安富利 (AVT) 2004 Q4 法說會逐字稿

I would now like to introduce your host, Mr. Vince Keenan, Vice President and Director of Investor Relations. You may begin.

Good afternoon, and welcome to Avnet's fourth-quarter and fiscal 2004 year-end corporate update. I'm Vince Keenan, Vice President and Director of Investor Relations for Avnet. 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 operations that exclude certain charges. Reconciliations of the Company's analysis of results to GAAP can be found on the Form 8-K filed with the SEC today, in several of the slides in this presentation and on Avnet's investor relations website 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 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 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 filings with the Securities and Exchange Commission.

In just a few moments, Roy Vallee, Avnet's Chairman and CEO, will provide Avnet's fourth-quarter and fiscal-year 2004 highlights. Following Roy, Ray Sadowski, Chief Financial Officer of Avnet, will review the Company's financial performance during the quarter. At the conclusion of Ray's remarks, Roy will wrap up with additional comments, after which a Q&A will be conducted. Also here today to take any questions you may have related to Avnet's business operations are our two operating group presidents, Rick Hamada, President of Technology Solutions and Harley Feldberg, recently promoted President of Electronics Marketing.

With that, let me introduce Mr. Roy Vallee for Avnet's fourth-quarter and fiscal-year 2004 business highlights.

Thank you, Vince, and good afternoon, everyone. Thank you all for taking the time to be with us and for your interest in Avnet. As we review the financial performance for the full fiscal year 2004, you can clearly see the impact of the value-based management initiatives that we instituted about three years ago. With recovery in our end markets and a lower cost structure, fiscal 2004 was a year in which revenue growth combined with operating efficiency to the drive a dramatic increase in operating income. Avnet's revenue, which grew across all three regions in both operating groups, was $10.24 billion, an increase of $1.2 billion or 13.2 percent over the previous year. The leverage in our operating model was evident by the corresponding growth of 116 percent in operating income, to $258 million excluding certain charges.

Pro forma EPS increased more than fourfold, from 23 cents in fiscal 2003 to $1.04 in fiscal 2004. Including certain charges, EPS was 60 cents in fiscal 2004, as compared with a loss of 39 cents in the prior fiscal year.

Our focus on working capital also paid off, as we lowered the amount of capital required to support our revenue growth. In fiscal 2004, we invested in working capital at the rate of approximately 20 cents for each dollar of revenue growth versus roughly 25 cents during the last upturn. This improvement in both earnings and working capital efficiency drove a significant improvement in our returns. Our NOPAT return on working capital, which we consider a key metric for shareholder value creation, grew 672 basis points to 10.6 percent for fiscal 2004, and ended the year at 12.9 percent for the fourth quarter.

We continue to drive the business toward our long-term financial goals, and are confident that we have the scale and scope required to grow faster than the markets we serve, and increase profits and returns faster than revenue.

Not only was fiscal 2004 an impressive year, but we finished on a high note, as the June quarter represented our best financial performance in over three years. In addition to revenue of 2.64 billion, an operating income margin of 3.25 percent, we also achieved a number of three-year quarterly bests, excluding certain charges in financial metrics that represent key drivers of our business. The three-year best metrics also included operating income dollars, net income dollars in percent, earnings per share, NOPAT return on working capital and, in the productivity category, gross profit per employee and expense dollars to gross profit dollars.

Another highlight of fiscal 2004 was the continued growth of our international operations. Revenue from outside of the Americas grew 20 percent, and now represents 47 percent of total Avnet revenue. In the Asia-Pacific region, Electronics Marketing grew quarterly year-over-year revenue by 50 percent to $1.3 billion. That should read EM grew for the year by 50 percent to $1.3 billion.

We continue to invest in this region to take advantage of the growth opportunities afforded by the world's fastest-growing technology marketplace. From IT initiatives to logistics and service centers, we are leveraging our knowledge of supply chain and engineering services to deliver superior value to a customer base that includes thousands of indigenous OEMs, ODMs and contract manufacturers.

