安富利 (AVT) 2004 Q2 法說會逐字稿

Good afternoon and welcome to Avnet's second quarter fiscal 2004 corporate update. If you are listening by telephone today and have not accessed the slides that accompany this presentation, please go to our website, 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. 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 operation that excludes certain charges. Management believes that providing this additional information is useful to investors to better asses and understand operating performance, especially when comparing results to previous period or forecasting performance for future periods. Management believes that 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 Avnet's Investor Relations web site at www.ir.avnet.com. Before we get started with the presentation from Avnet management, 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. Listed on this slide are several factors that could cause actual results to differ materially from those described in the forward-looking statements. More detailed information about these and other factors is set forth in Avnet's filing with the Securities and Exchange Commission. In just a few moments, Ray Sadowski, Avnet's Chief Financial Officer, will provide Avnet's second quarter financial update. Roy Vallee, Chairman and CEO of Avnet will then have comments regarding the company's performance during the quarter. At the conclusion of Mr. Vallee's remark, a Q&A will be conducted. Also here today to take any questions you may have related to Avnet's business operations are two Operating Group Presidents, Rick Hamada, President of Technology Solutions, and Andy Bryant, President of Electronics Marketing. With that, let me introduce Mr. Ray Sadowski for Avnet's second quarter financial overview.

Thank you and good afternoon everyone. Let's begin with an overview of our operating results for the second quarter of fiscal year 2004 ended January 3, 2004. As usual, for analysis purposes, we have segmented out the GAAP results as reflected on this slide, which include all restructuring charges versus our pro forma results of operations excluding such charges as shown in the next slide. We have also shown sequential and year-over-year performance and the highlight hounds provide the sequential and year-over-year comparison. The P&L results presented on this slide includes restructuring charges related to the $90m cost-saving initiatives we announced earlier in the current fiscal year. This impacts the results for Q1 and Q2 of fiscal 2004, as well as restructuring charges in last year's second quarter as we continue to streamline our business. Since the December of 2000 quarter, when the downturn began, we have removed out of our business over $500m of annualized expense measured in constant dollars to eliminate the impact of foreign currency fluctuations. During the second quarter of fiscal 2004, we recorded restructuring charges of $23.5m pretax, $16.4m after-tax or $0.14 per share. Including those charges, operating income was $34.2m as compared with an operating loss of $75.2m in the second quarter of last year when we recorded restructuring charges of $106.7m pretax, $65.8m after-tax or $0.55 per share.

We will discuss the nature of the current fiscal year restructuring charges and the related cost reduction in more detail in a few minutes. Net income in the current year second quarter was $8.9m or $0.07 per share as compared with a net loss of $58.7m or $0.49 per share in the second quarter of last year, both periods including the charges I just mentioned. This reflects as is pro forma operating results excluding restructuring charges. Sales in the second quarter of fiscal '04 were $2.55b, up 9% as compared with sales of $2.35b in last year second quarter, and up 6% on a sequential quarterly basis. This sequential increase is also notable in light of the extra week of our first fiscal quarter due to our 52/53-week fiscal calendar. With improved sequential sales, gross profit dollars increased by $20m or 6.5% sequentially and $13.5m or 4.3% year-over-year. Gross profit as a percentage of sales was up sequentially slightly but down year-over-year at the enterprise level. The gross profit margin decline we had experienced at the enterprise level as compared with last year is due to a combination of higher software sales at our technology solutions business, continuing rapid growth in Asia, and lingering softness in price.

On a pro forma basis, operating expenses excluding restructuring charges were $271.4m as compared with $268.5m in the first quarter of the current year and $284m in the second quarter of last year. This represents a $2.9m sequential increase and a $12.6m year-over-year decrease in operating expense. However, as the value of our currencies remain the same as in the first quarter or as it were a year ago, operating expenses for the second quarter were approximately $3m sequentially and down approximately $30m in currency dollars year-over-year. Pro forma operating income excluding restructuring charges rose by 42% sequentially and by 82% year-over-year. This is clear evidence of the strong operating leverage and a business model created from our expense reduction efforts. As expected, interest expense declined sequentially and year-over-year as we continue to benefit from debt reduction and by the positive impact of certain interest rates swaps. As discussed earlier, the sequential decline in interest expense is impacted to some extent by having one less week of expense as compared with the fourteen-week first quarter due to our fiscal calendar. Other income was down $2.7m year-over-year as last year's quarter benefited from higher levels of foreign exchange gains and as previously indicated were unlikely to continue. The company's effective tax rate for the quarter was approximately 31% the same as in the first quarter, but lower than a year ago. This lower effective tax rate as compared with last year's second quarter is largely attributable to favorable tax spending initiatives we put in place over the past year as well as due to the mix of profits globally at various statutory rates, such as higher income from our Asia operations.

