安富利 (AVT) 2003 Q1 法說會逐字稿

Good afternoon everyone and welcome to Avnet's first quarter fiscal year 2003 update. My name is John Hobeth (ph) and I am VP and director of investor relations here at Avnet. If you are listening by telephone and have not yet accessed the slides for the presentation, please go to our website, www.ir.avnet.com and click on the icon announcing today's event.

As a reminder to our participants, the slides that we will use today will move automatically, as we advance through the presentation. We are happy to accept questions via e-mail and have provided quick access through a link on your screen, situated to the left of the slide. We will receive your questions during the Q&A, as many as time allows during the Q&A. Now before we move onto formal introductions, I'd like to review Avnet's safe harbor statement.

This presentation contains certain forward looking statements within the meaning of section 27a of the securities and exchange act of 1933, and section 21e of the securities and exchange act of 1934. These statements are based on management's current expectations, and are subject to uncertainty and changes in actual circumstances. The forward looking statements include statements addressing future financial and operating results of Avnet and may include words such as anticipate, expect, believe, should or other similar words. Actual results may vary materially from the expectations contained in the forward looking statement. The following factors, among others could cause actual results to differ materially from hose described in the forward looking statements. Changes in business conditions and the economy in general, changes in market demand and pricing pressures, allocations of products by suppliers and other competitive and or regulatory factors affecting the business of Avnet in general. A more detailed information about these and other factors is set forth in the Avnet's filing with the SEC including the annual report in Form 10-K for fiscal 2002 and the most recent quarterly report in Form 10-Q. Avnet is under no obligation to and expressly disclaims any such obligation to update or alter any new forward looking statement whether as a result of new information, future events or otherwise.

To begin, Ray Sadowski, our Chief Financial Officer, will provide an overview of the company's financial results and liquidity position. Roy Vallee, Chairman and CEO, will then make several comments regarding the performance of the company during the past quarter. Comment on broader issues relating to Avnet and the industry and further detail planned expense and then we will move on to our Q&A session.

Also with us on the call today and available to take any questions that you may have related to our business operations are our three operating group presidents: Andy Bryant, president of electronics marketing, Rick Hamada (ph) president of computer marketing, and Ed Cammon (ph) president of applied computing. And now we will move on to Ray for our financial overview.

Thanks John and good afternoon everyone. I would first like to provide a broad overview of our operating results for the first quarter of fiscal 2003. Please note that for analysis purposes, we normally exclude all special charges in order to provide a clear comparison of operating results between the various quarters. Accordingly, for those with viewing access to our slides, you should note that the results for the 4th quarter of last year exclude special charges recorded in that period. Avnet's first quarter fiscal year 2003 results reflect revenues of 2.17 billion and a slight loss of 488,000 which is a sensory breakeven from an EPS perspective. Quarter to Quarter sequential revenues increased by approximately 29 million or 1.4 percent, due primarily to stronger sales in our electronics marketing and applied computing businesses.

Applied computing sequential sales growth was offset to a substantial growth by normal seasonal weakness in computer marketing. EM sequential revenue growth benefited from a stronger Euro, meaning in constant dollars EM's revenues would have been flat on a sequential basis. The overall net effect was a slight sequential growth in consolidated revenues shown here. YOY quarterly revenues declined by 27 million or 1.2 percent on the relatively weaker CM revenues during the current year quarter. Gross profit dollars and margin declined sequentially primarily as a result of the revenue mix shift between AC and CM. Revenue growth in the lower gross profit margin PC builder segment of AC, coupled with reduced CM revenues of higher gross margin business, drove a majority of the sequential decline driving consolidated gross profit margin. Operating expenses did fall sequentially and on a YOY basis fell by 10 percent or 29 million. Planned expense reductions for the September 2002 quarter were realized.

However, several mitigating factors offset the majority of the expense cuts. These mitigating factors totaling approximately 5 million, included the change in the value of the Euro, which increased the US dollar value of European expenses, annual merit wage increases, plus some severance costs less a one time cash recovery related to a resolution of purchase price contingencies pertaining to the acquisition of EDV and RKE (ph). As a result of these factors, operating income was lower sequentially and with interest expense remaining flat and other income bolstered by currency gains, income was slightly down on a sequential quarterly basis, resulting in our essential breakeven EPS performance. On a YOY comparison, EPS improved from a loss of 16 cents/share to breakeven on net income that was up over $18 million.

This operating performance is due almost entirely to cost-reductions over the past five quarters. The cost reductions are important because as you can see here revenues continue to track sideways. With Avnet sales for, quarter to quarter revenues continue to move at a relatively tight stable band. The lack of real market growth continues to be a disappointment but the flat trend is reflective of the relative stability in the industry. And like last quarter, while markets did not get better, the markets we serve did not get worse either.

While the companies revenue levels remain relatively flat over the last five quarters, EPS have improved since our earnings turned profitable since September quarter of fiscal year 2002. Avnet returned to profitability before special charges, within three quarters of the September 2000 low of a loss of. Once again as you can see from this graphic, EPS has stabilized but remained at a near breakeven for the last four quarters.

