安富利 (AVT) 2004 Q1 法說會逐字稿

Good afternoon, everyone, and welcome to Avnet's First Quarter Fiscal 2004 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 for the company's presentation, please go to our Web site 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 Web cast 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 our Web site and click on "Presentations" in the left menu bar. As always, we are happy to accept questions via e-mail and have provided quick access through a link on your screen at the bottom of the slide. We will receive your e-mails 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 accepted accounting principles or GAAP, the company also discloses pro-forma or non-GAAP results of operations that exclude certain charges. Management believes that providing this additional information is useful to investors to better assess and understand operating performance, especially when comparing results to previous periods or forecasting performance for future periods. Management believes the pro forma measures also help indicate underlying trends in the business. Reconciliations of the company's analysis of results to GAAP can be found in the Form 8-K filed with the SEC today in several of the slides in this presentation and on our Web site at www.ir.avnet.com. Now, before moving on to formal introductions, I would like to review Avnet's Safe Harbor Statement. This presentation contains certain forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E 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 cause actual results to differ materially from those described in the forward-looking statements include the effects of additional actions taken to lower cost, 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 filings with the SEC including the annual report on form 10-K for fiscal 2003.

 Just a few moments, Raymond Sadowski, Avnet's Chief Financial Officer, will provide our first quarter financial update. Following Ray, Roy Vallee, Chairman and CEO of Avnet will have comments of the company's performance during the quarter. At the conclusion of Roy's remarks, we will conduct our Q and A. Also here today to take any questions you may have related to Avnet's business operation are our two operating group presidents, Rick Hamada, President of Avnet Technologies Solutions as well as Andy Bryant, President of Electronics Marketing. With that, now let me introduce Mr. Raymond Sadowski for our first quarter financial overview. Ray?

Thanks, John, and good afternoon, everyone. Let's begin with an overview of our operating results for the first quarter of fiscal 2004 ended October 4th, 2003. As usual for analysis purposes, we have segmented out the GAAP results, which include all restructuring and other charges for the current period versus our pro forma results from operations excluding such charges. We have also shown the sequential and year-over-year performance and the highlighted columns provide the sequential and year-over-year comparisons. The P&L results presented here are influenced by two elements this quarter. First, due to our 52/53 week fiscal calendar, we have 14 weeks in our first quarter as compared with the normal 13 weeks. This extra week impacted most of our financial metrics. Second, there were restructuring and other charges related primarily to the $90 million cost-saving initiative we announced last quarter. Avnet's first quarter 2004 GAAP results reflect revenues of $2.4 billion, up $220 million sequentially, and up $234 million year-over-year. This sequential improvement in sales was greater than anticipated, even taking into account the extra week and exceeded the high end of our prior guidance by approximately $50 million for the typically slow summer quarter. In percentage terms, sales increased by 10% sequentially as compared with our prior guidance of sales improving in the 4 to 5% range.

Year-over-year, enterprise quarterly revenues were up by 11%, reflecting growing strength in both our Electronics Marketing and technology solution businesses. With improved sequential sales, gross profit dollars increased by $14.5 million, or 5% sequentially, and $11.5 million, or 4% year-over-year. However, gross profit as a percentage of sales declined sequentially and year-over-year at the enterprise level. The gross profit margin decline we have experienced at the enterprise level is due to a combination of the business mix between Electronics Marketing and Technology Solutions, stronger lower margin, higher asset velocity storefront sales in our Technology Solutions business, growth in Asia, lingering softness in component prices, and as a result of this softness, some competitive pricing pressure of late in our components business. Roy will talk more about these factors in a few moments. Under the GAAP results column for the first quarter of fiscal 2004, you will note that operating expenses are $300.7 million, which includes the impact of an extra week in the quarter, which we roughly estimate to be approximately $10 million. The GAAP operating expenses also include restructuring and other charges of $32.2 million. These charges are attributable to our previously announced $90 million cost-cutting initiative which involves combining our former computer marketing and Applied Computing groups into the Technology Solutions group and restructuring charges related to Electronics Marketing, our information systems group, and our centralized support operations. The charge also includes the write-off of the remaining un-amortized deferred loan costs associated with the multi-year syndicated bank credit facility that we terminated in September of 2003. Therefore, on a GAAP basis operating expenses increased both sequentially and year-over-year. On a pro forma basis, excluding restructuring and other charges, operating expenses increased by 5.6 million sequentially. The net impact attributable to the extra week in the quarter, partially offset by the benefit from further cost reductions.

On a year-over-year basis, first quarter operating expenses excluding restructuring and other charges are down over $9 million in delivered U.S. dollars. However, as the value of foreign currencies remained the same as a year ago, operating expenses for the first quarter would have been down by approximately $23 million in constant dollars year-over-year. If you adjust for the impact of the extra week in the current quarter as noted previously, operating expenses are down roughly $33 million in constant dollars year-over-year. On a GAAP basis, including the impact of restructuring and other charges, operating income fell both sequentially and year-over-year. However, excluding the charges and focusing on the results from operations, operating income rose by 28% sequentially and by 103% year-over-year. Again, we see the strong leverage in the business model created from our expense reduction efforts. As expected, interest expense up slightly sequentially and year-over-year, with the increase in interest cost associated with the $475 million of 9.75% bond issued during the March of 2003 quarter.

