安富利 (AVT) 2003 Q3 法說會逐字稿

In just a few minutes, Ray Sadowski, Avnet's Chief Financial Officer, will provide our third fiscal quarter financial update. Following Ray, Roy Vallee, Chairman and CEO of Avnet will have comments regarding the company's third quarter performance as well as comment on broader strategic issues related to Avnet and the industry.

At the conclusion of Roy's remarks, we will conduct our Q&A.

Also with us today and available to take any questions you may have related to Avnet's business operations are two of our three operating group presidents, Rick Hamada, President of Computer Marketing, and Ed Kamins, President of Applied Computing. Andy Bryant, President of Electronics Marketing, is now with us today so Roy will do his best to fill in.

With that, let us move on to more important things and I would like to introduce Ray Sadowski for our third quarter financial overview. Ray?

Thanks, John and good afternoon everyone.

Let's begin with an overview of our operating results for the March, 2003 quarter, our third quarter fiscal 2003. Please note that for analysis purposes, we have segmented out the GAAP results of the quarter in the first highlighted column. These results include the impact of special charges related to the early extinguishing of debt, which I'll outline in a few moments.

In the columns to the right we have presented our results before special charges in order to provide a clear comparison of the operating results in these quarters.

Avnet's third quarter fiscal 2003 results reflect revenues of two point three four billion dollars with net income before special charges of nine point six million or eight cents per share. As compared with the prior sequential quarter, enterprise revenues decreased slightly by approximately six point two million dollars or less than one percent. This sequential performance in sales was better than anticipated, exceeding our prior guidance by approximately $40 million.

This improvement over our expectations was due primarily to the positive impact of the Euro and due to stronger than expected sales at Electronics Marketing. Year-over-year, Enterprise quarterly revenues are up by $126 million or five point seven percent primarily due to the impact of the euro. With the lower sequential sales, gross profit dollars decreased by 8.5 million dollars sequentially and 3.9 million year over year. These lower gross profit dollars are reflective of business mix changes, margin pressure the industry has experienced during the downturn, specifically in the March 2003 quarter we experienced a reduction in vendor rebates in both our components and computer businesses, directly impacting gross profit dollar growth as well as Enterprise gross profit margins.

Operating expenses fell both sequentially and year over year as we continued to experience the benefits of our expense reduction efforts put in place over the past two years. Expenses in the March '03 quarter fell by 13.2 million dollars from the December '02 quarter. If you exclude the impact that changes in foreign currency exchange rates have on foreign denominated expenses, expenses fell sequentially by 19.7 million in constant dollars, reflective of the benefit from the 90 million plus (ph) in annualized cost reductions resulting from the restructure taken in the December '02 quarter. On a year over year basis, operating expenses are down 17 million in delivered U.S. dollars. However, had the value of foreign currencies remained the same as a year ago, operating expenses would have been down approximately 35 million in constant dollars year over year.

Expenses fell at a greater rate than gross profit dollars as a result, operating income, excluding the set (ph) quarter special charges were helped sequentially by five million dollars or 15 percent. Year over year, operating income grew by 13 million dollars, or 58 percent. Interest expense increased sequentially by 2.3 million dollars, largely as a result of the increase in interest cost associated with the new bond issued during the quarter. As most of you are aware, we recently issued a 9.75 percent 475 million dollar bond and tendered for the 450 mate of (ph) bonds out -- 450 million of outstanding 2003 bonds which are retired approximately 84 percent, or 379 million of the calendar 2003 bond maturities, and as a result interest costs accrued associated with the untendered bonds and the new financing. There was also about a 30 day overlap where the new bonds were outstanding and the tender had not yet closed.

As compared with the March 2002 quarter, interest expense is down slightly, reflecting a favorable impact on our overall debt reduction efforts during the past few years. Other income under the highlighted GAAP results column include a 13.5 million pretax special charge related to the early extinguishment of debt I mentioned earlier. Excluding the special charge, other income was up over the prior sequential quarter by 1.7 million dollars, largely due to favorable currency transactions which partially offset the 2.3 million dollars sequential increase in interest expense I just mentioned.

As a result of the preceding P&L impact, net income before special items was up over the second quarter of the fiscal year, increasing by 2.5 million, or two cents per share. In a year over year comparison, earnings after tax, excluding special charges have a positive change of nearly 11 million dollars, or nine cents per share despite lower gross profit dollars. Including special charges associated with the early extinguishment of debt, net income in our fiscal third quarter was 1.5 million dollars or one cent per share.

Again, the company benefited from its cost and debt reduction initiatives. These operating results again reflect our commitment to profitability at any level of revenue and we are relatively pleased with the progress but not with the absolute results. Enterprise revenues continued to move in a relatively tight, stable band from quarter to quarter. Amazingly, for the past seven consecutive quarters, revenues have been essentially flat. We are still looking for a meaningful, year-over-year revenue crossover. The continued lack of real market growth continues to be a disappointment, but the flat trend line reflects a technology industry with a stable foundation.

