安富利 (AVT) 2003 Q4 法說會逐字稿

Good afternoon everyone and welcome to Avnet's fourth quarter and fiscal 2003 year end corporate update. I am John Hovis, Director of Investor Relations for Avnet. If you're listening by telephone today and have not accessed the slides that accompany this presentation, please go to our website at www.ir.avnet.com and click on the icon announcing today's event. After registering, please click on the slides only for telephone participants option that appears on your screen.

As a reminder, to our webcast participants, the slides will move automatically as we advance through today's presentation. In addition, you can also download and print the slide presentation. To access the slides in PDF format, please go to www.ir.avnet.com and click on Presentations in the left menu bar. As always, we're happy to accept questions via the e-mail, and provide a quick access through a link on your screen at the bottom of the slides. We will receive your e-mail during the presentation and answer as many of them as time allows during the question and answer session.

In addition to disclosing financial results that are determined in accordance with generally excepting accounting principles, or GAAP, the Company also discloses pro forma, or non-GAAP, results of operations that should exclude certain charges. Management believes that providing this additional information is useful to investors to better access and understand operating performance, especially when comparing results to previous periods for forecasting performance for future periods. Management believes the pro forma measures also helped indicate underlying trends in the business. Reconciliations of the Company's analysis of results to GAAP can be found on the Form 8-K filed the SEC today, and in several of the slides in this presentation.

Before we move onto formal introductions, as always I would like to review Avnet's Safe Harbor statement. This presentation contains certain forward-looking statements within the meaning of Section 27 A of the Securities Act of 1933, and Section 21 E of the Securities Exchange Act of 1934. The forward-looking statements include statements addressing future financial and operating results of Avnet and are based on management's current expectations. Actual results may vary materially from the expectations contained in the forward-looking statements. Factors that could actual results to differ materially from those described in the forward-looking statements include the effects of additional actions taken to lower costs, the Company's ability to retain and grow market share, the Company's ability to generate additional cash flow, and any significant and unanticipated sales decline or changes in business conditions and the economy in general. More detailed information about these and other factors is set forth in Avnet's filing with the Securities and Exchange Commission, including the annual report on Form 10-K for fiscal 2002 and the most recent quarterly report on Form 10-Q.

In just a few moments Raymond Sadowski, Avnet's Chief Financial Officer, will provide our fourth quarter fiscal quarter financial update. Following Ray, Roy Vallee, Chairman and CEO of Avnet, will have comments regarding the Company's fourth quarter performance as well as comment on broader strategic issues related to Avnet and our industry. At the conclusion of Roy's remarks we will conduct our Q&A session. Also here today to take any questions that you may have related to Avnet's business operations are our two Operating Group Presidents, Rick Hamada, President of Technology Solutions, the newly named group resulting from a recent merger of Computer Marketing and Applied Computing; and Andy Bryant, President of Electronics Marketing. Also our new Chief Information Officer, Ed Kamins, joins us to help with any discussion regarding business operations related to Applied Computing and/or the merger and restructure underway.

With that let me introduce Raymond Sadowski for our fourth quarter financial overview.

Thanks, John. Good afternoon everyone. Let's begin with an overview of our operating results for the June 2003 quarter, Avnet's fourth quarter of fiscal 2003. For analysis purposes we have segmented out the GAAP results for the fourth quarter of fiscal 2002, shown in the light blue highlighted column, second from the right. Results presented for the current quarter, as well as the prior sequential quarter are GAAP results. However, the GAAP results for Avnet's third quarter of fiscal 2003 do include the debt extinguishment costs associated with certain of our long-term bonds that were purchased during that quarter. These charges amount to $13.5 million pre-tax, all of which is included in the Other Income/Expense caption, 8.2 million after-tax, or 7 cents per share.

The yellow highlighted columns provide the sequential and year-over-year comparisons of results from operations. Avnet's fourth quarter fiscal 2003 results reflect revenues of 2.19 billion, down 153 million sequentially. This sequential decline in sales was slightly greater than anticipated, below will end of our prior guidance by approximately 60 million.

In percentage terms, sales declined by 6.5 percent compared to our guidance of sales decline in the 3 to 4 percent range on unexpected weakness in our computer businesses which did occur. However, somewhat unexpected weakness in our components businesses accounted for the additional decline in top line. Nonetheless, year-over-year enterprise quarterly revenues were up by 43 million or 2 percent on positive year-over-year growth in both our Electronics Marketing and Computer Marketing businesses, which have benefited from the positive impact of the euro.

With a lower sequential sales, gross profit dollars decreased by $12.5 million sequentially, and 9.6 million year-over-year, excluding special charges recorded in the prior year fourth quarter. These lower gross profit dollars reflect enterprise business mix, business mix changes with the Computer Marketing, and margin pressures in both of our computer businesses. However, gross profit margin improved sequentially at the enterprise level, and rose both sequentially and year-over-year at Electronics Marketing.

Operating expenses fell both sequentially and year-over-year as we continue to benefit from our expense reduction efforts put in place over the past 2.5 years. Expenses in the June 2003 quarter fell by $8 million sequentially. On a year-over-year basis, fourth quarter operating expenses are down over $15 million in delivered U.S. dollars, excluding special charges recorded in the prior year fourth quarter. However, had the value of foreign currency remained the same as a year ago, operating expenses for the fourth quarter would have been at approximately $34 million in constant dollars year-over-year.