You will recall from last quarter's Web cast that we executed certain interest rate swap -- portion of the 9.7% bonds, which reduced interest expense by about $7 million annually based upon current short term rates. This created approximately $1.4 million reduction in interest costs in the first quarter of fiscal 2004. However, that $1.4 million reduction was more than offset by the extra week of expense in this quarter due to our fiscal calendar. One more comment on interest expense. We have now retired 100% or $450 million of our calendar 2003 bond maturity, a process which we started this past January and included in mid October of 2003. This will contribute to lower interest expense in future quarters. Other income was down substantially over the prior sequential quarter by $6.9 million and down by $3.6 million year-over-year, as the prior quarter benefited from gains relating to the movement of foreign exchange rates that we previously indicated were unlikely to continue. The company's effective tax rate for the quarter was 31%. This lower effective tax rate as compared with last year's first quarter is largely attributable to favorable tax planning initiatives we put in place over the past year, as well as due to the mix of profits globally at varying statutory rates. Based upon these tax planning initiatives and our projected business mix, we expect our effective tax rate will continue to be in the range of 30 to 35% for the remainder of fiscal 2004. As a result of the proceeding GAAP P&L impacts, the company reported a net loss for the first quarter of fiscal 2004 of $11.4 million, down from the prior quarter by approximately $23 million and down year-over-year by about $11 million. GAAP losses for the quarter were 9 cents per share.

Excluding restructuring and other charges, net income decreased slightly on a sequential comparison,  down by about $700,000, or 1 cent per share, reflecting the impact of the slightly higher interest expense and significantly lower other income during the quarter. However, year-over-year net income excluding restructuring and other charges was up $11 million or 9 cents per share.

As noted, the enterprise achieved higher sequential sales in the first quarter of fiscal 2004, representing the best first quarter revenue performance since fiscal 2001, 3 years ago. While one first quarter did not make a trend, we have lived through eight quarters of stable but flat market conditions, and the strength of the current year first quarter in combination with other market dynamics and our performance to date in the current year's second quarter point to another growth quarter coming up. You will hear more about this when Roy provides revenue guidance for the next quarter during his upcoming comments.  Overall, growth in the up cycle appear to be in process.

As we have pointed out in prior quarter Webcasts, Avnet's business mix and other market environmental factors continue to have a significant impact on enterprise gross profit margin. Over the past nine quarters, throughout the trough period of this downturn, the enterprise has experienced lower average gross profit margins, primarily due to a higher percentage of consolidated revenues in our lower gross profit margin, higher asset velocity computer businesses and consistent strong growth in Asia. With the strong revenue performance of Technology Solutions during the first quarter of fiscal 2004, Electronics Marketing share of the revenue pie, where the highest margin revenues are located, actually contracted slightly from 57% in the prior sequential quarter to 56%. Further accentuating this effect on gross profit margin during the quarter. As noted earlier, enterprise gross margins were also impacted by stronger software sales, stronger sales in Asia and pricing pressures.

In addition to Technology Solutions strong sales growth during the quarter, Technology Solutions also improved its gross profit margin sequentially, although they were still down year-over-year. However, due to pricing pressure as well as stronger than expected growth at EM Asia, gross profit decline at EM both sequentially and year-over-year. This had an impact on consolidated gross profit margins during the first quarter, which declined by 63 basis points sequentially. Roy will have some additional remarks regarding consolidated gross profit margin in his commentary in a few minutes.

We continue to maintain our focus on reducing cost and streamlining the infrastructure of our company to meet the market dynamics at hand. Earnings down for the quarter, there has been the obvious well discussed market pressures impacting gross profit margins. In past teleconferences, we have documented for you the cumulative effect of expense reductions accomplished through the downturn in response to the changing market dynamics. Today we are using a different graphic to portray the impact of our expense reduction initiatives. The graph on the left reflects the decline in operating expenses as a percentage of sales, and the graph on the right reflects a decline in operating expenses as a percentage of gross profit dollars. This is one of the key metrics used in our business to measure expense productivity. While neither ratio is where we would like to be today, we have managed the business carefully and have seen these metrics decline favorably and steadily since the December of 2001 quarter. Those improvements are reflected in the five consecutive quarters of year-over-year operating income margin expansion. During the quarter, expense reduction implemented as part of the $90 million annualized cost reduction initiative measured from the March 2003 quarter expenses. Cost reductions related to the combination of computer marketing and Applied Computing in the Technology Solutions, the centralization of our information technology group, and additional restructuring in Electronics Marketing and our centralized support services operations are being implemented.

Roughly one-third of the benefit is already reflected in the first quarter fiscal 2004 results. We expect the restructure and cost reduction initiatives to be mostly completed by the end of the March of 2004 quarter, and the vast majority of the $90 million of annualized cost reduction should, therefore, take full effect of fourth quarter of fiscal year 2004. The charge recorded in the first quarter of fiscal 2004 was $32.2 million, with approximately $17.3 million requiring the use of cash and $14.9 million of non-cash charges. In addition to the restructuring and other charge recorded during the first quarter of 2004, we estimate that charges in the range of $25 to $35 million will be recorded in future quarters in connection with the continuing cost reduction efforts.