During the September quarter our gross profit margin declined sequentially from 14.2 percent to 13.7 percent, consistent with the shift in business mix between CM and AC that I spoke about a few minutes ago. Another factor that has pressured our gross profit margin to a certain extent is the continuous softness of the IT markets we serve, as the cyclical trough perpetuates itself. Note that enterprise gross profit margins have remained relatively stable and over the same five quarter time frame but with average gross margin of approximately 100 basis points lower than during the up-cycle. This lower average gross profit margin, is driven primarily by the shift in business from our higher margin component business to our lower margin computer businesses.

During the fiscal year 2001 cycle peak illustrated in this slide, EM accounted for roughly 67 percent of consolidated revenues as compared with the cycle trough where it accounted for approximately 55 percent of consolidated revenues. We believe that the lower gross profit margin experienced by the company over the past five quarters is not structural but are temporary due to primarily a change in the enterprise revenue mix which should correct itself as we move through the next up-cycle. For the next up-cycle we see no reason why gross profit margins cannot approach prior levels.

The important part of the operating leverage created over the last several quarters, has leaded to some expenses.. Beginning in the September quarter, total quarterly operating expenses were reduced from a pro forma 358 million to 278 million as the first quarter fiscal 2003. In concert with our commitment to grow earnings and create shareholder value and a reaction to the continued disappointing market environment, the company will engage in further cost reductions during the December 2002 quarter and Ray will specifically outline those moves during his comments in a few minutes.

The net effects of revenue mix changes, gross profit dollar declining (ph), and cost reduction efforts resulted in a 32 basis point reduction in operating income margin from the prior sequential quarter. Over the past four quarters our operating income margin has also moved in a fairly tight but stable band. At levels that we feel need to substantially improve. Without material improvements in the markets we serve, a flat revenue and gross profit dollar performance will not generate the P&L results that we require.

We believe the results will show a marked change in the trajectory of our operating profit margin trend line going forward. The important part of the structural operating leverage that we have built into our business model has been achieved through our in working capital reductions. Working capital fell sequentially by about 155 million or 7.5 percent on essentially flat revenues. Since the peak of the last cycle in December 2000, we have reduced working capital by over 1.8 billion. With the full benefits realized with the companies return on capital employed, we look forward to improved and sustained productivity ratios in the next up-cycle. Cash generated from working capital reduction has been used primarily to reduce company debt. Since the end of December 2000, we have reduced total debt by about 1.6 billion. In the September 2002 quarter, using cash generated primarily from working capital reductions, we reduced debt by an additional 118 million, excluding the impact of the increase in the value of interest rate swaps which are reflected as additional debt on our financial statements. These efforts of reduced interest expense further increased Avnet's operating leverage and significantly strengthened our balance sheet. In the past couple of weeks we issued two press releases of furthering our ability to meet all related to maturing bond debt in 2003. And clarifying the terms and conditions of the recently amended multi-year bank facility. We position, use of current credit lines to pay down debt, credit leading triggers, cash-flow generation, and Avnet's ability to access the capital markets and execute an affordable debt offering in the short term.

While it is imprudent from a time perspective to try and answer all these questions today, here are the facts about our liquidity and our plans going forward. First, there are no restrictions on our ability to use our current bank facilities to liquidate debt upon maturity if needed. The only restriction, is that we cannot use our bank facilities to pay off debt prior to maturity. Second, the amounts currently outstanding under our bank credit facilities amounting to over 420 million are more than enough adequate, when combined with current cash and expected cash generation of over 373 million, to both liquidate maturing 2003 debt and to fund our global operations. Third, we will consider a capital markets transaction in the short term, to enhance our capital structure, with a new long term debt offering and use the proceeds to prefund the maturing 2003 bond. Fourth, it is not our intention to issue equity or use equity based capital markets transaction as a means to raise additional capital in the near term. Lastly, and perhaps most important, we do not think it is correct to assume that if the spring lean (ph) provision contained in our multi-year bank credit facility is triggered we would be further downgraded. Both agencies, Moody's and S&P were well aware of the spring lean (ph) provisions, prior to their recent downgrade announcements. Additionally, we have reached agreement with the banks participating in our accounts receivable securitization program to lower the ratings trigger in that facility. That agreement which will be signed shortly following the completion of the formalization of legal documentation moves the trigger to either Ba2 the Moody's rating or BB, the S&P rating. Two grades below our current ratings level. Therefore, we are not concerned relative to the availability of funds under that facility.