With geopolitical concerns largely behind us, relatively stability in monetary markets, and an administration refocusing on domestic economic issues, we hope for better days ahead.

While markets and the company's revenue levels have remained relatively flat over the past seven quarters, earnings per share, excluding special items, have improved fairly consistently since the 16 cent loss in the first quarter of fiscal year 2002, most notably over the past two quarters. The December 2002 quarter represented a strong crossover in earnings per share performance, and we enjoy this same year-over-year growth in earnings before special charges in the March '03 quarter, as well. The March '03 quarter represents the third consecutive quarter of year-over-year EPS improvement. Including special charges, EPS had a positive two-cent swing year-over-year, from a one-cent loss to a one-cent profit.

Business mix continues to impact enterprise gross profit margins. The enterprise has experienced lower average gross profit margins throughout the period of this downturn. This is primarily due to the mix of business associated with a higher percentage of consolidated revenues attributable to our computer businesses, which had a lower gross profit margin as compared with our components business. In addition, margins were further impacted this quarter by a reduction in vendor rebates in both our components and computer businesses during the quarter, as well as business mix at CM.

We continue to maintain that these lower gross profit margins experienced by the company over the past seven quarters is not structural, and should improve with the next up-cycle, and can return to levels enjoyed during the prior up-cycle as our revenue mix normalizes. This will only enhance the high degree of operating leverage present in the P&L.

An important part of our operating leverage created over the past several quarters has come through expense control. Since the peak of the last up-cycle in the December 2000 quarter, quarterly operating expenses were reduced from $359 million to 271 million in delivered U.S. dollars, as of the March 2003 quarter.

Foreign currency exchange rate fluctuations, specifically between the euro and the U.S. dollar, continue to impact the reported expenses. In constant dollars, we have reduced expenses from 358.5 million in the second quarter of fiscal 2001 to 246.4 million in the March '03 quarter. This represents a 448 million reduction in an annualized basis.

As I noted a few minutes ago, our cost reduction efforts have had a positive impact on operating income margins before special items, which increased 20 basis points sequentially, rising to 1.55 percent. Operating margins were up by 51 basis points year-over-year, representing the third quarter in a row this ratio has improved on a year-over-year basis. Operating profits, cash generation and leverage continue to improve sequentially.

Another important story here -- and I foreshadow some comments Roy will make in a few minutes -- is a balance sheet story. An important part of the structural operating leverage that we have built into our business model, which has already and will significantly impact our cash flow generation in the up-cycle, has been achieved through measures to improve asset velocity, and thereby, return on capital employed.

We indicated in last quarter's update that we did not expect to generate significant working capital reductions through the end of the fiscal year. However, again, and as you can see here in this slide, we exceeded our expectations in this area by a significant degree.

Working capital, consisting trade receivables plus inventory less accounts payable fell sequentially by approximately $134 million. Each of the operating groups continues to improve working capital productivity focused on inventory optimization efforts. The company's return on capital employed initiatives that we have talked about over the past several quarters continue to generate benefits in the form of greatly improved asset productivity ratios as Roy will discuss shortly.

Cash generated from working capital reduction has been used primarily to reduce the company's total debt. Since the end of December 2000, we have reduced total debt by nearly $1.85 billion and our total debt now stands at 1.47 billion including the impact of our new bond issuance. Given that the company has no outstanding amounts under its short-term bank banking facility or accounts receivable securitization program, our cash generation is adding to our available cash, thereby enhancing our liquidity.

The table provided here illustrates a strong liquidity position. Currently we have 930 million of net available liquidity increasing nearly 800 million since September of 2002 and up almost 600 million from the December of 2002 quarter. We currently have over 800 million of aggregate liquidity in excess of calendar 2003 and 2004 bond maturities. I should point out that just last month we reduced the capacity under our multiyear bank credit facility from 429 million to 350 million. This was done as a way of compensating our bank group for agreeing to modifications in our credit facility which increased our flexibility in certain areas.

Now I would like to turn the commentary over to Roy Vallee, Avnet's Chairman and Chief Executive Officer. Roy?

Thank you, Ray (ph) , and good afternoon, everyone. I want to begin by saying that I'm quite pleased with the relative performance of our team worldwide during our fiscal third quarter. The broader technology markets continue to move sideways, but the Avnet team continues to make significant strides and (ph) while managing those things we can control.

I commented last quarter that the operational and strategic moves we have made during the past two years of the industry downturn have moved the company into position to benefit our shareholders with improved financial performance. And as Ray laid out in explaining the company's enterprise performance, we see the validity of these efforts given our improved earnings and cash generation despite a slight sequential decline in revenue and gross profit dollars.