Year-over-year operating expenses declined more than the decline in gross profit. As a result, operating income, excluding prior year special charges did grow over 21 percent or $5.5 million to 31.7 million. On a sequential quarterly basis, gross profit dollars fell at a greater rate than expense dollars, creating a 4.5 million decline in operating income.

Interest expense was essentially flat both sequentially and year-over-year, as the impact of the decrease in debt offset the increase in interest rates associated with the 475 million of 9.75 percent bonds issued during the March of 2003 quarter. During the first quarter of fiscal 2004, we have executed certain interest rate swaps on a portion of the 9.75 percent bonds, which are expected to reduce interest expense in the range of $7 million annually based on current short-term rates. The full effect of this will occur in December of '03 quarter. And we should see approximately $1.4 million reduction in interest costs in the current September quarter. However, that 1.4 million reduction will be offset by the extra week of expense in the September 2003 quarter due to our fiscal calendar. This is probably a good time to mention that our fiscal calendar calls for 14 weeks during the September 2003 quarter and 53 weeks for our fiscal year 2004.

One more comment on interest expense. You'll recall that we previously retired approximately 84 percent, or 379 million, of the calendar 2003 bond maturities. The remaining balance will be retired in August and October of 2003, which will contribute to slightly lower interest expense in future quarters.

Other income was up over the prior sequential quarter by 16.3 million, largely due to favorable currency transactions and a negative impact included in the third quarter of 13.5 million of debt extinguishment costs related to the debt retirements mentioned previously. Excluding debt extinguishment costs, other income is up 2.8 million sequentially. Year-over-year other income was up 7.2 million, also due primarily to the favorable impact of foreign exchange rates.

The Company's effective tax rate for the quarter was 18 percent, significantly lower than in prior periods. The lower effective tax rate was largely attributable to the favorable impact of cash planning initiatives put in place over the past year, as well as due to the mix of profits globally at varying statutory tax rates. Based upon these planning initiatives and our projected business mix, we expect our effective tax rate will be in the range of 30 to 35 percent in fiscal 2004.

As a result of the proceeding P&L impact, net income for the June quarter was 11.5 million, up over the March quarter, which includes the special charge associated with the debt extinguishment referred to earlier, by $10 million. Earnings per share for the quarter were 10 cents per diluted share. On a year-over-year comparison, fourth quarter earnings after-tax, excluding special charges, increased by 10.8 million or 9 cents per share. Including special charges recorded in the fourth quarter of fiscal 2002, GAAP earnings were up significantly year-over-year by $73 million, or 61 cents per share.

Although it is beginning to sound a bit like a broken record, enterprise revenue continues to move in a relatively tight stable band from quarter to quarter. For the past eight consecutive quarters revenues have been essentially flat. And despite slight year over year growth in the last two quarters, we continue to look for 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.

As we have discussed in prior quarters, business mix continues to impact enterprise gross profit margins. The enterprise had experienced lower average gross profit margins throughout the trough period of this downturn, primarily due to a higher percentage of consolidated revenues being attributable to our lower gross margin computer businesses. It is important to note that the gross margins improved in both our EM and AC business units on both a sequential and year-over-year basis. And this lifted enterprise gross profit margins by 35 basis points sequentially.

We maintain our (inaudible) focus on reducing costs and streamlining the infrastructure of the Company. Since the peak of the last up cycle in the December 2000 quarter, annualized operating expenses have been reduced by an accumulative amount of $382 million in delivered U.S. dollars. Factoring out the impacts of foreign exchange, 478 million of annualized expenses, or 33 percent, have been removed from the business during that same time frame.

As we announced in our press release early in July, more expense reductions are scheduled in three areas. This includes cost reduction efforts related to the merging of Computer Marketing and Applied Computing into a new combined operating group named Avnet Technology Solutions. The other two cost reduction efforts announced are related to the centralization of our Information Technology Group and some additional restructuring moves in Electronics Marketing. Including some actions already taken during the June 2003 quarter, we expect to reduce expenses by roughly $90 million for the March of '03 quarter run rate. The restructuring charge is estimated to be roughly $50 million, with approximately 25 million cash related and 25 million non-cash related. We're actively implementing the plan to this undertaking, which we expect to be mostly completed by the end of December of 2003. Therefore, this expected annualized cost reduction should take full effect by our third quarter of fiscal 2004. The final charges associated with this initiative could vary from these estimates as reductions are being implemented. And we will update this in conjunction with our September of 2003 results. Although, we probably expect that the majority of the special charges will be recorded during the September of '03 quarter, there is a possibility that some of the charges will not be recorded until the December quarter.

As I noted a few minutes ago, our cost reduction efforts to date have had a positive impact on operating income margins, as we have enjoyed our fourth consecutive quarter of year-over-year increases in operating margins, excluding the impact of special charges. Operating profit margin was down 10 basis points sequentially coming in at 1.45 percent. The decline was due largely to lower operating profits in Computer Marketing, and Roy will touch on this in his commentary in a few minutes.

While markets in the Company's revenue levels have remained relatively flat over the past eight quarters, pro forma earnings per share have improved consistently since the 16 cent loss in the September quarter of calendar '01. The December 2002 quarter represented a strong crossover in pro forma earnings per share performance, and the June 2003 quarter represents the fourth consecutive quarter of year-over-year pro forma EPS improvement.

