艾睿電子 (ARW) 2008 Q4 法說會逐字稿

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

At this time, I would like to turn the call over to Greer Aviv for opening remarks and introductions. Please go ahead.

Good morning, everyone and welcome to the Arrow Electronics fourth quarter conference call. I am Greer Aviv from Arrow's Investor Relations department 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 statement. 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 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 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 turn the call over to our Chairman and CEO, Bill Mitchell.

Thanks, Greer. Thanks to all of you for taking the time to join us this morning.

Despite increasingly challenging market conditions, I'm pleased to report we were able to achieve sales and earnings in line with expectations for the fourth quarter. While 2008 progressed on a relatively normal trajectory through the first nine months of this year, we began to see business slow in September as the financial crisis in the US deepened and expanded into a global financial crisis. Macro pressures intensified in the fourth quarter, and as we sit here today, we see that 2009 is off to a difficult start in both our global ECS and global components businesses. Demand has continued to weaken, impacting all markets and economies around the globe. We expect the marketplace to continue to be unsettled and that visibility will remain limited for at least the next few quarters, and in our view, through most of 2009. We're not prepared to call a bottom yet, and while we cannot control external forces, we will continue to manage our business with discipline necessary to stay ahead of the curve in these uncertain times.

As I mentioned last quarter, we'll do whatever is necessary to keep our company in the strong financial shape that it is in. Mike will provide you with more details later in the call about the specific actions we have taken thus far. But let me emphasize that we believe the efforts we're implementing to reduce our cost structure today will better position us to navigate through these difficult times and emerge as a stronger, more profitable company. We've been faced with making very difficult decisions over the past few months, but it is our responsibility as a management team to be committed to taking whatever actions are necessary to support earnings and the long-term health of Arrow.

At the same time, we're still selectively investing in the future of Arrow to ensure we remain in a position of financial and market strength. This will allow us to take advantage of opportunities that may arise as a result of the widespread economic downturn. We are committed to our global ERP implementation and believe this initiative has and will create a competitive advantage and allow us to operate more efficiently in a global environment. We expect that our value added model and our focus on strategic priorities will enable us to be in a strong position when the global economic environment ultimately improves.

As has been widely reported, 2008 was a year marked by many challenges, but I would also like to note some of the many successes that we had within Arrow. We continued to execute on our strategic goals to achieve profitable, sustainable growth by entering new geographies and new markets, by expanding our product service and solution sets to ensure we touch every region, every end market and every technology. Acquisitions remained a strategic accelerator of our growth and we closed on a number of transactions this year, which have increased our global footprint. We achieved a major ERP milestone with the successful transition of our North American Sun group in April and our North American IBM group just early in February. While we just went live last week, early indications are that the IBM implementation will be just as successful as the Sun conversion and we're on track to transition additional businesses throughout 2009. We remain committed to this initiative, as we believe it will create a competitive advantage and allow us to operate more efficiently in a global environment. We also remain committed to our selected market, geographic, and people development initiatives, as well as continuing to evaluate acquisitions as strategic accelerators.

Just as importantly, we continue to make progress in certain key areas of our operations while maintaining our financial strength. Despite the impact on our business from the global macroeconomic crisis, we grew sales faster than the market in 2008 to achieve record levels of revenue of almost $17 billion. This year marked our eighth consecutive year of positive cash flow as we generated almost $620 million in cash from operations over the past 12 months. This has enabled us to self-fund all of our growth initiatives. I am pleased to say that our balance sheet and capital structure remain very strong, with net debt-to-capital near historic low levels, and we generated returns in excess of our cost of capital. I would again emphasize that we are managing our business for continuous improvement throughout all economic cycles.

In summary, our disciplined financial strategy and solid market position will allow us to weather this storm and emerge as an even stronger company. Mike will discuss the outlook and business trends in Global Enterprise Computing Solutions and Global Components and later Paul will discuss our fourth quarter financial performance.

Thanks, Bill. Before I provide an update on our business trends, I would like to discuss the actions we've taken given the deterioration in the global economy. The current economic conditions have forced many companies, including Arrow, to make difficult but necessary decisions over the past few months. Our initial response was to eliminate all discretionary spending throughout the company. But it soon became clear that this was not enough to counteract the diminishing revenue growth. While we seek to prioritize expense reductions that will minimize job loss, we did have to make significant headcount reductions over the past several months. These were difficult decisions, but required to maintain our financial strength and ensure that we retain our leadership position during these challenging times. We have already implemented a number of cost savings initiatives to reduce the severity of the impact of the deteriorating economic conditions it will have on our employees and our business.

In addition to headcount reductions, we have instituted other workforce actions including lower incentive structures, furloughs, and elimination of salary increases. While all aspects of discretionary spending have been curtailed, we have also had a number of facility closings and consolidations. We estimate the total impact of these actions will reduce costs by more than $175 million on an annual basis, while still selectively investing in the company with initiatives such as ERP, vertical markets, emerging markets, and our talent.

In summary, we believe the actions we have taken to align our cost structure with the market realities have been a prudent response to the deteriorating environment and are also based on facts as we see them as opposed to speculation about what may happen tomorrow. As Bill said earlier, we do not see a bottom and we will continue to evaluate our cost structure to identify additional opportunities to improve our productivity. As has been our consistent message, we remain committed to the ongoing efforts to improve the efficiencies across our organization.