Reviewing the liquidity numbers you can clearly see we expect to have more than enough liquidity to deal with the expected 2003 debt maturity and fund our operational needs. For those who doubt that we can continue to generate cash, I would like to point out that sales have been essentially flat for the past five quarters. During which time frame, we generated approximately 1 billion in cash, that includes 120 million in the September quarter just ended and 200 million in the quarter ended June 2002. Assuming no significant increase in sales through the end of the fiscal year, we believe that the 200 million of cash generation that we are expecting over the next 9 months is conservative. Since it includes about 150 million in tax refunds we received just a few days ago. Should sales begin to increase more rapidly, we believe cash generation from profits and available liquidity illustrated in this slide, is more than sufficient to fund any capital required for our operations.

We have many options open to us and here are the most likely scenarios to consider as it relates to our Debt/Cap structure: We can do nothing, as far as a permitted capital markets transaction and liquidate maturing debts using a combination of cash and credit from our existing facilities. As I discussed earlier, there is no restriction from accessing our current bank credit facilities to do so. Although its is not our preferred option. Second, our most preferred scenario, is to issue new senior debt in the bond market to partially cover our maturing 2003 bond. Another option would be to use a new larger borrowing facility that would be secured by certain assets of the company, to replace our current credit facilities and our maturiting 2003 notes. We have been reviewing such a facility, to include as part of our capital structure, because it provides an efficient way to partially finance a cyclical business such as Avnet.

We are actively working in parallel on both of these two scenarios. And we will provide further information on our progress as warrants. To further brief you on Avnet's current and future operating results, Avnet's CEO, Roy Vallee, will make several comments and lead us to our Q&A.

Thank you Ray and good afternoon, everyone. I want to begin by saying that I am genuinely pleased by the performance of our team worldwide for the September 2003 quarter. Market continued to move sideways, but the Avnet team is making great strides in effectively managing those things that we can control. We are moving this company into position to significantly benefit from the inevitable lift in the markets that we serve and reward our shareholders with improved financial performance. Ray layed out the companies enterprise performance and I will make some additional comments as well as highlight the performance of our operating groups. Then I would like to speak specifically to the cost reductions that we will be making in the December 2002 quarter and finish with some revenue and earnings guidance for the quarter and the rest of this fiscal year along with the June - ending with the June 2003 quarter.

As I've noted before, this unprecedented market environment has been challenging. Since the peak of the last cycle the December 2000 quarter our revenues declined sharply for three quarters and then moved side ways for five quarters, leaving us down approximately 40% as of the quarter just ended.

24:16 3:44It is against this back drop of five quarters of stable performance as well as the fact that we did not see significant growth on the horizon in the markets we served that the company is taking further action to size the business to current revenue levels in an effort to improve our financial performance and ensure reasonable profitability. The essentially flat sequential growth in revenue during the September 2002 quarter is clearly indicative of an industry that continues to tread water in the midst of a broad technology industry economic trough.

Our operating group performance tracked very close to the guidance we gave last quarter. EMs revenues were flat based on constant dollar growth. A.C. 11s were up offsetting each other as we anticipated.

This slide provides the updated quarterly group revenues and operating margin as well as the percentage breakdown of consolidated revenues by operating group and regions of the world. The revenue by region graphic in the lower right-hand corner depicts the relative growing importance of our Asia region which reached 10 percent of revenues. Our media region remained at 32 percent of consolidated region. The Americas region decreased from 61 percent to 58 percent of total revenues on a year-over-year basis.

The Asia region continues to be a primary growth driver at this time, as the region is becoming a more important part of the technology supply chain.

While I fully expect that the market will rebound eventually and our company's revenue growth will resume here in the U.S., Asia should continue to grow as a percentage of enterprise revenues.

We are well positioned in greater China and we will continue to invest in that region of the world to meet the needs of our customers and suppliers.

As an update to commentary made on last quarter's conference call, applied computing sales into the PC builder segment resumed growth as we guided last quarter.

After falling dramatically in the June 2002 quarter, sales of the micro processors and disk drives into the white box PC manufacturing sector grew 19 percent sequentially.

The group sales of embedded systems into the non-PC OEM segment also grew sequentially.

We anticipate continued growth in applied computing through the December 2002 quarter. Computer marketing is also expecting the typical seasonal growth that accompanies the end of the calendar year. Together, our computer businesses should grow 15 to 20 percent sequentially.

You have her me say before, we cannot control the markets we compete in, but we will continue to manage the things we can control. Since the December 2000 peak of the last cycle when the markets we compete in began to deteriorate substantially, we have taken out of the business approximately $323 million in annualized SG and A through seven consecutive quarters of expense reduction.

Reducing expense has been an important ingredient in bringing the company back to break even from the cumulative 19 cents per share loss we experienced and the three negative earnings quarters.

We have built a significant amount of leverage into our business model through prior cost reductions. The continued working capital reductions of over 1.8 billion and reductions in total debt by nearly 1.6 billion. Through additional cash flow generation we have strengthened our liquidity position with nearly $750 million in liquidity currently available to us today and we have a number of financing options available to us as Ray noted to ensure that we have adequate capital to meet any requirements the company has in the short or long-term.

These are things we can control and we have performed relatively well through this historic downturn.

