艾睿電子 (ARW) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Arrow Electronics Inc fourth-quarter earnings conference call. My name is Erica, and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today's call, Ms. Greer Aviv. Please proceed.

Thank you, Erica. Good afternoon, everyone, and welcome to the Arrow Electronics fourth-quarter conference call. I'm Greer Aviv, Senior Manager of Arrow's Investor Relations program, 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 Mike Long, Chairman, President and Chief Executive Officer; Paul Reilly, Executive Vice President Finance and Operations, and Chief Financial Officer; Andy Bryant, President Global ECS; and Peter Kong, President Global Components. By now you should have all received a copy of our earnings release. If not, you can access our release on the Investor Relations section of our website.

I would also like to point out that we issued a CFO commentary that has been posted to the Investor Relations section of our website that should be used as a complement to the earnings press release. You can access a copy of our earnings reconciliation for the fourth quarter and full year in our press release or on the Investor Relations section of our website.

Before we get started, 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, including our 10-K that was issued this morning.

We will begin with a few minutes of prepared remarks, which will then be followed by a question-and-answer period. As a reminder to members of the press, you are in a listen-only mode on this call, but please feel free to contact us after today's call with any questions you may have.

At this time, I would like to introduce our Chairman, President, and CEO, Mike Long.

Thanks, Greer, and thanks to all of you for taking the time to join us today. I'm excited to be discussing our 2011 and fourth-quarter 2011 results. It has truly been an outstanding year for Arrow Electronics. Our exceptional financial performance speaks for itself. With that said, I'd like to share some highlights from 2011 that illustrate our leadership position in the markets we serve.

We delivered a record revenue of $21.4 billion, representing year-over-year growth of 14% in what I'm sure we can all agree has been a difficult economic environment, and compound annual growth of 10% over the last five years. One of our long-term goals is to grow profits 1.5 to 2 times faster than sales, and we did that again in 2011, with operating income increasing 1.5 times faster than sales. We reported record earnings per share of $5.19, an increase of 26% from 2010, and 12% compound annual growth over the last five years.

Our commitment to generating superior returns was evident again in 2011, with return on working capital ahead of our long-term goal, and return on invested capital well in excess of our weighted average cost of capital. Finally, we generated more than $120 million in cash from operations in yet another period of solid growth.

In addition to our excellent financial performance in 2011, we successfully executed on our global strategy to drive growth in our core business, as well as in high-margin life-cycle services. Over the last 12 months, we completed eight acquisitions that have served to strengthen the core, and allowed us to enter new markets, products, and geographies that expand and enhance our portfolio of products and value-added services we can offer to suppliers and customers. I'm happy to report that the acquired companies are either meeting or exceeding our financial expectations, and contributing to our overall excellent performance. The value and importance of this strategy can be seen in the very strong performance in both of our business segments, in what was an uncertain and difficult market environment.

In Global Components, Peter Kong and his team did an admirable job of growing legacy business in a market that was expected to decline in 2011, and set records for annual sales and operating income. In 2011, we executed our strategy to expand the portfolio and increase our addressable market. Our strong performance, coupled with a number of strategic acquisitions, has accelerated our core business, and we continue to see new opportunities as we enter 2012.

In Global Enterprise Computing Solutions, we had a remarkable year, as Andy Bryant and his team also set records for sales and operating income. Over the course of the year, we made significant progress on our strategy to differentiate Arrow ECS, and solidified our industry-leading position. In 2011, we acquired new businesses that improved our strategic position in the market, and we expanded our service offerings to achieve higher value in margins. As we head into 2012, I'm confident ECS will be a benefit from the next wave of IT spending to build out the data center of the future.

It has been a year of tremendous accomplishments. Our industry-leading position and financial strength have been recognized around the globe. In 2011, Forbes magazine recognized us once again as one of the world's most admired companies, and we advanced to the top 50 on the Barron's 500 due to our strong revenue growth and cash flow returns. As we look forward to 2012, I'm confident we'll continue to make strong progress on our journey to be the world's premier electronics company, and to guide innovation forward. The future holds great promise for us, and we are well positioned to achieve even greater results of success.