Another significant international highlight is Electronics Marketing's turnaround in the EMEA region. After the VEBA acquisition, the new EMEA team came up with the strategy of people growth, productivity improvement and market penetration as their foundation for long-term profitable growth. From enhancements to our SAP computer systems to consolidating distribution centers, the team reengineered a wide array of processes to streamline the organization and improve customer service. As a result of the restructuring and other measures, Electronics Marketing operating profitability in EMEA -- Europe, Middle East and Africa -- in both dollars and margin is now comparable with North America. So, with growth that outpaced the market, EM EMEA was able to increase fiscal-year operating profit 388 percent, while driving a 293 basis point improvement in operating income margin. With a focus on best-in-class engineering and supply chain services, long-term supplier relations and superior customer service, I expect to see continued improvement in our EMEA business.

We have also completed the integration of our Computer Marketing and Applied Computing businesses in Europe, including the recent and very successful consolidation of their IT platform. This combination went very smoothly with no business interruptions, and a lower cost structure and higher overall profitability of the combined operating group was evident in the fiscal 2004 results.

The final fiscal 2004 highlight that I would like to cover actually spans several years. As we've told you before, we have spent considerable time developing a value-based management culture that is focused on shareholder value creation. Through the downturn of the tech industry, our progress has not always been apparent in our financial results. However, now that revenue growth has resumed, our operating leverage has become more apparent, and you can clearly see the impact of our driving value initiative. When quarterly sequential growth accelerated in fiscal 2004, we were able to substantially increase our operating profit margin, while setting new records for inventory turns and cash conversion cycles.

For the enterprise, our inventory turns were over 7 in fiscal 2004, while our cash conversion cycle improved by 10 percent to 67 days for the fiscal year. Other examples of the leverage in our model are the facts that gross profit per employee for the fiscal year 2004 increased 21 percent and operating income per employee grew 132 percent, both excluding certain charges.

Now, let's focus on Q4, ended July 3, 2004. Sales for the fourth quarter of fiscal 2004 were 2.64 billion, up 21 percent as compared with the prior year's fourth quarter and roughly flat with the prior sequential quarter. The year-over-year increase was driven by both operating groups, as Electronics Marketing grew 28 percent with strength in all three regions of the world, and Technology Solutions grew 11 percent. Excluding foreign currency impacts, consolidated year-over-year growth was roughly 18 percent, while sequential sales increased 1 percent. This performance is further evidence that the customer service initiatives we instituted during the restructuring are beginning to pay off.

In North America, our FAE productivity is up 37 percent, while design win sales are up 55 percent in the June quarter of 2004 versus the prior-year quarter.

At EM's Asia operations, our census has surpassed 1,000 people, with over 40 percent possessing technical degrees.

In Europe, we have automated tools for quoting and design registration, while adding field sales engineers to support expanding markets in Eastern Europe. At Technology Solutions, our investment in industry-leading sales tools and technical centers are contributing to the success of our VAR customers, while solidifying our number-one position with several key suppliers.

As you can see on this next slide, EM revenue was 1.61 billion in the current quarter. That's compared with sales of 1.25 billion in last year's fourth quarter. This represents year-over-year revenue growth in the June quarter of 28 percent on a reported basis, and 26 percent on a constant-dollar basis. This was our highest year-over-year revenue growth in over three years. This performance was strong worldwide, as all three regions grew over 20 percent, with Asia-Pac leading the way with 46 percent growth and exiting the quarter at an annual run rate of over $1.4 billion.

On a sequential basis, EM revenue grew 1 percent, or 2 percent if you exclude the impact of changes in foreign currency exchange rates. This sequential growth was at the low end of our guidance range, as the pace of shipments and bookings slowed towards the end of the quarter. At a regional level, 7.8 percent sequential growth in Asia-Pac and 3.7 percent growth in the Americas was offset by a seasonal decline of 5.6 percent in the EMEA region.

For the quarter, EM's book-to-bill ratio was positive across all three regions, although bookings in Asia-Pac have begun to moderate from the abnormally high 1.3 book-to-bill in the March 2004 quarter. On the pricing front, generally we see evidence of stable ASPs in conjunction with relatively stable product leadtimes.