However, we are not satisfied with a near break even performance. I stated last quarter we will do what is necessary to ensure profitability at whatever level of revenues we experience going forward.

So, where do we go from here? We think the markets will gradually rebound and begin growing again in 23. But we do not control the markets. What we can control given a reasonable amount of time to react is our level of profitability. We are committed to generating reasonable profitability at whatever level of revenue the markets will yield. We will continue the effort centered around our value based management and return on capital employed initiatives. This will help ensure that working capital productivity is maximized. But the most important action now underway is taking approximately $80 million of additional expense out of our business in order to return the company to reasonable profitability.

Without evidence of a pickup in the markets we serve, we must size the business to the level of revenues we are experiencing. We have targeted $80 million of annualized cost reductions aimed at re-sizing our infrastructure in three main areas. First, additional census reductions have been targeted and are mainly focused on non-customer facing personnel. Some reductions will be made through consolidation of selected facilities.

Additionally, some selected IT related initiatives are being curtailed. There will be a special charge in the December 2002 quarter associated with this expense reduction effort and we will outline that at a later date.

The net result of these cost reductions should have full impact in the March 2003 quarter. Expense reductions may not be evident in the December 2002 results due to a couple of factors. The timing as to when during the quarter the expense reductions are actually implemented and the impact of incremental expenses required to support the expected growth in our computer businesses.

As we guided in today's press release, we see enterprise revenue growth in the December 2002 quarter stemming from an expected 15 to 20% sequential increase in revenues from our computer marketing and applied computing businesses. We expect revenues from our EM business to be relatively flat sequentially.

This expected revenue lift gives us comfort with the current consensus estimates for the December 2002 quarter. For the March 2003 quarter we anticipate slight growth and enterprise revenues over the September 2002 quarter's revenue's levels, but we are not depending on that growth. With the affected cost reductions in place we should meet or exceed current consensus estimates of six cents for the March 2003 quarter assuming revenue is at least flat to the December 2002 quarter

Based upon the expected seasonal growth in the December 2002 quarter, and the outlined cost reductions we feel confident in meeting the current annual earnings per share estimates of 22 cents.

We are truly committed to creating shareholder value for our investigators investors. We are yielding dividends as we reach new levels of working capital productivity, asset velocity and operating leverage. We will accelerate earnings growth with the operational moves we announced today and our commitment to a strong balance sheet is unwavering.

Admittedly we have been astounded at how our stock traded over the last few weeks and the current valuation. Nonetheless we are confident that concerns about liquidity, cash flow generation and profitability will soon melt away as we go about our business of successfully operating this company. We are a leader in the markets in which we compete. Our management team is the most experienced in our industry. And we have a sound strategy to carry us forward and our balance sheet is strong.

We are returning to profitability at current revenue levels and our position to grow earnings and returns at an unprecedented rate as the technology market eventually recovers.

With that let's open up the lines for Q and A.

Excuse me, ladies and gentlemen. We will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone key pad. To remove your question from the queue, please press star two.

For participants using speaker equipment, it may be necessary to pick up your hand set before pressing the star keys.

Our first question comes from Stephen Fox with Merrill Lynch. Please state your question.

Good afternoon, guys. Roy, could you talk a little bit more about the restructuring by your business segment? In other words, where will it be more focused on? Also could you give us a head count and rough idea how much of a census reduction we are looking at over the next few quarters?

Okay. As I think we mentioned in the press release, each of our operating groups and each of our regions will be somewhat affected. But it is safe to say that the majority of the impact here is electronics marketing where the majority of the revenue declines have occurred.

Relative to the census, we are not prepared today to talk about the census reductions. We are not far enough along in terms of the decision making and announcement process to put out numbers as of this call.

Where is your head count right now? Could you give that number?

Absolutely.

We are slightly less than 11,000, which is about 4,600 from, down from the peak in December of 2000.

One last question. The applied computing business returned to profitability. I'm sure it's not where you guys would like it. What would it take to get it back to say those three to three and a half percent ranges that we saw earlier in fiscal 2002? And when do you think that will happen?

Hi, Steve. This is Ed. You're right. We have made the turn around from the loss to a profit in one quarter. We are proud of that. We are not proud of where the numbers are right now. But as Roy said, we should be participating in an up tick in the computer businesses this quarter. That should put us in much better shape. Anticipating a similar kind of move quarter on quarter. My guess would be we will be back to the kinds of numbers we like to see in the second half of our fiscal year, first half of next calendar year.

Thank you very much.

Our next question comes from Brian Alexander with Raymond James. Mr. Alexander, please state your question.

On your guidance for next quarter on the revenues, up 50 to 20 percent for C M NAC, is that for each division or is that combined? How should we think about that?

Brian, I would like you to think about it on a combined basis. Although I would not be surprised if both groups came within that same range. You know, I think we are seeing a little more pricing pressure in Ed's business in terms of processors and drives. He may be at the lower end of the range. And I think we see typically a little more seasonality in Ricky business. He may be at the high end of the range. But the guidance we are giving is 15 to 20 percent on a combined basis.