I would personally like to thank all of our employees for their exceptional work. Our record results reflect your hard work and dedication to the growth and long-term future of Arrow.

Paul will now provide an update on our financial results for the fourth quarter.

Thanks, Mike. Fourth quarter sales of $5.4 billion were in line with our expectations, and represent an increase of 4% year-over-year. Pro forma for acquisitions, excluding foreign exchange, sales were down 3% year-over-year. In Global Components, sales increased 3% year-over-year, as good growth in the Americas was offset by some weakness in Europe and Asia. Sales in Global ECS increased 5% year-over-year, primarily driven by growth in Europe. Our consolidated gross profit margin was 13.7%, an increase of 70 basis points year-over-year. Pro forma for acquisitions, gross profit margin was up 10 basis points year-over-year.

Operating expenses as a percentage of sales increased 70 basis points year-over-year. Pro forma for acquisitions, operating expenses declined 3% year-over-year, and are up 10 basis points as a percentage of sales compared to the fourth quarter of 2010.

To assist you with your analysis, acquisitions added $55 million to operating expenses this quarter. Operating income was $246.3 million, an increase of 4% year-over-year. Operating income as a percentage of sales was flat year-over-year. Pro forma for acquisitions, operating income as a percentage of sales increased 10 basis points from the year-ago period. On a pro forma basis, operating income in Global Components as a percentage of sales was flat year-over-year. In the Global ECS business, operating margins reached 5.3%, representing an increase of 60 basis points compared to the fourth quarter of 2010.

Our effective tax rate for the quarter was 28.4%, and for modeling purposes, you should assume our tax rate for the next few quarters will be between 29% and 30%. Net income was $157.3 million, an increase of 4% year-over-year. Earnings per share were $1.40, and $1.38 on a basic and dilutive basis, respectively. This was again a record level of earnings per share for Arrow. Our results this quarter reflect an approximately $0.05 benefit related to product shortages due to the flooding in Thailand, and we don't expect this to repeat in the first quarter.

We generated $147 million in cash from operations in the fourth quarter, and for the full year we generated $121 million in cash from operations during a period where we achieved record revenue and continued to invest in the Business. Return on working capital of 31% is above our long-term target, and is again best-in-class in our industry. Return on invested capital of 13.2% is well in excess of our weighted average cost of capital, and in line with the midpoint of our long-term target range.

For the full-year 2011, sales increased 14% to $21.4 billion, driven by the addition of recent acquisitions, and growth in both segments in what we all could agree has been a difficult economic environment. Pro forma for acquisitions, excluding foreign exchange, sales were up 2% year-over-year. Operating income was $952.5 million. That represented an increase of 22% year-over-year. Operating income grew at 1.5 times faster than sales year-over-year. Operating income as a percentage of sales was 4.5%, an increase of 30 basis points compared to the prior year. Our operating margin is again within the range of our long-term targets.

In Global Components, operating income as a percentage of sales increased 10 basis points year-over-year to 5.5%, and is within our long-term target range. Operating income as a percentage of sales in Global ECS reached 4%; that's an increase of 60 basis points year-over-year, and is near the low end of our long-term target range. We reported record earnings per share of $5.27 and $5.19 on a basic and diluted basis, respectively. Again, record level for Arrow. In 2011, we repurchased 5.1 million shares at a total cost of $182 million. We currently have $150 million remaining on our most recent repurchase authorization to fund future share buybacks.

In summary, we had a terrific Q4. We again reported industry-leading earnings per share, returns, and operating margins. We continue to deliver to, and exceed, our over-arching goals of growing sales faster than the market, growing earnings at a faster rate than sales, generating returns well in excess of our cost of capital, and being cash flow positive.

