安富利 (AVT) 2004 Q3 法說會逐字稿

Ladies and gentlemen, our presentation will now begin. Good afternoon, and welcome to Avnet's third quarter fiscal 2004 corporate update.

My name is Vince Keenan, and I am Vice President and Director of Investor Relations for Avent. If you are listening by telephone today and have not accessed the slides that have completed this presentation, please go to our website at www.ir.avnet.com, and click on the icon announcing today's event.

After registering, please click on the 'slides only for telephone participants" option that appears on your screen. In addition to disclosing financial results that are determined in accordance with generally accepted accounting principles, or GAAP,

The company also discloses proforma, or non-GAAP results of operations that exclude certain charges. Reconciliation of the company's analysis of results to GAAP can be found on form 8K, filed with the SEC today, in several slides on this presentation, and on Avnet's investor relations website, at www.ir.avnet.com.

Before we get started with the presensation from Avnet management, I would like to review Avnet's Safe Harbor statements. This presensation contains certain forward-looking statements, which are statements addressing future financial and operating results of Avnet. These statements are based on management's current expectations. Actual results may vary materially from the expectations contained in the forward-looking statements.

Listed on the slides are several factors that could cause actual results to differ materially from those described in forward-looking statements. More detailed information about these and other factors as set forth in Avnet's filings with the Securities and Exchange Commission.

In just a few moments, Ray Sadowski, Avnet's Chief Financial Officer, will provide Avnet's third 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 remarks, the Q&A will be conducted.

Also here today to take any questions that you may have related to Avnet's business operations are two operating group President, Rick Hamada, President of Technology Solutions through his online [INAUDIBLE],and Andy Bryant, President of Electronics Marketing.

With that, let me introduce Mr. Ray Sadowski for Avnet's third quarter financial overview.

Thank you, and good afternoon everyone. Let's begin with an overview of our operating results for the third quarter of fiscal 2004, ended April 3rd, 2004.

As usual for analysts' purposes, we have segmented out the GAAP results as reflected on this slide, which include all debt extinguishment and restructuring charges released in our fourth quarter results which exclude such charges as shown on next slide. We've also shown this the prior sequential quarter and last year's performance, and the highlighted columns provide the sequential and year over year comparison.

The P&L result presented on this slide include charges related to the early extinguishment of debt recorded in the third quarter's and fourth fiscal years 2004 and 2003, as well as restructuring charges that are reported in the second quarter of fiscal 2004.

On this slide, you can see that during the third quarter of fiscal 2004, we recorded a charge of 16.4 million pretax, 14.2 million after-tax , or 12 cents per share, related to the early retirement of 273 million of our 7 and 7/8% notes due February 15th, 2005.

This after-tax amount included the impact of a reduction of our tax rate to 27% for the fiscal year, as I will discuss shortly. Including these charges, GAAP net income in the current quarter was 26.7 million, or 22 cents per share, as compared with net income of 1.5 million, or 1 cent per share, in the prior year third quarter, when we recorded debt extinguishing costs of 13.5 million pretax, 8.2 million after-tax, or 7cents per share.

In the second quarter of the current fiscal year, we recorded restructuring charges of 23.5 million pretax, as we discussed last quarter. This slide reflects Avnet's proforma operating results, excluding the charges related to debt extinguishment and restructuring that I just reviewed. Sales for the third quarter of fiscal '04 were 2.64 billion, up 13% as compared with 2.34 billion in last year's third quarter, and up 3% over the prior sequential quarter.

The increase was driven by electronics marketing, where sales grew significantly by 24 over the prior year quarter and 20% sequentially. The change in foreign currency rates [INAUDIBLE] year over year, and sequential sales growth rates at the enterprise level by approximately 5% and 2%, respectively.

With the sequential sales growth of 3%, gross profit dollars increased by 29.5 million or 9%; and with year over year sales growth of 13%, gross profit increased by 51.5 million or 17% from last year's third quarter. Gross profit as a percentage of sales increased to 13.6% from 12.9% in the prior sequential quarter and 13.1% in the year ago quarter.

The gross margin improvement was largely due to business mix at the higher margin electronics marketing segment grew to represent 60% of Avnet's total revenue as compared with 52% in the prior sequential quarter and 55% in third quarter of fiscal 2003. In addition, technology solutions gross margins grew sequentially and year over year.

Operating expenses are 284.7 million, as compared 271.4 million in the second quarter of the current year 207.9 million until the third quarter of last year. Roughly half of the sequential increase was due to the impact of fluxation to foreign currency exchange rates, while remainder of the increase was primarily due to higher expenses necessary to support the increase in revenue.

Year over year expense actually decreased in constant dollars. In the March quarter, proforma operating income of 73.9 million was more than double the prior year third quarter and was up 28% on a sequential basis.

An example of the leverage in our operating model is evidenced by the comparative growth in gross profit dollars in relationship to the comparative growth in operating income dollars, or what we refer to as operating income drop through. In other words, how much is increase in gross profit dollars opposed to operating income.

In the current quarter, excluding the impact of restructuring and other charges, the [INAUDIBLE] level sequential operating drop through was 55% on a reported basis, but 67% on a constant dollar basis as currency fluctuations significantly impacted this metric.

At electronics marketing, the sequential operating income drop through this quarter was 65% in delivered dollars and 73% in constant dollars. We expect operating income drop through to continue in this range over the next several quarters. This operating leverage demonstrates the earnings potential of our restructured business as we continue to grow revenue during the technology and [INAUDIBLE] upcycle.

As expected, interest expense and other incomes were essentially flat on a sequential basis. With the increase in percent of revenue and profits in these rising international markets, as well as shifts in profits of all our international subsidiaries with different statutory tax rates, we revised our effective tax rate from 31% to 27% for fiscal 2004.

Significant improvement in profitability at EMEA and our growth in Asia are having a meaningful impact on our effective tax rate. The net affect of this cumulative adjustment on the current quarter, when applied to GAAP and proforma earnings, was to lower the effective tax rate on proforma earnings to 23%.