As we indicated on our prior call, 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. Excluding restructuring charges, net income increased significantly, both sequentially and year-over-year. Net income of $25.3m or $0.21 per share was up 134% sequentially and up 256% year-over-year. Again, we are clearly seeing the impact of our operating leverage we have created as a result of our cost reduction initiatives. As noted, the enterprise achieved higher sequential sales in the second quarter of fiscal '04 representing the highest quarterly revenues in 11 quarters and the best second quarter revenue performance since December of 2000, three years ago. This represents a fourth consecutive quarter of positive year-over-year revenue growth following many quarters of stable but flat market conditions. Overall, growth and the up cycles do appear to be in process. As we've pointed out in prior quarter webcasts, asset business mix and other market environmental factors continue to have a significant impact on enterprise gross profit margin.

Over the past ten quarters, throughout the soft 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, higher asset velocity computer businesses consistent to our growth in Asia and competitive market conditions. With the strong revenue performance of Technology Solutions during the second quarter of fiscal '04, year end share of the revenue by where the highest margins revenues are located contracted from 56% in the prior sequential quarter to 52% in the second quarter. Therefore, even though EMs gross profit margins were sequentially higher, consolidated gross profit margins were only up slightly on a sequential quarterly basis. As noted earlier, enterprise gross margins were also negatively impacted by stronger software sales and Asia's growth as a percentage of consolidated revenues. We continue to maintain our focus on improving productivity and streamlining the infrastructure of our company to meet the market dynamics at hand. During downturn, there has been the obvious, largest market pressures impacting gross profit margins. This traffic portrays the impact of expense reduction initiatives that we have executed in response to market conditions. The graph on the left represents the kind of the operating expenses at a percentage of sales and the graph on the right represents the point of operating expenses as a percentage of gross profit dollars.

Expense to gross profit dollars is one of the key metrics used in our business to measure expense productivity. Our neither ratio was where we'd like today, we've managed the business carefully and have seen these measures applied to the best levels in the last 11 quarters. In addition, annualized revenue per employee is back over $1m for the first time in 12 quarters. During the quarter, expense reductions were implemented $90m annualized cost reduction initiative measured from the March 2003 quarterly expenses. Cost reductions related to the combining of computer marketing and apply computing into technology solutions, the centralization of our information technology group and additional restructuring electronics marketing and our centralized to port service at operations are in the final stages of being implemented. Roughly two-thirds of the benefit is already reflected in the second quarter of fiscal '04 results and this should increase 85% in the third quarter of fiscal '04 with the balance of the savings impacting the following two quarters. We expect to restructure and cost reduction initiatives to be essentially complete by the end of June '04, when the Florida Computer Marketing and Applied Computing Systems in Europe are consolidated. The charge reported in the second quarter of fiscal '04 was $23.5m, with approximately $7.2m requiring the use of cash and $16.3m of non-cash charges. This brings the total charge for the year to $55.6m. At this point, we do not expect to incur any additional charges in connection with this cost reduction initiative. The real story is about operating profit performance. Despite the gross profit margin decline experienced since June of '01, we continue to improve operating efficiency. As a result, we enjoyed our sixth consecutive quarter of year-over-year increase in operating profit margin, excluding the impact of restructuring and other charges.

Operating profit margin excluding such charges was up 58 basis points sequentially coming in at 2.26%, and up year-over-year by 91 basis points. The improvement was largely due to substantially higher operating income at both EM and Technology Solutions. Technology Solutions operating income of $30.4m was up 40% year-over-year, and up 66% sequentially. Technology Solution's operating income margin of 2.49% as compared with 1.90% last year's second quarter, and 1.74% in the prior sequential quarter. Operating income on electronics marketing was $40.2m, up 79% as compared with a year ago, and up 20% sequentially. These operating income margins reached 3.02% in the current quarter as compared with 1.87% in last year's second quarter and 2.46% in the prior sequential quarter. This operating performance provided pro forma earnings per share of $0.21, up $0.06 per share in the second quarter of last year, up from $0.06 per share in the second quarter of last year, and up from $0.09 per share in the prior sequential quarter. This represents the sixth consecutive quarter of year-over-year pro forma EPS improvement. After restructuring charges, GAAP earnings per share was $0.07 per share for the current year's second quarter. We present here some year-over-year quarterly performance statistics which help illustrate the leverage we have created in the business model, while Enterprise revenues increased nicely, up in the 8% to 9% range for both the second quarter of fiscal '03 and the second quarter of fiscal '02.