This is a high-level summary of our financial results for the fourth quarter and for 2011. For more detail regarding the business units, please refer to the CFO commentary published this morning. We would also like to point out that we have updated our seasonality ranges, and we are available to discuss those with you at any time after today's call.

Looking ahead to the first quarter, we believe that total sales will be between $4.67 billion and $5.07 billion. Global Component sales between $3.35 billion and $3.55 billion. And Global Enterprise Computing Solutions sales between $1.32 billion and $1.52 billion. As a result of this outlook, we expect earnings per share on a diluted basis, excluding any charges, to be in the range of $1.01 to $1.13 per share.

Our guidance assumes that the average euro to US dollar exchange rate for the first quarter is 1.31 to 1. In the first quarter, we expect sales in our legacy component businesses to be in line with the low- to mid-point of normal seasonality. In ECS, we expect sales in the Americas to be in line with normal seasonality. In Europe, we expect it to be at the low- to mid-point of normal seasonality.

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

(Operator Instructions) Jim Suva, Citi.

Congratulations and happy new year to you and your team. The question I had was we've heard a lot from your chip supplier companies, whether it be Intel, Texas Instruments, the various component companies talking about a bottoming in orders and a rebound here. I just wanted to check to see if your Company is seeing that also or is there a little bit of a lag and are you hearing of it at all and are you also feeling that we're reaching a bottom here in calendar Q1 of the March quarter?

Thanks, Jim. I'll start off with this. The first thing is we've said over the years is as these cycles have happened, we typically come out of the cycle after the suppliers do and we typically go down after they do. So we get it back and we're usually offset to that. Having said to that, we saw our book-to-bill improve from the third quarter into the fourth quarter and now in the first quarter the book-to-bill is back at parity. So that is a good thing that we've seen. I would call it signaling right now a market stabilization. I don't know if it's an inflection point. We still have some of our customers that aren't quite sure if they're on the bottom and we have other customers that look like they're bouncing back, which is a good signal. I would fully expect that you would hear from the suppliers. I consider that great news that they start talking about the market changes because that says that we're not that far behind them. But I would call it right now a stabilization and I'd like to see really what happens after the Chinese New Year in Asia-Pac before we could really make a definitive call on that.

Great. I understand. My quick follow-up is on the inventory levels. The past few quarters, you've been working them down on a dollar basis and now it looks like your inventory workdown for March is about in line with your sales. Should we expect you to be at a going forward stability as far as inventory goes and go with sales or do you need to work down inventory some more or grow it some more?

Jim, good morning. I think what we've done over the last couple of quarters is work down the dollar value of inventory for two reasons. One is we wanted to get better absolute turns performance. That's how we measure success in managing our inventory. But also, we saw that the supply chain was a little bit out of balance coming out of the tsunami in Japan. Now I think for the most part that rebalancing, if you will, is behind us and really what we want to do is continuously try to improve how we manage our inventory. It's not an absolute let's get the dollars down as much as let's get the turns up at this point in time.

Thank you. Congratulations to you and your team. We're looking forward to 2012.

Matt Sheerin, Stifel Nicolaus.

Couple of questions. Could you comment on North America, looks like that was stronger than expected in the Components business I'm talking about, could you talk about areas of strength and was that orders and pick-up you saw later in the quarter?

Sure, Matt. We did see above normal growth and we also see, coming into the new year, being mid to normal seasonality, if you will. We did see some strength in aerospace and defense over the quarter. The lighting held its own. Alternative energy, while it declined, it didn't decline that much. And the medical industry had a little bit of a decline quarter-on-quarter itself. But we still see those four industries as driving growth for us in the new year. North America, I would say had a great year. We've seen a lot of new customers come on board with us in North America and the acquisitions that we did helped expand our marketplace and what we could go after that we didn't have before, which is also a contributor. So we continue to be bullish on the North America business.