As I mentioned a moment ago, the real story here is about our operating profit performance. Despite gross profit margin decline in the quarter, we continue to leverage our infrastructure well. As noted earlier, we enjoyed our fifth consecutive quarter of year-over-year increase in operating profit margins, excluding the impact of restructuring and other charges. Operating profit margin excluding such charges was up by 23 basis points sequentially, coming in at 1.68%, and up year-over-year by 76 basis points. The improvement was largely due to substantially higher operating income at Technology Solutions, which increased 266% sequentially or $13.3 million. Technology Solutions' operating income was up 75% or $7.9 million year-over- ear as well.

Operating income at Electronics Marketing declined slightly by 2% sequentially on lower gross profit margin. However, year-over-year operating income grew by 128% or $18.7 million, contributing to the strong enterprise performance. This operating performance provided pro-forma earnings per share of 9 cents, and represents the fifth consecutive quarter of year-over-year pro-forma EPS improvement. Including restructuring charges, GAAP EPS was a loss of 9 cents per share. We present here some year-over-year quarterly performance statistics, which help to illustrate the leverage we have created in the business model. While enterprise revenues increased nicely, up by 11%, operating income excluding restructuring and other charges is up by 103% pro-forma operating margin is up 76 basis points, and pro-forma earnings per share rose 9 cents. We have made great strides to change positively and permanently the business model of Avnet, but we still have more work to do. Another continuing positive part of our story is in execution of our balancing strategy and our efforts to structurally change and improve asset velocity and therefore thereby improve returns on capital employees. We indicated again in last quarter's update that we did not expect to generate significant working capital reductions during the quarter, but once again, we underestimated our sales. As you can see there in this slide, working capital consisting of trade receivables plus inventory, less accounts payable decreased sequentially by $57 million in U.S. delivered dollars. Factoring out the impact of foreign currency, we managed to lower working capital by $73 million.

In total, working capital has been reduced by over $2.1 billion since the downturn began. This quarter, working capital was reduced despite sales growth and slight inventory growth as well. The productivity gains we have made in prior quarters have not only been sustained, but we continue to explore ways to move towards even higher level of asset productivity. We had another solid quarter of cash generation. For the ninth quarter in a row, we have increased cash and generated another 50-plus million of free cash flow, which is on top of the $638 million and $869 million generated during the prior two fiscal years respectively. Cash generated from 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 2000, we have reduced debt by nearly $1.9 billion and our total debt now stands at $1.43 billion. During that same time frame, net debt defined as debt less cash and cash equivalents decrease by 65% from $2.9 billion at the end of December of 2000 to $1.01 billion at the end of the first quarter of fiscal 2004. In addition to the strides made in reducing total debt and net debt, cash and cash equivalents increased 137% over the first quarter of the prior fiscal year, and were up 299% over the same quarter in fiscal 2002. Working capital balances continue to improve, down almost $1 billion or 37% from the September quarter in fiscal 2002.

More important is our asset productivity. Working capital at the end of the quarter as a percentage of annualized sales is illustrated in the red trend line on the lower right-hand graphic and shows the company at historic low levels. Our return on capital initiative is paying real dividends to the business and we will continue to focus on improving these productivity metrics throughout the next upside. Now I'd like to turn the commentary over to Roy Vallee, Avnet's Chairman and Chief Executive Officer. Roy?

Thank you, Ray, and good afternoon, everyone. I want to begin by thanking our team worldwide for the meaningful progress achieved during this first quarter of fiscal 2004, as the broader technology markets appear to be showing early signs of improvement. I believe that our team continues to make significant strides in well managing those things we can as we enjoyed the best revenue growth quarter in two years, partially aided by one extra week during the quarter. As you can see from the graphic presented here, which illustrates quarter-by-quarter sequential revenue growth rates, growth in the first quarter of fiscal 2004 was the strongest in the past three fiscal years. Even if you allow for a 4 to 6% growth attributable to an extra week in the quarter, the 10% sequential growth suggests strength, especially during a summer quarters.

While we know the technology industry has been operating in a generally stable environment, signs are accumulating that we may now be into the early stages of the next technology up cycle. Our revenue guidance for the quarter proved to be understated at the enterprise level, which improved by 10% sequentially. And you can see the sequential revenue change for the enterprise in each group in the upper left-hand panel. Normally we would not have expected growth during a summer quarter. However, bullied by strong sales of software and benefiting from the fiscal calendar, Technology Solutions grew 12% sequentially and Electronics Marketing grew over 8% sequentially, driven largely by very strong revenue growth in Asia. Year-over-year, the enterprise in each group grew as well, and this is illustrated in the lower right-hand panel.

Avnet consolidated sales grew 11% with EM growing over 9% and TS growing nearly 13% year-over-year. EM Asia experienced robust growth for the first quarter of fiscal 2004, up 27% sequentially and up 65% year-over-year.

Unit demands while growing is still largely fulfilled with current capacity, which continues to create a buyers' market at this point. Although utilization rates are moving up and lead times are extending. In the midst of this market environment, we experience continued price competition within our competitive peer group. While growing or maintaining our market shares across regions, this dynamic served to put pressure on EM's gross profit margins along with the higher relative contribution from Asia. Regionally, Asia continues to grow as a percentage of our enterprise. Through the first quarter of fiscal 2004, Asia now accounts for over 14% of the enterprise revenue pie compared to 10% one year ago. EM Asia is now 23% of EM's global revenues. On a rolling four-quarter basis, Avnet EM Asia revenues were $988 million, and with revenues of $306 million in the first quarter, EM Asia is now on a $1.2 billion run rate for fiscal 2004.