Now I'll talk about our ECS business. Sales in global ECS were in line with the midpoint of our guidance, as strong double-digit sequential growth in storage, software, services, and proprietary servers was offset by a continued weakness in industry standard servers. Our ECS business did experience the expected year-end budget flush, although not to the same degree as would be expected under normal economic conditions. While growth has been pressured by the slowdown in IT spending that has been seen across the globe, our diversified and expanded portfolio of product offerings has served as a buffer to the softening demand environment. As I mentioned previously, our value model remains strong, even as overall IT spending continues to slow. With a focus on high growth enterprise markets like storage and software, along with our traditional mid-range server business, customers should continue to use data center Enterprise Solutions to boost productivity through the downturn. While IT spending forecasts are muted for 2009, our model is not tied to discretionary commodity products like laptops, printers, and accessories, which appear to have fallen faster than our space.

Looking ahead, our outlook for ECS is decidedly mixed. As visibility continues to be extremely limited, we would expect this to be the case for at least the next few quarters. With the assumption that IT spending will remain soft as macro issues continue to impact customer behavior, coupled with foreign exchange headwinds, we would look for Q1 sales to be at the higher end of normal seasonal sequential decline of 25% to 35%, excluding FX. Expense control will continue to be a focus in the first quarter of 2009, although our operating income margin will likely be under pressure until we see a turnaround in the global economic situation. In conclusion, the fourth quarter ended with the reality that the market continues to deteriorate, and through February to date, we have not seen any signs of improvement. That said, we performed well in a difficult period. We managed the balance sheet very well, controlled expenses, and outperformed the market.

In our Global Components business, sales were in line with expectation at $2.5 billion, while operating performance was impacted by a change in sales mix and gross margin pressure, as well as continued softness in most geographies and markets we serve. And the beginning of the first quarter has seen a further weakening in demand, with run rates declining from the end of the fourth quarter. In Asia-Pac, as we expected, sales growth was negatively impacted by the global economic crisis and this region posted larger than normal seasonal declines. We began to see a deterioration in business conditions in mid November, particularly from increased cancelation levels, which is a material change in customer behavior. However, our Taiwanese business outperformed our expectations in December.

In Europe, the sales decline accelerated in December with particular weakness in the Nordic region, Germany, and southern Europe. While emerging markets have continued to show growth, the pace of growth has slowed and could even become negative in the coming quarters. As a bright spot, our design win business in the region has been growing as a percent of revenue and certain vertical markets such as lighting continue to show growth.

Similar to what we experienced in Europe, sales growth in North America was significantly impacted by an accelerating slowdown in demand in December, as many customers shut down operations in response to the economic downturn and we began to see cancellations in mid December. However, some of our vertical markets -- including medical, lighting, and defense -- did not show the same level of deterioration as the rest of our North American business and have been more resilient in the face of the current economic crisis and our design win business has been showing relative strength.

Taking a look at leading indicators, pricing remained relatively stable and lead times were at the low end of normal. Our book-to-bill and components decreased quarter-over-quarter, and was slightly below 1 on a global basis for the quarter. Book-to-bill in Europe was up in Q4, but had declined dramatically in Q1, while North America and Asia-Pac decreased strongly as orders have slowed dramatically in those regions. As you heard earlier, cancellation rates have increased in all regions. In our quarterly survey of over 300 customers in North America, results showed that customers continued to exhibit a great deal of caution as the outlook for purchase requirements weakened sequentially, and we would expect this customer caution to continue. Paul will now give you a more detailed review of our fourth quarter financials.

Thanks, Mike. 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 fourth quarter of last year. I will review our performance excluding these items to give you a better sense of our operating results. 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.

Fourth quarter sales of $4.1 billion are in line with our expectations, and represent a decrease of 7% year-over-year, a decrease of 5% on a sequential basis. Pro forma for LOGIX and excluding the impact of foreign exchange, sales declined by 9% year-over-year and 1% sequentially. Global Enterprise Computing Solutions sales increased by 2% year-over-year and 26% sequentially to $1.6 billion in the seasonally strong fourth quarter and were in line with the midpoint of our guidance. This represents the 20th consecutive quarter of year-over-year growth for ECS. Pro forma to include the acquisition of LOGIX and excluding the impact of foreign exchange, sales were down 10% year-over-year and increased 29% sequentially. The fourth quarter for ECS once again demonstrated the leverage and scale we have in our model when revenue growth occurs, with operating income growing almost 2.5 times faster than sales on a sequential basis.

Focused management of working capital resulted in a record low level of working capital to sales and an increase in return on working capital of more than 250% sequentially and almost 20% better when compared to last year's fourth quarter. Global component sales of $2.5 billion decreased 13% year-over-year and 18% sequentially for a decline of 9% year-over-year and 14% sequentially excluding the impact of foreign exchange. Despite the realities of a difficult marketplace, our gross margin increased 10 basis points sequentially. We believe our focus on creating value for our supply chain partners will allow us to persevere through macroeconomic challenges. However, lower demand coupled with the fact that sales decelerated at a faster pace in our more profitable North American and European businesses, and our expense reductions caused our operating margin to decline on both a year-over-year and sequential basis. We continue to work to ensure our cost structure is in line with the market realities. Please refer to the appendix of our slide presentation for a breakdown of revenue by geography.