I guess, is the confidence in C M perhaps increasing towards the higher ends of that range? Is that based on what customers are telling you currently or increasing spending patterns over the past few weeks? Is that an assumption based on normal seasonal patterns?

Rick, you want to take that? Well, we may have a technical problem. Rick is not physically here. Brian, the answer is all the above. We are getting off to a reasonably good start here in the month of October. We, as you know in the enterprise space we have pipelines we can watch so we have reasonable quote activities in our pipelines. Then we are monitoring this activity against prior comparable seasonal periods. And based on the algorithms, if you will, if you can imagine that scenario, that leads us to believe we will be in that 15 to 20% range.

A couple other questions. Your inventory days were down considerably sequentially. Is that pretty much a function of the mix switching towards C M or would you say you reduced inventory kind of across your operating units?

While Ray is checking the data here to make sure I'm not telling any untruths, I believe we decreased inventory in each of the three operating groups and improved inventory productivity in each of the three operating groups.

That's correct.

This is Andy. In the semiconductor base, we improved our turn 16 basis points and had our best times turn over the last six quarters. Our components inventory is getting really back in good mix.

The final of course relates to other income, 5.9 million. If you could put color on what that was, that would be helpful.

Primarily two pieces. One is interest income which we had for a while and is reflected in prior quarters. In addition to that, the other primary amount relates to foreign currency gains wherein prior quarters as an example in the fourth quarter of last year we had currency losses. It's now swung the other way. The combination of both of those items account for most of the 5 million plus you see in other income.

What should we be thinking about modeling for that item?

Typically $2 million on a going forward basis. That currency was a little bit up usual. It hurt us in some areas and hurt us in others. The combination of interest expense and other items, it's generally a $2 million item is what we typically would look to model on a go forward basis.

Thanks a lot. Our next question comes from Mat Shearing with Thomas Weisel Partners. Please state your question.

Shearing (ph): Thank you. Roy, I know that you are not going to talk about exact head count reduction, but just particularly in the specific areas, is it electronics marketing or is it across the board? Just give us an idea of where you think the cost structure is too high right now.

Mat, the issue is more abdomen electronics marketing issue simply due to the severity of the revenue decline. I think maybe, you may be familiar with the bull whip effect in the supply chain. But we have a situation here where applied computing is still sitting at revenue levels above a year ago. Computer marketing is down but it's single digit down from a year ago. Electronics marketing is just now closing in. The key here is to look at revenue decline from the peak and EM has been where the brunt of the problem has been experienced. In terms of the cost reductions, as I mentioned earlier the majority will come from EM. However, there will be reductions in each of the inner two groups and each region of the world.

Shearing (ph): Okay, great. And with the inventory situation now, I didn't hear the beginning of the call, but what is your posture going forward in terms of inventories? I know you want to continue to generate some free cash here. Are you going to keep a lid on it? Are there areas where you see opportunities to bull up some inventories, take advantage of good pricing and be prepared when the demand kicks up?

Mat, we are through this entire cycle and especially the last three quarters or so, we are continuing to replenish our fast moving inventories. That activity is accelerated at electronics marketing over the last three to four months or so. So we will continue to do that. The reason we are able to continue the lower inventory and productivity is that over time we are eventually able to work the inventories out of the mix that we do not need to replace, while creating high asset velocity on those new inventories that we are replacing. I don't know if you followed that or not.

Shearing (ph): Yup.

As I look forward it's pretty much more of the same. Ed has inventory he would like to move out of his business. Ricky actually operating at a pretty high asset velocity today. Andy's got what we would call C, D, and E movers that he needs to continue to work down while he will continue to buy and aggressively carry his A and B items.

Shearing (ph): If particular make an additional comment, on the A and B items that are the high running commodity items we are also taking advantage of excellent pricing in the market right now at market price on these products. The net effect is we are able to get nor depth in our inventory, our days of inventory on the shelf, but not increase our working capital dollars. One of the advantages of our size and scale is the market price that is available to us right now based on the supply and demand.

Okay, mat?

Our next question comes from Mr. Sasmit Dwivedi with Goldman Sachs. State your question.

Good afternoon, guys. Some further clarification on the free cash flow from Ray. When you talked about the 200 million number, you are including the 150 million you received in the, in other words the additional operations related cash flow is about 50 million; is that correct?

That would be the minimum, that is correct.

Okay, that's fine. On the SG&A side, maybe Roy you can address this. I know you talked about not sort of having worked through the details just yet, but in terms of seeing the full impact of the cost reductions, what time frame are you thinking about? Would that happen in the March quarter already or more like a June time frame?

Our intent is to complete all of the actions associated with the cost reductions during the current quarter. So that in the March quarter we would experience the full effect of the savings.

Okay, that's fair. And then finally, I'm trying to get more color on the components business. What you are thinking about for the components business being flat for the December quarter, are you basically assuming that units and pricing both stay flat or is it an sums of a moving and then offsetting each other? Thanks.

