks, Brian. On ASPs, what you heard around the region is that ASPs were stable to down in kind of a single-digit range. What we said was they were stable to down slightly in most of the product categories, and it was consistent across semiconductor and passive electro-mechanical technologies, as well as across all of the regions. We expect that pricing pressure and the competitive nature of the market to continue in the second quarter, as best we can tell, to again a relatively stable to minor decline. And that's really the best that we can see.

We can never look forward. What we can look -- is we can look and see what we have actually seen and our experience is stable to slightly down. That's very consistent with the lead time environment we're very consistent with the lead time environment we're seeing. As we said in the regional commentary, the lead times are on the short-end of readily available to six weeks of what normal lead times would be. Again, no major differences across technologies or geographies.

Any more color on where the pressure is coming from in types of competitors? Is it coming from large global distributors, regional distributors, or is it coming from everywhere?

Every place, basically it's -- when you're in an environment like this, it's just -- we're seeing pressure competitive from all levels of competitors, Brian.

Great. And then, you guys did a great job on the balance sheet and in cash flow generation again. Paul, could you just talk a little bit about your expectation on whether we should expect to continue to see improvement in the inventory turns going forward. think some of your have alluded to the fact that distributors are starting to order more through at their sell-through rate and I'm just wondering if you agree with that, or do you think there's more progress to be made on the inventory front?

Brian, I think that we can make some more really good, meaningful progress in managing all of working capital. Not just in the inventory area but focused on payables, we're focused on receivables. Remember, as Brian mentioned, we're really focused on having the right product at the right place at the right time, without any sacrifice to our service levels. In fact, we're looking to drive higher levels of service and higher operational excellence. So, when we look at it, we were just trying to make sure we have the right product mix and managing it the right way. So we can make improvement across all of working capital at this point in time.

Okay, and then just two quick clarifications. Your tax rate, I think you said 33% in the quarter and going forward. Was your previous expectation 31 to 31.5%, and if so, why the change in the tax rate? And then, the $0.03 impact to EPS related to the payroll reserve, that was not excluded from your operating income I assume?

Yes. Start with the tax rate. I did say 33% in the quarter, as well as on an ongoing basis for the rest of this year. Our expectation was that it would be around a 32% rate throughout this year. In fact, we're looking at getting a slowdown in -- in the pace of our earnings in a couple of the low tax regions around the world, so that impacts the mix of earnings, and, therefore, impacts the effective tax rate. So, for sure, that is something that's impacting us.

As it relates to the -- the German issue, it is not exclude from our operating income comparisons that we talked about in the quarter. We just alerted you to the fact so you can do -- you can understand what changes you need to make for modeling purposes going forward.

Great, thanks a lot.

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

Yes. Thanks. I just had a question for Harriet, back to the demand you're seeing in Asia, specifically China. You talked about, really, no bounce-back after the Chinese New Year. Have you seen any signs that bookings are picking up there, at least any kind of feedback from customers that we'll see normal seasonal build going into the summer?

Yeah. I think there are kind of two major parts to this. The first is with the Chinese customers that are strongly associated with the mobile segment, or the telecommunications. There has been a stalling there. Both the granting or lack of the 3-G licenses and the loss of share for many of the indigenous Chinese mobile-handset manufacturers. That sector has clearly been affected. In the broader range of applications and customer base, growth is a little slower. The credit restrictions, the regulations that we've talked about previously have begun to take a little hold, so the growth is not quite as aggressive. And so there has been a slight slowing in the China region. But our expectations, with the exception of the lack of visibility in telecom and mobility, that we'll continue to see a ramp-up through the year, but at a slower place -- pace with those two sectors affected.

Okay, great. And then, just a question on the expenses. It looks like you're taking some costs out pretty much every quarter, tweaking here and there. Given that least we're at least relatively stable sales level here, is that pretty much it now or are there other things you're looking at to take other costs out?

Hey, Matt. As we talked about on our annual earnings release call, we have a target of $50 million of costs coming out of the business and we've identified, on an annual basis, we've identified that and we expect to get $40 million out this year. So we're really focused on that. But also remember we're focused on continuous process improvement, being more efficient and more effectively organized, and we were really looking to be -- to really drive something that's a change in our structure here. So we're always working it. We're always looking to improve. And that's what we're committed to.