Operating income, excluding restructuring and other charges is up by 83% from last year, and up 142% from two years ago. Pro forma operating profit margin is up 91 basis points from a year ago, and up 125 basis points from the second quarter of fiscal '02. And pro forma earnings per share rose by $0.15 and $0.23 respectively from last year's and the previous year's second quarter. We have change positively and permanently the business model EM. But as I indicated on the last call, we still have more work to do. For the 12th quarter in a row, we have generated positive free cash flow. In this most recent quarter, we generated another $100m of free cash flow, bringing the total for the first half of fiscal '04 to $153m. This is on top of the $638m and $869m generated during prior two fiscal years respectively. This quarter's cash generation include a tax refund of approximately $80m. Cash generated has been used to reduce the company's total debt and increase our cash balance. Since the end of December 2000, we have reduced total debt by nearly $1.93b and our debt today now stands at approximately $1.39b. During that same timeframe, net debt defined as debt less cash and cash equivalents decreased by 69% from $2.9b at the end of December 2000 to $908m at the end of the second quarter of fiscal '04. In addition to described reducing total debt and net debt, cash and cash equivalents increased 158% over the second quarter of the prior fiscal year and were up 286% over the same quarter in fiscal '02. Working capital efficiency continues to improve, with working capital at the end of the quarter as a percentage of annualized sales reaching another historic level of 17%. Our return on capital initiative is paying real dividends to the business, and we will continue to focus on improving productivity metrics throughout the next up cycle. Now, I would 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 all of their efforts, which allowed the company to more than double its pro forma profits sequentially during the second quarter of fiscal 2004 as the broader technology markets continue to show signs of improvement. I believe that our team is well managing those things we can as we increase all of our productivity and profitability metrics. As you can see from the graphic presented here, which illustrates quarter-by-quarter sequential revenue growth rates, growth in the second quarter of fiscal 2004 was almost as strong as growth exhibited in the second quarter of the past two fiscal years. When you allow for the 4% to 6% growth attributable to the extra week in the first quarter of the current fiscal year, this would suggest or imply 10% to 12% sequential growth if the first quarter's sales were normalized, which would be the highest sequential revenue increase since the second quarter of 2001. In addition, year-over-year growth exceeded 9% for the last two quarters. Avnet is now beginning to benefit from the next technology up cycle. Consolidated revenues of $2.55b for the quarter came in slightly over the high-end of the range that we provided last quarter. You can see the sequential revenue change for the enterprise and each group in the left hand panels and the year-over-year revenue growth in the right hand panels.

Technology solutions had a strong quarter with sales of $1.22b, up 16% sequentially and up 7% year-over-year as they exceeded expectations. The higher than expected growth of TS was due most notably to stronger software sales. Also note that while the year-over-year improvement in TS sales are somewhat flattered by the impact of foreign currency, it also takes into account that as we previously discussed, our TS business disengaged from serving more margin business, which had been running at roughly $300m of revenue per year. Although electronics marketing sales of $1.33b were slightly below our previous guidance, EM sales were up 11% year-over-year for the quarter. It's book-to-bill ratio for the second quarter was very strong and shipments during this third quarter are of to a good start. Component unit demand is growing and factory utilization rates are moving up causing lead times to extend. EM in Asia experienced robust growth once again for the second quarter of fiscal 2004, up 47% year-over-year. Consequently, Asia continues to grow as a percentage of our enterprise. Through the second quarter of fiscal 2004, Asia now accounts for 14% of total revenue compared with 10% one year ago. EM Asia is now almost 24% of EMs global revenue. EMEA, Europe, MiddleEast, and Africa, their percentage of enterprise sales was down slightly to approximately 32%, but it generated its best operating income in 11 quarters.