EMEA was stable at approximately 32% of enterprise sales while the Americas contracted to less than 54% during the quarter, down from over 58% in the prior year first quarter. This graphic serves to point out that, despite some gross profit erosion through the trough period, down 127 basis points from the September quarter in fiscal 2002, operating margins have per performed well, up a 152 basis points over the same time period last year. The issues with gross profit margin this quarter are not structural but largely environmental and should abate as market conditions come back into alignment.

As ray noted earlier, business mix is a key driver in determining our enterprise gross profit margins. We believe strongly that as component markets continue their recovery, higher margin EM revenues will likely constitute a larger proportion of consolidated revenue. Regional mix is also playing a role in determining gross margins with the growing relative contribution of lower margin Asia business. While this trend is expected to continue, the graphic illustrates that the impact on the business model has not been dilutive in the least. While these are lower gross margin revenues, they are also lower SG&A revenues, and over the past three years, we have seen operating profit margin expansion in Asia. Also keep in mind that EM Asia's asset velocity is roughly 25% higher than the Americas and EMEA, so returns on working capital are comparable to those regions.

And another key factor in determining gross profit margin is the competitive environment, which has been under pressure for eight to nine quarters now. In most cases, prices are now generally stable, albeit at its low levels, and as demand grows, so should ASPs followed by gross margin. Inventory turns reached a new historic high of 7.2 this quarter despite increasing inventory levels, which were up by 1% on sequential revenue growth of over 10%. Also DSO matched the lowest levels in three years. I continue to be pleasantly surprised at what our team is accomplishing in our working capital productivity. Over the past two years that we've been implementing our driving value return on capital employed initiative, we have achieved continuous improvement in asset velocity, and we have reached historic high. Working capital velocity measured as annualized sales divided by accounts receivable plus inventory less accounts payable has moved from 3.4 to 5.5 turn in that two-year time frame, a significant improvement. This ratio will vary going forward based upon our mix of business between components in computer product. However, as I noted last quarter in my remarks, this step function improvement in asset productivity by business unit is one that we are committed to preserve going forward. As such, we are into a new business model. One capable of creating higher levels of shareholder value as operating margin continues to improve during the up cycle.

You may recall that through the last cycle, our enterprise operating profit margin averaged over 4%. Today at the earliest stages of a new technology cycle, we set at 1.68%. With the lean enterprise we have today and the leverage we have in the operating model, there is no reason why in a normal business environment we cannot return to at least similar historic levels of operating margin performance once the up cycle begins in earnest.

For the combination of maintaining current levels of asset velocity and continuing to improve operating margins through the execution of our cost reduction initiatives and the help of improvement market economics, we should achieve our goal of delivering shareholder value through higher returns on capital employed. Our driving value gross the initiative has been and will continue to guide business decisions for an operating performance that creates shareholder value. In its most simple terms, we will build and operate value proposition that differ in their unique combination of profitability and asset velocity, all of which have the same end result, a return on capital employed that creates shareholder value at each operation. NOCAP (ph) return on working capital, net operating profit after tax is the primary means by which we measure, monitor and take action to drive our businesses towards shareholder value creation.

Here we have presented the enterprise NOCAP (ph) returns on working capital through the trial. Our first objective is to move this measure higher than our weighted average cost of capital or WAC which tends to average through the cycle about 10%, and then optimize the spread of NOCAP return on working capital over WAC based upon growth and strategic objectives. We still have a lot of work to do, but we are on the right track operationally and culturally. We have the team in place to execute on this vision, and we seem to have the last piece of the puzzle in place, and improving more beneficial economic environment. And so the markets we serve seem to be improving, albeit slowly. As mentioned already, our revenue performance during the quarter was somewhat of a surprise, and better than what one would expect by simply adding the effect of an extra week. As we did through the first quarter, we will continue to size our operations to market conditions to create acceptable financial results by business unit. So our focus is on execution and profit enhancement. We will continue to stress good revenues and maintaining asset productivity at these levels.

As I look to the balance of fiscal 2004, I am cautiously more optimistic as revenue growth resumes. We will continue to strengthen the leverage we have in the operating model by completing the balance of plan cost reductions, and then we will continue our constant focus on improving operating efficiencies. Our absolute results are still not acceptable, and we remain committed to achieving the business model that yields acceptable levels of profitability regardless of revenue levels. As we guided in today's press release, we currently see enterprise revenue in the second quarter of fiscal 2004 to be up sequentially from the first quarter performance of $2.4 billion, in the range of $2.475 to $2.550 billion, or up between $70 to $145 million sequentially.

Coming out of a quarter that enjoyed 14 weeks as opposed to the normal 13 weeks, we expect Electronics Marketing revenue to be flat to up 2% on a sequential basis, and we expect revenues in our Technology Solutions business to increase by 7 to 12% sequentially due to the typically strong seasonality of the second quarter. We expect earnings per share in the second quarter of fiscal 2004 to be in the range of 17 to 20 cents excluding the impact of incremental charges associated with the restructuring mentioned earlier. With that, let's open up the lines for Q and A.

Ladies and gentlemen, at this time we will be conducting a question and answer session. If would like to ask a question, please press "*1"on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press "*2" if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the "*" keys. Our first question is coming from Steven Fox with Merrill Lynch. Please state your question.

Hi. Good afternoon.

Hi, Steve.

First question, I don't understand you might not have this detail available, but in terms of sales per order on the component side, is there any change noticeable? I mean, if you looked at the dollar volumes per order, are they picking up, staying the same?