Our consolidated gross profit margin was 12.7%, a decrease of 120 basis points year-over-year, primarily due to an increase in the mix of business from Asia and ECS as well as weakness in North American and European components. On a sequential basis, gross margin decreased 40 basis points, driven principally by increased mix from our ECS business. Our core customer base of small and medium sized customers showed a more positive trend with gross margin flat in Europe and North America sequentially.

Operating expenses as a percentage of sales increased 30 basis points year-over-year, and decreased 20 basis points sequentially to 9.6%, the second lowest fourth quarter levels since 2000. As has been our consistent message, we remain committed to ongoing efforts to improve efficiencies across our organization and to lower costs in our business. As Mike discussed earlier, we have initiated a number of additional cost reduction programs to offset the weakening demand while at the same time investing our business for the long term.

Operating income was $126.6 million, a decrease of 38% year-over-year and 11% sequentially. Operating income as a percentage of sales decreased 150 basis points year-over-year, due to mix and lower gross profit. Sequentially, our operating margin was down 20 basis points. Our effective tax rate for the quarter was 30.2%. For modeling purposes, you should assume that our tax rate for the first quarter of 2009 will be between 30% and 31%.

Net income was $72 million, down 40% compared with last year and down 14% sequentially. Earnings per share were $0.60 on both a basic and diluted basis. This represents a decrease of 39% and 38% compared to last year's fourth quarter on a basic and diluted basis respectively. In accordance with Generally Accepted Accounting Principles, we will continue to evaluate the recorded value of our intangible assets, including goodwill, through the filing of our Form 10-K. An impairment charge, whether it's required now or in the future, will not result in any cash expenditure, will not affect our cash position, cash flow from operations, availability under our credit facilities, or any of our covenants.

This quarter marks our ninth consecutive quarter of positive cash flow generation, with cash flow from operations of $275 million, more than $50 million ahead of last year's strong performance. As Bill mentioned, for the year we generated $620 million in cash flow from operations. Our balance sheet remains strong with conservative debt levels. Debt-to-capital is near record low levels and debt to EBITDA ratio of less than 2. Importantly, we have no maturities coming due until the fourth quarter of 2010 and we will have more than enough cash flow generation to fund this. In today's challenging economic times, we believe our financial strength and conservative balance sheet are a competitive advantage that will allow us to weather the storm and maintain our industry-leading position.

In addition to our cash, our access to $1.4 billion in committed liquidity facilities provides us with flexibility and will enable us to take advantage of opportunities that may present themselves as a result of the global economic downturn. Focused management of working capital enabled us to achieve a near record low level of working capital to sales of 13.8%. Despite a difficult operating environment that has impacted our profitability, we continue to post strong levels of cash flow and to earn our cost of capital, which we believe demonstrates our commitment to creating shareholder value through all economic cycles.

One last comment to help you with your modeling. We expect our ERP expense in 2009 to be between $50 million and $60 million. From a cash flow point of view, ERP will have a negative impact of more than $100 million on cash flow.

Thanks, Paul. In closing, the current macroeconomic environment is clearly impacting our and virtually all companies in our universe and their financial results. However, I want to emphasize that we'll continue to manage the company prudently. We're going to focus on superior execution to ensure that we stay ahead of the curve in these uncertain times. Despite the near term challenges that may arise out of ongoing market volatility, I believe that our company is well-positioned to convert these market challenges into future opportunities.

I would also point out that in times of economic stability, we generate more cash, not less, and that serves to strengthen our financial position. As Mike outlined, we are taking aggressive actions to align our cost structure and strategic investments with the current market conditions. The more than $175 million in cost savings and operating efficiency as that we have identified and committed to through these actions will provide a catalyst for long-term growth when market demand recovers. Until that time, we remain focused on protecting the financial performance of the company, as well as the investments that will lead to future growth and market share gains. Also, I want to emphasize that that we are still investing in the ERP and our vertical markets, our new geographies and in our people, selective acquisitions as strategic accelerators.

It should come as no surprise that the first quarter is off to a tough start, as global business conditions have continued to deteriorate. We remain confident about the long-term health of our business model, but acknowledge the reality in which we are currently operating. In that vein, there are a number of headwinds that we will be faced with in the first quarter, including a stronger US dollar compared to the first quarter of 2008, and the costs associated with our ERP initiative, which Paul just laid out. We don't expect any cash flow impact from these increased expenses. Needless to say, our visibility remains extremely limited and we will continue to take a prudent approach to our guidance by providing you with wider than normal revenue and EPS ranges to account for the uncertainty in the marketplace.

So looking ahead, we believe that total first quarter sales will be between $3.0 billion and $3.6 billion, with global component sales between $2.0 billion and $2.4 billion and Global Enterprise Computing Solution sales between $1.0 billion and $1.2 billion. This is well below normal seasonality and reflects our view of the weakening markets that we serve. As a result of these weakening conditions, we expect earnings per share on a diluted basis and excluding any charges to be in the range of $0.32 to $0.44 per share. Our guidance assumes that the average Euro to US dollar exchange rate for the first quarter is 1.3 to 1 and this compares with an average exchange rate of 1.49 to 1 in the first quarter of 2008. Greer?

