艾睿電子 (ARW) 2008 Q2 法說會逐字稿

Good day, everyone. Welcome to the Arrow Electronics conference call to discuss their second quarter earnings. As a reminder, this call is being recorded.

At this time, I'd like to turn the call over to Sabrina Weaver for opening remarks and introductions. Please go ahead.

Thanks so much, Shawn. Good afternoon, everyone. Welcome to the Arrow Electronics second quarter conference call. I'm Sabrina Weaver, Arrow's Director of Investor Relations, and I will be serving as the moderator on today's call. If you would like to access today's call via webcast, please 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, Chairman and Chief Executive Officer; Mike Long, President and Chief Operating Officer; and Paul Reilly, Senior Vice President and Chief Financial Officer. Before we move on, I would like to review Arrow's Safe Harbor statements. Some of the comments to be made on today's call may include forward-looking statements including statements addressing future financial results. These statements 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 Q&A 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 with any questions you may have. At this time, I would like to introduce our Chairman and CEO, Bill Mitchell.

Thanks, Sabrina, and thanks to all of you for taking the time to join us this afternoon. I hope all of you have been able to sign in. We had a little bit of a glitch at the beginning that many people were trying to sign in and couldn't, so I hope you're all on the call.

Our performance this quarter is a story that I am truly delighted to tell. Sales and earnings per share exceeded our expectations, driven by strong performance in both global components and global enterprise computing solutions. We continue to execute well with near record levels of performance across-the-board. As we discussed in detail at our Investor Day program in June, we run our business for consistent performance and this quarter is further evidence of our success -- this in the face of a macroeconomic climate that has not improved from the last few months. We're well aware of the global economic issues that dominate the financial markets and we've watched them carefully. We fully recognize the challenges that exist, but will continue to manage our business to generate strong and consistent results regardless of market conditions.

Our performance in ACS was an example of impressive execution. Sales came in above our expectations and we returned our operating margin to industry leading levels. As you might imagine, we spent a lot of time in the last three months answering questions about the first quarter, and our results this quarter are proof that the business model has not changed. We have the right strategy in place with an unmatched set of solutions and a growing global presence that our supplier and customer partners find invaluable. And in an environment where CIOs and IT managers are being more prudent about their capital spending, our ability to generate net new demand is crucial for our business partners.

We also achieved a major ERP milestone with the successful transition of our North American Sun Group. We first announced this achievement back in April on our last earnings call, and am pleased to report that in tandem with this transition, our Sun business performed well and this was during a time of economic headwinds in the US market for enterprise computing. In components, our performance came in above expectations with particularly strong above seasonal growth from our Asia Pacific Region that significantly outgrew the market. North America remained relatively stable at the low end of normal seasonal trends. Conditions in Europe were soft with less than seasonal performance on a constant currency basis.

Overall, the market has continued to be relatively stable yet cautious. During this time, we have taken the opportunity to optimize our go to market strategies and to move forward with efficiency initiatives and vertical market objectives to ensure that we lay the groundwork for future long term growth. We will continue to invest in the long term future of Arrow to increase our opportunities in higher growth markets, to better leverage our global scale, and to further diversify our revenue streams. Our strategic priorities for the future are clear and have not changed. We will pursue significant growth opportunities that exist across products, markets, and geographies, and in addition to organic growth opportunities, we will strategically accelerate our growth with acquisitions, as evidenced by recent closing of both LOGIX and Achieva. We will continue to leverage efficiencies of scale and build best-in-class capabilities across-the-board and we will move forward with our global systems implementation to enable strategic initiatives and change our value proposition. We will do this while continuing to manage the company in a prudent, fiscally disciplined manner to increase profitability, maintain positive cash flow, and strengthen our already strong balance sheet. Paul will give you a more detailed review of the second quarter, and then Mike will discuss our business unit 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 second quarter of last year. I will review our performance excluding these items to give you a better sense of our operating performance. As always, the operating information we provide to you should be used as a complement to our GAAP numbers. For a complete reconciliation between our GAAP and non-GAAP results, please refer to our earnings release or the earnings reconciliation slide at the end of the webcast presentation.

Second quarter sales of $4.3 billion were above our expectations and represent an increase of 8% on both a year on year and sequential basis. Excluding the impact of the LOGIX acquisition that closed on June 2nd, we grew sales 6% over last year and the first quarter. Excluding both the impact of LOGIX and foreign exchange, sales grew by 1% year-over-year and 5% sequentially. Global Enterprise Computing Solutions posted very strong results and increased sales by 9% year-over-year and increased 26% sequentially to $1.4 billion in the second quarter. Excluding the impact of the LOGIX acquisition, sales were up 4% year-over-year and increased 19% over the first quarter, exceeding our guidance range. This represents the 18th consecutive quarter of year-over-year growth for ECS. Our operating margin improved by 160 basis points in the second quarter to 4.4%, and we grew earnings four times faster than the sales growth on a sequential basis. Return on working capital performance was also very strong this quarter, increasing more than 50% from Q1 when you exclude the impact of the LOGIX acquisition.