The Americas contracted to roughly 54% of consolidated sales during the quarter, down from 56% in the prior year's second quarter, but meaningfully improved operating income sequentially and year-over-year. This traffic surge to point out that despite some gross profit erosion, down 61 basis points from the December quarter in fiscal 2002, operating income margins have improved, up 125 basis points over the same time period. Inventory turns, again reached a new high of 7.9 this quarter despite increasing inventory levels which were up by approximately 5% on sequential revenue growth of over 6%. Also, DSO reached the lowest level in over three years. As I said on prior calls, I continue to be pleased with what our team is accomplishing at our critical working capital productivity metrics. Over the past two plus years that we have been implementing our driving value return on capital employed initiative, we have achieved continuous improvement in asset velocity, and we have reached historic highs. Working capital velocity measured as annualized sales divided by accounts receivable plus inventory, less accounts payable, has moved from 3.4 to 5.9 turns in that nine-quarter timeframe, a significant improvement. This ratio will vary going forward based upon our mix of business. However, as I noted last quarter in my remarks, improvement in asset productivity by business units is something 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 early stages of a new technology cycle, we set at 2.26%. With the lean enterprise we have today, and the leverage we have in the operating model, we see no reason why we cannot return to similar levels of operating margin performance through this cycle, given a reasonable up cycle duration. With the combination of higher asset velocity and improving operating margins, we should achieve our goal of delivering shareholder value through higher returns on capital employed. Our guiding value rose the initiative has been and will continue to guide business precisions towards an operating performance that create shareholder value. NOPAT, return on working capital is the primary means by which we measure, monitor, and take action to drive our businesses toward shareholder value creation. Here we have presented the enterprise NOPAT returns on working capital since the trial. Our first objective is to move this measure higher than our weighted average cost of capital or WAC, which averages about 10% and then optimize the spread of NOPAT return on working capital over WAC, based on growth and strategic objectives. We still have a lot of work to do, but we're 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, an improving and more beneficial business environment. The markets we serve are improving. As mentioned already, our revenue performance during the quarter was slightly better than we expected. So, our focus is on execution, and maximizing revenue and profit growth. We will continue to stress good revenues, and maintaining or increasing expense and asset productivity. As I look to the balance of fiscal 2004, I'm optimistic that revenue growth will continue. And we will continue to strengthen the leverage we have in our operating model by completing the balance of plant 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 the creation of shareholder value. As we guided in today's press release, we currently see enterprise revenue in the third quarter of fiscal 2004 to be in the range of $2.5b to $2.6b, essentially flat sequentially from the second quarter performance of $2.55b. We expect EM revenue to be up in the range of 10% to 15% on a sequential basis, but we anticipate revenues in our Technology Solutions business to decrease by 11% to 16% sequentially due to the typically weak seasonality of the March quarter. Consequently we expect earnings per share in the third quarter of fiscal 2004 to be in the range of $0.22 to $0.25. With that, let's open up the lines for Q&A. Operator? Operator are you with me?

Ladies and gentlemen, at this time we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd 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 star keys. Our first question is coming from Mr. Joseph Wolf with Banc of America. Please state your question.

Thank you. Good afternoon. May I ask a question about the software mix? Could you unfold and give a little bit more detail about how that impacted profitability last quarter in CS group? And then when we considered the March guidance and the approach on the EPS because of the EM mix, how that - the seasonality on this is the same on both the hardware and software side of that business?

Rick, were you able to hear Joseph?

Yes, I was Roy. Let me give some numbers on the software mix. Concentrating on North America, which is still geographically about our two-thirds of our business at TS. The hardware, software, and services mix was 68%, 22%, and 10% respectively. And if we compare that year-to-year, hardware was 74%, 14% for software, and 12% for services a year ago. So, the software mix had moved from 14% to 22% year-on-year for the Q2 time frame.

Okay. And Joe was there a question, we had a hard time hearing you. Was there a question regarding electronics marketing?

Yes. When we look forward, is the seasonality that is going to, I guess, positively impact the margins next quarter. Is that affected at all by the mix of hardware, software, and services, I mean is the seasonality the same in all of them right now?

Yeah. Actually the positive impact we are expecting is that from an Avnet perspective, we believe our electronics marketing business is going to grow, has got higher gross profit margins in our technology solutions business, and we believe that technology solutions especially in the branded enterprise equipment space will decline sequentially and that's a lower margin business for Avnet. And so as a result of that, we expect enterprise gross margins to be higher, and we can actually produce slightly higher earnings per share even on flat revenues.

Okay. But does the mix of the hardware and software and services make any difference?

Yes. Within technology solutions, it does. The software is typically lower margin than the vast majority of the hardware that we sell.

Okay. Thank you.

Okay? By the way, welcome to the call as our latest sell-side analyst coverage.

Great, it's good to be here. Thank you.

Our next question is coming from Mr. Steven Fox with Merrill Lynch. Please state your question.

Hi. Good afternoon. First of all, can you - is there any difference in terms of the days that would have had more of an effect on components than computers considering that computer can be more back-end loaded in December?

Well, with the fiscal calendar, of course, Steve was the same. So, I think, Rick, let me take a shot at this and then you fill in. But I think if you look at what happened because of the 14 weeks in the summer quarter, we picked up all of our vendors' September quarter end shipments in the first quarter, and then we had a 13-week quarter in December, but because of the 14 weeks in the first quarter, that pushed us out to January 2nd for the close and as a result of that, we picked up all of our vendors quarter-end shipments for the December quarter also. So, I don't think that there is any meaningful difference between EM and TS relative to the calendars.