Thank you, Bill. Please open up the call to questions at this time.

Thank you. (Operator Instructions). We'll take our first question from Matt Sheerin with Thomas Weisel Partners.

Yes, thanks and good morning. My first question is just is in regard to your component guidance. I appreciate that the visibility is limited, but you're just about halfway through the quarter and your guidance basically implies down 2% to down 18%. So what has to happen in the next six weeks to get to the low end versus the high end of your guidance?

Matt, this is Mike. As we said before, we've seen a decline in book-to-bill after the December quarter and we did see some cancellations and push-outs. We would need to see more rational purchasing with demand being real, if you will, in the near term. Right now, the lead times, as we've said before are on the low end of normal. So the ability to get product to customers is there if we do see a change in the demand environment. Does that answer your question?

Well, let me ask it another way. So if in the current weekly run rates you're seeing now and maybe just -- you adjust that for the Chinese New Year, and if that continues at that run rate, would that basically hit the low end of your guidance? So, in other words, would you need daily run rates to increase significantly to get to the mid-range or high end?

Matt, it's Paul. Interestingly, first, address the Chinese New Year which makes this a bit more complicated for us in estimation. In fact, the more we see, the more we learn. Folks in northern China just came back from their two plus week holiday yesterday, so it's difficult to understand what's going to happen in China in light of the very extended holiday period. Our guidance is always given to you with our best thoughts of what's going to happen with a range that we think we can deliver on. We can't call what's going to happen the rest of February and the rest of March, and we gave you our best shot of what we think today.

Okay. I appreciate that. And then just looking at the -- your ERP system, if you could just update the -- how that's going, where you've implemented it so far, any hiccups? And then on the expense side, you said $50 million to $60 million in expenses. How much is that up incrementally from last year? And if you could give us an idea, are the expenses for next year going to go down?

Matt, it's Bill. Let me first of all talk about the ERP and where it is. In April of last year, we converted in our ECS business the Sun business and that's gone very successfully. We've delivered a number of really good quarters out of that business after that. And so that's been a real success. We have gone live at the first of February with our IBM business, which is our biggest business in our computer products group. That's so far, so good. We're 10 days into it and so far, so good and we expect to continue with that. We would expect to have ECS completed by the end of 2009 and to have ourselves fully converted. We are right in the midst of beginning to transition the components parts of the business. Our first go lives start in the second quarter and those transitions will then carry forward through most of 2010.

One of the things I would point out to you, it may not be obvious upon inspection, is that some of the savings that in fact we are able to generate now have come about because we have been working on repositioning our company, simplifying our company, redesigning our company through our ERP efforts. It's a lot less about installing computer systems and a lot more about making sure you have efficient systems and processes. So we've been working on this for quite a while and in fact, many of the savings that we can see were in fact the benefits that we've been able to pull forward from our ERP work. So we're beginning to see some of the benefits. Those are starting to come through. We -- but there's still more to come. Paul, I'll let you talk about the financial piece of it.

Great, thanks, Bill. Matt, we said we're looking at $50 million to $60 million of expenses this year, expense charge. That will be about a $10 million to $20 million increase over full year 2008. Cash flow impact will be a bit less this year than it was last year. Next year, 2010 will be a big year for us in the components business, which obviously is much larger for us. So I don't think we'll see a significant decline in expense charges next year, though we did talk about reaping the benefits, the efficiencies et cetera, reduction spending in 2011.

Okay. That is great. Thanks a lot.

We'll take our next question from Brian Alexander with Raymond James.

I guess I'll start by picking up on the ERP questions. At the Analyst Day, Paul, I think you talked about $65 million to $75 million of cash flow impact and a $45 million OpEx impact in 2009. And now if I heard you, it's more than $100 million in cash flow and $50 million to $60 million of expense in '09 and it sounds like the '08 numbers came in higher than you expected. So the question is, is the project still on time and on budget with what you said at the Analyst Day and this just reflects an acceleration? Or is it becoming more costly and timely than you expected?

Brian, let me take a shot at that. We have not seen a material change in either timing or in costs. In fact, we're seeing the ability to get the benefits sooner. So in fact, we had pushed or pulled some spending up into this year and we did the same type of thing in 2008. From the cash flow side, what's interesting is we were able to buy some licenses. It's very technical type thing that we were able to pay off over a several year period, so that would account for the majority of the cash flow increase in 2009, or drag. We thought we would spend that money in 2007 and we were able to postpone it until 2009.

Okay. Great.

Brian, it's Bill. It's an interesting question. Bottom line, what Paul says is exactly correct. We are on spec, in scope and on budget and on time. We have been able -- and this has been an added benefit for us -- we have been able to see where much of the work that we've been doing to modernize the company, to strengthen the company, to make it simpler, to make it more efficient in fact are things that we can implement in advance of the computer system. The computer system will make it easier, will make it simpler, we'll get additional benefits. And that's where some of the $175 million in benefits have come from. And we've been working on this for a while. We know where it is and we know where to get it and that's good lasting benefits that we're starting to reap from this program. There's lots more to come there.