First of all, Andy, have you joined the call?

Yes, I have, Roy.

And I'm going to assume that you don't have that kind of data, or do you?

I do not, but I can comment that our line items that we are booking per day which affect, you know, essentially affect your order dollar rate, have climbed nicely in the quarter, so line items are trending up.

OK. And then on the currency rates, can you talk about the impact on sales, how much of that gross year-over-year was affected by currencies?

OK. Steve, you want the year-over-year impact? Why don't we give you the year-over-year and the sequential?

The sequential impact would be very minor, less than $14, pretty small impact, and it actually turned out to be a negative, as a matter of fact. Year-over-year, more significant, about $92 million was the impact on a consolidated basis of the change in foreign currency rates using Q1 of 03 rates versus applying those to the Q4 business. So about a 4% ip pact impact year-over-year.

And then one last question. In terms of just the environment out there, you mentioned, Roy, that lead times are standing as pricing pressures are still there. I mean, when you look out a couple quarters, do you see -- if this growth continues, do you envision shortages or do you just envision return to normal lead time? How do you describe the fix over the next couple of quarters?

Do you want my projection or my dream?

Your projection.

All right. Well, what's happening is we're continuing to see clear signs of improvement in the components markets in EMEA and in America, but very strong signs in Asia, and, you know, to be serious about it, the reality is we don't quite know how much of this is the seasonal built that will abate when we get through the end of the calendar year, and how much of this is a more permanent rise in consumption. On the other hand, I think that business is just beginning to come to the party, and business expenditures are likely to rise early in 2004 as a result of most companies with calendar fiscal budgets in place will increase those budgets effective early in 2004.  So all of that said, this feels a lot like the beginning of many other up-cycles that we've been through where units are rising at a pretty nice rate. Andy's business saw an 18% unit growth quarter on quarter in the first quarter, sequential growth, and as those units are rising, lead times are extending, and capacity utilization rates are rising, and given all of that, I think that it is highly probable that in the next, let's say in the next one to three quarters, we should see prices begin to rise again.

Thank you very much.

You bet.

Our next question is coming from Brian Alexander with Raymond James. Please state your question.

Hello.

Your mute's on, Brian.

Can you hear me now?

There we go.

Sorry if this question was asked, but with respect to the margin NEM, how much of that decline was due to, you know, a greater mix coming from Asia as opposed to just overall pricing/margin pressure, when should we expect that margin pressure to subside?

Andy?

I think most of it is due to mix. Our margin was under a little bit of pressure in America. Our margin in Europe was actually surprisingly strong, and Roy mentioned units were up 18% in the Americas while ASPs on average declined about 4%. So that kind of gives you a flavor for some of the pressure still on ASPs on a downward trend, but I will say that ASPs a are mixed bag, if you look at some of the ways we track standard products, we actually had ASPs rise slightly while some of the high end communication chips continue to be under pressure, programmable logic actually rose, and so the ASP picture is really a mixed bag, and there is some stabilization occurring. So going forward, as Europe and America recover and become a bigger part of EM total worldwide revenue, I believe margins will stabilize and have a shot at increasing.

So Brian, maybe this is implied in Andy's comments, but you know that Asia has been rising pretty steadily as a part of Andy's business, and yet his global gross margins have not been declining. I think that what's different in the quarter just ended is two things. We had the typically slow summer quarter in Europe, so we had less revenue contribution from Europe than we have in most quarters, and we really had the strongest sequential and year-over-year revenue growth quarter in Asia that we have seen yet in the cycle. So we had a more pronounced mix of business change by region for Andy.  

OK, thank you.

You're welcome.

Our next question is coming from Matt Sheerin from Thomas Weisel Partners. Please state your question.

Thanks. Good afternoon. Just a question regarding in Asia where you're seeing the strength. Is it selling to the global OEMs and EMS companies or are you selling locally as well?

Andy?

Well, we continue to see our -- business in Asia represent a higher percentage of our overall revenue, and I would still put our indigenous piece as somewhere between 60 and 70% of our Asian revenue. The strength is coming from Seltron, DVD, consumer, power leader, and I would say those are the four verticals that are essentially driving the Asia business, and in a broader sense, the wireless market. So it really is good solid indigenous Asia demand that is driving our business.

OK. And just back to the comment that you made, Roy, about lead times beginning to lengthen, prediction that we could see that continue into next year, are you seeing any of your large customers become concerned at all, or do you expect them to give you a longer lead time in terms of their order flow so that they won't get caught short, or are they still just living in this hand-to-mouth environment?

Well, let's see if Andy and I have the same answer on that one. Andy, do you want to go first?

Sure. Well, you know, I think we have kind of returned already to normal lead times, that being eight to 10 weeks versus two to four weeks. The percentage of our incoming bookings under 30 continues to be extremely strong, although we are starting to see some -- of our under 60 number starting to actually become a bigger percentage, so that's -- that we are starting to build a little backlog. So far there has not been overreaction. Some of the large OEMs are ordering out through the March quarter, and I believe everyone is aware of the stretch in lead time situation. So at this point, I believe we will start to see backlog build slightly in our distribution channel.

OK, great. And just one last question regarding expenses. I may have missed it in the beginning, but I know you've had this expense reduction program continuing. What should we expect in terms of SG&A, at least as a percentage in December and then going into March? Should we expect additional costs to come out over the next couple quarters?