I am going to ask Andy to take a shot at that. The reality is over the last couple of quarters EM's revenues have been relatively stable with rising units but declines prices, especially in the quarter just ended.

But Andy, as you think about the December quarter, how do you think about unit volume versus pricing?

I think the best guidance would be that each would remain flat. We have, as you noted, been experiencing a rise in unit shipments offset by ASPs and then as you look, as we just ended the September quarter, units kind of came back to even, so to speak. I think the best thing 11 to look forward to in December is flat on each.

But not a decline on ASPs, which would be good news

Thanks, guys.

You're welcome.

The next question comes from Rob Damron with SWS Securities. Mr. Damron, state your question.

Hi, guys. I want to ask you about the Asian marketplace, with that being the fastest growth segment and probably going forward as well. Could you talk a little bit the operating model there? I'm assuming it's a little lower gross margin, lower operating expense and that may have had some effect on the gross margin in the quarter. Maybe you can talk a little bit about the impact it was on this quarter as well as what you think it might be going forward. And also in terms of tracking business from the U.S. as it's out-sourced to Asia, how is Avnet going about doing that and at least making sure you are maintaining or capturing market share?

Okay, Andy is not here in the room. I've got a bunch of numbers in front of me. I'll take a shot at the first part, rob. Then I'll ask Andy if he wants to follow up on that as well as answer the second part regarding how are we tracking or what are we seeing in terms of transfer out of America and into Asia.

Regarding Asia, the reality is that our gross margin - let me first point out that our business is dominated by electronics marketing. Ed has a small operation there with applied computing. Rick has a very small operation in Australia, but the Asia business that we do is dominated by EM. At EM, our gross margins trended up sequentially in Asia. And while that is good, the reality is that they are still substantially lower than the gross margins that we enjoy in America and Europe.

However, even with the change in mix on a year-over-year basis, gross margin on electronics marketing is at least stable, if not up a little 12 bit in actual terms.

So rob, it seems like, you know, what is happening is the business that is migrating from America and Europe into Asia is what we would call, you know, tier one or top of the pyramid business appeared the gross margins on that and the gross margins that we are getting in Asia are not dramatically different.

In addition as Andy pointed out, the business in America and Europe where we are focused on the tier two and tier three customers, we are finding ways to hold and perhaps even expand our margins in that account base through pricing efforts, market pricing programs, et cetera. So net-net, year-over-year, including the rise in percentage of revenue coming out of Asia, Andy's gross margins are higher.

One follow up on that quickly first. Did the business in China, does that tend to be more fulfillment business as opposed to where you can add value? Is there an opportunity to add more value in the Chinese market?

Andy.

Actually, most of the indigenous business in China, you know, we're enjoying because of China products and sunrise which we acquired those companies. Is the part that you can add more value to, rob. We are calling on local OEMs. That's really not the International business that we are pursuing. Much more of a value added priorization and safe to say our long-term strategy is to penetrate the indigenous market in China. Everyone is aware of how much is shipping there in terms of contract manufacturing. Some of that is profitable and some of that is going direct.

Okay.

So I would add another comment. Even though Asia has tough margins, keep in mind that the business model in Asia is quite different. I'll share with you in fact our return on working capital in Asia is the leading figure among our regions today. Margins only one 13 component of the equation. We are building a model that still will meet the goals on return on capital.

The other part of that question was the market share or as business moves from the U.S. to Asia, you have systems that are in place to track that business?

We do. As I mentioned before the numbers are in the tens of millions of dollars that we see on an annual basis shifting over to Asia. Last year we saw roughly around $80 million. We are tracking it again this year. We are focused mostly on the OEM partner customers here that are shifting we do have a global transfer practice in place. It is active rate and our success rate is good.

Good, thank you.

Next question comes from Patrick Parr with UBS Warburg. Mr. Parr, please state your question.

Could you comment on Europe? I know it's a bit of an issue in the past. Would you give us an update on the operations there?

From if you look at Europe from a group perspective, the first thing I want to point out is that our applied computing group is realizing higher revenues and profits from the European business than we are getting here in America. And the significance of that is, that is certainly validation to us that there is a way to operate profitably in Europe. We just need to figure that out or get there with respect to the other two operating groups.

Computer marketing had a relatively soft quarter. I call it below expectations. And as a result, dipped into a negative income performance there.

And electronics marketing we had strong performance from our new businesses and a seasonal soft performance from legacy businesses. As a result we still lost money on electronics marketing in Europe for the quarter. We had been in the black during the June quarter appear we 14 gained with seasonal weakness in September.

Two groups were negative and one was positive.

Roy, with your planned additional restructuring, is Europe also focused there as well?

Absolutely. You want to comment on that, Andy?