On the restructuring that you announced today, how much of the $175 million is incremental to what you've announced previously? What is the timing of that savings by quarter, if you can help us with that? And then I guess finally, do you think that these savings will allow you to still achieve the earnings floor which I think, Paul, you've talked about of around $2.20 a share? That was in a different environment, obviously but if I extrapolate the first quarter guidance you've given it would seem like it would be difficult to achieve that. But perhaps with these savings you still think that's doable.

In looking at the cost savings, we announced $57 million in total last year. So this is additional expense items, cost savings, that get us to a total of $175 million. So effectively round numbers, another $120 million of actions. So that's what we're talking about here. It's not this plus last year. It's an accumulation of those numbers.

It's very interesting, we have I would say about half actually in Q1 of the quarterly run rate. The challenge as we go through this is that when you tell from an accounting point of view someone that you're going to have them exit the organization, then they stay for two weeks or for a month to transition the work. We want an orderly transition. Well, they still get charged to the P&L. In addition, in Europe and many countries, you have to go to the informal work councils and pitch your ideas to them and there's a process where they go through, they review it, they approve it and that doesn't get executed on. So we told people so that we think we've executed on in North America. There may be some people working out of the organization and in Europe we've already gone to the work councils. There's an actual time lag and those people will be leaving the organization early in Q2. So well along on execution. We have hard plans behind all of this. It's not a number that we're shooting for. We have plans that we're going to deliver on.

As far as the floor, you're right, that was a very different time. The first difference being that that was in a 10% downturn. We're all seeing now macroeconomic conditions that are suggesting that the downturn will be much greater than 10%. The other point I would also mention is that was when the exchange rate was 12% to 15% higher in Europe. So we're getting a bit of a drag on that also. So in this environment, $2 is going to be -- not be deliverable, because the sales dropoff has been greater. But we do remain committed to our long-term view on that as well as our long-term view on our operating income targets.

Okay. Thanks, Paul.

We'll take our next question from William Stein with Credit Suisse.

Thank you. First, just want to make sure, just a clarification on that last comment, that the $2 floor on EPS is likely not achievable in this environment, did I hear that right?

Well, that's correct. That was built on a 10% downturn and we see a more dramatic decline in revenues, both on reported for Q4 year-over-year as well as what's happening in Q1.

Will, it's Bill. Just a quick comment to that. We are absolutely committed to retaining the profitability of the company -- to make sure that we generate cash, that we retain a strong balance sheet, that we gain market share and that we keep the company in strong shape. You have read all of the outlooks from people that are in our space and in our universe. They're projecting anything from 15% to 35% down kinds of things. And as we go through and do the math -- and you will certainly do that -- given the savings that we can generate and the revenue levels that we see, it will be extremely difficult for us to meet that $2 target. Having said that, we are absolutely committed to maintain the profitability of the company, to maintain our return on invested capital, to maintain strong cash flow, and to continue to invest prudently in the long-term future of the company.

Okay. Another question. I feel like the elephant in the room is World Peace. They're the number one component distributor in Asia. They're number three globally. They essentially called an end to the downturn in Q1. I'm curious as to what they're seeing that you're not. Any opinion as to what they might be able to see here to call bottom in Q1? Their comments I believe it was yesterday were that they passed the low point in terms of daily and weekly ship rates in Q4 and that Q1 should be a bottom from a quarterly revenue perspective. Any comments on that would be helpful. Thank you.

Well, I'll take a shot at that. First of all, you know that we don't comment on what others say. All we can do is comment on what we see and we call what we see. And quite frankly we see it that we don't see a bottom yet and we don't see that for the first couple of quarters and probably through 2009. Sitting here, I hope they're right, because we will come out of it stronger and more rapidly because we have a broader global footprint. We have more business that's available to us. We're very, very strong in Asia. We've been outgrowing that market for a number of years. And so if they're correct, we're going to be the ones that are going to benefit from that, and so I hope that's true. All we can do, though, Will, is call it as we see it, given the indicators that we see all around the world. There are many of them, and that's what we've tried to do.

Asked another way, are you seeing any turn in the business in Asia, in particular?

Mike, you want to take that?

What we saw, Will, was a deterioration in the business conditions starting around mid November. And that was particularly from increased cancellation rates. Our Taiwanese business did outperform our expectations in December. And since the first quarter, market conditions have continued to deteriorate or soften. And what we've seen is the consumer in the automotive markets being the largest in the slowdown. It is early to determine the impact of the Chinese New Year on the quarter as Greater China itself is just starting to return and we have employees that are still out on holidays and have actually encouraged them to take time off during this time. And as a result, our visibility is low and difficult to assess the impact on the holiday. Most of our customers, suppliers and competitors, they're all forecasting lower Q1s than Q4 and mostly due to the less days from the Chinese New Year and the impact of the downturn. So I wouldn't say yet that we're in a position to call anything at the bottom.

Okay. Great. Thank you.

We'll take our next question from Stephen Fox with Banc of America Merrill Lynch.