It was this revision to our tax rate that accounted for our proforma EPS exceeding our guidance -- our revised guidance range of 27 to 30 cents per share. If we had maintained a 31% tax rate, as we recorded in the first six months, excluding debt extinguishing cost, would have been -- earnings would have been 30 cents per share.

On the cumulative improvement from 30 to 34 per share, 2 cents represents a cumulative adjustment for the first six months of the year, while the remaining 2 cents per share was a net benefit of a lower tax rate on the current quarter's operating results.

Excluding charges related to the debt extinguishing restructuring, net income increased significantly, both sequentially and year over year. Net income of 40.9 million, or 34 cents per share, was up 13 cents per share sequentially and up dramatically by 26 cents per share year over year.

Again, we are clearly seeing the impact of our operating leverage we have created as a result of our driving value initiative. As noted earlier, in the third quarter fiscal 2004, electronics marketing revenue growth exceeded expectations and drove total enterprise revenue to its highest level in 12 quarters. Although March is typically a seasonally strong quarter for our components business, the 20% sequential growth that electronics marketing experienced is significantly higher than the 7% sequential growth in the same quarter of last year.

While all three regions contributed to the growth of revenues at electronics marketing, our EMEA regions posted the strongest sequential growth at 36% in delivered dollars or 30% in constant dollars. On a year over year basis, electronics marketing revenue grew 24%. as Asia continued to lead the regions with year over year growth of 44%. Based on this performance, it is apparent that the electronic components recovery that has been underway for several quarters is now having an material impact on Avnet's results.

As I've said on prior calls, the lower enterprise gross profit margins that Avnet has experienced during the past several quarters was primarily driven by business mix, and to a lesser extent, by other market environmental factors. With the [INAUDIBLE] of the revenue growth in electronics marketing in the current quarter, EM's share of enterprise revenue grew to more than 52% in the December quarter to 60% in the current quarter.

As a result of the increasing percentage of higher [INAUDIBLE] in electronics marketing revenue, consolidated gross profit margins grew from 12.9% in the December quarter to 13.6% in the March quarter. Although the majority of the sequential increases is due to the business mix, I would repeat that technology solution increased its gross profit percentage on both a sequential and year over year basis, primarily due to its planned revenue reduction in certain low margin market segments.

This really portrays the impact of expense reduction initiatives that we've executed over the last several quarters in response to market conditions. The graph on the left meant to define the operating expenses as a percentage of sales, and graph on the right was meant to define the operating expenses as a percentage of growth profit dollars. In the current quarter, expense dollars rose as a percent of revenue, due to the change this affects between EM and TS.

The greater percentage of electronics marketing revenue, 60% of the current quarter versus 52% last quarter, caused this metric to increase slightly at the enterprise level, since the expense to revenue ratio is higher at electronics marketing than in technology solutions.

However, within electronics marketing, this [INAUDIBLE] of soft quarters, while technology solution is down 22% -- 22 basis points, excuse me -- from last year on flat revenue. Expense to gross profit is one of the most important metrics used in our business to measure expense productivity.

The chart on the right, which is operating expense as a percentage of gross profit dollars, is a driver of the operating income drop through that I talked about earlier. With our focus on expense reduction, we've created higher operating leverage as revenue grows.

While this expense to gross profit ratio is not yet where we would like it to be, it has improved significantly since the downturn began. We will continue to prudently manage expenses as revenue growth continues, and improve operating income margins throughout the upcycle.

We have been talking about the leverage in our operating model for several quarters now. And this operating profit margin slide provides a clear illustration of just that. As you can see on the right side, since our sequential revenue began to grow at the beginning of fiscal 2004, the slope of the line has increased.

The current quarter is the 7th conservative quarter of the year over year increase in operating profit margins, excluding the impact of restructuring and other charges, and it had the highest level we have achieved since the March 2001 quarter.

Operating profit margin, excluding restructuring and other charges, was up 4 basis points sequentially to nearly 2.8%. And up year over year by 80%, or 125 basis . Operating income margin improved meaningfully at both operating groups on a year over year basis.

Electronics marketing operating income of 63.6 million was up 108% year over year and up 58% sequentially. Electronics marketing operating income margin for the current quarter was 4% as compared with 3% in the prior sequential quarter and 2.4% in the year ago quarter.

Operating income at technology solutions mirrored the seasonal revenue decline; and at 25.8 million, was down 15% from the second quarter, yet was up 35% from the prior year third quarter.

Despite the drop in volume, technology solutions' operating income margin was essentially flat at 2.5% sequentially, but up 65 basis points from 1.8% in last year's third quarter. The company's improved profitability had a corresponding impact on both GAAP and proforma earnings per share.

GAAP earnings per share was 22 cents per share, up from 1cent per share in the third quarter of last year, and up from 7 cents per share in the December quarter. Proforma earnings rose to 34 cents per share, an increase of 325% or 26 cents per share from the year ago quarter, and it was 13 cents per share better than the prior sequential quarter.

As I mentioned earlier, approximately 4 cents of the sequential increase was due to the change in the effective tax rate for the fiscal year. On this slide, we present year over year quarterly performance statistics, which help to illustrate the leverage we've created in the business model.

And the year over year growth in enterprise revenues increased from 6% in the third quarter of 2003 to 13% in the current quarter. Operating income was up 104% from last year and 221% from two years ago. Proforma operating profit margins provided a better indication of the impact that business mix has on the bottom line.

In the third quarter of fiscal 2002 and 2003, electronics marketing contributed 55% of total revenues. Year over year consolidated sales growth of 6% resulted in a 51 basis points improvement in operating profit. In 2004, when electronics marketing increased to 60% of enterprise revenues, a 13% year over year growth rate in sales drove a 125 basis point improvement in operating profit margin, bringing the two-year increase to 176 basis points.