Our exceptional performance this quarter is proof that the model hasn't changed and we will continue to generate premium margins for the value we create. As we discussed at Investor Day, we continue to focus on improving the profitability of our European ECS business with the scale and management talent gained from the LOGIX acquisition, so more to come here. Global component sales of $3 billion increased 7% year-over-year and 1% sequentially, or an increase of 2% year-over-year and flat performance sequentially excluding the impact of foreign exchange.

For the last four quarters we have taken action to improve operating efficiency here. I will continue to focus on these initiatives as well as a higher mix of business from Asia Pacific resulted in a decrease in operating expenses to sales of 40 basis points year-over-year; however, continued softness in Europe coupled with a greater mix of business from the Asia Pacific region resulted in a decline in our operating margin on both the year on year and sequential basis. In Asia Pacific, sales increased 32% year-over-year, and were up 14% sequentially to $743 million, which is stronger than normal seasonality. We continue to raise the bar on our operating performance with gains in operating income of more than 40% year-over-year.

This was our sixth consecutive quarter and ninth out of the last 10 quarters with year-over-year increases in operating income dollars and percent. We also grew earnings five times faster than sales sequentially. Additionally, our focus on better asset management lead to an increase on return of working capital of 420 basis points year-over-year and almost 700 basis points sequentially in the second quarter, and that is almost double our normal seasonal increase.

In North America, total sales of $1.1 billion were down 4% compared with the second quarter of last year and down 3% compared to the previous quarter. Our focus on additional efficiency initiatives enabled us to increase our operating margin by 30 basis points year-over-year despite the challenging macro environment. In Europe, sales of $1.1 billion increased 5% over last year's second quarter and decreased 2% sequentially. Excluding the impact of foreign exchange rates, sales decreased 8% year-over-year and decreased 5% sequentially in a seasonally soft quarter. Market conditions in Europe have remained soft, though in line with our expectations. We do believe we have great opportunity for improvement and remain focused on initiatives to drive profitability in this region.

Our consolidated gross profit margin was 14.1%. Gross margin in our core customer base declined 10 basis points year-over-year at the small and medium size customers in our components business. While our total business saw a decrease of 30 basis points year-over-year, so it's primarily being driven by an increase in mix of Asia Pacific business, which increased from 20% to 25% of total component sales, as well as weakness in our European components business. On a sequential basis, gross margin decreased 50 basis points, which is in line with normal seasonality given the typical increased revenue contribution from ECS and from Asia Pacific in the second quarter. Trends in our core customer base of small to medium size customers were stronger, with gross profit margins declining only 30 basis points sequentially.

Operating expenses as a percentage of sales increased 10 basis points year-over-year primarily due to increased spending related to our ERP initiative and decreased 40 basis points sequentially to 10.1%, the second lowest second quarter level since 2000. As has been our consistent message, we remain committed to ongoing efforts to improve operating efficiencies across our organization and drive costs out of our business. From Q3 of last year through the last quarter, we've eliminated $47 million of cost annually. We continue to see additional opportunities to improve our productivity, and this quarter we identified another $9 million in savings primarily in our European business and we actually saw $1 million of those savings in the second quarter.

Operating income was $173.2 million, a decrease of 2% year-over-year, and an increase of 6% sequentially. Operating income as a percentage of sales decreased 40 basis points year-over-year, principally due to mix, with a higher mix of lower margin operating income in Asia-Pac and ECS and an increase in ERP. And just to be clear, the only year-over-year decline in operating income percent in our business was in Europe. Operating margin decreased 10 basis points sequentially primarily due to the aforementioned reasons in the normal seasonal uplift in ECS.

Our effective tax rate for the quarter was 31.8%. This was higher than anticipated due to our geographic mix of earnings compared to our expectations. For modeling purposes, you should assume that our tax rate for the remainder of 2008 will be between 30% and 31%.

Net income was $102.1 million, up 1% compared with last year and an increase of 4% sequentially. Earnings per share was $0.84 on both a basic and diluted basis. Diluted earnings per share included $0.02 related to the LOGIX acquisition which was not included in our guidance. This represents an increase of 2% and 4% compared to last year's second quarter on a basic and diluted basis respectively, and represents the highest second quarter level since 2000. We are extremely proud of our earnings performance this quarter which came in ahead of our expectations, despite the well publicized uncertainty in the global economic environment. This quarter marked our 7th consecutive quarter of positive cash flow generation with cash flow from operations of $101 million.

Our balance sheet remains very strong with conservative debt levels and debt-to-capital near record low levels. Focused management of working capital enabled us to maintain a near record low level of working capital sales of 15.5%. Additionally, our commitment to creating value for our shareholders is reflected in our return on invested capital, which exceeded our cost of capital for the 18th consecutive quarter. Mike will now discuss our performance and business trends in global enterprise computing solutions and global components.

Thanks, Paul. Enterprise Computing Solutions posted excellent results for this quarter and significantly exceeded our expectations. Performance was driven by double digit year-over-year growth in storage, software, and services with year-over-year growth in proprietary servers. Our customer base continues to see the importance of building out mission critical systems, evidenced by the sequential growth in all of our product segments and a notable 50% gain in proprietary servers. The market for industry standard servers has slowed a bit as customers have been more cautious with their discretionary IT spend. Yet, as evidenced by the strength in all other product segments, the need for complex technology systems to provide security and storage solutions has not diminished.