As usual, I will make some further comments about our enterprise performance and comment on our operating groups performances. Then I would like to finish with some revenue and earnings guidance for the June quarter before moving to Q&A.

Here we have presented the absolute revenue performance for the enterprise as well as each operating group. Our revenue guidance for the March quarter provided during our Webcast last quarter was largely in line with actual results. We anticipated a sequential decline in consolidated revenues with total revenue in the range of 2.25 to 2.3 billion. Revenue was down .3 percent; however, it was approximately $40 million higher than expected, benefiting from growth at EM (ph) and the strength in the euro. Year-over-year we saw growth nearly six percent (ph) , again largely driven by the euro.

The graphic in the upper left provides the specific sequential and year-over-year percent change in revenue at the enterprise level and for each group. EM enjoyed its best revenue performance in seven quarters. EM revenue was up sequentially by over seven percent and six percent year-over-year. This was the third consecutive quarter of year-over-year growth for EM. It appears components market is gradually improving while anti clip it markets remain stagnate.

I believe the fact we are seeing general components in the turn of replacement are brought the supply chain, causing unit growth. With this unit growth no longer being completely offset by ASP decline.

ASPs in general seemed to have bottomed. So with unit growth we are now experiencing revenue growth as well.

On a segment basis, we have seen some signs of life recently in the communications segment, but this has mainly come in the form of higher sales into contract manufactures serving that segment.

Also, our new aerospace business has been performing very well. We have seen slight improvement in the wireless, storage, networking, and industrial control segments. It appears that the recent geopolitical concerns confronting the nation and the world have not meaningfully impacted our components business or our computer marketing and applied computing business units either.

On seasonal and other market environmental issues, the computer businesses were both down sequentially in the range of eight percent. Normally for the March quarter, CM revenues would be down seasonally in the 10 to 20 percent range. However, CM revenues were down less than normal, driven by a sizable sales carry over from the December quarter.

Year-over-year revenues were up 14 percent, driven principally by that same sales carry over coupled with software and storage sales growth.

Our North American two-tier distribution business continues to be our strongest operating division within the computer-marketing group.

Our single peer reseller business units has been the most strategically challenged throughout the technology downside. We recently installed a new president to head that unit, promoting Jim Teeter (ph) , a senior executive, from within the organization.

Revenue and applied computing was down as expected, due to lower sales in the PC builder customer segment.

Our volume microprocessor and disk drive businesses that sell into the PC white box systems over market have been under pricing pressure for a number of quarters. Pricing has deteriorated in seven instances below the level that we consider irrational. Our commitment to profitability and charm over value creation impels us to lower revenues where we cannot make an acceptable return on investment.

As a result of these lower revenues, applied computing is restructuring its business model in the PC white box systems over market. While not exiting the PC builder space fully, we are reducing our exposure to this market. It is not completely clear how this restructuring will further impact revenues since we are redirecting some resources in a higher margin business and we cannot predict market behavior.

But we do expect to reduce expenses at AC by approximately $10 million on an annualized basis and we will have a special charge of a similar amount related to that restructure in the fourth quarter of fiscal 2003. This action should have a positive effect on AC's future operating income and margin.

The non-PC OEM business has grown as a percentage of revenues and profits over the past three quarters. Within this division of applied computing, we are investing in infrastructure to sell more solution services, which carry higher gross margins. This is a relatively small revenue base today, but one that we believe can grow and deliver appropriate returns.

The upper right-hand panel on this slide illustrates revenue by region. Again, we see the relative growing importance of our Asia region, growing by over 10 percent sequentially and up nearly 50 percent year-over-year.

The Asia revenue base now constitutes 11 percent of composite revenues and approximately 18 percent of electronics marketing. And noted (ph) last quarter's, Asia's last quarter as a percentage of Enterprise revenues and this is bearing itself out. We are well positioned now in the People's Republic of China, and we continue to invest in that region of the world to meet the needs of our customers and suppliers. Our Europe, Middle East, and Africa region also grew as a percentage of total revenue sequentially and year over year and the Americas region again decreased as a percentage of consolidated revenue, going from 58 percent to 54 percent on a year over year basis.

Here, we have presented our operating income margin by group. The left hand panel provides GAAP results and the right-hand panel provides the pro-forma results excluding special charges. Focusing on the right hand graphic, you can see that on a sequential basis AC and the Enterprise improved operating profit margins. EM operating margin was up 50 basis points sequentially and 143 basis points year over year. Gross margins enhancement efforts as well as cost reduction efforts contributed to this performance. We have seen average selling prices bottom out during the quarter while lead times have not increased except in isolated cases and remain normal as a general room.