Moving to Technology Solutions, sales were 1.03 billion in the June quarter, up 11 percent as compared with sales of 935 million in the year-ago quarter, and down 1 percent sequentially. Excluding the impact of changes in foreign currency exchange rates, the corresponding change would be 9 percent on year-over-year growth and flat on a sequential basis.

On a regional basis, both North America and EMEA grew double digits year over year. The 1 percent sequential decline in revenue was below our guidance range of plus 2 to 5 percent, primarily due to a combination of greater-than-expected seasonal slowdown in Europe and some product transition issues at a key supplier.

In North America, our Technology Solutions business grew 4.3 percent sequentially, as strength in storage, software and networking more than offset declines in servers and microprocessors.

And now, I'd like to turn the commentary over to Ray Sadowski, Avnet's Chief Financial Officer. Ray?

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

This first slide shows a year-over-year comparison, with the dollar and percentage change in the highlighted columns on the right. As Roy already mentioned, revenue in the June quarter increased 21 percent to $2.64 billion. Gross profit increased 73 million to 368 million or 25 percent higher than the fourth quarter of fiscal 2003. Gross profit as a percentage of sales increased to 13.9 percent from 13.5 percent in the year-ago quarter. Expenses of 282 million were 7 percent higher than last year, but if you exclude the impact of changes in foreign currency exchange rate, expenses were up only $12 million or 4.5 percent.

The combination of higher revenue, higher gross profit margin and expense controls resulted in a 54 million or 170 percent increase in operating income to $86 million. Operating income margin of 3.25 percent for the quarter is our best performance in over three years, and represents a 180 basis point improvement over the year-ago quarter.

Below the operating income line, lower interest expense was more than offset by lower other income. All in all, this resulted in a quadrupling of net income to 48.7 million or 40 cents per share on both a pro forma and GAAP basis.

The next slide highlights a sequential change in our pro forma results for the fourth quarter of fiscal 2004. As you can see, in addition to the change column, we have included a reconciliation to GAAP net income at the bottom of the slide to account for the debt extinguishment costs incurred in the March 2004 quarter. While revenue was relatively flat sequentially, gross profit increased $9.4 million or 2.6 percent over the March quarter, as gross profit margin increased 34 basis points to 13.9 percent. Operating expenses of 282 million were $2.5 million lower than the March quarter, primarily due to the impact of changes in foreign currency exchange rates in Europe.

As a result, operating income increased 11.9 million or 16 percent on a sequential basis. Operating income as a percentage of sales reached a three-year high of 3.25 percent. At an operating group level, Technology Solutions' operating income margin was roughly flat sequentially, at 2.4 percent, while EM's grew 69 basis points to 4.7 percent. One way we measure the leverage in our business is by tracking the comparative growth in operating income dollars in relationship to the comparative growth in gross profit dollars, or what we refer to as operating income drop-through. In the current quarter, the enterprise-level sequential operating income drop-through was 126 percent on a reported dollar basis, and 89 percent on a constant dollar basis.

In Electronics Marketing, where both revenue and gross profit margin increased sequentially, the operating income drop-through this quarter was 157 percent in delivered dollars and 110 percent in constant dollars. This performance provides a good indicator of the leverage in our business, as we continue to focus on quality revenue and expense control.

Total gross profit margin has improved 103 basis points over the past two quarters, as EM has grown to approximately 61 percent of total revenue, as compared with 54 percent in the first six months of fiscal 2004. Although business mix is a primary driver of the enterprise gross profit margin improvement, I would repeat that both EM and TS improved gross profit margin on a sequential basis. In particular, the Americas region of Technology Solutions has shown steady improvement over the last two quarters, as their strategy of value-added solution selling has improved the quality of its revenues.

The improvements on this slide portray what happens when revenue growth combines with expense control. The graph on the left reflects a decline in operating expenses as a percentage of sales, and the graph on the right reflects a decline in operating expenses as a percentage of gross profit dollars. The graph on the left is another example of the impact that a change in business mix can have on enterprise-level metrics. As Electronics Marketing increased from 54 percent to 61 percent of consolidated revenue over the past two quarters, operating expense as a percentage of revenue has begun to level off, as the EM business has a higher expense-to-revenue ratio, just as it has a higher gross margin as compared with Technology Solutions.