Our performance this quarter further demonstrates the leverage we have created in our models. Earnings grew at almost four times the pace of sales, and more than 90% of the incremental gross profit dollars fell directly to the bottom line. This highlights the execution on our strategy to achieve scale and the productivity gains that that scale enables. We worked hard to get here and we have a lot more to do. As we discussed at Investor Day, we continue to build the scope and the efficiency level of our ECS business in Europe.

On June 2, we announced the closing of LOGIX, a leading value-added distributor that has almost doubled the size of our European operation. This acquisition has brought us scale and an expanded geographic footprint, and we're now in the top three economies in Europe. It's also brought us some talented management and strong relationships with key vendors that are integral to the success of our European strategy. Integration is underway and we are executing to our action plans to bring our profitability levels in this region closer to the industry leading levels we've already achieved in North America.

There's also more to come with our ERP implementation. I walked through at Investor Day how the technology will create the infrastructure to provide best-in-class services to our partners and truly change the value proposition of ECS.

As Bill mentioned earlier, on April 1, our North American Sun business transitioned smoothly without any delay in processing orders or shipping and receiving products. This transition exceeded our expectations and our employees have immediately become more efficient and more effective. I'd like to take this opportunity to thank the teams at Arrow that have worked very hard to make this happen.

In summary, we had a great quarter and we're delivering on our strategy, despite the backdrop of an unsettled economy. But before I move on to components, I'd like to spend a minute talking about the seasonality in our ECS business. In the last 18 months, Arrow ECS has transformed from a $2.5 billion North American business to a $5 billion business with a richer set of solutions. Now spanning 28 countries worldwide, with this, our business has become more seasonal, and in order to increase the transparency, we laid out an anticipated quarterly revenue trend during our Q4 earnings call. With the addition of LOGIX, these trends will change a bit, so we want to make sure you understand the current seasonality of our ECS business and update the schedule we provided to you back in February.

Now that Europe represents a meaningful portion of our ECS business, the summer holiday season will have a more material impact on the third quarter. We believe typical seasonality with LOGIX will be between 5% to 15% decrease in Q3. With the stronger seasonal increase that LOGIX experiences at year-end, the seasonal uplift for ECS is anticipated to be between 35% and 45% in Q4. And Q1, we'll see a more significant seasonal decrease off the Q4 high in the range of 30% to 35%. Along with the changing sales trends, our operating performance has also become more seasonal. You should expect to see stronger seasonal increases and decreases in operating margin than we typically generated prior to the acquisitions of KeyLink and LOGIX.

Global components also posted a solid quarter with sales above our expected range at $3 billion. In Asia-Pac, our stronger than seasonal growth was driven by performance in China, Taiwan, Australia, New Zealand, and the [Azion] region. In spite of the headwinds posted by the earthquake, we took advantage of market opportunities and significantly outgrew the market. Our strategy in this region continues to take shape with prior investments paying off through consistent gains in profitability. Asia-Pac remains an area for both strong organic and acquisition related growth. A few weeks ago on July 7th, we announced the closing of Achieva. This acquisition improves our position in the Azion region, strengthens our regional team and enhances our existing demand creation capabilities.

In North America, the market was pretty stable with higher book-to-bill than the second quarter of last year, despite weakening economic conditions. Year-over-year softness in North America was again driven primarily by weakness in the transportation end market. Yet our vertical market initiatives are providing us with growth opportunities, evidenced by another quarter of double digit growth in our defense and aerospace segment. We continue to focus on operational excellence, making further efficiency gains, that Paul had mentioned earlier, and increasing our operating margin amid a choppy market condition. Last quarter we spoke about the weakening conditions in the European marketplace and performance came in as expected in the face of a weaker macro picture and a less competitive export market. Though this market weakness, we are moving forward with our ongoing efforts to broaden our existing customer base and drive for more consistent and productive operations throughout the region.

Taking a look at leading indicators, lead times and pricing remain stable. Lead times were within normal ranges between eight to 12 weeks and cancelation rates were within normal levels. In line with the normal seasonal trends, our book-to-bill decreased quarter-over-quarter and hovered near 1 on a global basis for the quarter. Book-to-bill in Europe was flat. North America held above 1, with a higher level than last year's second quarter despite macro weakness and Asia-Pac declined slightly. And in our quarterly survey of over 300 customers in North America, results showed that inventory levels are well positioned for the majority, yet their outlook for purchase requirements modestly softened for the second consecutive quarter.

Overall, the market continues to be relatively stable, yet cautious. In response, we continue to manage our business responsibly and take advantage of the growth opportunities, while at the same time focusing on ways to further leverage our global scale to take us to the next level of profitability. Bill?