EM EMEA has had two consecutive quarters of operating income improvement and all three EM regions enjoyed robust year over operating income growth led by the EM Americas region. In the six quarter since the heichl (ph) trough in September of 2001, EM has increased operating profit margins before special charges in five of the six quarters and operating profit margin is up 277 basis points from its September 2001 trough performance of -0.4 percent.

On lower revenues during the quarter, computer marketing saw its operating profit margin decline by 26 basis points sequentially. While expenses were down sequentially during the quarter, the gross profit dollar decline was greater due to business mix, but higher software sales and lower revenues in network. However, CM's operating profit margin increased by 26 basis points on a year over year basis.

International computer businesses saw significant improvement in operating income margin year over year. At applied computing we saw operating profit margin improvement over the prior sequential quarter, but the group again saw operating profit decline year over year. Last year at this time this group had experienced erosion in gross profit margins driven by severe price pressure in that PC builder customer segment. Each applied computing region achieved positive operating profit indicative of the profit at the can place (ph) . However, both the European and Asian businesses, where the volume is the majority of revenues had significant year over year operating profit margin decline.

In the Americas buoyed by our focus on the higher margin Solutions Systems, we saw a healthy improvement in operating profit margins sequentially and year over year. We have stated that we will continue to fund those business models that create acceptable returns on capital employed. There are still suppliers for the PC builder customer segment that value our role in distributing their products. And customers are willing to pay for the value-add we bring. This is managed on a regional basis by manufacturing franchise engagements and customer by customer.

Ray mentioned briefly the strides we are making on the balance sheet, and specifically the improvements to our working capital productivity metrics. Last quarter, we indicated an expectation that inventory turns -- illustrated on the left-hand graphic -- likely would not be sustained with the expected business mix change. And that DSOs -- illustrated on the right-hand graphic -- may increase marginally in the March quarter on slightly lower sequential revenues.

Well, DSOs tracked largely as expected. However, I am impressed with the work our team is doing related to our inventory productivity. Inventory turns improved to 6.8 -- another historic high.

What this means is that we are gradually changing the business model for our company. Note the progress we have made in reducing our cash conversion cycle. When the industry down-cycle reached its lowest point in the June to September 2001 timeframe, our cash conversion cycle had peaked at 118 days. This is up over a four-year average cash conversion cycle of 96 days.

We began implementing our return on capital initiatives in earnest in the fall of 2001, and we are now about one and a half years into this business and cultural change process. As of the end of the March 2003 quarter, our cash conversion cycle is now 66 days -- 29 days lower than where we were at the peak of the economic cycle back in December 2000, 30 days lower than the four-year average, and down 52 days from the highs that occurred at the cycle trough (ph) .

We have made significant strides and reached historic levels of asset productivity and balance sheet strength, in spite of this downturn.

The story, however, may be more than just the positive mention about our balance sheet strength and improving asset productivity. Here we have isolated our working capital velocity and enterprise operating margins. Note that our working capital velocity has jumped to new historic highs at 5.5 times sales. We are into new territory in asset productivity.

But this number alone implies that with our net liquidity at over $800 million today, we could fund well over four billion dollars of revenue growth.

The graphic also illustrates the tremendous leverage we have on our business model. With any lift in market conditions, even slight improvements in our operating margins will generate significant returns on capital employed and shareholder value creation.

Avnet remains committed to improving operating performance and profitability. We manage the things we can control, and you can see we are having tangible success. Our earnings leverage continues to grow with the actions that we have taken to size our operations to the market conditions we have faced. Since the December 2000 cycle peak, we have removed $448 million in annualized SG&A in constant dollars. In delivered dollars, we have reduced SG&A by over 350 million.

Since December 2000, working capital reductions are now over two billion dollars, and reductions in total debt are nearly 1.9 billion. Primarily through cash flow generation, we have strengthened our liquidity position, with approximately $930 million in liquidity currently available to us -- 827 million if we subtract the calendar '03 and '04 bond maturities. We are in a strong position to meet any needs the company has in the short or long-terms.

So, where do we go from here? We are in a stable market environment. We believe the technology markets will begin a slow rebound and grow slightly through the end of calendar 2003. Although, we don't control the markets, we can manage our business to ensure our shareholders achieve an appropriate return on their investments.

This quarter, again, tangibly demonstrates our commitment to improve results. While pleased with our team's efforts and progress for the quarter, we remain dissatisfied with Avnet's absolute results, and we will continue to work at improving our results in the coming quarters. We continue to manage things we can control.

As we guided in today's press release, we currently see enterprise revenue in the June 2003 quarter to be down slightly sequentially from the March quarter performance of 2.34 billion. We expect revenues to exceed the June 2002 quarter level of 2.14 billion and should be in the range of 2.25 to 2.3 billion for (ph) the current quarter. This would result in year-over-year growth at the enterprise level and be the second quarter to cross over since the current downturn began in December of 2000.