In the June 2004 quarter, expense to revenue declined 11 basis points, as a lower expense-to-sales ratio in Electronics Marketing offset an increase at Technology Solutions, where sales declined sequentially. Electronics Marketing expense-to-sales ratio was at its lowest level in 13 quarters, while Technology Solutions is down (ph) 77 basis points year on year.

The charter on the right portrays the more important expense productivity metric of expense to gross profit dollars. This ratio, which demonstrates the leverage in our business model, has improved in every quarter of fiscal 2004 when you exclude certain charges. Throughout the upturn, we have been very vigilant in controlling our costs as the business expanded. Even though our fiscal 2004 revenues grew 13.2 percent, our operating expenses excluding certain charges were up only 1 percent. Excluding the impact of changes in foreign currency exchange rates, operating expenses declined 4 percent as consolidated revenue grew 9 percent. While we are pleased with this performance, we still have more room for productivity gains, and will continue to focus on operational excellence initiatives in order to maximize our operating income drop-through.

In the fourth quarter of 2004, earnings per share continued the pattern of sequential and year-over-year improvement. In the June 2004 quarter, diluted earnings per share was 40 cents per share. This compares with GAAP EPS of 10 cents in last year's fourth quarter and 22 cents for the March of '04 quarter. On a pro forma basis, the 40 cents per share this year compares with 10 cents in the year-ago quarter and 34 cents in the March 2004 quarter. For the full fiscal year, pro forma diluted earnings per share improved 81 cents per share to $1.04, while GAAP earnings of 60 cents per share grew 99 cents per share over fiscal 2003.

The next slide portrays the key metrics that underpin our driving value initiatives focused on creating shareholder value. The graphic on the left details our operating-margin performance over the past two quarters. The current quarter represents the eighth consecutive quarter of year-over-year improvement in operating profit margins, excluding the impact of restructuring and other charges.

In the June quarter, Electronics Marketing achieved its highest operating income margin in three years, at 4.7 percent. This represents a 69 basis point improvement over the March 2004 quarter and a 195 basis point improvement over the fourth quarter of fiscal 2003.

Technology Solutions' operating income margin of 2.4 percent was 183 basis points better than the year-ago quarter, and roughly flat with the prior sequential quarter. The chart on the right depicts the working capital velocity, which equates to the annualized quarterly sales divided by the total quarter end of accounts receivable plus inventory less accounts payable. This is a key performance metric in our return equation.

Over the past two quarters, this metric has trended down as a result of the business mix issue I referenced earlier. As the more working-capital-intensive Electronics Marketing grew to over 60 percent of revenue, the improvement in enterprise-level asset velocity began to level off. However, both operating groups continued to deliver significant improvements over fiscal 2003 in several working capital metrics. In Electronics Marketing, inventory turns for fiscal 2004 improved 16 percent. With a significant increase in supply chain engagements worldwide, we have been able to increase our visibility into our customers' requirements and improve the overall quality of our inventory.

At Technology Solutions, a near 50 percent increase in inventory turns drove a 31 percent improvement in its cash conversion cycle, as compared with the prior year. These dramatic changes are another example of how our value-based management culture has driven operational excellence.

NOPAT return on working capital is the primary metric we use in our business to measure shareholder value creation. As you can see on this graphic, the improvement that started during our restructuring phase has accelerated as sequential revenue growth returned in fiscal 2004. In the June 2004 quarter, NOPAT return on working capital increased 113 basis points to 12.9 percent, our best performance since the third quarter of fiscal 2001. The corresponding year-over-year improvement totaled 749 basis points, of which approximately one-third of the increase was due to a lower tax rate in fiscal 2004. The steady improvement in NOPAT return on working capital is proof that our value-based initiatives are working.