Okay. Thanks very much.

Thank you. Your next question is coming from Patrick Parr from UBS.

Good morning, guys. A question on your guidance. You're basically guiding to flat sequentially, at least in the mid-point of the sales range, yet you're talking about components being flat and computer products being up sequentially, which would imply growth total overall. How would you help me understand that a little bit e better?

Pat, I think you did the math pretty well. Don't forget we're giving a range. When we look at the three regions in components, we have different models, different thought processes about what's going to happen in each of the regions. Our expectation, based upon historical perspective, is that we would see an improvement in the sales line in computer products. We've seen that in the past. Historically, we've had the second quarter and the fourth quarter being our strongest quarters, though to be quite honest, Mike and his team have done a nice job of driving increasing sales each and ever quarter. So I think that your analysis is pretty much on at this point in time.

Okay. And then follow-up, the working capital performance continues to be great. There has been a perception that the channel, of which you guys are part of it, is holding too much inventory, has worked it down and is in a position moving forward to begin some element of re-stocking. Is this how -- what I would be expecting from you, is inventory to be increasing or do you expect to continue to work inventory down?

Let me give you some data points. Jan mentioned lead times right now are relatively short, below or end of normal. I think we've talked about in the past that we actually track inventory levels in a very informal way at customers and our suppliers. In fact, what we do is look at publicly available data between the end of a quarter and our earnings release. And we've seen, really, no major change or significant trends coming out at the supplier level. So some suppliers be up a little bit, some be down a little bit.

We also do an informal survey. We survey over 200 customers in our North American Components Business. And what we've seen is that, consistent with last quarter, the majority of those customers feel that inventory levels are at the right level. So, I don't see anything to be an indication that there's an impending inventory boom or build either at the supplier level, in the channel, around distribution, or the end-customer base.

You would be taking product then more or less at the rate that you're selling it out at this point?

See no change in our volume patterns right now based upon end market demand.

Okay, thanks.

Thank you. Your next question is coming from Bernie Mahon of Morgan Stanley.

Hi. Question for you. As it relates to your semiconductor suppliers, could you take about the pricing that you're getting from them? If you saw any deterioration in the March quarter, and what the expectations are for the June quarter?

Jan, why don't you take that one?

Sure. Bernie, if you look at pricing from our suppliers, again, what you're going to always see is it varies by technology and what you see. Some are up, some are down. It's a tough environment to be raising prices. And yet what we're seeing is, in general, they're also realizing pricing pressure. It's very consistent with what we said before on what we're seeing in pricing in general, and it's a relatively stable environment, with a slight pressure on declining prices. Very consistent with what we're seeing overall.

Okay, so just kind of from a blended -ASP perspective it sounds like it's stable, they're declining a little, and that's kind of what you expect from the June quarter also, no major decline there?

So hard to know what's going to happen going forward. The best thing we can tell you is what we've experienced going backwards and that -- you've described it accurately.

And then also, just kind of a follow-up previous question. On the components side of your business, you said it would -- your guidance is roughly flat on a sequential basis. However, you said that average daily sales would be flat to down and that there's also fewer selling days, so that's difficult to reconcile. Did I hear that correctly?

Bernie, I think we were talking on a more global basis. Getting into the details, we're talking about one fewer shipping day in North America, as an example. So that's not going to have a dramatic impact on what we see in North America as an example.

We also, when we stop and think about Asia-Pacific as a region, in fact, you know that in China they have the extended Chinese New Year celebration during the first quarter, and while for sure they have holidays and celebrations in the second quarter, it's not as dramatic. So you've got to -- look at all the pieces around the world. We are entering a holiday period in -- in Europe, though it will not be as dramatic in past years, because Easter was earlier this year, and the two days of holidays in certain countries and the one day of holiday around Easter occurred in the first quarter. So, you have to try to peel it back and look at each of the pieces individually.

That's really helpful. Thanks.

Thank you. Your next question is coming from Steven Fox of Merrill Lynch.