With the close of fiscal 2003, we wanted to illustrate the significant P&L improvements we had made over fiscal 2002. While enterprise revenues have remained stable, providing only a 1.4 percent growth rate, we have managed to raise operating income, excluding special charges, by 56 percent. Pro forma operating margin is up 46 basis points, and pro forma EPS rose 42 cents. These results from operations, while very encouraging, and I want to take just a short pause to tell our team that they did a good job during the year, those results are still not acceptable. More work is in front of us to move the enterprise back to an acceptable level of operational and financial performance. We have made great strides to change positively and permanently the business model at Avnet, but we still have more to do.

One key part of the story is our balance sheet strategy and our efforts to structurally change and improve asset velocity, and thereby improve returns on capital employed. We indicated in last quarter's update that we did not expect to generate significant working capital reductions throughout the end of the fiscal year. As you can see in this slide, working capital consisting of trade receivables, plus inventory, less accounts payable increased sequentially by 19 million in delivered U.S. dollars. Factoring out the impact of foreign currency however, we managed to again lower working capital, this time by $29 million.

We had another solid quarter of cash generation. For the quarter we generated another 105 million of free cash flow, bringing the total for the fiscal year to almost 638 million, which is on top of the 869 million generated during the prior fiscal year. Cash generated from cash earnings and working capital reductions have been used primarily to reduce the Company's total debt and increase our cash balance. Since the end of December of 2000, we have reduced debt by nearly $1.86 billion, and our total debt now stands at 1.47 billion. The Company has no outstanding amounts under its multi year bank facility or the accounts receivable securitization program. And our cash balance continues to grow, as you can see in the chart on this page. And as the chart also shows in the midst of a continuing trough environment, we haven't nearly approached the level of cash balances that we enjoyed at the peak of the last up cycle in December 2000. Our (inaudible) simply stated is solid.

As of with the P&L, we also wanted to highlight the significant improvements made on the balance sheet over the past two fiscal years. As of the end of fiscal 2003, total debt is down almost 20 percent from 2002, and down 43 percent over 2001 levels. Total debt is now 44 percent of total capital, down from the 50 plus levels of prior years. Net debt follows a similar pattern of significant reductions, and reflects the strong increase in cash enjoyed over the past two years. Cash and cash equivalents increased 148 percent over the prior fiscal year, up over 230 million in one year as we have paid down virtually all short-term debt and have been accumulating cash.

And finally our working capital balance is down almost 17 percent from fiscal 2002 year-end, on essentially the same level of revenue. Since the end of fiscal 2001, working capital is down over $1.2 billion. But more important perhaps it is the asset productivity. Working capital as a percentage of sales is illustrated in the red trend line on the lower right hand graphic, and shows the Company at historical low levels. Our ROCE (ph) initiative is paying real dividends for the business. And we will continue to focus on improving these productivity metrics through the inevitable up cycle.

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

Thank you, Ray. And good afternoon everyone. We are closing the books on our fiscal 2003. And as Ray has just show you, we have really improved the business in many areas, through a fiscal year that has frankly been a challenge, needless to say.

I want to begin by thanking our team worldwide who have persevered through the second year of this unprecedented technology down market. The broader technology markets continue to move sideways. But the Avnet team continues to make significant strides in well managing those things we can, as we all look forward to the excitement and rewards of the next industry up cycle. As I will explain later, I am cautiously optimistic about our prospects in fiscal 2004.

Our revenue guidance for the June quarter proved to be largely in-line with actual results in our computer businesses. However, we experienced a slight revenue weakness in our Electronic Marketing business that we do not expect. Revenue at CM was down 7 percent sequentially, due primarily to lower starting backlog. Revenue was down 17 percent sequentially at Applied Computing on normal seasonality, slightly better than we expected as we continue to reduce our exposure to the PC Builder marketplace. The EM revenue declined developed largely through continued weakness in North America, where average selling prices, or ASPs, in some commodities came under new pressure. And the Asian migration effect continued to affect the business. I should point out however, that EM North America gross profit margin increased both sequentially and year-over-year.

Europe softened a bit with June quarter revenues below March results. In addition, EM Asia experienced a slightly slower rate of growth for the June quarter, but still a robust 41 percent year-over-year, feeling some negative impact from SARS late in the quarter. In America, unit volumes of components increased slightly during the quarter, but ASPs fell by about 7 percent, generating lower total revenues in EM North America, down slightly less than 6 percent.

At CM, revenue from North America accounts for over 80 percent of the group revenue. In the North American business, sales were down sequentially, as expected, again due to lower starting backlog versus the March quarter, which benefited from backlog carryforward from the end of the calendar year. However, in addition to lower revenues, gross profit margin was down as well, due to product mix and competitive pressure in the server and storage arena, amplifying the sequential decline in gross profit dollars at CM.

Revenue at Applied Computing was down, as expected, again due seasonal effects and lower sales into the PC Builder segment. The higher gross margin Embedded Solutions business at AC was able to build momentum during the quarter, which helped in lifting AC's margin percent sequentially for the second consecutive quarter. Year-over-year, and positively impacted by the euro, we saw revenue growth as about 3 percent at both EM and CM, while AC was down by about 2 percent.

Here you get a view of the year-over-year change in the enterprise business mix by group and region. The graphic in the upper left provides some evidence of the downsizing we're doing in the PC Builder segment of our AC business, as AC fell from 17 percent of the enterprise revenues to 16 percent year-over-year.