Okay. Great. And if you plug in the seasonal ranges you're giving for Components in the materials that you put out, if you put in the low end for each region, you still get to the high end of your guidance range for the quarter and I know that in the commentary you talk about low to midpoint of seasonality for each region. So could you talk about the -- how do you explain that in that you just said that you thought North America would be in line with seasonality, maybe a little bit weaker? Could you talk about the other regions and maybe share with us book-to-bill ratios?

When we look at -- what we've tried to put into the CFO commentary is normal seasonal ranges for our traditional businesses. The fact of the matter is, our traditional businesses are shrinking down as a percentage of total sales which adds complexity to trying to project from one slice of our Business to the whole segment. So we need to be -- we, Arrow, need to be careful, make sure we help you all understand what we're trying to accomplish there. Because we have traditional businesses and then we have lots of other businesses around it at this point in time. So when Mike, I think, referred to our book-to-bill improving, that's true by regions in the month of January. And it's not -- it's across the board. So we feel good about where we're going but we've got to be just a little bit careful about taking what is our I'm going to call legacy business, projecting where there is seasonality and mixing that into the whole segment where there may be businesses that don't have seasonality in there. I'll use as an example the iPad space in North America. That actually is much smaller as part of the mix and actually goes the other way. So we see normal uplift in sales in Components in Q1 but in fact in the iPad space or EAD space as we call it now, it actually goes down a bit in Q1 versus Q4.

Okay. You said book-to-bill was up. Does that mean it's positive or above 1 in all regions?

Yes.

Except Europe.

Europe is still trailing a little bit?

Europe's still below 1.

Okay. Just one last question if I can. It looks like good cost controls in the quarter, had some restructuring. Do you have costs that are coming out of the Business in the next quarter?

Yes, Matt. We will be taking a look at our costs in line of some of the acquisitions we've done as well as the individual markets. We would expect that we'll be looking at something around the $30 million range for the first half of this year to come out, and really what we're doing is trying to drive some efficiencies that we have. We did do our system conversion in central Europe. That went off without a hitch. And as you know, when we do those conversions, we end up holding on to some costs that we won't need at a later date to make sure that we deliver the service that we want to to our customers, and we'll be reconciling really the last two installs and getting some of that cost out in the first quarter and continuing to look at the markets. So we think the number is about $30 million over the first six months.

Okay. That's helpful. Thanks a lot.

Brian Alexander, Raymond James.

Very impressive incremental operating margins in ECS this quarter, particularly in North America, and I think all of that driven by better gross margin performance. So how much of the improvement in gross margins came from the acquisitions versus improvement in the core distribution mix versus product shortages which I think you alluded to earlier? And then within mix, what categories are really driving that improvement?

Andy, why don't you go ahead and take it and I'll do a follow-up.

Brian, I think if you look at the core distribution business, our mix towards services and software was the primary driver of the higher gross margin. Hardware lagged a bit as we closed out Q4. Acquisitions did play a little bit of a role but I will tell you that really our legacy business' both in Europe and North America were very strong on the margin side. So again, the mix in software, we've noted virtualization was strong. Infrastructure, software was strong. Things like database, systems management, storage management, all having strong growth. So we were very pleased with the margin model that we ended Q4.

So just over in Europe, Andy, it seems like margins came down and I think you guys cited mix there. But it seems to be a lot of the same mix drivers that are helping you in North America so I'm just wondering why is mix hurting the European profits but helping North America?

I can help you with that. Actually, it's kind of funny how Andy and the team have transitioned this Business because if you go back five, six years ago, this Business lived on proprietary servers. And proprietary servers were the big growth aspects of the Business and they at the time drove the margin and we've now moved into a little bit of a situation where some of the services, the software and some of the storage products have actually delivered higher margins and Europe for the quarter mix-wise had what I'd call a better proprietary and industry standard server performance in the overall business than North America did. And I think that's where you see the difference.