Hi, good morning. Couple questions. Just first, clarification. On the $175 million, are you saying that of -- there's half of the remaining $120 million that you just instituted is going to be realized in Q1 and that leaves $60 million? Or was it half of the $175 million?

Steve, what I was trying to say is if you take the quarterly run rate, which is about $42.5 million, we've achieved in the first quarter about half to a little bit more than that. And we're executing the plans to make sure that we get close to 100% in Q2 and that we're at full run rate in Q3.

Got it. And then can you talk a little bit about cancellations in more detail, specifically this quarter? Has the cancellation rate remained high through today or has it started to dissipate?

We continue to see cancellations today and as you heard, right now lead times are on the low end of normal and what we're seeing is that our customers have depleted their inventories. We've seen a slight build at the manufacturer level. And what we would expect is that eventually, as the customers work through their inventories and generate cash for themselves, that we would see some buying. We have not seen that happen yet and would hope that that would happen in the near future. But again, we don't see any indicators that show us that customers will start increasing their demand.

Okay. And then on your own inventories, your total inventories were sort of flattish, but I assume part of that's mix related. If you just looked at the component inventory turns in your business, I assume they went down. Where are they relative to your comfort level at this point?

When you look at it, in fact there's a couple things impacting inventories. So foreign exchange makes it lower. The acquisitions make it higher. We are down in absolute dollars compared to the fourth quarter of 2007. And our components business we saw a slight decline in inventory turns. That's not unusual when there's a downturn. Inventories take a little bit longer to catch up. They're still well in excess of where we were in the last tech wreck. So we're -- we feel we're in good shape. I'll let Mike talk about how he feels about comfortable, uncomfortable with the level of inventory right now. But remember, Steve, we also manage working capital as a big pool. So if we may increase inventory, we also may be able to increase payables with suppliers so that networking capital is not impacted.

Okay.

I would say right now what we're -- we are relatively comfortable with the levels of inventory we had. And again, remember, we said we were managing the company based off of what we see in the facts, not speculation to what might happen in the market. So we're managing our inventories in line with the market and in line with customer demand. And that's why you're not seeing massive fluctuations at this point in time. You have seen a reduction in the inventory as Paul said, but we're not doing anything crazy. We stand prepared to be here when the demand turns and that's our expectation, to continue to have the inventory to provide the service that our customers need.

Great. And then very quickly, Paul, do you have a headcount number for the end of the year -- from the end of the year?

I don't have it with me, but definitely we can get that information for you.

Okay. Thank you.

We'll take our next question from Shawn Harrison with Longbow Research.

Hi, good morning. Getting back to the restructuring savings, maybe we could just look once that full run rate is achieved. The break-out between the global components business and ECS, what percentage of the savings will fall to each?

We don't have the information. We're not going to disclose the information by business segment. I would say, though, that it's more tilted towards the components businesses in general. But we're looking at this also around the efficiencies that come out of ERP. So we'll see greater efficiencies in ECS this year. I actually am pretty enthused by the ERP roll-out because when there is the recovery in the broad economy and revenues go back up, we'll get a tremendous amount of leverage out of the new system and not be in a situation where we have to bring back costs at the same pace that we may have done in the past.

I guess as a follow-up up to that then, the $175 million in savings -- is there a way to quantify how much of that is permanent, so when you do see revenues come back up what we can expect will still be not in the model going forward?

Well, it's hard to project at what pace the revenues will come back. Let me give you an idea of the areas that we've made these cuts in. So when you look at it in the employment headcount area, it's over $110 million. So that's a big number. There's furloughs, incentive reductions, benefit cuts that are $25 million plus. We're able to do better in freight now, professional fees, less temp help because obviously we don't need it. We can use our own people. Reduction in IT. Reduced T&E and meetings by $5 million. Warehousing facilities down by $5 million. So facilities and warehousing, that's gone forever.

T&E, meetings, we're sitting in our telepresence room right now as opposed to flying around the world, flying around the country. We have that all in many locations now at Arrow. That's cutting back on T&E permanently. We made that investment. IT, we're thinking smarter and better. Right now, we have to run two systems. We're rolling out a new one plus we've got to maintain the old one. We'll get rid of the old one eventually. That's a permanent savings. Temp help because we're more efficient, that will be permanent savings. How we're managing freight -- that will be permanent savings also. So it's tough for me to say what's going to happen in the future around personnel costs because it depends on the pace at which revenue recovers. I would say that our expectation is that we have permanent costs in that area out of the business also.

Getting back to working capital and cash generation in 2009, given that you're managing total working capital, is there a number of days that you'd like to see come out of the cash cycle during 2009 that we could maybe look for an additional cash generation?

It's a good question. We track it as working capital as a percentage of sales. So we're looking for a number that's between $0.13 and $0.14 for every $1 of sales. That's our target. That's what we're driving towards. That's what we're driving for. So we feel that that's an opportunity to not only get cash flow out of efficiently managing our inventory now, or our working capital now, but also to be able to be better than we were in 2008.

Okay. Then just two quick follow-ups. I guess baseline capital expenditures excluding the ERP system in 2009? And then just your thoughts on cash usage here over the next six to nine months, beyond the restructuring?