Hello, Matt. It's Ray. You'll see further expenses coming out of the business. Roughly at the end of the first quarter, we had about a third of our 90 million out and reflected in the statement already, which means that naturally more of that has been taken out, but so far the impact in Q1 has been about one-third. You'll see a pretty steady face in Q2 to Q3. We expect to be completed by the end of March of 2004, so by the time you get to our fourth quarter, the June quarter, you'll see the full impact of the $90 million. So you should expect as we go forward into Q2 further reductions in expense for two reasons. One, we no longer have the extra week, so that will account for some of the decrease, and in addition to that, we'll have further expense reductions, which will impact the quarter.

And then Matt, just to add to that, the increase in revenue will bring some increase in incremental expense as well, so we have to separate the gross expense reductions from the net effect.

Got you. OK. Thank you.

You're welcome.

Operator, before you move on, I've got a question probably for Andy. Andy, could you provide an update on your components business in Europe? How is that region performing? The question came in over the Internet.

OK, John. Actually we're quite pleased with Europe. We had our fourth consecutive quarter of operating income growth year-over-year in Europe and we actually -- which is kind of -- had a stronger summer quarter than we did June quarter, so I think it kind of validates the strategy first of all that we've implemented in Europe, the effectiveness of the cost restructuring and takeouts that we've done, and I believe it's also reflective of some market share gains in the region as well. So overall quite pleased with the progress of our European production.

Operator, can we move forward to the next question, please?

Yes, sir. Our next question comes from Stephen Savas from Goldman Sachs. Please state your question.

Thanks. Good evening.

Hello, Steve.

How are you?

Good, thanks.

Two questions. One quick one is a followup on the Asia Pac. I know you've all said that things are a bit consumer-heavy there, and I guess the question as we think about going into the March quarter since Asia is a growing portion of your business and it is so consumer-heavy, would we expect higher than normal seasonal drop-off in March than we've seen historically?

Well, you know, obviously it's, I think, a fair thing to be concerned about. I think we also have to be cognizant that Chinese new year takes place in the March quarter, but all that said, you know, we just completed a quarter where we grew, you know, in the mid 20's on a sequential basis, and if I reflect back on the couple of last March quarters, what really happened is, the rate of growth subsided, but we still grew sequentially from December to March in Asia.

Right.

OK?

Right. That makes plenty of sense.

Yes. So my perspective is that a slower growth rate, but most likely we will still have some growth in Asia. Andy, does that make sense to you?

It does.

OK. That makes perfect sense, and I guess that's kind of what I was getting at, so that's fine. And then one maybe more of a macro question. Typically your inventory tends to go up as end markets recover, but through this downturn, you've done a lot of streamlining, you've changed many things in your operation systems, et cetera. I was wondering on your comments, if you could comment on your ability to maintain thinner inventory as end market pick up versus what inventories have done in prior recoveries, assuming -- let's all hope we have a recovery here.

Right, right. Well, I think in general, you know, part of what's happened here is we've had a longer downturn than normal, but by roughly 2X, by the way, and because of the length of the downturn, we've had more time to focus on the slower-moving inventories that, once they are eliminated, they do not need to be replaced even in the up-cycle. So that's one point. A second point is our driving value return on capital initiative had an impact on the culture of the company, and the folks who are responsible for making inventory investments are being measured on the returns on those investments, and so we have a different mind-set going forward. So all that said, as revenue grows, there is no question we will need to grow inventory and we will need to grow working capital, but our expectation is that we are at these higher levels of working capital productivity, and it's the working capital productivity by business unit that they did not expect to change meaningfully. We would hope to hold the gains and grow the inventories proportionate to the revenues from these levels of productivity.

That's great. That's exactly what I was looking for. Thank you very much.

Hello, Steve, I would like to just insert one thing. I've mentioned this in my speech but I want to say it again, and that is, if, in fact, EM grows faster than TS in the up cycle due to the bull whip effect of electronics component or the bull whip effect of the Supply Chain, then the enterprise asset velocity could slow a bit, but that would only happen if operating margins were rising due to the higher EM content.

OK. That makes sense.

OK?

Thank you.

You're welcome.

Your next question is coming from Scott Craig with Morgan Stanley. Please state your question.

Good afternoon.

Hello, Scott.

Just quickly, can you discuss the profitability by region, Roy? And I apologize if you went over that a little bit earlier.

I don't happen to have that.

Scott, what profitability are you talking about? Operating or -

Yes, on a geographical basis. Give us some flavor around that?

I have it with me by group, Scott. I guess the real point is, there's not a big story there. I think what we probably ought to do is -

I guess maybe -- if you look at. So comments Andy made earlier, looking at Electronics Marketing, which is obviously the biggest operation outside of the U.S., Asia operations have had five consecutive quarters of year-over-year operating income growth. So as Andy mentioned earlier, continued improvement in our EM European operations. From an Asia perspective, similar numbers with the growth there, operating income again is growing year-over-year. I'm just trying to eyeball it now, but it looks like five quarters as well of year-over-year, operating income growth. Including improving operating income margin as well. So that's looking at EM. From an Americas perspective, you know, profitability has been, you know, softer than I guess we might like, but still trending upward to some extent over the last eight quarters, although the most recent quarter was slightly down. So that kind of gives you a picture of the Electronics Marketing group from a regional perspective.