Thanks, Mike, and congratulations to your teams for a terrific quarter. Overall, this quarter's results exceeded our own expectations and we did this in a marketplace that continues to be cautious. And we've used that word a lot and I think the market is cautious and being mindful of all of the macroeconomic conditions that we see, but we continue to push forward. I commented in my closing last quarter that our performance in ECS did not meet our expectations and we would not accept subpar levels of profitability. And as evidenced by our strong results this quarter, we worked very hard to raise the bar and we did it. We continue to manage the delicate balance of taking advantage of opportunities in the marketplace to ensure continued growth while at the same time managing our company prudently to make sure we're in tune with prevailing market conditions.

It's been several years repositioning Arrow and the end result is a company with a solid balance sheet, stable earnings, consistent cash generation abilities, a diverse revenue stream, and very strong growth opportunities. This allows us to perform consistently throughout economic cycles and to generate cash in returns in excess of the cost of capital regardless of where the market is. Overall, the macroeconomic (inaudible) has not improved in the last few months and we are definitely not immune to the turbulence of the financial markets. We have certainly put ourselves in a position to better manage fluctuations. That's what we've shown we can do and we'll continue to do so.

Looking forward, we've been monitoring the marketplace and all of the leading indicators that we watch to keep a close watch on trends with our customers and suppliers. Looking ahead into the third quarter, we anticipate normal seasonal trends in both of our businesses. We believe that total third quarter sales will be between $4.1 billion and $4.4 billion, with global all component sales between $2.85 and $3.05 billion and global enterprise computing solution sales between $1.25 billion and $1.35 billion. We expect earnings per share on a diluted basis excluding any charges to be in the range of $0.73 to $0.78 per share.

As I said in early June at our Investor Day event, I am as bullish on Arrow as I've ever been and that's in spite of what's going on in the broader markets. We occupy a unique value-added space in the supply chain with growth opportunities across every customer segment, end market, every geography and many technologies. I believe that we are in a very powerful position to provide true value to our customer and suppliers who are the best technology companies as we connect both sides of our equation through value add services that simply can't be connected any other way. To steal the words of a supplier partner who participated in our Investor Day presentation, Arrow puts together the man generation, leads, customer seminars, education programs. To be able to go out and create that reach, that's real value. We will continue to create value not only for our business partners, but also our shareholders as we move forward with the strategy we have laid out to capture both profitable growth and improve our return on invested capital. As always I want to thank the team at Arrow for their wonderful commitment to building the future of our company and with that, I'll turn it back to Sabrina.

Thank you, Bill. Shawn, please open up the call to Q&A at this time.

(OPERATOR INSTRUCTIONS) We'll take our first question from Matt Sheerin of Thomas Weisel Partners.

Yes, thank you. My first question is regarding the computing operations which was better than expected, both top and bottom line. So first question in terms of why you saw stronger than expected demand -- how much of that was just due to the fact that the pushouts you saw in the March quarter got done in the second quarter? That's number one, and number two, on the operating margin side, I know there was some leverage on the expense side and some costcutting, but how much of that also benefited from the fact that you exceeded your rebate thresholds and other agreements with suppliers that enabled you to get a better gross margin?

Thanks, Matt. I'll take that. Our performance for this quarter exceeded the expectations which you had indicated and we did achieve sequential growth from all of our product segments. While we did close on a number of deals that were pushed out for the first quarter, excluding these deals, we still actually experienced normal seasonal trends for the second quarter. So the sales trends in general were healthy for us. Getting towards the second question regarding operating margins, our performance this quarter, I think, demonstrates a little bit of the leverage we've created in our model. Earnings grew at almost four times the pace of sales and actually more than 90% of the incremental gross profit dollars fell directly to the bottom line. I think this highlights part of the strategy for us was to achieve our scale and some of the productivity gains that that scale we said would enable us. The last quarter, we spoke about how those rebate levels adjusted to the changing conditions, and this is really a normal process, Matt. These get negotiated quarterly and they're negotiated based upon your forecasted sales. So we didn't get any rebate if you will, to make up first quarter, if that's what your insinuation is. This model is a consistent model where these rebates are negotiated and you still have to hit your sales plateaus to get that. So there really wasn't anything that we got as a benefit from Q1, if that answers your question.

Okay, it does, thanks. And then a question regarding the components business. Your guidance, you are basically saying that you are expecting seasonal trends in the business overall, but you have seen weaker than normal trends in Europe for at least two or three quarters now. US has been so-so. So would you characterize all three regions as seeing seasonal trends, or is Europe still going to be a little bit weaker than normal given what's going on there?

Well, I would characterize sort of the current demand that we are seeing really the book-to-bill in Europe is flat, North America held above 1. Typically in the quarter, North America is flat to down. Europe is flat to down a little bit more, given the summer holidays. And in Asia-Pac, we had such strong performance this quarter that we may experience a little less than the seasonal uplift there going into the quarter just because of that strong performance.