Regionally, Asia continues to grow as a percentage of our enterprise. Through the June 2003 quarter, Asia is now nearly 14 percent of consolidated revenues. And year-over-year Asia grew at about 57 percent. Including all four quarters of fiscal 2003, Asia is now approximately 11 percent of enterprise revenue and 17 percent of the EM's revenue. Asia should continue to grow as a percentage of the enterprise. And we're well-positioned to capitalize on the growth in that region. We continue to invest in Asia to meet the needs of our customers and suppliers.

EMEA, Europe, Middle East and Africa, was stable at 32 percent of the enterprise, while the Americas contracted to 54 percent. Operating margin at the enterprise level fell 10 basis points sequentially, from 1.55 to 1.45 percent. However, as Ray noted earlier, operating margin, excluding the impact of special charges, is up year-over-year for the fourth consecutive quarter, and for the full year, up 46 basis points over fiscal 2002's performance to 1.32 percent.

Focusing on the left-hand graphic, you can see that on a sequential basis EM's operating margin was up 36 basis points. The right hand graphic shows EM's operating margin, excluding special charges, is up 124 basis points year-over-year, without any meaningful revenue growth. This was due to higher gross margin and lower expenses both sequentially and year-over-year. However, both CM and AC experienced declines in operating margin sequentially. CM operating margin was down 136 basis points to .73 percent. And AC was down 122 basis points to .3 percent. Year-over-year, excluding special items, CM's operating margins were down by 259 basis points, while AC was successful in raising margin by 81 basis points over that prior year June quarter.

Fundamentally, the impact of lower revenues across business lines, lower gross profit margins, business mix and geographic weakness in Europe all contributed to the decline in operating profit margin in the computer businesses this quarter. As well, these same factors serve as the backdrop to the merger of these business into Avnet Technology Solutions. In order to provide acceptable returns, the combined business must be significantly leaner, while preserving the important value proposition they take to market.

The cost reductions that Ray outlined are being put in place to provide the enterprise with improved profitability, while maintaining the high assets velocity generated to date. Included in these cost reductions is the consolidation of the Computer Marketing Chandler Arizona Logistics and Integration Center, into the Applied Computing facility in Phoenix, Arizona. Logistics requirements in Europe are in the final stages of review and could result in additional consolidation there shortly.

Inventory turns reached an historic high of 6.8 last quarter. And with the decline in revenue, those inventory turns and DSO fell slightly from the prior quarter. Nonetheless, I continue to be pleased with the work our team is doing related to our inventory's productivity and asset velocity in general.

Throughout this fiscal year we have improved our asset velocity and achieved historic highs. Working capital velocities, measured as sales divided by receivables plus inventory minus payables, has moved from 4.4 to 5.4 year-over-year, a 20 percent plus improvement. We're into a new business model. On a full fiscal year basis, we have gone from a working capital velocity of 2 times in 2001 to 3 X in 2002. And with the (inaudible) initiative working its way throughout the organization on potentially flat revenues, we are at a 5 X level in fiscal 2003. This is a step function improvement in asset productivity, which we're committed to preserving going forward. This productivity ratio will vary somewhat based on our actual mix of business. But our guiding value, return on capital employed initiatives, will continue to guide business decisions.

Based on this level of working capital efficiencies and our net liquidity and over $900 million today, Avnet is currently positioned to fund well over $4.5 billion of organic revenue growth. During the last up cycle the markets and the business models we had in place yielded enterprise operating profit margins in the 5.5 percent range. We're a more efficient Company today, and becoming more so every day, with more leverage in our operating models than ever before. We know they any lift in market conditions, combined with the leverage we have today, will rapidly improve our operating profit. This combined with the asset efficiencies we have worked hard to put in place, will cause the Company to generate much higher returns on capital employed and create shareholder value. That in a nutshell, is our financial strategy.

So we will continue to manage the things we can affect. We will continue to size our operations to market conditions to create acceptable returns on capital employed. As evidence of this, since the December 2000 cycle peak, we have removed $478 million of annualized SG&A in constant dollars, and over 380 million in delivered U.S. dollars. Through our fiscal 2004 and December quarter, that amount should grow significantly due to restructure and cost reductions outlined by Ray earlier. Since December 2000, working capital reductions are now nearly to 2.1 billion, and reductions in debt are nearly 1.9 billion. We're now a leaner and meaner enterprise.

So to summarize fiscal 2003, I think there are four points to be made. The environment we operated was for all practical purposes stable all year long. We focused on rightsizing the Company to what the environment was giving us in terms of revenue. We made significant strides operationally and financially. As I said earlier, our P&L leverage in at historic levels with employee productivity approaching peak level. Asset velocity is at historic levels. And cash generation is growing and contributing to a significantly stronger balance sheet and liquidity position.

And our value based management initiatives are focused on ROCA CE is changing our Company. It has changed our business model and has positioned the Company to create increased levels of shareholder value. What is the outlook for fiscal 2004? Well, I am cautiously optimistic. I see a market environment remaining stable in the short-term. Now we have an extra week this quarter, which will positively impact revenues. And so we expect enterprise revenue to go sequentially over the June quarter. Beyond that, we believe the technology markets are now in a slow rebound. And revenue growth in the markets we compete in will likely accelerate as the fiscal year progresses.