We certainly are looking at throughout the EM organization, not just Europe as Roy pointed out, aggressively getting after our expense model. We are being very careful as noted not to affect selling personnel and customer facing personnel. We are focused on things like real estate, in particular in Europe. We've got several IT platforms. So we are looking at consolidation among some of the IT expenditures. We are really going to zero in on every non-value added expense in the quarter and decide what we can do without.

So the answer is yes, Europe is very much a part of that focus.

Rick.

Rick, you've taken action this quarter?

Your characterization is correct. Revenue wise North America and Europe had similar revenue year-over-year declines. The North America O P had been year-to-year very flattish while Europe had gone from plus to minus. That focused activity attention on our activities there.

The second question for Ray, maybe I'm envious of your tax refund, but what, obviously this is not something we expect on a normal basis. Can you give us more explanation of the 150 million?

Essentially the 150 million as you can imagine with the profitability or lack of profitability over the last couple years, that does present, I should say last couple of quarters I meant to say. It puts us in a position where 15 with our tax strategy, we can take advantage of the losses in filing for refund. Essentially it is really nothing magical. It's a situation when you are losing money, you have an opportunity just as when you are making money to pay taxes, you have opportunities to generate refunds. Unfortunately with some of the losses that have been incurred during the last four quarters, including those over in Europe, as well as some restructuring we have, from a timing perspective, it puts us in a position where you can generate a certain amount of refunds from a tax perspective.

How will that show up on the P and L? Will that be another income, one time special - will that be amortized or what?

It's all part of what we already essentially have taken into our P and L, anticipating certain benefits would occur. Essentially there is no P and L benefit. The only impact would be to remove the receivable that is currently on our books for approximately that amount.

Okay. Great. Thank you.

You're welcome.

The next question comes from Robert Norberg with JP Morgan chase and company. State your question.

Thank. It's Tom Dinges in for Roger. What was the depreciation and amortization during the quarter and what was the CAPEX?

Some other people asked that on the Web site. It's 20 minimum, the capital expenditures were about 12 million. gross, it's 17 million less about $5 million relating to sales of certain properties that were done during the quarter.

Okay. A follow-up question would be, what are expectations for margins, especially in the December quarter as you see an increase in the computer related business? This is specific to the gross margin line. You see an increase in that business there and computers, which generally 16 has a little bit lower on the margin side and if you have fairly stable ASPs in EM, what do we think about the margins relative to where they are now, the impact from the cost savings, you said you will see a significant amount of na in the March quarter. Will that mostly be localized or on the SG and A line? Will there be some overhead that gets reduced and we see a little bit of move in the gross margin line in the March quarter? Thank you.

Tom, if you look back at last year's December quarter, we had a scenario where the two computer businesses combined got up to about 50 percent of enterprise revenue. And that drove a gross margin of about 13 and a half percent. So although I wouldn't want to forecast the gross margin at this point, I would tell you that it's probably going to be a little lower than the quarter just ended, but I don't think it would be significantly different from that 13 and a half from last year.

Regarding the cost reductions, just scanning my memory of all the things we are working on, seems to me everything is appear SG and A item. Is there anything of substance that would affect gross margin?

Everything we are contemplating right now would have an impact only on SG and A.

Okay, thank you very much.

Needless to say, Tom, we would expect the gross margin to flip back over, if I can use that expression, as the computer business retreats and the March quarter an the component business expands.

Okay, thank you.

Before we move on, I have one question that has been asked from one of our listeners. What sort of visibility do you have into Q4 sequential growth? I assume this means calendar Q4, so the December quarter of the 15 to 20 percent in the computing businesses. And wouldn't you expect to benefit from seasonality in the electronics marketing business?

The visibility that we have is really nothing more than what I have already stated. We have the majority of the month of October behind us at this point from a booking and billing perspective. We have algorithms that tell us where October is likely to finish and based upon that where we are likely to finish the quarter based upon prior year period. We have also our booking pipelines where we track opportunities and we have closure rates that we can apply to those pipelines to estimate revenues.

And it turns out that there is actually quite a correlation at this stage of the quarter. I guess I would caution everyone that it is still fairly early in the quarter. But it turns out that however we look at the numbers, they do keep coming back to this 15 to 20 percent revenue growth. We are reasonably comfortable with that number.

Relative to EM, it is true that we have historically enjoyed on a global basis some revenue growth within electronics marketing. And I would not we terribly surprised if we got some revenue growth out of electronics marketing. However, coming through the December quarter as many of you have probably heard from the component makers, both active and passive component maker, there has been some slowing of momentum in that business. Although we were able to eke out a little bit of growth, we think the right thing to do at this point is signal that we expect flat revenues there.

Thank you, Roy. I have a question for you, Ray. We certainly answered this question many times in the last couple of weeks. You cemented on it a little bit earlier today. I'll ask the question. It came from one of the listeners. If you secure a new bank facility, won't the agencies down grade you for subordinating the public bond?

Our belief is the answer is no. The potential that some of the, our credit facility might have some leans triggered, we don't believe will trigger enough basically secured debt where the rating agencies will move to in any way impact our ratings.