Yes, Matt, this is Bill. Just as a follow-on to Mike, again, the comment that says that we're going to see normal seasonality -- everything we're seeing is within the normal seasonality given that we have seen weakness for the last couple of quarters in Europe, and it's an area that's a real focus for us to make sure that we stay on top of that. We had a really strong quarter in Asia, just a terrific terrific quarter, and the US is okay. Pretty stable. We certainly watch all of those indicators very very carefully and from where we sit today and what we know, it looks like everything is within normal seasonality. The issue always for us in the third quarter is our visibility is relatively limited until we get into September due to the summer slowdowns primarily in Europe, to a lesser extent in the US and also to see what the summer [build] brings in Asia. This is a victory and really peaks in the September period. So this is always our toughest quarter to provide guidance around just because of the seasonality trends, but as we see it now, it looks like it's within normal trends.

Just one last quick question if I may, just regarding inventory was up a little bit. You also had an acquisition there. How much did that affect inventories? And one are your biggest semi suppliers the other day basically said that the distributors had taken basically put the brakes on orders later in the quarter, watching inventories. So what's your component inventory situation like and your overall philosophy about inventory building right now?

Matt, it's Paul and I'll take a shot at the details behind the change. If you look at it, we prefer first off to manage working capital in total. We like to think that if we invest a little bit more in inventory we can do better in receivables or payables, and the fact that $0.155 were at near record -- low levels, which is a good thing. You look at sequentially sales were up 6% and working capital was only up 2%, excluding the impact of LOGIX, so another measure of efficiency. To get to your question specifically, LOGIX and foreign exchange contributed somewhere between right around a $25 million number as an increase in inventory from the first quarter. So if you strip that out, that means basically that inventory was up for the corporation less than 3%. Interestingly when we look at it, North America and Europe increased or decreased, but it was less than 3% and Asia-Pac was above the 3%. And that kind of makes sense in light of the fact that it is the fastest growing region. So we feel pretty good where we are right now on inventory, and we'll always take the opportunity to make sure that we can meet the demands of our customers while at the same time being as prudently as possible managing the total level.

Okay, thanks a lot.

Your next question comes from Brian Alexander of Raymond James.

Wanted to clarify the response to Matt's question on the computer business, the profitability. Is the 4.4% operating margin that you realized in Q2 for ECS -- is that a normalized margin level for the second quarter with all of the acquisitions in? Or is that somehow inflated by the strong rebate performance that you are able to achieve in light of the goal resetting you did at the end of the first quarter?

Brian, it's Paul. Let me lead off on that one. No significant impact from the LOGIX acquisition. It was only in for one month. So when we look at it much like we talked about at Investor Day, we see that as a more traditional level, 4.4% for second quarter. So when we look at it we think that's normal operating business as we talked about in the first quarter. A tremendous amount of operating income is driven by sales and ability to leverage our cost structure. And there was no makeup in the second quarter if you will, to get more rebates than what we normally would receive based upon levels of revenues.

Okay. And Paul, can you just touch on the linearity -- last quarter you saw somewhat expected weakness in the last couple of weeks. At the Analyst Day, you've raised the low end of your earnings guidance, but I don't recall you adjusting your sales guidance at that time. So I'm just trying to get a sense for whether the sales upside, particularly on the computing side that you saw, really came in the last couple of weeks of the quarter.

I would say that the pace of business is pretty consistent with what we see in more normal times, which is that many of the deals in computer products and in fact in components for that matter happen in the last month. So for sure that's the way we see it happening as a matter of course in our business.

Final one for me, just a little bit more detail on the profitability decline you saw in Europe on the component side. It sounds like from a profit standpoint, it was a little worse than you expected. How much of that was driven by the weak top line versus maybe more aggressive pricing or some other factors? And could you just comment more specifically on what you're doing to restore margins in Europe to more historical levels? Thanks.

Brian, I'll lead off with the questions around the numbers and then I'll let Mike and Bill address what we're going to do going forward. When you look at it, it's interesting. We did see a decline year-over-year, yet the European operating income percentage is ahead of our corporate average, and that's a positive thing for us. In fact, it's ahead of the segment average. When I look at it, it's really driven more so by top line, because of the fact that we're just not getting the same level of sales. When we look at it in fact, GP in our core customer base in Europe was relatively flat year-over-year, change of maybe 10 to 15 basis points. So really, it may not necessarily be a head on analogy, but first similar to what we had in the first quarter in ECS, where if you don't have the sales volumes, you get a little bit caught with having fixed costs. And we all know that Europe is more fixed cost in nature. So that's really what we're seeing right now as far as the change in operating income percent. As far as actions going forward, I'll turn it over to Bill and Mike.

Yes, Brian. I think we can tell you we continue to be a little concerned about Europe. That market has clearly weakened in the first half of the year. But I think what we have to remember, a portion of this is historical. If you look when North America had their decline, when it started -- in historical days, Europe has usually had a decline starting about six months later. And so we've seen that normal lag behind North America, and then due to the Euro strength that's impacting some of the export competitiveness and that's the other side of this, which we believe is making it a little deeper than before. And we do believe that Europe will remain soft in the third quarter. As with any business we have, we are working on things to become more efficient but we're really really looking at a 90 day window here. And we don't see any signals that that market is turning around for us, especially going into the summer holiday season.