Good morning. Just focusing back on the big picture. A lot of the commentary you've given today sounds like typical trends you would see at the top of a business cycle. I guess what I'm trying to wonder is, or if you could get into a little bit, putting aside inventories a little bit, looking at end demand, why we are not going to see sort of a downturn that could be lasting for two, four quarters, and, especially when you consider there are inventories building at some major OEMs as you look at results this quarter. Thank you.

Thanks for the question. There's a couple of data points that we're looking at right now. If you look at the components business around the world, generally they're moving sideways, a little bit up, a little bit down, for three quarters now. So I'm not sure I would necessarily call that the peak of an up market. Not quite sure what that really means. When we look at our customer ordering patterns, we don't see any significant change. We don't see any real end-market demand. It's been rather broad. We have 150,000 customers around the world. Would not been dependent upon as an industry, one particular product set or one particular end-market [customer] demand. Like we started last peak and last down cycle, where so much of the demand -- unusual demand up and down was driven by telecom and networking. So, when we look at it, we see more of the same, at least for the quarter. We're admitting that visibility is limited, can't see much beyond this, the second quarter. But we're seeing that it's kind of moving sideways generally around the world.

Paul, it's Brian, what I would add to that, I agree whole heartedly. but also we saw some slight improvement in book-to-bill. Lead times are still very stable. And overall, it's -- it's a market that, as Jan described, lead times are short, relatively stable.

And Steve, this is Bill, we've seen this now, this is the fourth consecutive quarter where it's been -- things have been stable, supply and demand has been in balance, lead times have been relatively low, prices have been relatively stable over this period, and that's the environment that -- that we see and we're trying to react to. And again, what we're trying to drive the company to do is make sure we're not dependent on either being in an up cycle or trying to react to a down cycle, or trying to predict where it is, but to make sure that we have systems and processes in place that say we can succeed and prosper and drive the business, no matter which direction the cycle is going. Because quite frankly, we're not smart enough to know -- know whether we're up, down, sideways, backwards, which direction we're going in.

I appreciate the comments. Just one other quick follow-up. How much money was the cable assembly business losing that you're selling?

Steve, it's Brian. The business was basically break-even, slightly below break-even on the $40 million in sales.

Thanks.

Thank you. Your next question is coming from Thomas Dinges of JP Morgan.

Hi, a couple of quick ones for you. Paul, your commentary about cash flow for the rest of the year, are you expecting, given what you're going to see from growth rates and so forth, that you're expecting positive cash as you go through each quarter, or are you just making a general comment about cash flow should be positive as -- as you you kind of aggregate the rest of the year together?

My comments were driven around expectations for the second quarter and then -- then, specifically, what we think about the rest of the year. So. as we look forward, we really think that throughout the year we'll be cash positive. There may be some quarters where we're more up in cash flow and may be some quarters down, but we think for the whole year we'll be positive.

Okay, and then, finally just a quick question on Europe. Obviously it's been a question out there for a lot of folks as to what's going on in that market. Maybe just a little bit more qualitative commentary about what you guys are seeing out there, either by country or by major region in terms of buying patterns, especially separating out the difference you've had, because you've a lot of transfer business, obviously going from western Europe to eastern Europe. But what's left there in the indigenous markets, what are you guys seeing in various countries and the different -- differentiated regions out there? Any color there would be helpful. Thank you.

This is Bill, and I'm going to ask Germano to give a follow-up comment on that. As you rightly mentioned, the situation is a bit different in each one of the countries. We continue to see that -- that there are possibilities for growth in Europe. We are trying to focus on getting some of that growth. Some of it is out of the mature markets of Germany, France, U.K., Spain, etc. We are looking to, and have been, expanding into eastern Europe, with new offices and new capabilities to be able to take advantage of the transfer of business that's going on within Europe.

We are focused on a couple of end-market segments that we thing look attractive to us. Every place in the world we like the opportunities in the passives and the electro -- electromechanicals. Having said that, that goes into an environment that overall is, the macro-environment has been -- has been difficult and challenging. We've remarked on the up-tick in the -- in the Euro, that's put real pressure on European manufacturers and European suppliers. We have -- we've tried to react to that and make sure we're in the best place that we can possibly be. But it remains a challenging macro-environment and a competitive environment, which is true of where we are around the world. Germano, would you like to add a bit to that?