I want to remind everyone that although the higher gross profit, lower asset velocity electronics marketing business has a great impact on assets to operating income margins, the [INAUDIBLE] operating groups to return on capital metrics. In the lower right hand graph, you see these improvement in earnings over the last two years, and we estimate we're at roughly halfway back to the previous high in December of 2004.

During the quarter, we refinanced some of our higher interest rate debt with a convertible offering that increased a term of a portion of our debt at a much lower interest rate. On March 5th, we completed our offering 300 million or 2% convertible [INAUDIBLE] measures due in 2034. We drew a lot of the net proceeds at 292 million to retire 273 million of the 7 and 7/8ths that due February 15, 2005.

In addition, we utilized cash on hand to payoff the 100 million of 6 and 70 notes due that matured on March 15, 2004. Our maturity profile has improved, with debt due in a two-year period dropping from 480 million at January third, 2004 to 142 million at April third, 2004. Also, as a result of these transactions, we expect annual interest savings going forward of approximately $20 million pretax, which would positively impact earnings per share by 12 cents per share on an annual basis beginning with June 2004 quarter.

During the quarter, business operations, excluding most financing activities, consumed approximately 83 million of cash. The net outflow of was cash driven primarily by a 125 million increase in inventory, most of which is in support of higher customer demand in the electronics marketing segment. I want to note although electronics and marketing working capital dollars grew during the quarter, its working captial velocity reached its highest level ever.

Combined with the financing transactions discussed previously, the company's debt position decreased by $30 million during the quarter, and its net debt position, consisting of debt of 1.36 billion and cash and cash equivalents of 331 million, increased 91 million sequentially to slightly over 1 billion at the end the third quarter of fiscal 2004.

On this slide, you see the improvement in our debt, cash and net debt balances over the last two years. Most of this strengthening of the balance sheet was due to continuing focus on the working capital productivity as reflected in the graph at the lower right. As we've now completed our third consecutive quarter of sequential revenue growth, our working capital dollars increased on a year over year basis.

However, our working capital efficiency continues to improve. The primary driver behind the working capital growth in our March quarter has been the inventory build in the electronics marketing segment in response to increasing customer demand.

During this period, electronics marketing inventory turns have continued to improve, which, when combined with the operating income margin trends, has resulted in a near doubling of EM's low cap return on working capital when compared with the prior year.

At the end of price level, working capital as a percentage of annualized sales was 17.7% in the third quarter of fiscal 2004, as compared with 18% in the prior year third quarter even, though the revenue mix shifted to the more working capital-intensive electronics marketing segment.

Just as our cost cutting initiatives have built leverage into our profitability model, our return of capital initiative has had a real impact as we continue to improve asset velocity during the current top cycle in components. 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 congratulating our entire global team on Avnet's best quarter in the last three years -- and specially our EM team and EMEA.

Over the past several quarters, they have been engaged in a turnaround that has completely transformed their region. Despite many challenges presented by the technology downturn, they remained focused on gaining profitable market share and improving efficiency throughout the organization.

Well, that hard work has paid off with a strong financial performance this quarter that is their best since fiscal 2001. Going forward, I believe that the entire global Avnet team is well positioned to capitalize on the strengthening demand in our end market to build on the success of this quarter.

Before we get into the details, I'd like to quickly recap the highlights from the quarter just ended. First, the electronic components market is beginning to get a lift from our suppliers increasing capacity utilization, and resulting extension of lead times.

In fact, we have seen strong customer orders and book to bill ratios on electronics marketing for the second quarter in a row, as we continue to see lengthening lead times coupled with lead inventory at our customers.

Although the recovery is at different stages in each of our regions, we believe that current trends will continue for several quarters, and we're encouraged by the growth that is now occurring in EMEA, in constant currencies and in the Americas.

Second, electronics marketing EMEA had a very strong quarter, with sequential revenue growth of 36% in delivered dollars, 30% after adjusting for fluctuations in foreign currency exchange rates, and sequential operating income growth of over 100%.

I want to highlight that this dramatic turnaround is about more than cost cutting. From logistics to IT, to customer service, they have completely transformed the way they conduct their business, and I believe we've only seen the beginning of what our EMEA operations can achieve.

Third, our value-based management initiative, driving value, continues to propel both of our operating groups to higher returns. Through a combination of right sizing the expense structure and extraordinary focus on capital productivity, we've been able to take advantage of recovering markets to drive dramatic improvement in both our [INAUDIBLE] and low cap return on working capital metrics.

And, as a result of the evaluating profitability by business segments, we've been able to improve the quality of revenue, witnessed by technology solutions' 35% growth in operating income on flat sales year over year. Consolidated revenues of 246.4 billion for the quarter came in $40 million higher than the high end of the range that we provided in January.

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 reasoned panels. As Ray previously stated, electronics marketing had a very strong quarter, with sales of 1.59 billion, up 20% sequentially and up 24% year over year, as they easily exceeded the January guidance of up 10 to 15%. EM's growth was driven across all three regions, with EMEA leading the way.

Electronics marketing in the Americas region had its best performance in six quarters, as they also grew revenue double digits on both a sequential and year over year basis. Asia continued to post record quarters, with year over year growth of 44%.

Strong consumer demand over the last several quarters is being joined by a steady improvement in corporate capital spending, driving EM growth in all three regions. Technology solutions sales of 1.05 billion, which were in line with expectations, were down 14% versus the December quarter and roughly flat with the prior year third quarter.

While the year over year growth was flat, I want to point out that the third quarter of fiscal 2003 included approximately $90 million of low margin revenue that we are no longer serving -- which would, by the way, represent roughly $100 million in constant dollars this quarter.

As we stated on prior calls, our driving value initiatives have resulted in a decision to disengage from certain low margin business. If you adjust for that decision to focus on higher margin revenue, the technology solutions year over year growth in the third quarter would have been near double digit, and we expect that it ties us year over year growth in the current June quarter.

With the 20% sequential growth in electronics marketing and seasonal decline at technology solutions, the business mix by segment changed significantly this quarter. Electronics marketing, which had been averaging about 55% of enterprise revenue over the past two years, jumped back to 60% of revenue in the third quarter of fiscal '04.