Brian, it's Bill. One other thing to note, and we did note it at Investor Day, but I'd reemphasize it. Some of the biggest benefits that we will get from our ERP conversion in fact are in Europe. In inventory management and operating efficiencies and margin strengthening, et cetera. What we have real trouble getting at today because of our three separate systems that we run in Europe -- that will get better but we won't begin to see that until late in 2009 to 2010 is when we will begin to see some of those benefits. However, there are things and Mike just laid out a number of them that we can and will do to improve the profitability in Europe. We know what they are and we're moving forward with them to improve the operating efficiency and to really focus on making sure we get more than our fair share of the top line demand that in fact is out there. So we will make that better.

Thank you.

Our next question comes from Jim Suva of Citigroup.

Great. Thank you and congratulations on great results. When we look at the acquisitions that are now being folded in, especially LOGIX and Achieva, can you help us kind of with a run rate for SG&A? Because I believe a lot of them came in not for the full quarter and it's really trying to get apples to oranges and trying to guess good run rate. And then in addition the follow-up question, if you can talk about the acquisition pipeline, because I believe now all your announced acquisitions have been closed and kind of what you're seeing out there. Should we expect something to keep coming in here in Q3 to Q4 time period or are the acquisitions starting to taper off a little bit?

Okay, Jim. I'll take the first part of the question which is around acquisitions. You're right, LOGIX closed on June 2nd, so that was in our numbers for the month. Operating expenses in that business are probably about 200 to 300 basis points less than our corporate average, but remember, one quarter or one month of that business on our quarter doesn't have much of an impact. Achieva was not closed until July, so that's not in our second quarter results. Their operating expenses will be in that 7% to 9% range also.

And Jim, it's Bill. The second part of your question was about the acquisition pipeline. As you know, we don't comment on specifics of any acquisition or on the pipeline. Clearly, we have signaled that we are and will continue to look for strategic acquisitions that accelerate our strategic priorities and we will continue to do that. We have the balance sheet to do it, and wherever we can see an opportunity that will accelerate our strategic plans, we will, we are ready to move.

Okay, and just a clarification on Paul's comments on SG&A. More so for our outlook for September and going forward, do we need to take up the run rate that right now is at say $421 million or $422 million that you just announced, do we need to take that up say another $20 million or $10 million or how should we think about directionally for the September quarter?

I would suggest that if you were in that $12 million to $15 million range, that would be a good number for expense increase.

Great. Thank you very much and once again congratulations.

Thank you.

Our next question comes from Steven Fox of Merrill Lynch.

Hi. Good afternoon. One question on the computer business. You updated us on the potential seasonality for the Q4 to Q1 period. Are you endorsing that as something that's reasonable still based on what you're seeing in your customer base? Or is it too soon to say whether you would have such strong seasonality in the fourth quarter?

If you take the change as we were talking about, what we've done is we've essentially in the last year doubled our business and as we've done that now, half of our business falls within Europe which actually has different seasonality history than the North America market does. So what we did, Steve, was we took the revenue growth for North America and that seasonality and the seasonality of Europe, and combined them. And that's how we came to our numbers.

So you're saying it's more of a function of the fact that Europe is extremely slow this quarter than it is of any kind of confidence going out into the fourth quarter?

Yes. The summertime slowdown, remember, Europe still has their holiday season in the summer. That actually helps change the seasonality of that market versus North America. And as a result, you see a higher Q4 uptick in the new seasonality chart that we had showed in the slides. And what we're trying to do, Steve, is to make sure, we're completely transparent with what's happening with our market and how we think this business is changing cyclically, so we can all have the same expectations going into each quarter.

Okay, that's helpful, and then just one other question on Europe, on the component side. You mentioned the book-to-bill is flat but it's still below 1. Can you just give us a better sense for how far below? And when you say you're still cautious on it, is that an implication that your order book has been deteriorating as you've gotten into July or is that not the case?

No, I think what we're telling you is we're expecting Europe to have normal seasonality, and again this is the vacation time when Europe does traditionally go soft into the quarter. As I said, we're still concerned about the market because of the Euro strength and does that have another impact on what is already a seasonally slow time of year, but we're still believing that we're going to be seasonal in Europe.

Okay. All right, and how far below 1 is Europe in the book-to-bill?

Slightly.

Okay. Thank you.

Sure.

Our next question comes from William Stein of Credit Suisse.

Great. I'd like to touch on the guidance again if I can. It appears to me that when I pull out some expected revenue from Achieva from the components business, we're looking at the guidance, it appears to be around down 1% organically on a sequential basis. I think normal is up a couple percentage points. And then likewise in systems, it looks like you're guiding down about 15% and that's again if we back out most of the LOGIX revenue that will be new this quarter. And that seems to be, the systems seems to be at the low end of what you're saying is the new seasonality components appears to be slightly below what we normally see. How do I reconcile that with the comments around normal seasonality is that you're taking a prudent approach given the macro backdrop or am I missing something?