Meanwhile, we're continuing to strengthen the leverage we have in the operating model through cost reduction. The bottom line is that our absolute results are still inaccessible. And we remain committed to achieving a business model that yields acceptable levels of profitability regardless of revenue (inaudible).

Fiscal '04 consensus EPS estimates, before any special charges for Avnet, are 67 cents on projected revenues of 9.7 billion, or about 9 percent revenue growth year-over-year. We expect to achieve that consensus barring any decrease in revenue from current levels. As we guided in today's press release, we currently see enterprise revenue in the first quarter of fiscal 2004 to be up sequentially from the June quarter performance of 2.2 billion, in the range of 2.25 to 2.35 billion, or up 60 to $160 million. We expect sequential revenue growth of 4 to 8 percent in our EM or components business. And we anticipate revenues at our new Technology Solutions business will increase by 3 to 6 percent sequentially.

Factoring in an additional week of expenses due to our fiscal calendar, and assuming a more normalized tax rate in the 30 to 35 percent range, as well as lower anticipated other income, earnings per share in the September 2003 quarter should range between 8 and 11 cents, excluding the impact of incremental special charges associated with this restructuring that Ray mentioned earlier.

So with that, let's open up the lines for Q&A. Operator?

(CALLER INSTRUCTIONS). Brian Alexander of Raymond James.

Roy, I just want to touch on the operating margin decline in the Computer Marketing Group, or as it was formally known as Computer Marketing. Most of the operating margin decline there is due to the pricing pressure that you talked about. And if you could just talk about the pricing pressure, where is it coming from? What types of competitors? Is it coming from vendor direct initiatives, other distributors? And if it is other distributors, are they existing competitors or are there new competitors entering the market causing downward pressure?

I will let Rick address the pricing issue specifically. But let me also just remind you, Brian, that there was a, although it was expected, the fact is there was a revenue decline, meaningful revenue decline sequentially, due to this backlog anomaly. And that certainly effected the operating margin for CM for this quarter. But with that, Rick, can you elaborate on the pricing?

Sure. Part of it was due to the geo mix, Brian. The Hall-Mark business, the North American distribution business actually compares very favorably to their peer group, I would say from a result basis -- the Enterprise Solutions and the Partner Solutions in Europe, where most of the struggle had been coming from. And there are really no new competitors on the horizon. The challenges are coming from, again, those particular businesses, a bit associated with the product mix as we continue to grow our software business, and for the close of the fiscal year as well tidying up on some of our reconciliations. A situation, I am very focused on making sure we rectify in very short order.

And then just a follow-up on EM. It sounds like there was some ASPs declines out there this quarter, which is a little bit different than what your major competitor talked about a week or so ago. And I think if we look at this quarter and the previous quarter, it sounds like the trends you're seeing in pricing on the components side are a little bit different. How should we interpret that and think about that going forward?

You want to take it, Roy?

Let me just make a comment, Andy, and I will flip it to you. I'm not sure that I know how to answer how you should interpret it. But, as you remember, last quarter we showed a relative stability, a small decline in ASPs, and they showed a greater decline. This quarter if I understand it, they showed more stable ASPs and we showed a decline that was significantly greater than what we had seen previously, but still less than what they showed last quarter. So I'm not sure what the interpretation is, but the data is the data. Andy, go ahead.

Yes, I was just thinking, the external data says that ASPs are flat. Remember that we are giving you some insight into Americas where there is rotation to Asian, number one. There's competitive pressure on the market in America due to that rotation to Asia. So I think if you look at ASP's worldwide, you would characterize them as flat to maybe slightly down. But when you look at specific ASPs in America where there is, again, extreme pressure and competitive business environment, some of the commodities, I would say it is mostly standard product that is feeling the pressure. So discretes and standard logic, as an example have some pressure. But the more high end products and proprietary products, Brian, are actually stable. And in some cases, some product is actually trending up, like DRAMs are trending up.

Okay, thanks. That is helpful. Just one last question. Ray, other income up sequentially this quarter. You talked about it a little bit earlier. I think 2.8 million mostly due to foreign currency. Could you just give us a little bit more color on what you mean by that? And then maybe dig a little bit deeper into why the other income was up? And how should we model that going forward?

It is simply with the way some of our business operates and some of our methodology for hedging certain foreign currency exposures, we have resulted in some gains over the last couple of quarters. Keep in mind, included in that other income as well is a fair amount of interest income, based upon not only our cash balances, but other receivables that are interest (inaudible). But predominately the biggest piece is the foreign currency, which again is just due to some of our currency exposure, and the way we manage through that. We have been fortunate over the last couple of quarters and that has worked to our favor.

On a go forward basis, we really do not model that into the business. That is why I think in Roy's commentary relative to guidance for the upcoming quarter, we have an expectation that that number will be reduced a fair amount. So I would probably, from an old world (inaudible) prospective probably cut that number in half, maybe even a little bit lower than that. And I think that should be pretty close to where things would turn out, unless again currency moves in a direction that turns out to be favorable for us.

And I guess just to clarify, is the benefit that you're getting from currency being offset in other parts of the income statement and maybe depressing your gross margin or expense ratios?

Correct. The way we report -- it is a combination of a number of items, but that is certainly one component. That if you look into the expense category and into cost of sales, they are being depressed because of the way we tend to account for our currency gains, which are different than from what I understand others do. But this is the way we have done things consistently. But you are correct in that some of that gain in essence is offset in other parts of income statement.