We expect sequential revenue growth in our EM business in the low-single digit range. We anticipate computer marketing revenue will decline by five to ten percent from the unusually strong March quarter. And we expect [Inaudible] revenue to decline in the 20 percent range on seasonality factors that typically play into this quarter as well as lower PC-builder (ph) revenues.

Before special charges and incorporating the revenue declines discussed earlier, we estimate that the June quarter earnings per share will be in the range of eight to eleven cents and including the anticipated special charges, earnings per share should be in the range of three to eight cents.

Looking into fiscal 2004, we are making good on our resolve to create shareholder value for our investors. Our efforts in adopting a value-based management culture continue to yield tangible results as we reach new levels in working capital productivity and operating leverage. We have shown that we can continue to lower cost at a rate that will improve earnings even without improvements in the market environment.

We are committed to generating acceptable levels of profitability going forward. To the extent that markets remain flat, we will continue to evaluate each segment of our business, making expense reductions or other changes where required to insure acceptable profitability. As sales begin to rebound, the operating leverage we have built over the past two years should yield rapid profit growth.

And with that, we'd like to open the lines for Q&A.

Excuse me. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star, one on your telephone keypad. To remove your question from the queue, please press star, two. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.

Your first question comes from Brian Alexander with Raymond James. Please state your question.

Good afternoon. Just - I'm sorry if you touched on this earlier. I'm back and forth between two calls, but looking at your growth sequentially in EM and also Arrow (ph) had a pretty impressive quarter as well, how do you reconcile, you know, the strong sequential performance in that business versus what - you know, what we seem to be seeing in the end market not really showing signs of strength. Do you get the sense that customers are stocking inventory? Clearly you're not, based on your balance sheet, but just wanted to know how you think about that. Thanks.

Yes, Brian, I think what's happening is that in many of the equipment end markets like PCs, like cellular handsets, we are beginning to get unit growth, but pricing pressure is preventing or precluding dollar growth in those end markets. We had the same thing in components, you know, really since the downturn began. But we're reaching a point now in the components markets where ASPs are flattening out. And when you couple flat ASPs, even if they're flat on the floor - you couple that with increases in unit volume, and you get this inevitable, you know, beginning of growth in the components market.

I don't think this is atypical of previous cycles. And I don't think it's inconsistent with what's happening in the end markets.

I think where we're at unit growth now being not completely offset by ASP declines yielding component dollar growth and I suspect that as the year progresses we'll get a similar patter in the equipment markets as well.

So, I guess the strong ASP declines that Arrow saw you did not see those type of declines this quarter?

Brian (ph) , who didn't? If I look at ASP in an aggregate and I have detailed information for our American business, so I'm - this is Andy Bryant talking through Roy Vallee, I'm looking at the chart here and, you know, our standard products were exactly flat in terms of ASP. Analogue, PLDs, and memory were actually up and where we saw decreases it was in areas that you would relate to pricing pressures such as military and Asics.

So and when you put it all together in aggregate, we had, you know, less than a one percent sort of shift in ASPs in the quarter.

And then finally if you could just comment on gross margins within EM, I think your competitor also saw slight pressure there. You know, I think your gross margins have been holding up relatively well within that segment. How did they fare versus the previous quarter?

Versus the previous quarter they were down, but we believe that that's largely attributable to lack of vendor rebates that come at the end of the calendar year. If I go year-over-year, they were virtually flat.

Thank you.

You're welcome.

Your next question comes from Matt Scharing (ph) with Thomas Weisel. Please state your question.

Yes, thanks, and good afternoon.

Hi, Matt (ph) .

Just I guess back to the gross margin issue because normally with the positive product mix of higher component sales, you know, versus computer in the pike computing and then you talked about kind of flattish ASPs, maybe we can help us better understand the vendor rebates, why they were down and what your expectations are for gross margin both within EM and then enterprise wide going forward.

Matt (ph) , first of all the vendor rebate issue with regards to EM is largely a Europe issue and so as Europe becomes a bigger part of the equation, it's a bigger factor.

Yes.

But the rest of the story involves vendor rebates at CM, which are becoming more and more difficult to come by as the market continues to be under pressure. And then a product mix shift at CM. This increase in software revenue, for example, it's getting us a lower margin, but that business is coming with what Rick it's either close to zero or zero working capital?

That's right.

And so it effects the gross margin line, but we get it back, Matt (ph) in operating income as well as return on capital.

Yes.

OK?

OK.

And as we talked about applied computing, because of actions its taken, you know, it's basically dug its heels in on pricing. It actually improved its margin on a sequential basis.

OK. And your expectations for gross margin for EM in June?

I would suspect that it will be flattish to it current level.

OK.

I look at last year, you know, this year the third quarter, the March quarter was basically flat year-over-year. The June quarter last year rose by about 25 basis points. So I'm expecting flat to something like that again.