Okay, Will, it's Paul. On the guidance when we look at it, we don't see it being any different than what we've seen in the past from normal seasonality, so there's a range of normal seasonality. There's not a particular number that hits all the time. When we look at it, there's not a tremendous uplift from either business in sales in the coming quarter. I'll use this as an example. The month of June is strong for LOGIX, and we know that they will be shut down in the month of August. So August virtually had no impact. So when you start to piece it apart and look at the individual components, we think we'll be right in the range of what happens in a normal summer period.

Okay. And then on the components side, the best way that I can read what happened this quarter is that you gained share in Asia. Is that right and if so, do I think about it being from smaller local vendors or maybe gaining -- maybe the DTAM versus TAM split is changing or do I think of this as share gains versus another global competitor?

We believe it's going to come out clear that we gained share in Asia. What we've got to really temper that with is that we are still early after the quarter for the reported [numbers] to come out and really balance that share. We think the other markets we were probably flat, but the overall share gains and the big share gains will come out of the Asia region. Does that help you?

Meaning share gains from smaller local competitors or potentially from -- ?

I think we'll have to see. I think there were other competitors that have put out where they thought they would fall and we'll just have to see when those numbers come in and most of those guys announced behind us. So we're looking at it like you are.

Yes. Typically, it is hard for us to be really precise as to where it, where share gains come from in terms of specific competitors. What we have seen quite consistently is that the share of the Top 10 distributors in Asia has been growing over the last several years, and the share of the top three have been growing faster than the share of the Top 10. So we think this is part of a long term secular trend that's going on, and this quarter was just another piece of what's been a longer term story. But in terms of specifically where it comes from, what we've seen is sort of the all other one has been the one shrinking more on that and we have almost no visibility into it.

Great. Just one additional one if I can. In the past, I'm not sure if it was last quarter but certainly in several quarters in the last few, you've talked about slower sales to the EMS channel, I think in particular among the big North American EMS vendors. Can you comment on how that channel performed or that market performed for you in the quarter, please?

Yes. We've seen the EMS companies, the large EMS companies if you will, for us, pick up a little primarily in Asia-Pac. That's where the largest activity has been for those customers. The pricing has remained stable at that customer base but it has not been double digit type growth. This business is slowly picking up for us from what we saw in the quarter and that pickup was primarily in Asia.

Great. Thanks very much, guys.

Our next question comes from Brendan Furlong of Miller Tabak.

Thanks for taking my call. Most of my questions have been answered, but I have just a quick one on your European ECS business, which is obviously growing to be quite a substantial part now. Can you give us some color on the demand environment in Europe? You obviously made comments on the US, but if you can give some comments on Europe, it would be great. And then secondly, the seasonality, thank you for the color on the seasonality, but do you think that the weakness in Q1 of this year might lead to some distortion of Q4 seasonality? Thank you.

I'll take the seasonality piece first, just so we can all remain clear. What we're showing for Q1 is what we actually believe happens in that business now that Europe is half of it. The combination of the two markets and the changes that they do have does lend as you can see a smaller downside, but the range now also shows a higher upside than in the past. And that will be equated dependent upon the mix between North America and Europe. And that's why those ranges are where they are. In terms of the demand we're seeing, we're keeping a pretty close watch on this now as you can imagine, but we see a relatively stable market. But we're still cautious about it. Server demand, as you know, was soft in the first quarter and then did rebound for us in the second quarter. We're seeing stability in the proprietary servers, but the IT departments as we believe in the industry standard servers are slowing some of their discretionary spending. And we think the forecast we put out there for the third quarter to you is an accurate reflection as we can get on that you is an accurate reflection as we can get on that market.

Perfect. Thanks a lot.

I'd like to come back just for a second on the seasonality issue, because many of you commented on it and it's really an important issue. We have taken a very strong strategic position in building our European footprint, and I'm really pleased with how that's come together, particularly with the addition of LOGIX which now enables us to have a complete set of capabilities across all of the countries in Europe and allows us to really begin the full integration of the European Operations which will lead us to returns that are far closer to North America. The side effect of that is that has increased seasonality of the business. It just has. Europe is more seasonal because of the summer season, because of the winter quarter, the first quarter, than is North America, and that's what we're trying to reflect to you. So that's just an outgrowth of the mix of business which we have chosen to pursue. That's overall positive for the business. It does have that side effect of increasing seasonality and as Mike says we want to be as transparent as we possibly can about the change so that you all understand that and know what it is we are, what we're seeing in our marketplaces. Strategically, I am really really pleased with where we have positioned and how we have positioned ourselves in Europe. I think we have lots of upside ahead of us.

Understood, thank you.

We'll go next to Carter Shoop of Deutsche Bank.

Hi, congratulations on a good quarter. I wanted to talk briefly about the quarterly survey that you referenced. I believe that's mostly a North American survey. You mentioned about the order book, I think it was that came down for the second quarter in a row. Can you discuss that a little bit more detail, please?

Sure. We do a survey every quarter as you know, and what we ask on the survey are what we believe or what buyers think their buying habits are going to be. On the inventory piece, customers were fairly confident that the inventory levels were still stable and close to being in the right place. The change we saw for the second quarter was a small deterioration in what they thought the volumes would be going into the third quarter. So we did see a little more instability I would say from the buyers regarding their volumes, and we actually believe all of that is reflected in our numbers for the quarter. Paul, do you want to add anything to that?