Okay. That makes sense. Just the follow-up on storage, looks like it reaccelerated in terms of growth. Any color on the storage business in terms of whether that was broad-based across vendors? I know you don't have a lot of vendors there but was it broad-based or was it more skewed toward a particular vendor? Thanks.

It was a broad-base run for us and the server -- or the storage business now I believe is our number one product that we sell. That growth over the last several years has really started to outpace the server business and with all the storage that is still required out there, all the infrastructure changes, the data center of the future, the cloud is really continuing to accelerate that business for us and we couldn't be more pleased with all the suppliers we have.

Great. Okay. Thanks so much.

Amitabh Passi, UBS.

Just a clarification, could you elaborate where the $0.05 benefit you said in the December quarter came from the Thailand floods, was it from pricing increases? Was it specific product categories? I missed that and I apologize if you've addressed that already.

Sure. We're not very big in HDD product sets but we have a business that's able to operate nimbly. It's in our Components business, it's not the ECS business. We're able to connect willing sellers of products in demand with willing buyers and that business performed exceptionally well in the fourth quarter and that business accounts for most of that. Obviously, as the flooding -- the impact of the flooding recedes and that business goes back to more of day-to-day type of operations.

To clarify, was that with HDDs?

It was principally with hard disk drives but it was also some other products in there.

Got it. And then just maybe I could clarify, I thought normal seasonality for the fourth quarter projects your Computing Solutions was 35% to 45%, it looks like you came slightly below normal seasonality, maybe just color in terms of what might have happened and where the shortfall came from.

Was that referring to Q4?

Yes, Q4 for Computing Solutions.

I think one of the things that we have to -- this relates to my earlier comments around seasonality. The fact of that matter is that unified communications business doesn't have the same seasonality as our traditional businesses that we've had for a long time. In addition, don't forget as we transition from a Business that as Mike referred to as one-time dependent upon servers, to a Business today that has storage, software, and services, that changes some of the historical mix. So for sure I think we would say that we saw our server business not act in normal seasonality in North America and that may impact the overall Business but when you look at our GP dollar performance and operating income dollar performance, we'd be ahead of normal seasonality.

Okay. Got it. Thank you.

Shawn Harrison, Longbow Research.

Just a follow-up on first the cost reduction commentary in the first half of the year. Is that $30 million versus the fourth quarter run rate? I guess in what business would it be more focused, Global Components or ECS?

Just as a point of clarity, we're talking about getting more efficient and more productive, being able to squeeze out $30 million of costs that are on an annual run rate basis. We expect to execute on that $30 million of annual cost reductions during the first half of the year. So we won't get to full run rate if you will until the third quarter but that's how it's going to go out. We've had pretty good success over the last several years in being more efficient and more effective in setting targets and driving them out of the business. That's our target for this year. And it will be in all aspects of Arrow, not just Components, not just headquarters, not just ECS.

Okay. And then with ECS, seeing that the benefit from HDDs was in Global Components of 5.3% EBIT margin this quarter, at the top of the long-term model but it seems as if the mix continues to move in your favor. Is there upside as we move going forward given the M&A activity plus just the mix moving in your favor to drive that margin even higher?

I will take it. Our goal in life here as we shared with you at Investor Day last year is to continue to drive our M&A program towards services, towards more products that we're not in today that require us to do some sort of value-add which also indicate a higher margin. We do believe that we will do that not only for ECS but for the entire Company and it will obviously take some time, given how large our legacy businesses are and we'll continue to attend to them and do the acquisitions as we need to to ensure our position in the marketplace. But yes, our overall goal is not to stop.

Okay. Then one final point of clarification, just a commentary on continued weakness in low-end handsets in Asia, is that business, has it bombed or is it continuing to see sequential down ticks? Just any clarification would be helpful.

Peter, you want to take that?