The last subject I would like to cover is the progress we made this year in strengthening our balance sheet. As the graphic depicts, we continued to reduce our debt in fiscal 2004, and exited the year with a debt-to-total-capital ratio of 41 percent versus over 50 percent just two years ago. Through a combination of debt reduction and convertible refinancing, we were able to reduce our quarterly interest expense from 26.9 million in the June 2003 quarter to 20.4 million in the most recent quarter. In addition to this 24 percent reduction in quarterly interest expense, we also lowered our blended interest rate from 7.3 percent in the fourth quarter of fiscal 2003 to 6 percent in the fourth quarter of 2004.

Free cash flow for fiscal year 2004 was 13.5 million, including the use of 50.5 (ph) million related to acquisitions completed in prior years. Excluding those acquisition funds, cash generated during fiscal 2004 was $64 million, even though we grew the topline by 1.24 billion. Throughout fiscal 2004, we applied roughly $100 million of cash from our operations to reduce debt. We also significantly improved our liquidity with the new $350 million credit facility we announced last month. When combined with our accounts receivable securitization program and cash on hand, we exited the year with over 1 billion of available liquidity. We are very comfortable that, as we start a new fiscal year, we are well-positioned to fund future growth.

Now, I'd like to turn the commentary back over to Roy. Roy?

Thanks, Ray. As I said earlier, fiscal 2004 was the year where revenue growth meant operating efficiency. In addition to the significant financial improvements that Ray just covered at the Avnet level, there have been noteworthy operational improvements in both operating segments. So, before I move onto guidance, I would like to recap those initiatives at a segment level.

In Electronics Marketing, we continue to enhance our multiregional and global value propositions of design and supply chain services with a focus on operational excellence. Our design chain initiatives reflect EM's ongoing commitment to provide demand generation support that links supplier technologies to our customers' application needs. As part of that linkage, we worked with our suppliers to develop a process that connects our registered design wins in the Americas and EMEA regions with manufacturing demand in the Asia-Pacific region. This process allows us to get compensated for our engineering work, while enabling us to track component flow through manufacturing.

As well, in Asia-Pacific we have expanded the number of independent design houses that we work with, in order to take advantage of an evolving business model that continues to fuel rapid growth in electronics manufacturing. Over one-third of these alliances are developing Avnet-specific systems solution projects focused on the latest digital consumer and wireless solutions.

And lastly, in North America, we extended our distribution agreement with IBM to include ASIC devices and technology. With this agreement, and through Avnet design centers, a broader array of customers will now be able to gain access to IBM's industry-leading ASIC technology, while also utilizing Avnet EM's materials management capabilities. This agreement marks the first time that IBM has opened up its ASIC design methodologies to a channel partner.

Although Electronics Marketing offers a variety of design chain services and products, the one common aspect across all regions is that our customers realized lower total costs and faster time to market by working with us. In fiscal 2004, our supply chain initiatives continued to focus on supporting our customers' multiregional business needs. In Asia, we became the first electronics distributor to implement a RosettaNet partner interface via eHub with Fiber Home Telecommunication Technologies Co. Ltd., a leading provider of telecommunications equipment in mainland China. This implementation enables Avnet and Fiber Home to share real-time purchase order requests and acknowledgments via the eHub platform, based on RosettaNet's order management partner interface processes standards. This agreement represents a major milestone in our commitment to deploy eHub, based on RosettaNet standards in China and expand Avnet's role as a leader in e-business.

Finally, our focus on expense is more than just cost control; it's about productivity. Our ability to innovate will allow us to not only realize savings today, but build more leverage into the model going forward. While prior restructuring focused on physical assets and cost structure, the past year has focused on operational excellence, with particular emphasis on customer service. The Electronics Marketing team established a closed-loop customer satisfaction methodology that provided valuable feedback on the customers' experience with Avnet. As a result of this initiative, EM has implemented multiple process improvements that have resulted in substantial productivity gains. Enhancements to our CRM programs have allowed EM to capture an estimated 18 percent more projects at existing customers in the June 2004 quarter versus the prior sequential quarter. Our outside-looking-in target account program, which focuses on new account expansion, has been a great success thus far, generating many sales opportunities and wins. It is programs like these that have allowed EM to capitalize on the growing distribution marketplace without a corresponding increase in operating expenses.