In the overall scheme of things as a percentage of assets, as an example which is the methodology that S and P uses, the amount of assets that will be subject to some type of security is well below any threshold that, that S and P would use to consider a down grade. We don't see that as being an issue at this particular point in time.

Our next question comes from Robert Rodriguez with first Pacific advisors. Mr. Rodriguez, state your question.

Rodriguez (ph): Hi, Roy. Real quick question since you broke up. Have you received 150 million on the tax refund yet?

Yes, we have.

Money is in the bank.

Operator, let's move on. Bob apparently is on a cell phone.

The next question comes from Carl Moody with Wachovia Securities. Mr. Moody, please state your question.

Moody (ph):: Thank you. Within your electronic marketing group, are there any trends by end market developing? In other words are there any end markets that might be perhaps stronger or weaker than others?

Andy?

Well, the one that jumps out first is military or the aerospace business is doing quite nicely for us. In particular we had a very strong September in mill air owe. But our industrial summer base, tier two customer base which is the industrial control market is hanging in there nicely. There are some signs of opportunity with in what I'll call wireless and in some cases broadband to the home. People manufacturing D S L modems, that type of product.

But in general the overall communications market remains weak. So I characterize it again as mill air owe, our industrial customer base and then communications third.

Could you comment.

Moody (ph):: Could you comment on the P L D business? How is that trending?

That was kind of flat, September to June. General lead times in P L D are stable, somewhere in the neighborhood of six to eight weeks lead time. There was, you know, again a flattening of revenue in that space in the September quarter.

Moody (ph):: Have you seen any sort of a re-do you understand bound in that business in the month of October?

It's a little too early to call. There is some good activity, but as you know this type of product is designed an pretty much our sales are predicated on the roll out of certain projects. It's too early to call it.

Moody (ph):: One last question, if I might. You mentioned earlier that you are seeing acceleration of A and B movers. In the electronic marketing. Could you give us an idea generally what type of components you are talking about there?

In general, you know, that's where we get more into the commodity products. Particularly discreets, logic, analog, as an example. But there are other products that are upscale a bit, like M P Us and flash and these types of products that we're turning very quickly and making sure that we have ample supply on the shelf.

Moody (ph):: Thank you very much.

We are going to try to squeeze in two more questions and wrap up the call.

Next question is from Carl de young with Deutsche Bank. Please state your question.

Deyoung (ph) : You talked about the three liquidity scenarios. You mentioned issuing straight to help you refinance the up coming maturities would be the preferred option.

I didn't really get a good sense for which option you think is more likely. I was hoping you could comment a little bit more about that or give us a sense for the probates there.

I guess a lot of it will depend upon when we get to the market. If we try to go to the market obviously tomorrow, we probably will be unsuccessful or have to pay a ridiculous premium because of the, I'll say anomalies for lack of a better term that is going on in the marketplace right now. As we go forward, our belief is that the market will stabilize to some extent, which will provide us with an opportunity to go and get a straight debt deal. If I were handicapping right now, I would probably say it's a, probably a fifty-fifty split that we will go to the straight get route versus increasing the size of our securitization program. There is even obviously a distinct possibility we do accommodation of both, depending on how receptive market conditions are when we go to the market.

As you noticed on one of the earlier slides, we do have adequate capacity today to handle a maturing, the maturing bonds of 2003. So we will be obviously like to get another transaction done as quickly as possible, just to strengthen our overall capital structure. But if not a situation where we believe we have to go into the market in desperation type mode and therefore pay any price. We will look to the markets as we go forward before we make a final decision as far as which one of the number of different options we have that we might avail ourselves of

Deyoung (ph) : Thanks, that's helpful.

Last question comes from Mike Meenar with AIG. Please state your question, Mr. Meenar.

Meener (ph): I think I got it more or less answered. I missed the opening statements as I was coming into you from another conference call.

So I was going to ask the same thing about the 450 due next year. You think, just to summarize, you have capacity on the securitization program. You think you have access to the preferred market and hopefully the markets in general will turn before the August and October maturities that you may in fact be able to do straight debt?

Yes, that would probably be our hope. If they do not turn, again we have adequate capacity to handle the maturities without doing anything, quite frankly. That is not what our preferred approach would be.

Meener (ph): The slides you referred to, if I look on the Web site, where will I find them?

You're asking where the slides are? The slides will be posted to the Web site subsequent to the call.

Meener (ph): Subsequent, okay. I'm looking now. Thank you very much.

John Hobeth (ph): Okay. First of all, thank you for joining us today. Please take time to complete the survey before you leave the webcast, for those of you joining through the webcast. If you have further questions feel free to contact me, John Hobeth (ph), here at Avnet. We will follow up on e-mails we received. We did receive 20 e-mail questions. And first and for most we want to thank you for participating that way. Thank you all and we'll see you next quarter. Good-bye.

This concludes today's teleconference. Thank you for your participation.