OK. And then with regards to the restructuring, it looks like the costs are going to be a little greater than the $50 million. Is there a chance for upside on the $90 million cost savings that you've been discussing previously? Thanks.

There's the possibility of a little bit of an upside. One of the reasons -- I guess two factors that are accounting for the costing a little higher than we expected. One, as we mentioned in our remarks, we did write off the unamortized loan cost associated with our bank credit facility, and that was not something we anticipated a quarter ago, so that was not in the charge, the estimate of the charge last quarter, and I guess that was about a $4 or $5 million in number. And then there are some other issues over in -- not other issues but other items over in Asia that are a little bit more expensive than we anticipated, so there always is a possibility of an upside, but right now I think we're sticking to our target of $90 million, and hopefully as we go through, there will be some upsides.

OK. Thank you.

You're welcome.

Our next question is coming from Patrick Parr with UBS. Please state your question.

Hi, guys.

Hi, Pat.

OK So maybe to revisit two topics, Roy, looking at the March quarter, if hypothetically you came in the middle of your range for December, $2.5 billion or so in sales, I know there's a lot of moving parts in Asia and other factors, but would we still in a recovery expect a sequentially down top line, or is it possible that we could have flat to up baseline strength in the cyclical factors rather than seasonal factors?

Yeah. I think we need to move towards profitability as opposed to what's possible. Because here's what happens. In the December quarter, one of the big questions is, how strong is Rick's Technology Solutions business? And, you know, the stronger that business, the more difficult it is to maintain flat revenues or grow on a sequential basis. So that's one point. Second point is, Andy's business, we just talked about this, lead times are extending, prices are firming. If prices start rising and customers start building --, he could have a very exciting March quarter, but that's all sort of what's possible. If you ask me what's probable, I would say it's probable that we will have a small single digit decline in revenues on a sequential basis from December to March. And it will simply be, you know, the lack of computer revenues offset somewhat by strength in the component sector, and if, in fact, that scenario is what happens, it should be accompanied by higher gross margins and then some nice profit pull through as a result of  those higher gross margins.

And those margins will be a result of, I guess, mix factors as well as cost-cutting that's been going on?

Well, the gross margin would be mostly related to mix, possibly to better market conditions, and then the half margin would also include the effect of our 90 million restructuring initiatives

OK. Second question on (inaudible) Asia, I guess the fact that there's lower margins in Asia is not new information. Could you give us a sense, though, of what the differential budget iin the EM business between margins in Asia versus, say, Europe and the U.S.?

Yes, just a very, very general terms, what I can tell you is that our, our operating margins at EM Asia today are comparable to our margins in America and Europe. Now bear in mind, EM Asia is hitting its peak/record revenues, while America and Europe are still far below their peaks, but as we're operating today, we're getting the same kind of profitability out of Asia that we're getting out of the other two regions.

On a gross margin basis, can you give me any help there?

Gross is substantially lower. You know, as we sit today, sort of half, roughly.

OK. All right. And then I'm sorry, final question, I guess Andy started to give some pretty interesting information on pricing trends by product category. Andy, I was wondering if you could maybe just give us a few areas that prices, you know, went up or down that are notable like flash, memory, et cetera?

OK.. What have you had is high performance analog increase. Our ASPs at Avnet increased in high performance analog. Programmable logic, 2% increase on the high performance analog. Programmable logic was up pretty nicely at 6.5. Standard products, up 2. Asic sales, half a per percent. We saw memory rise 3. Communications fell 3.5. And then we had some end of life shipments in the military semiconductor area that caused somewhat of a higher than usual decline in our ASPs as we made some end of life shipments there. So if you take that out, you know, you can really see that the total ASPs were down 4.7, taking that out, things actually stabilized to slightly rose. So that's the information I have today.

OK Andy, any comment on IP and E data?

I do not have the IP and E data with me, but in general, I was in a conversation where most of those ASPs obviously in the passive area are still under pressure, and slightly fell but the connector market some of those ASPs have risen.

Great. Thanks a lot. Andy real quick or Roy, you might want to answer this to too, another question from the Internet, what is the percent of business that is turned versus scheduled orders in the quarter?  Andy, you got that number?

Yes. I can give you for sure the Americas number. As mentioned earlier, our turns business continues to run at a pace very close to 50% of the total incoming booking stream, and we continue to enter into our quarterly objectives with somewhere in the neighborhood of 35% to 45% backlog coverage on our quarterly objectives, and that's also true in Europe. So you can see that it's still a very high turn velocity environment. It is still not an environment where -- amounts of back backlog have been laid in and, therefore, it's still somewhat encouraging because of that, because the probability is that some lead time fleshing out will lead to some improved under 60, under 90 type activity.

OK. Thank you. Operator, let's go to the next question, please.

Yes, sir. The next question comes from Mr. Thomas Dinges with J.P. Morgan. Please state your question.

Hello, guys. Real quickly, Roy, when you had run through a number of reasons why the margins it fallen quarter to quarter, one of the reasons was you'd mentioned the higher proportion of software sales within the Technology Solutions business.  Was this sort of an anomalous event here where you had some vendor promotions go on there, or is this something where you're just all together seeing more emphasis by vendors in those markets putting a lot more emphasis on using the channel? And second, there has been a lot of commentary here, Andy's gotten a lot of questions from his business. I wonder if Rick, with his business being up as strong as it was this quarter, this being the first quarter that you guys have combined what was the (inaudible) and Applied Computing groups, give us some better color there on just exactly, you know, what was really driving a large proportion of the gains here this quarter, and any kind of flavor there on vendors may be in the hardware area that are using the channel or emphasizing the channel a lot more that we can look to in the December quarter.