Yes. I think that the comment about Europe is quite simple. Europe is really growing very little from the economic point of view, and electronics right now in these days of costs is relying a lot more on the general growth than in the past. Having said so, I can say also that there are segments that grew very well over the last, say few quarters, slowing down a bit in the first one. Harriet was mentioning, for instance, the telecommunication, particularly the wireless business. That is seasonal and is difficult to foresee the second quarter will pick up again as they were predicting a few months ago. For sure we see some difficulties in the mechanical market, particularly the market serving the automotive.

Electronics is [inaudible], and so as electronics continue to grow into the market, but, as everybody can read in the papers, even Europe is suffering a bit from some [inaudible] problems, and so there's a weak demand of cash in general. Having said so, I think that we have places where the market is suffering a bit more, like Germany. Others where the market is a bit more stable, like U.K. All in all, difficult to make a prediction. We have for sure opportunities. There is no doubt that we have invested in order to take our best opportunities in eastern Europe. Even if, my opinion, we still need to understand more of the evolution. The trend seems to be that ,European -- western European companies de-localizing or relocating to some of the countries. We have again example, with automotive industries, car industries particularly going to Slovakia or Hungary, or other places.

And this, overtime, is of course getting full-out, let's say of our other suppliers. As well as opportunity may lie in Russia, we are exploring the market. We have not yet invested massively because of the environment, we need to understand better. So, all in all, initiatives in western Europe, where we think we can grow, with specific focus on market segments and or, let's say countries, or regions of the country, and in western Europe, where we will take advantage over [inaudible] rate growth over the next few quarters. Of course, western Europe being probably only a fraction of the European market right now. And we expect, of course, to have competitive environment and to continue our way of improving continuously day-to-day and looking for some more structural changes while we go to take advantage of -- to exploit our resources we have in Europe right now.

Okay, thank you.

You're welcome.

Thank you. Your next question is coming from Michael Walker from Credit Suisse First Boston.

Thanks. Quick question for Paul, first of all. With the savings coming out of the op-ex line, do you think that it's -- that there's an opportunity for the SG&A, as a percentage of revenue line, to dip back below 11% by Q4 this year.

For sure we're focused on driving down the absolute dollar amount. It's difficult to say what's going to happen in Q4's percentage because of limited visibility, quite honestly. We do know that, historically, the growth we see in our business, dramatic growth we see in our business usually is in computer products in the fourth quarter. That always has a lower cost to serve. So it's very possible. But, our drive is, as Bill mentioned, to be financially successful no matter where we are in a cycle. We know -- we recognize a very important factor to do that is to drive down the absolute dollars that we're spending on operating expenses.

Okay, and then a question for Bill, and possibly Harriet as well. Last net Avnet announced the acquisition of Memec, Memec's gone out of its way to -- to build a pretty strong presence in Asia, and I know that's where a lot of the growth is in distribution right now. I'm wondering if you have any thoughts on that deal, specifically how it might affect Arrow's operations in Asia.

Sure. Let me take a shot at that one. First of all, Avnet has been a good competitor and Memec has been a good competitor, and we would expect the combined entity to continue to be a good competitor. Having said that, we have and will continue to complete vigorously and globally in all parts of the world, including Asia. We continue to believe in our long-term strategy, which is really focused on organic growth, coupled with opportunistic acquisitions that can meet our strategic financial and operating target, and we'll continue to focus on that, not only here but also in Asia. Harriet, do you want to add anything to that?

Yes, Bill, I would just add that I think our strategy, which is to support all the different customer groups across all of the regions and to be really developing the models with the supply chain and with the support that those customers need to get fast time to market, I think that -- that commitment is strong and that's what we're very focused on across the region.

Okay, thanks.

Thank you. Your next question is coming from Carter Shoop of Deutsche Bank.

Great. Thanks. Question on, kind of, longer-term strategy, how you guys view yourselves in the industry going forward. Before, I sensed that you guys wanted to be the clear number one, in kind of all geographies, all product categories. Clearly, this acquisition by Avnet makes them the largest distributor globally, by roughly $3 billion. And at the same time you're talking about how you want to grow the business organically on a go-forward basis. Can we kind of reconcile those two points and what should we expect, kind of going forward, in regards to a longer-term operating strategy?