The international growth experience within electronics marketing had an impact on the regional split. As you can see in the chart on the right, the Americas' share of total enterprise revenue declined 3% from the year ago quarter to 51%.

The EMEA region, where electronics marketing growth was partially offset by decline in technology solutions, increased slightly but remains approximately 35%. EM Asia, which continue to post dramatic year over year sales growth, grew to 14% of the enterprise and represented 20% of electronics marketing revenue.

In addition to revenue growth, EM Asia had another strong profit quarter, with record operating income as it recorded its 9th consecutive quarter of year over year operating growth, with income growing faster than sales. This graphic shows the highlight the impact that our cost reduction initiatives have made on the bottom line.

When comparing the third quarter of fiscal 2004 with the comparable quarter of fiscal 2002, gross profit margin has dropped 46 basis points, while over the same time period, operating income margin has increased 176 basis points. This is another example of how the operating income drop through that Ray mentioned earlier is driving profitability as revenue increases.

The sequential drop in enterprise inventory turns from 7.9 to 7.4 in the current quarter is due to the change in business mix that was mentioned earlier. As the more working capital-intensive marketing segment grew to 60% of total revenue, the enterprise level inventory terms had a corresponding drop, as we have been forecasting.

Within the electronics marketing business, inventory turns and net days have continued to improve, and currently stand at all-time record levels. As I stated on previous calls, our driving value initiative is all about shareholder value creation.

Over the past two years, we have focused and expanded the organization toward our goal of profit growth and higher returns on capital. Business decisions take into account both the impact on profit and the consumption of working capital. With our previously announced cost cutting initiatives nearly complete, we are accelerating the rate of growth in operating margins as revenue growth returns.

This improving margin, coupled with historically high levels of working capital velocity, are allowing us to generate increasing returns on capital deployed. As you can see in the graphic on the left, business mix had an impact on another velocity metric. Working capital velocity, measured as annualize sales divided by accounts receivable, plus inventory, less accounts payable, declined to 5.65 this quarter as a result of the higher working capital intensity of the electronics marketing segment.

At the same time, the leverage that resulted from our restructuring drove operating margins from 1.45% in the fourth quarter of fiscal 2003, to 2.8% in the current quarter. This near doubling of operating margin occurred over a period where quarterly revenues increased by 21%.

These metrics, working in tandem, drove return on capital to our highest level in over three years -- excuse me, in three years. NOPAT return on working capital 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 NOPAT returns on working capital since the drop. As you can see on the right side of the graphic, the slope of this line is turned upward -- has turned upward as revenue growth accelerated in fiscal 2004. NOPAT return on working capital increased from 4.4% at the end of June 2003 to 9.6% in the current quarter, using our historic 40% effective tax rate.

When you apply the current 27% effective tax rate that Ray discussed earlier, Avnet's NOPAT return on working capital is now 11 6%. This steady improvement on NOPAT return on working capital at the enterprise level is proof that our value-based initiatives are working. Although our two segments have differing characteristics when it comes to margins and asset velocity, both are showing consistent improvement when it comes to return on capital, which is vital to increasing shareholder value. The markets we serve are continuing to improve.

Our revenues exceeded the high end of the range we provided for the quarter in January. As a result, we have accelerated the rate of growth in profitability and asset velocity metrics. That said, our focus will continue to be on execution and maximizing shareholder value creation.

We will continue to stress good revenue growth while maintaining or increasing expense and asset productivity. Regarding the June quarter, I'm optimistic that revenue growth will continue.

And we will continue to strengthen the leverage we have in the operating model, along with our constant focus on improving operating efficiencies. Although we are very pleased with the results for the March quarter, we remain committed to greater improvement in margins and returns going forward.

As we guided in today's press release, we currently expect enterprise revenues to be in the range of 2.65 2.75 billion in the fourth quarter of fiscal 2004, versus the third quarter performance of 2.64 billion and last year's quarter revenues of 2.19 billion.

We expect electronics marketing revenue to be up from the third quarter in the range of 1 to 4%, as the industry continues to recover; and technology solutions business to increase by 2 to 5% sequentially. Both these growth rates take into account the current value of the Euro to the U.S. dollar, which is roughly 5% below the average rate reflected in our results for the March 2004 quarter.

And we expect earnings per share in the fourth quarter of fiscal 2004 to be in the range of 35 to 40 cents per share. With that, let's open up the lines for Q&A.

Certainly. Ladies and gentlemen, at this time, we'll be conducting a Q&A session. If you would like to pose a question, please press star one on your telephone keypad.

A confirmation tone will indicate that your line has been placed in the question queue. And if someone else already poses your question, you may remove your line by pressing star two. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the pound key.

Thank you. Our first question will come from Joseph Wolf of Banc of America Securities.

Good afternoon. This is Alex [INAUDIBLE] for Joseph. I have a question on the inventory. You mentioned that the inventory for this quarter is 125 million higher towards support the customer demand.

Can you give me some idea in terms of where the -- your customers and suppliers view, in terms of going forward, the gross opportunity? Has their view changed from say, December quarter to current quarter?

So the inventory that we're talking about here is electronics marketing. I'll take a shot at the question -- then Andy, I'll ask if you would like to add something.

I think the perspective we have is that we've been seeing very robust growth throughout Asia Pacific for about 7 quarters now, and most of that growth has been driven by a very solid end demand for consumer electronics.

In the March quarter just ended, we saw double digit growth in America and in EMEA, both sequentially and year on year. And I believe that that's an indication that corporate capital spending is rising.

So the kinds of things that are still being manufactured in the West are products that range from high-end IT in communications gear to medical instrumentation and industrial automation, and those customers are, in fact, seeing an increase in demand from what we had seen, you know, literally just a quarter or two quarters ago.