Hey Roy, if I can just add, from an EM perspective, at least from the Americas. Yes, we had 68 shipping days in our first quarter ending September, we had 60 shipping days end of December quarter and I think the big the difference for EM is because 50% to 60% of our billing has continued to come from turns type revenue. We had much fewer days to get turns revenue in the second quarter. So, we are expecting obviously the full 65-day quarter in March to have a positive impact.

Yeah, that's Steve, I would say qualitatively that in the computer business, there is a big drive at the end of the year by the vendors to entice the customers to spend capital budgets, and so there was lots of booking and billing activity even through the holiday period whereas I think in the components base, the perception we had is that bookings and billings slowed in the second half of December and then picked up again right out the shoot in the beginning of January.

Okay, great. And then Roy just one technical question in terms of looking at your expenses relative to gross profit dollars that ratio you mentioned. They have a long-term target from a companywide standpoint?

Our long-term targets are typically three years in nature and I would say the three-year target for that metric is in the 60% range.

Okay. Thank you very much.

You are welcome.

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

Thanks. Good afternoon.

Hi Brian.

Just a question on the guidance for the EM business. Sequentially, I think you said up 10% to 15% was just pretty impressive. I don't think a lot of your suppliers are guiding up that much sequentially for the March quarter. So, just wondering if you could give us some color on the strength you are seeing there, maybe by geography? And then I have a follow-up.

All right. Andy, you want to take that one?

Sure. Well, we had a positive book-to-bill of 1.11 to one globally, and Brian every geography was positive 1.04 in America, 1.19, which was exceptionally strong in Europe, some of that due to seasonality, and 1.12 in Asia. So, I think the difference that we see leaving December is that worldwide EM had a second consecutive positive book-to-bill and for the first time, every region participated and over, say 10 quarters since we have seen that happen. So, we built backlog, significant backlog to carry forward and now as we sit in January with actually one day to go as of this evening to close out our January month, we certainly are tracking the early guidance in revenues over October and might even have a shot of matching December revenue in the month of January, close. So, the business is strong and the bookings remain strong.

Brian, the only thing I would add is that you know what's been going in Asia for quite sometime now. The difference is we now see America and Europe beginning to show growth as well.

So, all regions should be up sequentially?

Oh yes with Europe, probably leading the charge.

As usual. This is normally the best quarter of the year for Europe and it would appear that it's going to be the best quarter we have had in a while in Europe, and Asia will be up sequentially despite Chinese New Year.

Is it possible because you have been keeping inventories pretty lean that you may have missed some sales in the December quarter that you may regain in the March quarter or is that not fair to read into that?

No. I don't think so. We built inventory in the December quarter slightly. Factoring our currency, we built about $40m worth of inventory worldwide. We had some difficulties in certain areas around Flash and FPGA, some of those due to allocation, some due to some quality issues, but I don't think in general we missed any turns business due to lack of inventory.

Okay, thank you.

You are welcome.

Your next question is coming from Mr. Matt Sheerin with Thomas Weisel Partners. Please state your question.

Yes. Thank you. Really, kind of turning your inventories, we are up a little bit, but inventory days were down again. Given that we are in the part of the cycle where we could see component shortages in semis and across other areas, and given that distribution is really the only place in the supply chain where there is proper inventory. What sort of philosophy about potentially taking advantage of that in building some inventory going forward, and what should we expect to see there?

Yes. The reality is that, especially at EM, we have been building inventory on the devices that we would choose as the distributor to speculate it and normally those devices would be - the fast moving parts that have a reasonably broad customer base. Therefore, they have a relatively low risk to us by stocking. And we have actually been building up that inventory now for several quarters, while we have been continuing to reduce the slower moving inventory that did not need to be replaced. So, you know Andy just made the comment that he doesn't believe we have lost any terms business as a result of, it's just a mean approach we have take into the inventory, and that is precisely my perception as well. So, I would tell you that we have already been stocking up. Now, if run rates continue to rise, it would be our natural desire to continue to increase those buffers, and I would say at this point in general, it seems like we will be able to do that. Andy, anything you could add.

No. I think that covers it pretty fairly.

Could you just give us an example of some areas where you have been building, will it be through commodity, semiconductors, or analog, for instance would be connectors just give us some example?

Well, we have been building particularly in high performance analog and we have been building in MOSFETs and power management. These are some of the key areas where we think we can take advantage of the swings in the market. But, as Roy commented, our commodity inventory, you know, in Standard Linear, or lets say Logic and Microcontrollers, and PLDs have been pretty fresh and pretty up-to-date and we have been rotating out the slow-moving items to bring in more fast-moving items, and so I would say they were in good shape. But the three that I mentioned, first on key areas that we have been building from the inventory.