OK, great, and then one other question regarding Applied Computing and your restructuring there. That guidance for 20 percent sequential decline, is that -- I know that's easily down, but does that take into account any plans for discontinuing any product lines or backing off for instance in certain process or describe sales (ph) ?

Yeah, you want to take that one?

Sure. Matt. It does account for moving away from sales that don't meet our margin criteria, and we are evaluating that by supplier, by customer and by geography. We're not moving out of everything across the board but we're dealing with each individual circumstance as it comes up and we do expect it to have some impact, some significant impact on the size of our topline, but there's an improving margin.

OK, have you cut any vendor lines yet or do you plan to?

We have not as of this moment cut lines but we expect that there is a possibility on a case by case geography, applied geography basis.

So Matt, just to explain the process of that, we're taking a position regarding pricing and margins, that position drives up revenue lines, so revenue line drives two things. One, the size and the extent that Ed could invest in that segment of his business, but also that means that a specific vendor gets to be smaller than is practicable to carry that vendor, then that could result in a termination, and frankly it could be them terminating us or us terminating them, but we will continue to focus our energy on the vendors where we can generate acceptable returns.

And might I add one more thing, and that is that there could be a line where we don't sell in volume at low margins but we do sell as part of our integrated embedded solutions where we make very nice margins.

I got it, thanks.

OK, we got a question, Ray, that came in over the email, and I want to kick in here during Q&A. The question comes from Mark Poltair (ph) of CSFB. With the fourth quarter coming in at the low end and low growth, will Avnet likely go back to the banks for covenant labors?

Mark, in response to your question, at this point in time, based upon the covenants that are in effect and our projections on a go-forward basis we're comfortable that we will not need to have any covenant labor (ph) in the foreseeable future. We probably will go all the way to the end of the facility and should not have a problem unless things deteriorate from here. But based upon what our expectations are currently we do not expect to have to go back to the banks for any kind of covenant release.

Thank you Ray, next question, operator?

Your next question comes from Patrick Parr with UBS Warburg. Please state your question.

Hey guys. It's pretty high tech reading off of the emails there. Regarding the working capital, you keep saying that you pretty much squeezed as much blood out of the turnip as you can yet you continue to generate positive cash flow from lower working capital. What's the guidance, per se, for this quarter. Will you continue to try to generate -- continue to lower working capital as we move ahead?

I think we're going to stick with our story. We don't think there's much left to be taken out and I've got to tell you that this is based on having reached record levels of productivity. There's an assumption here that the team will not be able to get much more accomplished.

So, from my perspective, I'd be modeling flat working capital revenues for the June quarter.

And then, you'll surprise us on the upside (ph) , right, Roy?

Well, if the team keeps going, I'm happy to surprise. But I've got to believe we're getting close to the end here.

You know, the next set of surprises really ought to be around what we can do with productivity as revenue begins to grow. I think everybody understands we're gonna have to build working capital when the revenue rises, but that doesn't mean that we have to reduce the productivity levels. And, in fact, it'll be interesting to see what our team can do with those productivity metrics on the way up. But I really do believe we're getting close to the bottom here.

OK. Second question, unrelated. You gave us the breakdown revenue-wise geographically. Can you give us a sense of profitability in each of the three regions? And specifically Europe; if that's making money, losing money, and what the plan is there?

[Inaudible] Pardon? [Inaudible]

Well, Pat, I can tell you -- you know, just provide a little bit of guidance for that. We not only consolidated on the picture (ph) , I guess. But if you look at electronics marketing, as an example ...

OK.

vallee ... from an operating income perspective, all regions are profitable. So, even in our European region where, as you know, we've struggled in the past, they have turned to profitability, not only in an operating income line perspective, where they've been for a number of quarters, but they're also profitable from a bottom-line perspective, as well.

All three groups were profitable in Europe in the quarter.

OK. Are there any regions or groups that were not profitable?

No, I don't think ...

No.

No.

OK.

All regions of all groups were profitable.

That's what I was asking.

Got that?

Thank you.

You're welcome.

Our next question comes from Thomas Dinges (ph) with JP Morgan. Mr. Dinges (ph) , please state your question.

Thank you very much for taking my call.

I was hoping that, Roy, we could talk just briefly at sort of a high level. You guys have been on a very formal initiative to improve, you know, your return on capital, and the results so far have shown, you know, a lot of improvement there. I wondered if you could, outside of some of comments you've made today -- you know, what things have you guys done really well? What ways have you changed sort of your go-to-market strategy and so forth that's allowed you to see some of these improvements outside of just a lot of the cost-cutting that you've done? And really, what is there left to do on this to get you guys up to your long-term goals -- meaning, where are we, necessarily, in this process? And then I have a follow-up.