So my perspective is that corporate Cap Ex is on the rise. As a result of that, the more complex equipment that is typically manufactured in America and Europe is experiencing increased demand, and the customers that we serve in these western markets are now sort of joining the party that has been going on in Asia for quite some time.

Andy, any thoughts?

No, I would just agree that most of the inventory build is in Europe and America, where we serve a broader, more horizontal customer base, as you noted, Roy. And in Asia, we had a slight increase in investment inventory, but we continued to hit record turns and velocity levels in Asia.

So I think the inventory is positioned well for the broader horizontal customer bases we serve in Europe and America, which is over 40,000 customers.

Thank you.

Just a quick follow up on the inventory, do you expect this inventory build up will continue in the June quarter and December quarter, both in terms of actual dollar amount and the percentage of the revenues?

Again, since this really doesn't apply to TS, it's an EM only, I will ask Andy to address that one.

We believe that, you know, we're still driving our business to a 22 to 25 cents working capital per dollar growth in sales, and we're out to overachieve on our metrics again in the June quarter. And as Roy noted, our turns and our days of inventory improved, even with the inventory build.

I suspect we may build a little more inventory in June, but product is tightening up and I think the build in June would not be as significant as the build in March.

Thank you very much.

You're welcome.

Our next question will come from Steve Fox of Merrill Lynch.

Hi, good afternoon. Just one other follow-up on the inventory question, you've become a lot more efficient over the last few years during the downturn churns of managing inventory. You have net returns, like you mentioned.

What is a normal end range, do you think, in a good environment like we're in to see your inventory fluctuate in terms of the churn spaces, or however you want to look at it?

Well, Steve, I think that, you know, part of what's happened you could equate to operational excellence initiatives and the better use of automation and improved processes.

Part of it needs to be attributed to our driving value initiative and the focus on return on the capital that's employed, not just the incremental profit opportunities. And as a result of that, my personal expectations is that inventory velocity is not expected to pull back from here on a by-region or operating group basis.

So the enterprise [INAUDIBLE] velocity could move around, depending on business mix, but I'm not expecting our velocity to deteriorate from here, and therefore, I would expect to hold at these levels and possibly continue to find ways to improve. Andy?

No, I think that's really an accurate statement, and nothing else to add there Roy.

Thank you. And then Roy, just one follow up. Europe, as Americas, profitability levels is a big achievement for you guys.

Going forward, where would you say, you know, should we look for similar targets in terms of profitability for the Americas in Europe now, or is Americas going to remain more profitable, say, over the next 12 to 24 months?

You know, in the medium to long term, the answer has always been that the profitability should be comparable.

In the very short-term, you know, there is this Euro-dollar exchange that has inflated the results from EMEA in terms of delivered dollars. And so, for example, in the June quarter if there is, in fact, something like a 5% decline in the value of the Euro, my guess is that America will pop up on top.

So we may see America leap back ahead for the next few quarters, depending on what happens with the exchange rate. But I think over time, we have plenty of room for improvement in margin in Europe, and we'll continue to have room for improvement in America; and so I think we're going to see those two regions in a relatively tight range. Again, Andy, what do you think?

Yeah, I think, you know, both of these regions are just now starting to lift, in terms of year over year sales growth, so I think we have some of our most exciting operating leverage in these two geographies.

I would add that.

Thank you very much.

Thanks Steve.

Our next question will come from Brian Alexander of Raymond James.

Just a quick follow up on that previous question. When you talk about the impact, Roy, is that strictly an impact on the operating income dollars, or is there also an impact on operating margins?

Most -- Hi, Brian, it's Ray -- most of the impact is going to be on operating income dollars. Some of the activity will have an impact on margin, but for the most part, the impact is going be on the dollars involved.

And then, you know, just looking at your sequential growth over the last couple quarters, I think, in EM -- it seems to be, you know, faster than the rate of growth for your customers.

And so it doesn't sound as if you're concerned that your customers are perhaps building inventory, so help us think through some of the things that you look at in terms of monitoring customer inventory, as well as double bookings and things like that.

Well, again, I'll take a shot, and then, Andy, I'll flip it over.

But yeah, Brian, I think what happens is, as product lead times extend, customers who were operating in a hand to mouth fashion with very little buffer stock are now really required -- I'll even used the word forced -- to place orders in advance and begin to build or rebuild some buffer stocks.

So it is not unusual at this stage in the cycle for customers to consume more units than they are actually shipping out the door in the form of finished equipment. That trend will continue throughout the remainder of the up cycle until supply at some point in the future exceeds demand and product lead times contract, at which pointed the customers will be able to then bleed off those buffer stocks that have been created.

So that's the point in the cycle that we're in. A second point I would make is that, keep in mind that with our stronger and larger presences in Asia, we are playing a bigger role in the consumer market; and actually,when you look at some of the numbers -- for example, what has been going on with handsets -- and then think about things about digital flow cameras and MP3 players, the growth rates have actually been quite high, and that's part of the reason we're experiencing that kind of growth in Asia.

And then the final point is what is actually still yet to come, so it's sort of counterintuitive. I am going to make an argument here that our growth rate will accelerate more before things come in line with the end market; and that is, we have yet to see much in the form of average selling price growth, and that typically comes a little bit later in the cycle as products become two scarce to fill all the demand.

So all that said from my perspective, we're still getting a high degree of orders in the under 30-day book ship category. I'm talking to a lot of customers, as many as I can, and I am not finding customers who are telling me that inventories are building up in an undesired way. Andy, anything else?

Yeah, let me just add a couple numbers that mostly apply to the European and the American markets. And those numbers would be that 80% of our incoming bookings are still scheduled under 90 days.

So that's an indicator that there's still a very tight window in the booking arena. And as you mentioned, Roy, in fact 35% of those bookings are due immediately to customers.

And then the other data point, again, that applies more to Europe and America and the more horizontal markets where we stock deeper, we still only have 60% coverage of backlog to anticipated revenue for the quarter, so those two figures kind of show you that we're still in a fairly healthy state.

Was that -- Brian?