And again on the high any products, really the same story that commodity, capacitors have got a ceramic and panel on chips, and that standard connectors, those are things we would choose to speculate in stock out, but the devices that get sold to a limited number of customers, you know we would chose not to speculate on most of those devices and try to work with customers in getting some sort of a supply-chain agreement in place.

Okay, great. And just regarding your guidance again for the electronic marketing in terms of 10% to 15%, do you see any kind of inventory refresh happening at your customers, and then also on pricing, are you seeing your blended ASP go up, and is that part of your guidance?

You want me to take it Roy?

Yes, sure.

Well, what we see, the first part of the question was inventory refresh from the customer. What we see is an increase in 30 to 60, 60 to 90, and over 90 incoming orders. So, although a lot of our business is still dependent on turns, which we define as under 30, we see our customers weighing in backlog, and I think that is a result of their increase in demand and their desire to hedge at least 90 days of schedule, which is a kind of new phenomena. So, that's a pretty good indication. As far as ASPs are concerned, you know, we look at average selling prices here in the Americas, you know based on our own units and resale, and there is a lot of rotation and there is a lot of change in mix, and the factual answer within the Americas as we saw some slight pressure again on ASPs based on our own mix. But it was fragmented, you know military was up, high performance analog was up, certain other things were down, like standard commodity, logics, etc. And so, looking external, outside of Avnet, we definitely see our suppliers beginning to hold average selling prices and in many cases increase the cost and average selling price of certain devices. So, we see the external environment stable to The only thing I would add at a high level is that customers based upon product lead times, customers are now required to buy out into that 60, 90, 120 day window that Andy was talking about. But, my perception is that in America and in Europe, the customers have just come to realize that this is a requirement now to ensure supply, but there has not been a significant amount or meaningful amount of inventory billed, going on after customers. They are scheduling out, but not building up big , still a reluctance to do that.

Okay, great. Thank you.

Our next question is from Steve Savas with Goldman Sachs. Please state your question.

Sure, thanks. Good evening. I guess maybe Ray Sadowski, kind of macro question. How you would characterize things picking up the last quarter and this quarter relative to other recoveries you've seen more in this business than anybody else is on his phone. So, I was just wondering where are the similarities, where are their differences and everything from backlog build inventory, ASPs what are you seeing and what's similar, what's different?

From my perspective, what's different is on the end demand, the industry has been driven by consumer electronics as opposed to the classic demand drivers of IT and communications. And so, up until just the last couple of quarters, it's really been all about consumer electronics and now we're just beginning to see corporate capital purchasing on the rise, driving the more traditional demand drivers. So, from my perspective the recovery that occurred in worldwide semiconductors in 2003 was done kind of on one leg and 2004, unless consumer spending declines and I don't think it will. It looks like we could have a double barrel end demand driver. If you go to the back of the supply chain, you look at the components ramped. The perspective I have says that the downturn was twice as deep, and net it was twice as long as all previous downturns, and what's happening now in the knee of the curve here is a faster uptick than any other cycle that I've seen. I think if you look at data that ranges from the year-on-year growth rates and worldwide semiconductors to what's happening with the semi-equipment booking levels. It looks like we're in a very steep ramp here, and of course the big question is how long is that ramp going to last.

Okay. That's very helpful. And then just, maybe a quick question for Roy on FX impact if any, can you give us a sense of what that meant in the quarter?

Exchange rate has changed quite a bit sequentially and year-over-year. From rough order of magnitude I guess, if you look at it sequentially, you're talking overall P&L items being impacted by that 2% and year-over-year in a certain level overall by that 5%.

Presumably against you?

I'm sorry?

That 2 and 5% against you?

No, of course. In other words sales will be up consolidated by about 2% sequentially and year-over-year by that 5%.

on that sales, how about on the bottom line?

Bottom line, not really a huge impact again because of the profit levels primarily in Europe. So, roughly on a bottom line, after-tax we are significantly less than $1m benefit sequentially and same thing year-over-year. So, not really a big impact at the bottom line, just more impact on sales, gross profit dollars and expenses probably will get to the operating income line and below not a significant impact.

Fair enough. Thank you.

But, we are fixing that.

Alright. Thanks.

Next question is from Scott Craig with Morgan Stanley. Please state your question.

Hi, good afternoon guys.

Hi, Scott.

Just a quick question on the leverage side. Obviously, there is great leverage this quarter, every dollar of sales. Can you, maybe, provide some color on how you think that plays out going forward here as we started to answer what looks like the sweet part of the cycle? Thanks.