I would say on CapEx, it runs historically ex ERP somewhere between $50 million and $65 million, so that's really CapEx, excluding ERP. As far as cash utilization going forward, I think we're very similar to most US companies and other international companies. We're looking to hoard cash at the moment. We're committed to your investment grade rating. And we're going to make sure that we have the right balance as Mike and Bill have said between expense reduction, but investing in the business.

So at least near term, hoard cash, and if the opportunities come up, then look at those? But nothing on the at least immediate horizon?

Correct.

Okay. Thank you.

We'll take our next question from Jim Suva with Citigroup.

Great, thanks very much. Now looking at this level of run rate and the economic outlook that you have, seeing that the $2 to $2.50 floor is off the books, so-to-speak. Looking at your guidance, is it fair to say $1.40 to $1.50 is a good rate? Or since Q1 is typically the lowest, should we be looking at a $1.50 to $1.75?

Jim, it's Paul. If you do the math on the midpoint of our guidance for the first quarter, it's above $1.50 and we don't have full run rate for expense savings yet, so I would suggest it's north of $1.50.

Okay. And then on the cancellations, any commentary on -- are they more on the components side or the systems side or both?

We've seen the cancellations, remember, on the components side primarily. And remember, coupled with that, we did see a slight negative book-to-bill going into the quarter and we're trying to see a sign that shows that that's reversing, but we haven't seen it yet. On the computer side, the demand for us has been relatively steady, given the marketplace. And again, we have not seen the wild fluctuations in that business that maybe people have seen in laptops and accessories and other discretionary items. Remember, the mid-range business is a mission-critical business, and while we know that it is based on capital spending, we haven't seen the violent swings that some of the other industries have seen. So hopefully that will give you a little clarity that the big cancellation rates have been on the components side.

Okay. And as a quick follow-up, on the component side, you're guiding down 18% to 2% range. It seems like a lot of the chip vendors were guiding down significantly much more. What's normal seasonality in your components business? And are we at risk of having a little bit too high of guidance there? But I guess since we've only got six weeks left in the quarter, do you feel pretty confident in that?

We gave the guidance based off of what we see today and, again, visibility is limited. Remember, the suppliers are basing their declines off of a smaller customer base than we have. So the suppliers' customer base really more around if you would say -- a general comment -- the wireless industry or the networking industry or things that are built in what I would call a very narrow market. Where if you look at the strength of Arrow, we have many small customers running right up to what we would call our large core accounts, and that marketplace has declined less than what we've seen with the OEM manufacturers.

Okay. What's normal?

We'll come back to you with the information. I don't have it right in front of me. You're right, this is outside of the range of normal seasonality for the first quarter.

Thank you very much, everyone.

We'll take our next question from Carter Shoop with Deutsche Bank.

Good morning. I have a question on lead times. I was hoping that you guys could quantify what your lead times are now in the components division and how that compares to where they were in January and also to where they were on the last earnings call back in October.

We were seeing lead times in the normal 12 week, if you go back to the tail end of last year. Those lead times have come in substantially for many reasons. Obviously, there's still been some building going on by the manufacturers into the first quarter, the quick slowdown pace of the market. And again there's a difference in passive components versus active components. But all in all, easily been three weeks shaven off of that lead time. We're not really hurting at this point in time. If a customer would come in tomorrow, I'm sure we have a good chance of filling that order.

Okay. That's helpful. And then one of the areas that you've discussed is performing relatively well is lighting. Can you discuss what the year-over-year growth rates were in the LED business in the December quarter and how that compared to the September quarter?

I don't have the exact number for the December quarter, but in 2008, our lighting sales doubled and we would expect them to double again this year.

Okay. That's helpful. And then in regards to component inventory turns, you gave us a little bit of color on the fact that they declined sequentially. Can you disclose what that actual number is and how that compares to peak inventory turns in components?

Carter, I can give you a round number on that. We were down about 15% in inventory turns in components from the fourth quarter of last year. Yet, that -- at the level we're at today is approximately 40% better than the down cycle that we last went through. So not from the peak of performance, but still 40% ahead of where we were in the last downstroke.

Great. Thank you very much.

We'll take our next question from Brendan Furlong.

Good morning, guys, thank you. Couple of quick questions on the balance sheet. Looking into Q1 in terms of I guess inventory dollars and accounts receivable, what are you guys planning from that?

Could you give that one to me again?

I'm sorry. On the balance sheet, inventory in terms of dollars into Q1 and accounts receivable -- what's your thought process in terms of AR into Q1?

From an AR point of view, we monitor it based upon DSOs. We don't necessarily set a dollar amount. So we would expect to see an improvement in DSOs in the first quarter. But we're talking about 1 day, which is a meaningful number in dollars, but we're looking for an improvement there. It's very interesting. We didn't see a significant change in pay patterns in the fourth quarter and that encourages us, and we expect to see that to hold true in the first quarter also. So from a receivables point of view, some improvement from a DSO point of view, but we don't manage it based upon how many dollars we're willing to commit to receivables.

And your inventory you were hoping to take down again in Q1?

It's not a matter of taking inventory down as much as we want to make sure we have the right level of turns and the right quality of inventory. So historically, what we've done is we focused on trying to make the slower turning inventory turn faster versus the hot movers. So I wouldn't expect us to see a significant change in our inventory position going forward absent anything around revenue levels.