Yeah, that's very helpful. Just one last question. If I am doing the math right, adjusting for currency, it looks like your sales were up about 35 million sequentially in local currency, yet SG&A was up over 6.5 million, so help me understand if that math is right.

It looks like the SG&A was up more than I would have expected, given the local currency sales growth.

Say that again, Brian, please?

35 million sales, 6.6 million SG&A?

Yeah, that's reasonably close. And I think some of the expense bill has been in various areas outside of Europe related to, you know, such things as significant growth in profitability in terms of incentives and commission in one area, but also business activities as well.

So some expense dollars, you know, increasing to support, you know, pretty big growth here in the Americas as well. Keep in mind over in Europe, I would say a little bit in more of a turnaround situation from an expense perspective, and therefore they might have a little bit more leverage initially in a turnaround -- from a turnaround perspective from where they've been versus where the Americas have been.

And going forward Ray, is this the same type of ratio you would expect over the next few quarters -- just under 20% incremental SG&A for every dollar of sales?

We're talking rough -- a little bit higher than that. We're saying increasing expansion on a sequential basis We're talking about a drop through of about 75%. And the total of that incremental expense is about 25% on a go -- between 20 and 25% on a go-forward basis.

Of gross profit.

Of gross profit dollars.

So one of things that would be helpful is, take a look at the numbers year on year, because the seasonal decline in TS business distorts the drop through a bit. So if you look at it year on year, you get a little better comparison. I also believe that the Euro dollar exchange rate distorts the drop through. In fact, we cited some numbers on the call around that.

So we're still looking for gross profit dollar -- incremental gross profit dollar drop-through in the, you know, 70, 75% range over the next few quarters.

Okay. Thank you.

Thank you. Our next question will come from Matt Sheerin of Thomas Weisel Partners.

Yes, thank you very much. Roy, or Brian, could you talk a little bit more. You talked about you're kind of waiting for the ASP to increase, and in fact, velocity growth to [INAUDIBLE] for signs to see more than just flash memory and [INAUDIBLE] and some other specific areas.

When do you think -- what will it take for us to see kind of a broader uplift in ASPs; and then as a follow on, Roy, you talked about, you know, this stage of the cycle. What stage of the cycle do you think we're in?

You know, Matt, it's --- my answer to this question will be, you know, obviously subjective and speculative, because we don't have facts and figures to support it.

But I will tell you this, product lead times made a significant move in the fall quarter, and they moved out to something on average 10 to 14 weeks, with the exception of a few product commodities that were essentially on allocation. In the March quarter, lead times were relatively stable. You know, a few got a little worse, a few got a little better.

And my interpretation of that is that all of this consumer demand that drove the activity in the December quarter went through its normal seasonal pull back in the March quarter, creating some weakness in the market which was offset by this increase in corporate capital expenditure.

And so the fact that we held lead times stable through the March quarter would indicate to me as the consumer spending resumes its normal seasonal pattern and corporate Cap Ex continues to grow as the calendar year goes on, I think we're going to get into tighter and tighter product supply.

And as we get to the point where they're still putting more orders than there is supply, then the vendors -- all the vendors, and including the distributors, will begin to become more selective about what orders they take, ant that will put pressure on ASP. All right? I think we're getting close.

Certainly in the second half of the year and maybe a little bit in the June quarter. Andy?

Well, Matt, I'll just comment on ASPs. You know, overall, ASPs are moving upward in Asia, and we have seen ASPs ising there, and ASPs have been flatish in Europe and America.

But in the quarter ended March, one of the indicators that's a very positive indicator of our units, shipped in America in March, reached their highest level in over three years, so surpassed even Q3 of our fiscal '00,, so you got to go back 12 quarters to find more units shipped in America.

So I agree with Roy, we are on the front-end of it, and you know, unit demand keeps rising and inevitably ASPs rise with that.

And Matt, when you talk about stage of the cycle we have to talk about end market versus supply. On the end market side, you know, consumers have been going pretty good for quite a while.

I am not an economist, but it seems to me we have to take into consideration the global economic expansion that's underway in contrast with what is undoubtedly going to be higher interest rates as we go forward and try to peg consumer spending.

On the business side, my perspective is that business has been underspending for the past three years, and only in the second half of calendar 2003 did business spending begin to perk up. And I believe that we're in the very early stages of that demand, which has been our historical driver for the components market.

On the supply side, there is quite a few investments that are now being announced. But these investments, you know, minimally will be 18 months and in some cases 24 months to come on stream.

So the probability of supply exceeding demand, you know, anytime soon, is I would say pretty remote.

Okay. Fine. And then just quickly, you mentioned that lead times are stable at 10 to 14 weeks, is that right? It's still in that -- it's still in that range, right?

Andy?

Yeah, I mean, the general lead time is 10 to 14. There are areas and pockets of extended lead time, like Memory Flash, at 20 weeks with pending allocation; but in general, yes, 10 to 14 weeks is the lead time and it's stable.

Are you seeing any other areas other than Flash in Asia, for instance?

Well, the areas that continue to stretch out the fastest are discreets and analog, you know, where certain packages that serve, as Roy said, the consumer market, are running 22 to 30 weeks. So there are -- you know, there are pockets where lead times are stretching quite long, and then things like Standard Linear, Logic, you know, Micro Controller, would all fall in the area you just described of 10 to 14 weeks.

Okay, thanks very much..

You're welcome.

Thank you. Our next question will come from Steve Savas of Goldman Sachs.

Thanks. Good evening.

Hi, Steve.

I guess just a couple of questions maybe related to Asia and, you know, obviously you're seeing very high growth there.

I know typically you have lower growth margins, but because of lower Op Ex, your operating cost is pretty good, and higher velocity gives you higher returns. I guess I was wondering, just, what the trend line is for each of those margin lines. And then on top of that, in terms of the growth that you're seeing, is there any end customer area where it is disproportional, like what is the mix between growth of local indigenous customers versus global OEMs or contract manufacturers?