In Technology Solutions, we have made substantial investments in sales, tools and web-based systems to help our customers succeed and expand our relationships with new and existing suppliers. As we continue to focus on solutions sales in the enterprise segment, the ability to enable and deliver integrated solutions featuring state-of-the-art technology is critical to sustaining our leadership role in value-added distribution. One example of how we deliver innovation to our customers is our Channel Connection portal. In February, we demonstrated capabilities to connect VARs to IBM's e-business On-Demand strategy at IBM PartnerWorld 2004. By providing tools and enablement training, Avnet Partner Solutions is helping VARs develop a new level of consultative selling. This powerful suite of tools and services are designed to help IBM VARs identify and mine emerging e-business On-Demand market opportunities that address their customers' business challenges with a total solution.

At Avnet Enterprise Solutions, we opened two new hands-on storage expertise centers to demonstrate multistate data replication for protection of valuable data. The new storage expertise centers provide customers with a hands-on environment where they can see how actual information technology equipment from different vendors would work if it were installed in their places of business. Customers can test drive the latest storage technologies, including network storage, disaster recovery, backup and restore and business continuance, as well as understand the impact on their storage-related costs.

The IBM division of Avnet Partner Solutions is increasing the number of independent software vendors or ISVs connected to the marketplace through their Enablement Services Partnership or ESP program. The ESP program is dedicated to helping ISVs design, integrate and finance IBM solutions as a complement to their applications development in order to enhance their overall success. By utilizing Avnet ESP, ISVs can focus on their core competency, namely developing applications for vertical markets, and let Avnet's ISO-certified integration center build, test and install their solutions on IBM's world-class e-server and storage technology. This partnership allows the ISVs to get to market faster and increase their ROI while providing IBM an efficient channel through an expanded customer base.

While these initiatives contribute to the success of our customers, our suppliers continue to expand their relationship with Technology Solutions. In the storage market, we recently announced agreements with EMC to distribute their Clarion AX/100 network storage system and Legato information lifecycle management solutions. The addition of these products allowed APS and its resellers to offer advanced data protection at entry-level price points, as well as leverage the broadest storage portfolio in the industry. By combining these products with our unique suite of assessment and demonstration tools, VARs can shorten the sales cycle and simplify the procurement process.

Suppliers also rely on Avnet Partner Solutions when it comes to rolling out new products. When IBM introduced its new i5 server products, the IBM division of APS was ready with comprehensive education, training and certification programs to allow its IBM resellers to ramp quickly and realize incremental sales. By making the investment in sales tools and developing enablement programs that provide demand generation and in-depth training for solution areas, Technology Solutions has maintained their position as IBM's largest worldwide technology partner.

During fiscal 2004, the Applied Computing Solutions or ACS division of Technology Solutions has been investing in new tools and capabilities to capitalize on opportunities in the single-purpose computing marketplace. ACS has worked with suppliers to develop channel programs that are designed to meet the specific financial, technical, integration and logistics needs of system builders. Their work in creating the Intermec Mobile Advantage Program has resulted in ACS being recognized as the highest-growth Intermec distributor in calendar 2003. These innovative programs have been instrumental in solidifying Technology Solutions' leadership position and value-added distribution for the enterprise segment, while increasing both gross and operating income margins over fiscal 2003.

And finally, I'd like to think the people of Avnet for their effort in what has been a very successful recovery year. Throughout the technology downturn, they stayed focused on delivering value to their customers while embracing our value-based management culture. Their perseverance has paid off this year, with significant improvements in all of our financial metrics. I'm confident that the groundwork we laid this year will allow us to continue this trend as we enable success for both our customers and suppliers.

As we guided in today's press release, based on current business conditions, seasonal factors and the current value of the euro, we expect enterprise revenues to be in the range of 2.55 to 2.65 billion in the first quarter of fiscal 2005, which represents a growth of 6 to 10 percent as compared with the first quarter of 2004, which was a 14-week fiscal period. We expect Electronics Marketing revenue to be down from the June quarter, in the range of 1 to 4 percent, due to seasonal factors and the digestion of some overheated bookings during the last couple of quarters. Technology Solutions revenues are expected to be seasonally normal, plus or minus 2 percent sequentially. We expect earnings per share in the fourth quarter of fiscal 2004 to be in the range of 30 to 35 cents, up significantly from a GAAP loss of 9 cents per share and a pro forma income of 9 cents per share in the first quarter of fiscal 2004.