Just a follow-up on this -- beat a dead horse on the component sales. A lot of the semiconductor companies are also saying they're seeing a little bounce in terms of orders but you're saying no. Can you -- if I missed this, I'm sorry. On the cancellations that you're seeing, et cetera, is it all coming out of Asia? Is there a geographic spread on what you're seeing in the components? How is US and Europe versus Asia? Is it all just Asia kind of thing?

First off, let's remember that the direct manufacturers again are dealing with a narrow customer base. They have bigger positions in the consumer industry, if you will, the cell phone industry, if you will, and also directly into automotive. A little bounce for them could be a hiccup in the consumer industry or in the wireless industry. We don't have anything that moves us that quickly. Again, if you take the rest of the industry that we deal with and the 140,000 customer base we have, we are seeing cancellation rates in every region of the company. We're seeing them in North America. We're seeing them in Europe and we're seeing them in Asia. And again, too close to call what will happen after the Chinese New Year. If you're equating that bounce back for the direct manufacturers, I would certainly hope to see that. And I would welcome that. But right now, we don't see it.

Thank you.

(Operator Instructions). We'll take our next question from Brian Alexander with Raymond James.

I guess just one follow-up. Big picture question. If I just look at the components business, your operating margin's at 3.6%. Granted, it's a very difficult environment and you're reducing your cost structure, but they're similar to where they were in 2003 despite the fact that your sales are about 50% higher. I realize that Asia is a higher percentage of the mix now versus then. But I don't think that would explain the whole issue. So could you just talk about what other structural changes might have occurred over the last several years and why you're still comfortable in the long term operating margin target for that business, given that we haven't improved over six years, despite 50% higher sales?

Hey, Brian, it's Paul. Let me try to give you some directional information on the performance of the businesses. So in the fourth quarter, our North American components business operated with operating income percent at what I would say is a strong level. And that's reflective of the fact that we've been able to recognize a change in the business which is built more around value added services, differentiated gross profit, differentiated cost also but yet more for us, more profitable business for us. You're right also that we've seen a growth in the Asia-Pac business, which dilutes down our margin. We're not at the levels that we've set as targets.

The third thing I would point to is around Europe, and two factors there. We haven't seen the same pace of growth, if you will, in Europe. So that means it's less as a mix for all of components which drags down the operating income percent. But the other thing is that I would say in retrospect, we focused a tremendous amount of effort in making sure we get back to Best-in-Class operating income percents in North American components, and within the last1.5 years or so we've been doing that also in Europe. But the big issue is Europe has three systems. So we really can't get those costs out fast enough until we get ERP rolled out there. So Mike and Bill both mentioned we have some plans in place that are pretty exciting to be able to now take some of those costs out even though we don't have ERP rolled out there. But it's going to take us some more time to really get them back on track, if you will, reflective of all the great work that's been done in North America to drive their operating income percent back up.

I take you back again to some of the things that we talked about in the -- our Analyst Day last year, which seems like a very long time ago. One of the things we did lay out was the road map for getting to our long-term targets. We certainly have seen a decided blip that's come on in the fourth quarter and continuing now. But that road map is still correct. We can certainly get there, even in spite of increasing impact of Asia, increasing impact of ECS, both of which are lower gross margin regions. But when we get them where we want them to, we'll be at the right operating margin region. We have run into headwinds with foreign exchange. We haven't gotten the benefits of ERP. But we do see that road map as still a good one and that's what we're continuing to follow for the long term. In the short term, we will continue to manage the company as prudently and wisely as we possibly can get. But for the long term is still on that long-term road map that we've projected some months ago, which seems like a different era for sure.

And then just a follow-up on industry standard servers, I think you mentioned that that was the weakest part of the computing business in the quarter. So would you say that's more a function of the market demand? Do you think that's more a function of the vendor line card that you have, perhaps some of your key vendors lost share? Or is there any other story within there that suggests you're de-emphasizing that product line due to poor returns? Just want to make sure I understand the performance there.

We actually believe it's a pause, if you will. We still believe that hardware swap-outs toward virtualization will happen. No matter what data you look at, if we look some at IDC -- and it still cites that only 5%, Brian, of those servers worldwide have been virtualized with virtualization software at this point. So there's still a lot of opportunities ahead of us, and that really translates to a great opportunity for us as this business starts to pick back up, especially because we're the number one distributor of VMware. With the current economic environment impacting us, the spending, the discretionary portions of the budget, it's more likely that this is a slowing and getting pushed out versus a missed opportunity and that's how I would characterize it. But again, it's not something that somebody has to do right away to be able to turn their system on tomorrow.

Right. So it's still a strategic product line for you?

Absolutely. I think it's still a huge opportunity for us going forward, and I fully believe that the pause in discretionary spending is what's put the lid on it for now.

Makes sense. Thank you.

It appears we have no further questions left in the queue. At this time, I would like to turn the conference back over the presenters for any additional or closing remarks.

Thank you. 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 release and this presentation will be available on our website. I would 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, Mike, or myself. Thank you and have a nice day.

Thank you, ladies and gentlemen. That does conclude today's conference. We thank you for your participation.