I think Malaysia at this moment I think visibility is still relatively low because they're just coming back from Chinese New Year. We're probably in a better position to really know which way it's going, based on the book-to-bill up to the end of January, I think it is improving. But it's too early really to say for sure which way it's going. It will probably be another two to three weeks before we'll have a better handle in terms of what's going on there.

Okay. Thank you for the clarification.

William Stein, Credit Suisse.

I'd like to address the Components business again. In the CFO prepared -- in the presentation it talks about cancel rates and other leading indicators matching normal patterns and you talk about book-to-bill now at 1.0. I'm wondering why we're seeing the guidance below what I think is normal seasonal?

Will, it's Paul. Visibility still remains a bit cloudy. And we're really looking hard at what's going to happen. The fact of the matter is, we've outperformed any competitor in any market. And as Mike mentioned, we think that we're at the tail of the trends that suppliers see so we're just taking a cautious approach to it.

Okay. Fair enough.

That also gives us a better feel for how we're going to run our Business, quite honestly, and that's a consistent message we sent throughout the organization.

Okay. Now, thanks for telling us about the Thailand flood impact on the components side. I want to make sure I understand, that benefit rolls off in the March quarter and also did you have any negative impact, for example in storage systems?

Well, in storage systems at ECS he we had a little bit of a backlog that did not get shipped in the December month. But I believe that those issues will work their way out in the first quarters. I wouldn't call it a significant impact to ECS.

One quick one, if I can, guys. Can you give us an update on the IT asset disposal and life-cycle management business, I think you might have renamed it earlier but I missed that. And I think we've seen some acquisitions that have been done in this area that have been put into different segments, some in one and some in the other. Can you clarify that for us and talk about how big that is for you today, that business overall and where you think it can go over the next couple of years? Thank you.

Sure. So yes, we have changed the acronym from IT asset disposal to electronic asset disposal. So that's how we're referring to it internally. All of that from a segment point of view sits in the Components business today. As Mike mentioned, generally or broadly for all of our acquisitions, they're at or ahead, I can tell you of our Business case for the Board and I can tell you that in 2011 we in that space exceeded the Board case. So we feel very good about where we are. We have critical mass now. We are the first one also to have a European footprint. We think it's a competitive advantage for us. And we're driving the business hard and we expect to see good growth this year also, and we know like all of our businesses we'll grow earnings faster than we'll grow the top line.

Okay. Great. Thank you.

Robbie Wilkins, Goldman Sachs.

First question on the ECS business, I was just wondering, looks like networking infrastructure and virtualization did really well through the year. I'm just wondering if this is going to lead the growth impact in 2012?

Yes, so I think that we've worked hard to increase our networking offering at ECS. We signed Juniper, which was announced last quarter and yes, I do believe as we look at the converged infrastructure play that's happening out there in the market, that storage, networking, and virtualization will continue to be leaders in 2012 and so will security. So I would say all of those continue to be looking like pretty critical purchasing points for most companies who are building out their cloud infrastructure.

Okay. Great. And then the second question, just on your M&A pipeline, wondering if you could give any update here. I know someone mentioned earlier the reverse logistics has been pretty popular. Just wondering how you're viewing that versus the buyback you guys have left. Any update there would be great.

Well, on the M&A piece, we still believe that the market is fairly attractive in the areas that we want to expand in. We have been and are going to continue to be very disciplined in respect of how we evaluate these acquisitions to make sure that they fit not only the financial targets but also our strategic and cultural goals for the Company. I think that what you've seen from us in the past has been very pointed towards the services, the life cycle businesses, and also in the core and product expansion. I would not expect to see any dramatic change from our strategy going into the new year. Paul, you might want to address the buyback.

On the buyback as we mentioned in the script, we have $150 million authorized. We've been very consistent in the last several years that we will offset dilutive impact of any equity awards. Our Board meeting is at the end of the month, February. We'll have an idea on what those awards will be and we'll take the appropriate action to ensure that there's no dilution around that and then we'll continue to think about the remaining authorization about how we might deploy that. We've been very aggressive in returning capital to our shareholders and we'll continue to do so, striking a profit balance between funding organic growth with our cash flow, doing M&A, returning capital to shareholders

Steven Fox, Cross Research.