Well and again, in terms of our ongoing strategy, we're going to continue on the path we're down and we think this will drive us to be the clear number one over a period of time. And -- and the reason we say that, is because we'll continue to focus on growth in all of our businesses all around the world. We do want to outgrow the marketplace. As we've said, we will look at acquisitions on an opportunistic basis. It's not whats driving our strategy, we'll look at the ones that make sense financially, strategically and operationally. We're going to continue to -- on our internal focus in continuous process improvement, operations excellence, to make sure we're the best partner for our customers and our suppliers. We're going to continue to focus on our shared leadership, which is the building of great teams and the unleashing of our teams to build our business around the world. And we're going to drive for greater financial stability. And I think that's the right strategic framework and I think that will still drive us to clear number one.

And just, Carter, to take it -- to amplify on what Bill has said, one of the things that we're focused on is not size for the sake of size. We could enter new markets that had low mix of value-added, and we feel it's a critical component of what we provide both for our customers and our suppliers. But we can enter low margin commodity-type product sets that would increase our sales levels but not really fix our profitability level. That's really what we're focused on. How to be a premium investment, generate premium investment returns, whether that's growing earnings, improving working capital. In fact, if you look at our track record over the last eight to ten quarters you'll see that, while in certain markets we may be smaller in size in revenue dollars, we're equal to or bigger in operating income dollars and definitely larger, or better performance in operating income percent.

Great. Two more questions, if I may. First one, it sounds like off guard in regards to the incremental pricing pressure on a competitive basis. I was wondering if you could kind of quantify A, how much impact that was to operating margins, and kind of, B, when you actually saw that price pressure really accelerate? Was that, kind of, beginning of the quarter or was it near the end of the quarter?

What we really saw was the fact that our very strong number one leadership position in the major markets, we're the competitor most likely to be attacked. And, we saw that really in different pockets at different times throughout the quarter. Surprised, I don't know. To us, we're not competing just on price alone. We're looking to compete on the value we create for our customers and our suppliers. Creating value, service levels, tools that we have in place. But there are competitors out there that are looking to compete principally on on price, and that's impacting the entire market.

While I'm sure it's very difficult to estimate if you've gained, lost or maintained share in the market, would you be willing to wager a guess?

Market share data really isn't available to us completely until later in this month or into next month. So it's really not full, complete at this point in time. But, I'm looking over at Jan and see if she want to give you the preliminary data we have.

Carter, all I can fell you is the early indications we have seen, Paul's correct, we don't have full data from all suppliers. But a roll-up of what we have so far would say that we've held or gained share.

Okay. Great. Last question. On the Avnet-Memec deal, obviously there will be some supplier, customer, and employer attrition following that merger. What kind of benefits do you expect to realize from that?

Carter, it's Bill. We'll have to evaluate as that comes forward. Clearly, we'll go in and take a very hard look at what this means in terms of suppliers, customers, people, what it means by geography, what it means by end -- end-markets, etc., and we will, as I said, we will compete vigorously, as they would expect us to and as we would expect them to.

Great, thank you.

Thank you. Your next question is coming from Craig [Huttenbach] from Wachovia Securities.

Yes, in your press release you noted there were a couple of regions where the book-to-bill was the best, or at least orders were the best within a couple of quarters. I know you mentioned North America on the call here, were there other regions where you did see that pickup in bookings?

Craig, it's Brian. We saw an improvement to book-to-bill both in North America and in Europe. And really, when you look at the Asian market, the way business has traded there, book-to-bill ratio is not a significant indicator.

Okay, are there any end-market applications you could point to within North America? I know, specifically geography-wise, in China you noted there was some weakness in wireless. But, in terms of the improved bookings, are there any areas, applications that you see as driving that improved performance?

Craig, as Paul mentioned, we have such a broad customer base, 150,000 around the world, we saw -- and we saw broad improvement in this area in a market with stable lead times and broad product availability, which is really not surprising.

Okay. But no market, be it communications or consumer, that you could point it?

No.

Okay. Thanks.

Thank you. Your next question is coming from [Shawn Conner] of Waterstone Capital.

Thank you, but my question has already been answered.

Thank you, gentlemen. There appear to be no other questions.

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

Thank you, gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.