We tend to look at drop through relative to gross profit dollars as opposed to revenue dollars because the revenue mix affects the gross margin quite a bit. So, we look at GP dollar growth versus operating income growth, looks like we had about an 85% drop through this quarter. That is consistent with what Ray and I have said on previous calls, which is 80% to 90% in the early stages of the recovery. So, we still think the drop through is going to be in that range for the next few quarters, and then over a span of about four to six quarters, it will taper down closer to a 50% drop through. So, in that, let's call it, 80% to 85% range in the immediate future and tapering down to 50% over a span of roughly four to six quarters.

Just a quick question. Andy, do you see the turns business, which you mentioned as a percentage of business, when do you first see that turns business starting to decline a little bit more, is it going to be this quarter or still another couple of quarters away?

I think it's going to continue to hang in there for a couple of quarters. In the Americas, I can give you the figure. I do not have visibility today into Europe and Asia, but in the Americas, it is still running about 38% of our incoming order rate, but what has happened is the majority of the increase in bookings, obviously our total dollar booking throughout, the majority of that increase is going into the schedule over 90 column.

Scott, the 130 volume isn't dropping off, but the other bookings are rising. Am I right, Andy?

Yes. That is correct because the dollars overall are rising. So, that's a very accurate statement.

Okay. Thank you.

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

Good afternoon guys.

Hi, Patrick.

On prior calls, Andy has given some good pretty color as far as the trends within the various product segments. I was wondering, Andy, if you could do that again, looking at the December quarter as well, sort of what your expectations are from March.

Are you referring to lead times?

Lead times, pricing, unit growth, and whatever you can give us.

Well, I think the general, first of all, the broad macro statement is that where lead times, the last time we talked, a quarter ago, we are running up to about eight to ten weeks. They are now, in general, lead times are 12 to 14 weeks across the board. Exception to that would be capacitors and various standard commodity ICs, like logic fabs and what we, still would call, you know, the standard commodity products. What is moving out, you know, pretty nicely is the high-performance analog, any stock of 23 packages. We actually have many of our suppliers formally have flash on allocation. So, you know, as you look at certain areas that would include MCUs, you see some lead time stretching out 12 to 14, another example would be in the discrete area, 15 weeks is the general lead time. So, what we do see is just a general strengthening and lengthening of lead times with pockets of allocation, primarily around flash and we are having some difficulty in the FPGA area as well, lead times are stretching out on FPGA. Some of that, I think, some of that is due to packaging as well as it is capacity. In the area, it's still pretty easily obtained in terms of lead times, anywhere from six to eight weeks, the only thins that's stretching out is DK and DK pendulum has stretched out to 12 weeks. So, overall, it's strengthening and as I said ASPs are holding and in some cases, rising. So, I believe that would be the color for this quarter.

And then Roy, you referred, I guess, to your view that the company could recapture some of the - I don't want to use the word peak margins, but some of the historic margins, what time frame are you referring to because obviously the company has changed a lot since the early to mid '90s. And once your target goal here say, you know, 12 to 24 months out or maybe 24 to 36 months out.

24 to 36 comes out, of course, it is largely dependent upon the cycle. But in that timeframe, I would expect Avnet's operating income to be in the 5 plus category, and the comments that we made in the script was that in the last cycle, we averaged greater than 4% operating income margin, and we don't see any reason why we won't average over 4% again in this cycle, assuming that we get a reasonable duration to the up cycle. I think depending on how long the up cycle runs, I think we are going to rival cheap margins of the past. We could be hindered by product mix, but if that happens, we will have very high asset velocity and return. And we are reasonably comfortable here that we can get back to the same average operating income margins that we had in the last cycle.

And while that is even within a greater contribution, presumably from Asia where your operating margins are lower or is that something you think you can move up?

The answer is yes and yes. The reality is that so far, Asia's operating margins have not been a negative or deterrent to the enterprise margin. We fully believe they will be as Europe and America, they'll kick in and return to the kind of operating margins that we know they can, but even if that happens, we certainly don't think that the operating income gap will resemble the gross margin gap in Asia because of the low SG&A, the operating mall that we have there.

Okay, great. Thank you.

You are welcome.

Our next question is coming from Eric Gonzalez with . Please state your question.

Hi gentleman, good afternoon. Thanks for the good color on describing the uptick you are seeing in the market right now. Question on inventories and working capital. Given that you may be laying in a little additional backlog here in preparation for an uptick, how should I be looking at working capital going forward?