First of all, thanks for providing us with another acronym. That's appreciated. Just going back, looking forward on your margin for the coming quarter, especially in the Computing Solutions segment, even when we adjust for some of the impact from mix, et cetera, are we looking at higher year-over-year margins in Computing Solution, given where we're exiting the year? If you could provide any color on how to model out this new level of Computing margins.

Steve, year-over-year we do have an expectation that we'll see a move up in our ECS North American value-added distribution business in operating income and we expect also a continuation of the improvement that we've seen in the European business.

So of the similar type of year-over-year increase as you just experienced in that segment? I mean, it was pretty substantial.

It's tough to really call Q4. That's a really just a spectacular quarter, quite honestly. It's tough to say that's what's going to be the normal trend each quarter. So I wouldn't think that we would see that much of an uplift. Our European business is facing a bit of a headwind right now, when you look at the overall continent, right? And the ECS business in Europe really is very much tied to capital expenditures and companies in Europe around capital expenditures, probably pretty similar to experience that we went through in the United States three or four years ago where cash was critical or liquidity was critical. So I think that may be a bit of a drag on the operating income margin improvement year-over-year but our expectation is we'll see good improvement nevertheless.

Okay. That's helpful. And then second question, on Europe in general, I guess there's a real chance that your trends remain below seasonal all this year. You've talked about efficiency improvements. What happens if that's the case? Would you consider other actions to either consolidation operations or eliminate services et cetera within the continent? If you could just talk about your contingency plans there.

I think if you take a look at the past, we're not treating what's going on now than any other market swing we've ever seen over the last several years. If the market does not go our way we will certainly address any inefficiencies that we have in the Business on both sides and take the appropriate actions. Right now, we forecasted out what we've seen. We've talked about our initial work on the cost side to gain efficiencies and if we need more, the market changes on us, we'll certainly address that. But again, we're not into whipsawing the business on things that we may see but we do have plans in the drawer that if the market changes on us one way or another, that we can implement those.

Great. Thank you very much.

Ananda Baruah, Brean Murray.

A follow-up just to the margin question, to the ECS margin question, I believe you said you expect ECS North America Op income dollars to grow and also improvement in Europe. Was that improvement in the margins or also growth in the Op income dollars? And I guess appreciate the comment about this quarter, the really, really strong margin quarter, with a lot of confluence of circumstances coming together, perfect storm so-to-speak. But that being said, since it sounds like you pointed towards mix and the new line card which sounds more -- I don't know, more permanent, at least as being a part of the Business as the primary driver, have we reached the point where the ECS margins if not as strong as this quarter are sitting in a different place as we move forward now than we were for the better part of 2011?

Okay, let me try to answer the couple questions you asked. So when I was answering the question before I was talking about operating income percent. We would expect operating income dollars to go up in North America and we would measure in euros, not dollars, and we expect it to be flattish to marginally up in Europe. Relates to margins, remember, we set very aggressive best-in-class by far targeted margins and we're already in that range in North America. We said all along that the level of maturity, not business maturity but organizational maturity in our ECS business in Europe is different, and we've really grown quite a bit through acquisitions and each year we're turning our attention to operational efficiency which will help close the gap between the targeted margins that we have and where they are today. So I do think to your point, several years ago when we put out the targets for ECS folks never thought we could get there and now we've proven that in North America we have delivered and we'll also continue to push hard in the European business to ensure we deliver for the segment.

Great. Thanks. That's helpful. I guess just one quick follow-up. What if any impact, positive impact from hard drives do you guys have baked into the March-quarter guidance?

We don't have anything baked in.

Got it. And is that just due to absolute conservatism or have the forces completely changed as they impact you that you just don't think there will be an impact? Thanks.