Yes, thanks, Mike. The real issue is that unfortunately, it's not a statistically based sample, so --

Right.

-- we look at it for more around what might be a change or a trend. In fact if you look at the actual results, the change that we're seeing as Mike mentioned is marginal. And in fact if you were able to go out and get the pundits that do political surveys, they might say what's in the band of acceptability are no change. So we're watching it closely. We want to make sure we're talking to customers and suppliers around the globe to understand what their sentiment may be right now, but don't see it as much more than a nominal change in thoughts about the next quarter. That's probably also reflective of the fact of the economy as Bill mentioned earlier is probably a little bit softer today than it was three months ago. So they're probably equally cautious as we move forward.

Got it. That's helpful. I feel like usually you don't comment on any changes there in lead times or ASPs, and for you guys to single out that this is the second consecutive quarter that coming down, I thought that was interesting. So just to kind of wrap all of these data points together, in the US we're seeing the market deteriorate a little bit. In Asia, we'll see worst than normal seasonality and components following a strong Q2, and Europe, you're concerned about foreign exchange and also deteriorating macro conditions there. That environment usually tracks the US market by roughly a six-month lag time. All that said, we feel good about the seasonality in Q3. Are all those comments, I mean, pretty much the way you guys are thinking about the market right now?

Yes, let me just try to get it synchronized. Agree that what we expect in Asia-Pac is still good performance, lower end of normal seasonality, watching the Olympic impact very closely. In North America, I wouldn't say getting worse as much as more of the same. So what we're seeing is I would say within the range of normal seasonality. And Europe, I would say also more of the same in that we've been calling it for us anyway, not sure about anybody else, for being a soft business for two to three quarters. So we'll work off of normal seasonality off of two to three quarters of softness, not necessarily trending worse. As Mike mentioned, we're looking hard at the business to grow the top line as well as to make sure that we're spending where we do in expenses prudently.

Great. Thanks. In regards to Asia, do you have any visibility in regards to which type of components you're taking share at, be it PLDs, analogs, connectors, et cetera?

The short answer is no. The short answer is we actually don't. We almost never get that level of detail and we certainly wouldn't have it at this point in time. But we're pretty sure it's going in the right direction.

Okay, that's helpful. In regards to management succession, we've seen a lot of people switch positions over the past several quarters in the computing division while the executive suite has been pretty consistent. Any thoughts on management succession at the executive suite level over the next 12 to 18 months?

Well, one of the things that we spend a lot of time on at the Board level and at my executive team level is making sure that we have the right people in the right spots, and what you're seeing is normal succession activities -- getting the right people into the right places, working forward with development plans. We have very thorough talent reviews and development reviews that go on a couple of times a year that cascade throughout the whole organization. And what you're seeing is normal activity that's going on. I personally spend a lot of my time on this. I think it's one of the most important things where I can spend my time. My team spends a lot of time on it, because at the end of the day, we have make sure that we have the right leaders and the right spots with the right training and the right capabilities. I'm proud of what this team has done, and we will continue to have that as a high focus for us going forward, because if you have a good team, lots of good things happen to you and I think we've got a good team.

Last question for you. In regards to restructuring charges, what is your outlook there for the next six months and then also going into '09, should we expect maybe $5 million to $10 million of restructuring charges per quarter indefinitely? Or how do you think about that?

Well, it's interesting, when we look at our restructuring charges, we usually have a payback period of less than a year on them, with the payback being the cost savings. So we're constantly looking to make the business more efficient and more effective as we go forward. Sometimes there might be a bit bigger because there's real estate involved. Sometimes they're less. The other interesting thing that was when we look at all of the charges we've had over the last several years, they virtually net to $0 because we get better performance in tax, we have facilities on gains, recovered some warranty monies offset by restructuring and other claims from acquisitions. So the way we look at it, it's kind of netted out over a period of time and we look at it as a savings over the long term for the business. As I said, the payback is at about a year. And that's depending on how efficient we can get the business, so we'll just have to see each quarter. It's hard to call we'll do $5 million to $10 million a quarter because we don't have that as a target internally. The target we have is each and every time we speak to the management team, speak to the employee base, how can we be more efficient? How can we spend more effectively? Where should we invest? Where should we cut back?

Paul, I think that's exactly right. That's an area of focus. We continue to look at that and so that's just part of the way we run the Company, and that is, we will continue to look at the ways we can get more efficient all the time as we move forward.

All right, we have no further questions on the phone at this time. I'd like to turn things back over to Sabrina Weaver and the other speakers for additional or closing remarks.

Thank you, Shawn. Before ending today's call, for those participating in today's webcast, we will quickly scroll through the slides referenced in our webcast that contain a reconciliation between GAAP and adjusted results. This reconciliation is also included in our earnings release, and both the earnings release and the presentation are available on our website. I would like to thank all of you for taking the time to participate this afternoon. If you have any questions about the information presented today, please feel free to contact Paul or myself. Thank you, and have a great afternoon.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may disconnect at this time.