Okay. So I'll take -- why don't I take the drop through question and margin trend, and Andy you take the end customer trend. And Steve, what's happening is, you know, our business in Asia is nicely profitable. We are generating acceptable returns on capital.

There is operating leverage, there but it's not as strong as what Andy talked about in Europe and America, because we're already running at full throttle.

So our drop through rate there that we're targeting is 50%. So we're reinvesting about half of our growth in gross profit dollars, and we're taking about half of that to the bottom line. And while doing that, we're trying to manage asset velocity to give us the return on capital needed to create shareholder value.

Overall, I would tell you our business in Asia is quite healthy, and we're very satisfied with its progress, both in terms of revenue and profit generation.

Are your margins on the growth line trending flat, or are you feeling any pressure there?

No, they're -- they're actually trending pretty flat, and my expectation is that we ought to be getting some upward pressure before too long.

Because of leverage or just because of a change in the structure?

Well, initially, what will happen is, we'll get these higher ASPs that Andy talked about on sort of our traditional margin. So we'll get more margin dollars as a result of that.

And then as product becomes tight in Asia, we'll be able to get higher margin percents as well. So it's not actually leverage in our model; it's supply and demand balance.

Okay.

And then Andy, you want to talk about the customer segmentation? Is it shifting from indigenous to anything else, or what's happening there?

Yeah, I'll have to say that I do not have this quarter's results, but you know, last quarter we looked at 60% indigenous, 40% more international-based companies operating in Asia in terms of our revenue mix. I'd have to come back with that figure exact for this quarter.

Yeah, and Steve, that was -- the indigenous portion was down a bit in that quarter from where it had been prior, meaning that the multinationals, and most notably, the EMS companies, had ramped up spending.

Okay. That's great. Thank you.

You're welcome.

Our next question will come from Scott Craig of Morgan Stanley.

Good evening. This is actually Bernie [INAUDIBLE] for Scott Craig. Just a question for you on Europe. You had pretty strong growth there.

You said, you know, obviously there was demand and market share gains. Could you kind of quantify the 30% sequential growth, and maybe how much was from demand and market share? And then regarding market share, who do you think you're winning that from?

Andy?

Well, I think, you know, market share certainly -- we measure our share in terms of what we believe is the total available basket turn distribution in Europe and I believe that, you know, we could have gained a point of share in the quarter, perhaps even more -- we don't have all the final results.

We're certainly taking some share away from some of Irigus [PHONETIC] and some of the smaller regional players at this point. And you know, I would expect that that would continue in the June quarter.

Okay, and then as far as the demand, are you seeing that continue for the June quarter also -- the strong demand that you saw in March?

We did have a healthy -- you know, as noted, we had a very healthy book to bill globally.

But, yes, we saw our European book to bill, even with those exciting revenues that we posted in Europe, we had a very strong book to bill. So we do see the carry over into June and, of course, the exchange rates will affect the final results, but momentum is there.

Okay, and then just finally, along it's same lines. Can you go over the book to bill by region?

Sure. We experienced a 1.18 to 1 global book to bill in America. 1.1. Europe, 1.19 and Asia 1.33.

Okay. Thanks a lot.

You're welcome.

Our next question will come from Patrick Parr of UBS.

Good afternoon, guys.

Hi, Patrick.

Regarding the inventory issue, and kind of coming at it from a different angle It looks like you probably used about 100 million or so in free cash flow this quarter.

As you continue to build some inventory and then turn the corner and get better leverage, at what point do you think you'll become free cash flow positive again?

Right now our estimates are that as we go through the June quarter we might use a little bit more cash, but our expectation right now, based upon our internal projections and expectations, will start generating a -- I'll say a small amount of cash as we go into the September to December quarter.

So that right now our expectation for the calendar year is at well be, you know, relatively narrow range of being cash flow neutral with a, you know, plus or minus $50 million. That's our expectation today, assuming no down shift in revenue growth.

Okay.

And then Patrick, as we've talked in the past, there will be two factors that would drive this. One would be the rate of growth and perhaps counterintuitively in our business, the higher the rate of growth, the more cash we consume during an upcycle. And then the other factor would be the mix of business between EM and TS,. Of that growth, how much is coming out of EM versus TS?

So those would be the two things that will actually determine cash flow consumption. Our management approach is to manage the return side of that equation such that independent of the rate of growth or the mix of growth, we have adequate returns on the capital that we're employing.

Okay, that's fair. All right, a second question on the customer segmentation. As you look at your OEM business and EMs customer base and maybe your smaller businesses that you sell into, were there notable differences in the strength and weakness pertaining to those segments?

Andy?

Not really. The growth is coming from both sectors -- and of course, as you know now, you know, as much as 50% of the OEM world out sources, some of their manufacturing to EM aside. So the two are tracking pretty close, but it is it's small to medium customer base that's lifting nicely in the Americas and Europe.

So whether it be through an EMSI partner or direct with the OEM, that customer base is recovering nicely.

Okay. And then a final simple one, I hope. Tax rate obviously came down. Ray, what would I think about for fiscal '05 in terms of a tax rate this year?

Interesting question. I guess I would say, you know, we've obviously lowered it pretty substantially. I would say at this particular point in time, I would probably be more right around a 30% range.

We'll know a lot better by the time we get on our next call, based upon what our expected mix of profits will be for fiscal '05. But where we have to give guidance between 30 and 35%, I'm probably pulling that down maybe 4% or so, so you're in the high 20's or the very low 30's, is where right now I'm currently estimating.

And of course, as we go into fiscal '05, depending on the -- where the -- you know, again, kind on where strength comes from, it could conceivably continue at the rate of 27%, but I guess I wouldn't make that assumption at this point in time.

Okay. I'm sorry, and then one quick final one You guys took a lot of heat last year from the ratings agencies. At this point, I think it's pretty clear the business has turned.

Is there any, I guess, prospects we would eventually, you know, see some upgrades to your credit ratings as we've started to pass-through recovery here?