Steve Fox of Merrill Lynch.

A couple of questions. First of all, I'm sorry if I missed this, but did you say how much currency rates effected the top line?

Steve, we didn't. Currency rates -- one second -- on a sequential basis currency affected the rates by roughly 2 percent it looks like.

Two percentage points?

Yes.

And how that year-over-year, do you have that, Ray?

Year-over-year, we're talking about, it looks more in the range of about 6 or so percent on a year-over-year basis.

And then from a geographic standpoint, Asia is increasing as a percent of your business. From a profitability standpoint, Roy, can you talk about where you are? I know Arrow has been challenged in making money over there. Where do you stand on profit for the Asia components?

Steve, we are profitable in Asia, have been for several quarters. EM global gross profit margin is actually still continuing to rise both sequentially and year on year, including the rise in content from Asia. Now all that said, the operating profit margins coming out of Asia are typically lower than what we are accustomed to in either America or Europe. And we need to offset that with higher asset velocity. And I would say at this point in time, we're not satisfied with the level of profitability coming out of Asia. However, it is profitable, and we absolutely believe we will be able to achieve our no cap return on working capital objectives there ultimately.

So is the focus on getting up the operating margin and the passive (inaudible), or really it is just a matter of turning its capacity?

It is really both. If you -- and (inaudible) anything you want to add, just jump in -- but let me make a couple more comments. Steve, two things, the gross profit margin is typically lower in Asia under any conditions, but the margins are depressed worldwide based on the condition of the industry. So we expect that as things begin to strengthen a bit, and you see stabilization in ASP's and some lead time extension, we will in fact be able to increase the gross profit margins in Asia. And we base that on prior experience.

Relative to expenses, you know at this rate of growth, we are fronting substantial expense flows. We're adding product line, loading tech staff, and product managers, etc. And so again, at a lower rate of growth I would expect a higher rate of drop through down to operating margin. So I think that industry conditions, as well as rate of growth, will have a positive effect on our operating profit in Asia on a go forward basis.

Just one last question, Roy. Europe has been -- I don't know a lot of managers this quarter talk about it being a little bit bigger concern. Where do you come out on Europe as you head out of summer? Obviously it is going to be slow this summer, but are you concerned that it could stay slow, say, into next year?

Well, I would tell you this, let me make a statement that applies to Europe, but also applies to the business in general. You know, we normally see a weaker June quarter than March quarter in Europe. And if I were giving a qualitative commentary on this year, I would say it was slightly weaker than the normal seasonal pattern. However, we have already completed July. And it turns out that July is the month where we get the benefit of the extra week this quarter. And our bookings and our billings in Europe I would describe as very healthy in July. So certainly just the opposite of any continuation of weakness from the June quarter.

Matt Sheerin of Thomas Weisel Partners.

Roy, concerning the consolidation of the computing businesses, and your decision to basically ease out of the PC components build area. What does that do to your long-term relationship with Intel, and then also AMD? And do you plan to participate in any way in those markets? I know you are still, I believe, AMD's largest distributor. What is your general philosophy about that business going forward? And then as a follow up, how do we think about that business sequentially in December, because normally both at Applied Computing and your computer businesses are up in December. So seasonally how should we think about that part of the business now that you're sort of easing out of that?

Okay. So first, let me add a little bit of clarity. With regards to North America, our revenues in the PC Builder market segment are dominated now by Advanced Micro Devices. And that is a relationship that we don't see changing anytime soon. The business model there is profitable. It works for us both in terms of operating income, as well as return on capital. And so no significant change in America.

If you jump over to Europe, we still have a relatively significant revenue stream comprised of not only Intel microprocessors, but disk drives and other products into the PC builder segment. And, Matt, you are correct that we are continuing to hold the line from a margin perspective. And as we do that, our revenues are falling and we are continuing to react in the form of expense reduction to right side that business.

So going forward, I would anticipate that we would experience lower revenues from Europe in the September, and possibly, or probably lower revenues in the December quarter than what you might otherwise have modeled. Now of course, that'll be offset by increased gross margin percent. And the reason we are backing away from those revenues is because we feel they have very little effect on our bottom line profit.

With regards to our relationship with Intel, I would describe it as very good. We were Intel's first distributor in the world. We are a substantial distributor for Intel. And the difference in the relationship is that we're no longer a primary channel to market for them in volume micro processors. However, in all of their embedded products, ranging from their flash semiconductor into the electronic components account base to the Intel boards and boxes that we use in our Embedded Solutions business at Applied Computing, Intel is a premier supplier. And we have a great relationship with them in those products. Rick, anything you want to add to that?

No, I just -- we are taking a very disciplined look at all of that business, particularly in Europe, and trying to make sure that as we take this opportunity to put Technology Solutions together, we understand where we're making money, where we're not, and allocating resources accordingly. As you would expect I am sure. (multiple speakers).

Gee, thanks And just another question regarding your inventory. You will continue to work that down, given that you're looking at a little higher sequential growth in September than into December. What is your outlook in terms of inventory, will you have to build that back up with things a little bit?