Well, I started the, you know, the Return On Capital Initiative in total -- you know, we came to the conclusion that it was the right thing to do at the right time as we were winding down our hyperactive M&A campaign. So, the industry is largely consolidated. There's two primary players remaining in the market, and we thought it was time that we leverage the scale and scope that we had created.

So, we identified return on capital as the primary metric that needed improvement. And what that did was it changed the scorecard internally between good revenues and bad revenues. It moved the scorecard from profitability expressed as a return on sale to profitability expressed as a return on the capital that's employed. So we established that as the key metric. We then went about an education process. We then went about modifying income plans.

And so now we have measurement systems, goals, compensation systems, all aligned driving to this new scorecard about return on capital. And so what that means is that we as assess suppliers, as we assess customers, as we assess transactions, we're measuring them now on that basis and what we're finding is that there are ways to do business that provide greater returns on capital than we have historically operated on. And it's that action times, you know, thousands of transactions that is yielding these results that we've been talking about, Tom.

Now, as far as what does it take, you know, where we are - we are stuck in this revenue range at levels of profitability that we continue to feel are unacceptable. So we have actions we must continue to take and identify on a quarter-by-quarter basis to move us closer to our target. And ultimately I believe that technology is not dead, there will be a resumption of growth in the technology end market, and when that growth occurs, that's the operating leverage that we're talking about both on the P&L as well as on the balance sheet. So we think we're going to achieve some, you know, interesting results as we begin to get some top-line growth.

And just a quick follow-up question on that, which [Inaudible] off of another caller's question in terms of working capital velocity and so forth - you've made a comment earlier in terms of putting some metrics around how much liquidity you had available and how much revenue you felt that could potentially fund. And that was based, if my math is right, on sort of what the historic norm had always been.

As you guys have gotten a lot more efficient and this [Inaudible] this will lead to, you know, will you be able to generate cash or not quite consume as much in an upturn. Do you still feel that it's going to take somewhere in that 20 to 25 cents on the - on the revenue dollar of working capital, you know, to fund that - to fund that dollar of revenue or are you finding as you guys are going through this process way where you may not necessarily consume as much working capital in the upturn and therefore may not need as much?

Tom, it isn't (ph) the latter, but in order to really get at the question, there's really two dimensions to it.

One is for each of our three operating groups, I'm very confident we're going to be able to grow with working capital productivity greater than each individual group has seen in the past. Now what that means at the enterprise level is a function of our mix of business by operating group. So which group is the most efficient? [Inaudible] followed by what [Inaudible] marketing. So as our mix of business by group changes, the enterprise working capital productivity changes. Now, of course, what happens is so does the operating profit margin, as well, because it goes hand-in-hand.

OK. Thank you very much.

You're welcome.

Our next question comes from Rob Damron from Southwest Securities. Please state your question.

Hi, Roy.

Hi, Rob.

I had a question about how the competitive environment may have changed just in the last couple months since Arrow (ph) acquired Pioneer (ph) . Has Avnet picked up any additional suppliers or have you seen any incremental revenue opportunity come your way?

We have not picked up incremental suppliers yet. And we are picking incremental revenue by customer where customers either don't want to move that business to aero or they feel that they already have too high a concentration with aero.

So, yes, we are racking up gains and, you know, we certainly I don't think we have a dollar figure placed on this yet because the story's still getting told, but we're confident we're going to increase revenue as a result of that transaction.

And then in a more macro sense, Rob (ph) , I think that the acquisition from our perspective was a healthy one because it continues to solidify the notion that this segment of the industry is consolidating around two key players.

Right. And just one unrelated question regarding SARS and the impact on your China business. Have you seen any impact at all or any changing, you know, I've even heard a couple of data forms where some manufacturing is actually moving back to the States now as a result of, you know, maybe an incremental risk that we're seeing overseas.

Yes.

Can you comment on that in general?

Yes. My view is, you know, this is sort of like the Iraqi war replays in that there's an awful lot of talk but the measurable effect on our business is still very, very hard to find. We have taken specific actions in our Asian units to mitigate risk. Those actions are a bit disruptive and that sort of thing, but when I look at our bookings and billings, I can't see the impact of those actions.

So we've cancelled some trips. I cancelled a trip two weeks ago. We've cancelled some trips of our Asians coming over here. And yet I don't see a severe economic impact.

I think that SARS has the potential for that. If it doesn't get under control relatively soon, however, I can't point to it yet.

OK. Thank you.

You're welcome.

Our next question comes from John Horva (ph) with Lehmann Brothers. Please state your question.

Thanks. First question is in regards to the guidance for electronics marketing. So what I'm wondering is, I'm under the impression that the June quarter tends to be a little bit softer, so maybe if you can talk about the normal seasonality for the June quarter.