For us, it's not that big of an issue, number one. And number two, we don't think that the market will be in the kind of constraint that it was in the fourth quarter, and I think products will free up based off of what the sales growth is expected to be in the first quarter for most people that use those drives to manufacture. So I think we're into a balancing situation and there was really no expectation that hard disk drives are really going to drive much around here at all.

Fantastic. Thanks a lot. Congrats on a solid quarter.

Operator. Lou Miscioscia, Collins Stewart.

Thank you. I guess looking at base IT demand, looks like that you all grew in the US pro forma about 1% for ECS. I'm just wondering if you thought that was in line with the market, above the market or below the market, maybe just give us your thoughts for how demand appears for first quarter from an organic standpoint.

I'll start off with that. I'll go as long as my voice will hold out. I'm sort of fighting a cold which is a bad day to be doing that with all you guys on the line. We really think that ECS in general had a fantastic year, and I believe in almost every product category we made good gains and good strides throughout the year. I also think that the changes in the product portfolio helped us to grow. I do believe we are relatively in line with the market. I think if you look at the new year, we're expecting IT growth to be somewhere around 3% to 5% based off of the forecast that we read the same as you and we concur with those at this point in time. But all in all, I believe we're on track. I believe we're in there with where the market is. But more importantly, I believe we're in great position from where the market is heading into the future with the cloud and the data center of the future. So we believe we'll continue to outgrow the market.

Okay. Maybe then also following up on that, you gave good color on storage services, networking software. What about servers? I know you comment about them but maybe you could give us growth for industry standard servers and what you also saw in the proprietary area.

Servers grew in Europe, both industry standard and proprietary. In North America, after a very strong refresh cycle, both proprietary and industry standard took a pause and were actually down year-over-year in the Americas, but I believe that some of that was a reflection of exactly what I referenced, a pause, and I believe that the server business will continue to chug along and get back to normal seasonality in the first quarter in North America.

Okay. Great. Thank you.

Brendan Furlong, Miller Tabak.

Quick question, with the Component business improving into the March quarter, should we expect the gross margins to get a little bit of a tailwind there with the -- especially out of Europe?

As we look to the first quarter, we're not really planning on exceptional change in gross profit levels. Europe itself as a continent is faced with some real economic challenges. That usually means that it will be a very competitive marketplace and maybe a bit price sensitive. So I don't see us getting significant uplift compared to the fourth quarter in GP in that particular segment, though I would expect year-over-year that the gains that we've made in the second half of 2011, we'll keep those gains. Maybe not a sequential basis but definitely year-over-year we'll see an improvement.

Okay. Great. My last follow-up would be on the -- going back to the inventory question that came up earlier. Do you think your turns will improve in the March quarter or you'll call them more or less flattish with December?

We would be looking for improvement in the first quarter.

Okay. Thank you.

We have time for one more question if there's any more questions.

Sherri Scribner, Deutsche Bank.

I was just curious, I had a couple of quick modeling questions. I think most of my questions have been answered. In terms of the interest expense, it ticked up a bit, Paul. Would you expect it to remain at these levels in 2012?

I would expect it to stay at the Q4 level annualized subject to deployment of the cash flow we generate.

Okay. And then in terms of operating expenses on an absolute dollar basis, would you expect operating expenses to come down in the first quarter as revenue comes down, or should those stay relatively flat?

I don't know that we'll really have a chance to execute on our -- and get cost out in the first quarter from our $30 million targeted level, so I don't think you'll start to see any of that until second quarter or into second half of the year. So I think you'd see a normal trend in expenses in Q1.

Okay. Great. Thank you.

We have no further questions at this time.

Thank you, Erica. If you have any questions about the information presented today, please feel free to contact Paul or myself. Thank you, and have a nice day.

Thank you for your participation in today's conference. This concludes the presentation. Everyone may now disconnect and have a great day.