Well, you know the focus for me is really on the productivity stats as opposed to the absolute dollars. But I would tell you that the revenue growth that we're forecasting for the September quarter at this point in time doesn't really contemplate an increase in revenue run rates. And, therefore, I would not expect at the enterprise level that there would be any significant build of working capital in that quarter. And it turns out that in the December quarter, if you exclude market growth, the bulk of the revenue growth would be from the seasonal strength in the computer business. And that turns out to be our highest asset velocity business anyway. So once again not expecting a significant change in working capital. So I think I would describe working capital over the next couple of quarters as closer to flat than anything, with maybe a slight increase. And that is dependent upon whether or not revenues actually takeoff on it. Operator, real quick, I want to -- a question was sent in by e-mail. Ray, this is for you. It is from Jeffery Clayton Berger (ph) at CSFB.

Are you still in compliance with your interest coverage covenant related to your revolver? Do you have full access to the revolver?

The answer to the question is absolutely yes. And we do have full access to the revolver. But as we said earlier, based upon our cash balance and expected cash needs, we really don't intend to access that revolver in the near future.

Thank you, operator, next question please.

Patrick Parr of UBS.

This is actually Ben Root (ph) for Pat. Roy, given that Young (ph) unit came in a little bit weaker than what you guys were expecting this quarter, can you walk us through why you are expecting EM to be up 4 to 8 percent next quarter? Does that actual one week, is that about accounting for most of it, or what else is accounting for some of the strength there?

Yes, I will point to two things. And I will ask Andy if he would like to add. The one week is a big deal. You know, keep in mind, some of our revenues at EM are a function of monthly statements into customers based on their monthly bill schedules. And then some of them are dependent upon day-to-day bookings, or what we described as the under 30 or current booking rates. And throughout this down cycle, lead times have been very short. It turns out that the under 30 content in the booking numbers has been inordinately high. It is has been a very high percentage of total bookings.

So the point I am trying to make is that we get the benefit of extra days on the turns business, but not necessarily on the monthly schedule business. Now if I just reflect on the month of July, which has already been completed, and by the way this really applies to EM and the enterprise, so I'll go ahead and kill two birds with one stone. If you take last July and establish a daily run rate and add the five days that we picked up this July, we finished the month with revenues that are slightly higher than that extrapolated run rate. So we believe that we got the quarter off to a good start. We believe that we've gotten full benefit the extra week. And if you make the assumption that August and September should be relatively normal months, you know, based on last year's period and the prior quarter, you come up with the kind revenues that we projected. Andy?

Yes, I think that kind of summarizes it well. I would only add that June was unexpectedly soft. And that wasn't just true for Avnet, that was true for the semiconductor market. Number two, we're heading into a seasonally strong quarter in Asia. So the summer quarter in Asia is typically strong. And then as Roy noted, our July, particularly in Europe, showed some good signs. So with that, I would say America becomes the wild-card, and we're showing some signs of stability there. So all of that kind of points to the growth for the quarter.

Andy's business in Asia actually have higher billings in July than it had in June.

Roy, if we exclude that extra five days, what would EM look like on a normalized basis? Would it be up 2 percentage rather than 4 to 8 percent?

Well, it is interesting. If I look at the last couple of years, I would say that you know the norm would be flat for the summer on a sequential basis, to maybe down one or two percent. You know, Europe is definitely slow. Asia is quite the opposite, it is one of the strongest quarters of the year in Asia, and America is typically flattish to maybe down just slightly in the summer quarter.

Okay, thanks. And just is one last question, Roy. Given all the rotations that you guys have talked about, with your suppliers and customers moving to Asia, and given that you only have a, I guess, less than 20 percent presence there, can you walk us through how you expect to capture some of -- more of the revenues that are migrating there? Whether you plan to move more of your operations there or what have you?

Andy, do you want to take that?

Yes. When we have a specific program to capture migrations in place, it involves teams in the U.S. and Asia. And so that has actually been very successful for us. We have quantified that shift, captured in the hundreds of millions of dollars, over the last two years. The last two fiscal years. But I think it is also important to note that we really think our long-term opportunity in Asia continues to be the evolution of the indigenous market as opposed to the shift. Remembering that the shift is a function of low-cost manufacturing, high-volume purchases that are typically coming out of large Tier 1 OEMs and a lot of our focus now in the People's Republic of China is very heavily focused on our own demand gen (ph) efforts with the emerging OEM customers in China. So I think we're after both markets. The one that is pursuing us, but we're mostly after the market that we're pursuing.

And just to add, the shift is really an EM phenomenon relative to manufacturing. Relative to Computer Marketing and Applied Computing I would describe it as not material.

Great. Ray, one last question. Of the 90 million cost saving that you are talking about, can you break it out between the three areas that you're looking at in terms of centralization of IT, restructuring moves, and EM merging CN and AC?

I think, believe it or not, it is coincidental that roughly, if you break it -- we categorized it between the merger of AC and CN as one category. The IT consolidation is two. And then Electronics Marketing restructure, as well as corporate related or supported initiatives, which is included in that number, roughly a third and a third and a third. It is pretty close to that. So that is the way it is falling out as we stand right now.

Tom Dinges of J.P. Morgan.

Real quick on the Computer Marketing side, you made a comment earlier in the prepared remarks talking about one of the reasons why that was down was both seasonal, but also you had some lower backlog. And the reason that profits were down was the revenue shortfall, but also was the issue concerning the product mix in the area. And I'm curious as to what you see exiting June, and what you're seeing exiting July now in terms of backlog for the next couple of months or in the near-term in terms of product mix and in terms of just aggregate backlog, because that has somewhat rectified itself? And then I have a follow-up question for Ray?