On enterprise basis, we have working capital sitting at 17% of sales right now. If you exclude the impact of any significant change in mix of business, I don't see any reason why we won't be able to at least hold that 17. So, you could think about $0.17 of working capital per dollar of sale. Now, I want to tell you that my expectations over the next several quarters is that our electronics marketing business will grow faster than our technology solutions business due to this thing that is called the bullwhip effect in the supply chain. And our asset velocity in EM is lower than our asset velocity at TS. So, given that, rather than $0.17, you might see a number closer to $0.19 or $0.20 per dollar of sale in working capital dollar increases.

Thank you. And just a follow-up on our EM revenue for the month of January. You said you felt that it would be flat with December. The Chinese New Year is over. Did you see any fall off, where do you expect it to go in March?

Yeah. In general, we see January matching December sales, which when we look at the way we drive our quarters, that would be somewhat unusual, since the December quarter is a five-week quarter, although we had quite a bit of holidays and the January month is a four-week month versus a five-week month. We saw a pretty good buildup ahead of the Chinese New Year on bookings. I cannot give you the figure for the close until Monday there but we do anticipate that the Chinese New year will have minimal impact on our run rate. It looks like we are going to hold pretty good, and as Roy mentioned, going forward, February and March present full 20-day and 25-day months for us and typically Europe has its strongest quarter, and because we are now seeing some strength in America, that is pretty much why we have the optimism that we can get close to the guidance that Roy has given.

Do you have any sense that customers are building any inventory possibly in the wireless segment?

We do not - we still see our customers very lean with inventory and we still see the EMSI factor cautious to build inventory and so we're still operating in a very high velocity environment.

Okay. Thank you.

You're welcome.

Our last question is coming from Mr. Allan with Pennan . Please state your question.

Great quarter guys. Had a quick question on working capital, looks like cable generated a fair amount of cash in the quarter. Is this cable's inventory ratio, whether it is as strong as you can get to or what's the outlook there.

Allan, I think the way I would answer that is that, the quarter had a strong technology solutions content and a lot of that occurred late in the quarter as IT vendors provide incentives for customers to place orders and a reasonable amount of that business turned out to be drop ship. So Rick correct me if I've got this wrong, but I suspect that you generated a significant amount of AP at the end of the month that in turn was matched by AR.

That's correct.

And inventory is sort of a neutral there, right?

That's right.

Yes. So the one way to think about that Allan is that, it's a bit abnormal on the AP line, but it's offset by AR and so we have this quarter as you work through the quarter will be the - any differential that exist between AP days when we pay our bills as opposed to money we collect from our customers.

Okay. The AR performance actually looks very good. It didn't look like there was an offset there.

Yes. Well actually I think, AP in days was fine as well. Right Rick.

Correct.

If you look at the actual dollars from a cash flow prospective, you would see that the receivables at a consolidated level essentially offset the payables and that's really what Roy is referring to, as you look at the bulk of - significant amount of the TS business taking place for latter part of the quarter. And our AP days have been 38 days, 39 days consistently for the last three quarters in a row.

Okay. And I'm little confused about the FX gains as it relates to the topline versus earnings, I think you said during your comments there was $30m negative effect in cost. Could you just run through some of the -

Just to give you the overall flavor, you need to understand that our businesses in Europe, which clearly are the ones mostly impacted by foreign currency. Although performing much better and trending much better as we mentioned, there is a relative profitability, it's still not significant. So what you are really seeing happening with the change in currencies is all of the numbers are getting bigger. So essentially sales are bigger, gross profits are bigger, but operating expenses are bigger as well. So if you look at what's happening, if you look at our Euro operating income, at the moment those numbers are not significant overall to add net percentage of operating income and therefore regardless of what's happening with foreign currency rates, it's not going to have a great impact on Avnet by the time you get to the operating income line.

Is the same true for Japan?

Excuse me, we're not there.

Okay. Thank you very much.

If we would, we hope to be more profitable.

Okay, thank you.

Thank you, you're welcome. Operator.

Yes sir.

Well, I think that's to wrap. We have some final comments coming.

Okay, go ahead sir.

No I think they are recorded.

Okay.

It's the closing comments.

As we conclude today's quarterly analyst update, we will quickly roll through the three slides mentioned at the beginning of this webcast that contain the non-GAAP to GAAP reconciliation of results presented during our presentation. These slides contain additional fitness for graphs presented during today's webcast. This entire slide presentation including the GAAP financial reconciliation can be accessed in downloadable pdf format at Avnet's Investor Relations website www.ir.avnet.com. Just click on presentations in the last menu bar. Also you can click on GAAP financial reconciliation in the last menu bar of the website and access just the GAAP reconciliation information data sheet alone. Thank you for your participation in Avnet's quarterly update today. If you have any questions or feedback regarding the material presented today, please contact Avnet's Investor Relations department by phone or e-mail. This concludes today's conference. Thank you for your participation.