Tom, I'm going to let Rick answer, but before he does, I do want to take the opportunity to just compliment Rick in this forum for the performance that he turned in. In the first quarter of a merger of two operating groups. He's been a very busy camper, and he's turned in some pretty good results. Rick?

Thank you, Roy. And obviously it's all due to having a great team. Tom, thanks for your interest in the systems business, by the way. On the software comment, we were up sequentially in North America about 20% with the overall software business, and it's not due to a lot of new entrants, but I would just say a continuing focus. Much of the year-over-year growth which is in the 80% range was still due to a primarily an IBM software channel chip decision that was made in the July time frame a year ago. As we go forward, the year-over-year comparisons will be much less dramatic, but again, 20% sequential still shows that there's a commitment there. There is continuing interest in looking at how this model plays for those players, and also keep in mind it was also influenced by the 14 weeks, not only the extra week, but we did pick up two quarter-ends in our Q1 from a fiscal calendar point of view. Looking at the overall landscape on the commodity mix, for APS now, hardware/software services, I usually share that the total mix there, the Q1 mix was at 71% hardware, 17 software, and 12 services. A year ago, it was 79% hardware, 10% software and 11% services, so you can see the continued overall migration, and again, that's pro forma for a total ATS, so the year-ago numbers are for CM and AAC combined. Even within the hardware, there still are some growth stories going on. Our overall server business was up, but also impacting not only the total growth but the margin picture is we have consciously decided to address and focus on profitable business as we've previously discussed on quarterly calls, and as an example, hardware was overall pretty much flat even though as a percentage of the business, it was down, even within the hardware story, though, servers as a commodity were up, storage systems were up, but mass storage defined as hard disk drives were down dramatically. That's about 60% year-over-year in North America. Again, due to a disciplined focus on trying to identify and steer resources to the profitable line of the business.

OK. Thank you very much.

Operator, we'll have one more question

Yes, sir. Our final question comes from Kevin McCarthy of Credit Suisse First Boston. Please state your question.

Thanks. Hello, guys.

Hi, Kevin.

Roy, you mentioned earlier about achieving - there's no reason why you guys can't achieve the 4% operating returns you had when -- I guess at the peak of the market. Given the efficiencies you've put into the model now, the asset capabilities, do you need to return to the same level of revenues to effect that 4% return, or is there a revenue number that you could share with us that you think is enough to drive that sort of 4%?

 Well, actually let me just clarify one thing and that is, the 4% is a number that was an average through the next cycle -- through the last cycle, not the peak. And the commentary that I gave was similar. I was talking about averaging that number through the cycle as opposed to the peak. At peak, we were over 5% in the last cycle and over 6% of the one prior to that, and I think the primary difference being that the last cycle had only two up years in it. The first time that I can remember in the history of our industry that that occurred. So my expectation is that we will be rivaling those peak margins as well as the average operating margin through the cycle. The only reason why it's not a bigger number, Kevin, considering the cost that we've taken out of the business, is the change in the mix of business. Back in those previous cycles, Electronics Marketing was two-thirds or greater of the enterprise total, and in a forward cycle, we're not assuming that EM gets all the way back to two-thirds. If they do, then we certainly could be looking at establishing new peaks for operating margin for the enterprise. And then finally, in terms of when do we get there, the last cycle, we peaked out at $12.8 billion, and as I said, we've got operating income in the greater than 5% range, our expectation is that we should be able to get there somewhere in the $11 to $11.5 billion range.

OK. Great.

Certainly well before 12.8.

Great. One last one, with October now underneath or completed into this quarter, this quarter is usually fairly linear, at least on the EM side, is that correct? So based on what you've seen in October, do you feel pretty good about the linearity of the quarter?

Well, we feel pretty good about the projection that we're giving, and we have the benefit of having most of October behind us. We had that five-week quarter, so we're a little later than normal putting out our numbers as a result of that -- excuse me, the 14-week quarter. Sorry. So the answer to your question is yes, we feel pretty good about the forecast that we're giving based on what we know coming into this call.

OK. great. Thanks a lot.

You're welcome.

OK, thank you, everybody, for the Q and A. As we wrap up today's quarterly analyst update, we're going to quickly scroll through some additional slides that we mentioned at the beginning of our web cast that contain the non-GAAP to GAAP reconciliation of results presented during our presentation, and of course these slides can contain additional footnotes for graphs presented during the web cast today. The entire slide presentation including the GAAP financial reconciliation can be accessed in downloadable PDF format at our web site. 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 alone if you're so motivated.

We would very much like to thank you for your participation in our quarterly update today. Also as you may have seen in our earlier press release, Avnet's 2003 annual shareholders meeting will be held next Thursday afternoon, November 6th. Shareholders of the company as of September 8th, 2003 record date are welcome to attend the meeting in person here in Phoenix, Arizona or access the annual meeting by teleconference. Details are available on our web site. If you have any questions or feedback regarding the material presented today, please contact me, John Hovis, directly by phone or email. Again, thank you for your time. We look forward to being with you all again in January 2004, when we report our fiscal 2004 second quarter financial and operating results. Goodbye.

Thanks, everybody.

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