Okay, Rick, you want to take that one?

Well, I will start with the calendar impact. The issue with the backlog difference was that the biggest backlog was carried over from December, where we actually had a two day disconnect on a calendar basis. Interestingly enough in this particular quarter, Tom, we're going to catch two quarter ends, because Monday, June 30th, was the beginning of our quarter, which was the end of the calendar for some of our partners. And we're going to close on Friday, October 3rd, if I remember correctly. So we going to actually pick it all up here and get two quarter ends in one shot here for CM.

The fourth quarter we picked up less carryover from March to April than was carried over from December to January. So that is where that came from. That didn't affect the revenues beyond expectations. We were setting expectations in Q4 at CM for a 5 to 10 percent decline, and we came in right at about 7 percent. So again the revenues were in expectations. We didn't have any real increase surprises on the expense side. That is why we focused on the margin problem, which led directly to the operating profit problem. And again I think I spoke to that earlier.

Around the relative geographic and divisional impact, product mix and the changes we've made in some of those nonperforming divisions, such as AES leadership change that was made in the fourth quarter. June 1st -- April 1st, Jim Peter was announced taking over that particular division. And now he is settling in and those changes ought to start to be impactful to CM's revenues and results starting in Q1 of FY '04 and having further affect around FY '04.

Okay, thank you. And a real quick for Ray. Given the cost savings and the charge, it sounds like it is -- much more is going to be flowing through in September. Given if we would trend sales out, and I know you guys wouldn't be happy if sales sort of trended out on a sequential rate that we're looking at for next quarter, out over the next four quarters? Have we in absolute dollar terms set somewhat a low bar here on the operating expense, given that you're going to save roughly about 90 million or so over the next four quarters?

Yes, I am not sure I followed you, Tom. Ray, I am not sure I followed the question. Tom, try again?

Okay, sorry. It was the operator there. What I was asking is in terms of absolute dollars of operating expenses that you've got now in the SG&A line, given that you're going to implement the cost savings of roughly about 90 million over the next -- it is going to come through over the next four quarters, have we -- if we trend sales out at the sequential rates that we've got going from this quarter to next quarter, have we set the low bar in terms of operating expenses? Meaning, your incremental gross profit dollars should increase going forward as you are kind of holding the line on expenses?

Yes. The way we got our numbers, it doesn't hit the gross profit so much as it does the operating profit, Tom. But here's what happens. The extra week in the September quarter is going to cause SG&A sequentially to actually be flat to up slightly, even with the cost reductions that we're taking. Because there is essentially 1/13 extra expense in there. However, as you get out to the December quarter, that week falls away. And I think the point you were making and that is that the expense reductions that have been taken, that will be effective in the December quarter, will actually take the number down below that. So I think that was your question?

That was the question.

Yes. And then of course as you go out further, we're really expecting the majority of the impact of these savings to be fully embodied in the March quarter.

Operator, we have time for one more question.

Victor Savas of Goldman Sachs.

Also knows as Steve Savas, but I guess I just had one question on consolidation opportunities. You have done a great job improving your balance sheet. You did put a shelf up there, I think, not too long ago. I was wondering your thoughts on consolidation opportunities? What might be your criteria if you're looking at any? And would there be some particular regions that you might be focused on?

Steve, or your twin Victor, we established the shelf because with the bond offering last February, we essentially used up all of the outstanding shelf that we had registered. And we always want to have a shelf in place in the event that there is a decision to do some form of strategic financing. There is no immediate plans to do that. The shelf was just put in place to be prepared.

Relative to consolidation, I think that's our position has not changed. And you should not read that the shelf is a change in that position. And our position has been that whereas during the rapid fire consolidation of the industry, we decided to be a consolidator instead of a consolidatee. Today we're looking to leverage the scale and scope of the organization that we have built worldwide. So to the extend that acquisitions are on the horizon, they would be relatively minor, especially compared to our past acquisition activities.

The other thing I would add is that based upon our driving value or return on capital initiative, we will be paying a lot more attention to the return on invested capital in these transactions. And perhaps putting a little less weight on the accretive nature of earnings, or the impact of accretion to earnings as a primary driver for us. So no immediate activities pending, no aggressive plans. The shelf was put in place primarily for strategic financing.

You are very welcome. Okay, thank you everybody. As we conclude today's quarterly analysts call, we going to quickly scroll through two slides mentioned at the beginning of our webcast that could contain the non-GAAP to GAAP reconciliation of results, presented during our presentation. And then slide number 31 contains additional footnotes for graphs presented earlier on slide 18.

You can download the entire presentation, which includes all of the GAAP financial reconciliation by accessing a downloadable PDF at our website, www.ir.avnet.com, and again just click on Presentations in the left menu bar. Also you can click on GAAP financial reconciliation in the left menu bar of the web site and access just the GAAP reconciliation information data sheet by itself.

Again, thank you for your participation in this quarterly update today. If you have any questions or feedback regarding material presented, please don't hesitate to contact me, John Hovis, directly by phone or by e-mail. Again, thanks for you time. We look forward to being with all of you again in October when we report our fiscal 2004 first quarter results. Goodbye.

Thank you very much, ladies and gentlemen. That does conclude this afternoon's teleconference. You may all disconnect your lines at this time. And have a wonderful evening. Thank you.

(CONFERENCE CALL CONCLUDED)