And then also how the quarter track and where in the quarter you saw the strength? And if the strength was in March, if that continued into April and if that accounts for the seasonal up tick?

And then also if built into this guidance your assuming that ASPs are going to hold firm during the June quarter in electronics marketing.

So, John (ph) , I'll fill in for Andy again. First of all, yes, we pick ASPs, you know, they're laying on the floor and they don't have a long way to go down so I think they're going to stay pretty consistent.

As far as how the quarter tracked, you know, we morally did a surge in March that is especially true with Asia where we come off with Chinese New Year holiday and we got what I would call a normal surge. We saw in components the way the revenue came out, which surprised us a bit. We thought America would be about flat in March and it was. We thought Europe would be up sequentially and it was, but it was up about 17 percent, so it was stronger than we expected. And then Asia we thought we'd be closer to flat sequential due to the Chinese New Year holiday and we ended up getting I think around seven percent sequential growth in Asia as well.

As I look out to the June quarter, we don't see anything happening so far in April that causes us to change our outlook. I expect that June will be up from March in Asia, again due to the Chinese new year holiday and we're expecting Europe and America to be flat to just a little better than flat quarter on quarter and that's how we get to our low single digit expectation.

OK, great and just one more question about the euro impact. If you have this handy and just the absolute dollar impact from the euro on the quarter both on the revenue line and on the operating expense line as well.

Well, I'll give it to you total foreign currency as opposed to the euro in particular. Obviously the euro is the biggest piece. On the revenue line sequentially the impact was about, on a consolidated basis about 52 million dollars. Are we talking operating expensing here?

Yes.

About 6.6 million dollars.

John, let me just add that the way we do these calculations, and Ray correct me if I got these wrong, the average exchange rates from one quarter to the other,. so the average of the December quarter versus the average of the March quarter, and it's not clear to us that everyone uses the same formula.

OK, thanks.

OK, I think we've got time for one more.

Our next question comes from Steven Fox from Merrill Lynch. Please state your question.

Hi, it's actually Eric Weinstein for Steve. I was just wondering, giving the progress that you continue to make in inventories that you might review some of the trends you saw in inventory by geography in the March quarter.

We -- let me think about this for a minute. I believe we reduced inventory in every group in every region except Electronics Marketing in Asia.

Great, thanks.

OK. We have time for one more?

We'll take one more.

One more.

Your next question comes from Kevin McCarthy with First Boston. Please state your question.

[Inaudible] guys. Roy, could you talk a little bit about lead times a fly Asia Ts (ph) were lead times pretty stable or was there a product category too where you saw some lead times push out possibly. And the follow-up question is possibly on the why did you talk about components improving as you go throughout the year pricewise? Does that mean an intended growth in the end markets or is there so many components to actually improve the revenue basis without any unit improvement from the end markets? Thanks.

OK, first on the lead time front, based on the reports I'm getting, there's no sustained extension of lead time times in any product category. What we see is periodically a hot spot, but there's enough capacity out there in the industry that as those hot spots surface you have the production redirected and demand gets satisfied. So we're not yet seeing sustained lead time in any given product category. Relative to your question on pricing it's a bit counter-intuitive, but the answer is yes, semiconductor ASPs can rise and semiconductor dollars can grow without further endmarket growth.

And what it boils down to is capacity utilization at the semiconductor IDMs and foundries, and that capacity utilization is a function of units so if competition in the end equipment market is such that ASPs offset unit growth at the equipment level you can have a zero dollar growth PC market, a zero dollar growth handset market and you could still end up with more units and with capacity utilization rates rising and not a lot of investment going into the semiconductor industry, there is a scenario where semiconductors can grow, not meaningfully but they can grow without meaningful growth in the end markets.

OK. Thank you.

You're welcome.

John?

OK. Roy, Ray, thank you. As we conclude today's quarterly call, we're gonna quickly scroll through the two slide that were mentioned at the beginning of our web cast that contain the non-GAAP and GAAP reconciliation of results presented during our presentation. Please remember this entire slide presentation, including the GAAP financial reconciliation, can be accessed in a downloadable PDF format at our Web site. Just click on presentations on the left menu bar. Also, you can click on the GAAP Financial Reconciliation in the left menu bar of the website, and access just the GAAP reconciliation information data sheet by itself.

I'd like to thank all of you for your participation. Once again, please take one additional minute to answer our survey. If you have any questions regarding the material presented today, please contact me, John Hovis, directly by phone or email.

As noted in our earnings press release earlier this afternoon, Avnet will be presenting at a number of conferences coming up in the next several weeks, and you can view the upcoming conference schedule on the website just mentioned.

Again, thank you for your time. We look forward to being with you all again in August when we report our fiscal 2003 fourth quarter and yearend results.

Good-bye.

Thanks, everybody.

Thank you, gentlemen. This concludes today's conference. Thank you again for your participation.