Well, we would certainly hope so. I think if you look at our current rating -- and obviously we are split between Moody's and S&P, I would say that from an S&P perspective, I am not sure if a ratings upgrade is in the near term, but I would certainly hope if we put another quarter or two of solid results that we have here, I would expect their outlook to be a bit more stable outlook.

From Moodys perspective, I would certainly hope that based upon what's gone on from the last couple quarters from an increased profitability perspective, there should be a reasonable opportunity that we at least move up a notch, maybe two, as we certainly hope for.

And we certainly will be having conversations with them in the near term to discussion what some of their requirements may be or what some of the issues may be that's holding us back.

But certainly our expectations are, and we're certainly managing the business to move back into an investment grade environment with both agencies, right now being below that with Moody's.

Okay, great. Thank you.

Our next question will come from Carter Shoop of Deutsche Bank.

Good afternoon, thanks. I had a handful of quick hitters here. First off, on the cost cutting initiative. Could we get a progress report on how that's going?

Yeah, essentially, as we reported on the last call, everything has been completed other than some work being done over in Europe in connection with consolidating two of our IT systems together.

That is on track and as we indicated, it is scheduled to be completed in the June timeframe and have a system cut over as of the first of the fiscal year. And that's when the balance of the reductions will come into play. And I would say that, you know, at this point, it is roughly 5 to 10% of the number.

And most of it has already been impacted -- that's just the last piece that's left to go.

Okay, great. Thanks. And then maybe a question for Rick here, who's been awfully silent today. A breakout for the TS sales between software, hardware and services.

Thanks Carter. The commodity break down for the quarter was 71% hardware, 16 software and 13 services.

Okay. Great. Thanks. And then for Andy, I was wondering if we could get a little bit more color on the strength in the EM division in regards to end markets.

Do we see a strength there on the com side, more on the industrial side? In addition, could we get a little bit of color on semi-demand versus IP&E?

Certainly the industrial customer base in Europe and America, as Roy mentioned, that's giving us the biggest lift. And within that, you know, there's the medical, there's the manufacturing control type environments, which are doing very well.

Our defense aerospace business continues to be quite strong in America, so from a coms perspective, I think we do see wireless markets in lots of areas, gaining strength in all geographies -- in terms of new product introduction around wireless. But in terms of standard coms, that's still lifting quite slowly.

And then IP&E is stable, similar to semiconductor. We're still seeing lead times in the 8 to 12 week range, with some exception around commercial connectors that are in high demand. So the IP&E side of the business from a lead time perspective is closely nearing the semiconductor products as well.

Okay, great. And could also we talk about the inventory build in the quarter in the EM division? Was that mostly semi or is that more IP&E or is that a pretty even build there?

I do not have the break down on that -- and I can get it.

But I would assume that semiconductor would be slightly higher. But we can get that break down.

Okay. Are you -- are you running into problems with being able to procure inventory to meet customer needs? It sounds like a lot of the kind of higher end analog and other competitive suppliers are being pretty watchful of inventory levels in the channel.

Are you seeing this environment -- the relationship between your component suppliers and [INAUDIBLE] channel kind of changing this part of the cycle versus last cycle?

Well, I think everyone is a little more cautious, but there are no buying restrictions from the electronic product manufacturers in place, and very few formal allocations yet in terms of lead time and allocation. So I think there is a lot of caution.

As Roy said, inventories are still pretty lean, and everybody's focused on velocity. So I still think it's in a very health state.

Okay, great. One last great. On the tax rate, I wasn't surprised there that it came down after a strong quarter in the Americas and in Europe. Why did that happen? Is Europe -- is the European tax rate lower on operating profits there, or what's going on?

I'd have to look at the -- the European region, we're in a situation where, depending on which region you are in, from a break-even or losing mode situation where, you know, with our visceral and estimated tax rates, we would not take advantage of any losses.

So as Europe starts to recover from the effective tax rate perspective, the benefits Siemens of not recording a -- the impact of not recording a benefit on losses starts to go away and then your effective tax rate will get lower.

So we'll see a lot of demand in Eastern Europe? Is that primarily from the contract manufacturers, or -- ?

In Eastern Europe, it is very heavily weighted toward contract manufacturers.

Okay. Great, that's all I have. Thanks a lot.

Thank you. Ladies and gentlemen, our final question is from [INAUDIBLE] Securities.

Hi, good afternoon, gentlemen. Most of my questions were answered. Just a quick Cap Ex and depreciation in the quarter?

Cap Ex for the quarter -- about $4.5 million and depreciation was 15.5.

And can you give us a range for where -- you mentioned that you expect to start generating some cash towards the end of the calendar year. Can you give us a range for what you [INAUDIBLE]?

Yeah, it's Andy. In this quarter, we used about 80, 85 million of cash, and next quarter we expect to use a small amount. [INAUDIBLE] by the end of the year, come out to be break, even plus or minus 50 million. So you're really talking about pretty nominal amounts of cash flow generation in Q3 and Q4, so that's for the whole calendar year, we'll be right in the plus or minus $50 million range.

So that could be the range for any quarter, depending on which quarter we happen to be in. But again, when we get through the balance of the year, we expect to be relatively neutral from a cash flow perspective.

Okay, great. Thank you.

As we conclude today's quarterly analyst update, we'll quickly scroll through three slides mentioned at the beginning of this broadcast that contained the non-GAAP to GAAP reconciliation results presented during our presentation.

These slides contain additional footnotes for graphs presented during today's webcast. This entire slide presensation, including the GAAP reconciliation, can be accessed and downloaded in PDF format at Avnet's Investor Relations website, www.ir.avnet.com.

Thank you for your participation in Avnet's quarterly update today. If you have any questions or feedback regarding materials presented today, please contact Avnet's Investor Relations department [INAUDIBLE].

Thanks, everybody.

Ladies and gentlemen, thank you very much for your participation in today's audio conference. You may all disconnect your lines at this time, and have a wonderful day.