The forecasted sequential decline in EPS is due to a combination of business mix, our annual compensation increases and a slightly higher tax rate projected for 2005. And with that, let's open open up the lines for Q&A.

(OPERATOR INSTRUCTIONS). Brian Alexander, Raymond James.

Just looking at the balance sheet, the inventory up, I think, about 72 million sequentially, could you just give us a little bit more color there, given that you are guiding revenue flat to down sequentially, why the inventory increase, what segments of the business and geographic breakdown, if you can give us that?

First of all, 100 percent -- let me check that. The vast majority of the inventory increase occurred at Electronics Marketing. No unusual patterns at Technology Solutions whatsoever. The increase in Electronics Marketing was less in the June quarter than it was in the March order. It was indicative, Brian, of the positive book-to-bill that we had in all three regions of the world. And as we've talked in the past, our inventory tends to follow our customer order and forecast patterns when we have them on supply chain agreements. And going into the first quarter of this year, with revenues trending down slightly and the softness that we've seen in bookings, we would expect no significant change in inventory for the current quarter. If up at all, it will be modest, and we will be, certainly, working to manage it in line with incoming orders and revenues.

Turning to your revenue guidance, the decline of 1 to 4 percent in EM -- how much of that sequential decline would you call seasonal, versus some of the other factors you referred to in terms of overheated bookings, and perhaps customers working down some inventory?

I think, on a normal basis, with our current geographic mix, we would think the seasonal pattern would be flat to minus 2. And so we are guiding minus 1 to minus 4. So there's sort of two points in there, roughly, that we are attributing to this correction of bookings that seems to be taking place.

And the last question, in terms of the impact on your guidance from the higher tax rate in compensation increase -- any way you could quantify that?

The tax rate -- we are projecting tax rate going forward of 30 percent. So whatever that number works out to be.

It's a penny or two, Brian, on a sequential basis. And of course, the actual tax rate will come in based on where the revenues and profits flow around the world. You know, the annual compensation increase -- we go through this every year, although we haven't been for the last few years, because there hasn't been a lot of compensation increases. But typically, for us on a worldwide basis, this might be a $5 to $7 million pretax number. And then, of course, the mix is the mix. We have to see what happens here with Technology Solutions and EM's revenues from a mix perspective.

Before we move on, I'd like you just ask everybody to limit themselves to one question and one follow-up. And if we have time at the end, we'll come back.

Matt Sheerin, Thomas Weisel Partners.

So, if you could just go back to your commentary about overheated bookings, could you be more specific about geographic region? I know you had been talking about Asia being very, very strong. So is that the area where things have to correct themselves? What's your general sense of the recovery in the cycles here, because we're getting lots of mixed messages from various suppliers and OEMs about the recovery in IT spending, et cetera. What's your general sense of where we are right now?

I'd be happy to provide you that, but Harley Feldberg has been on the job now for about six weeks, and I think he's got all the answers. I'm going to let him answer first, and then I'll provide any color that may be appropriate.

Thank you, Roy, for that handoff, and good afternoon, Matt. I think your question really related to regionality of the softening. Is that correct?

Yes.

Clearly, the bulk of the softening the we have seen of late is really driven out of Asia -- and really, to be specific, China, because Asia is obviously many different markets, as well. What I would say by region is, if I start with Europe, for example, EMEA is really acting as we would have expected with its normal seasonally, nothing really unusual happening there. In the Americas, we are seeing a slight bit of softening coupled with seasonality, so I think that accounted for one of the two points that Roy suggested in his previous response. And in Asia, clearly we're seeing our incoming business levels really flat to slightly down is probably the best way I can respond, by region.

And is that in response to customers working off inventory, or are there signs that end-market demand forecasts are not good?

From our perspective, Matt, it really is about working off of inventory, working down inventory. We believe the fundamental demand is still quite good.

And, Matt, if you run a full fiscal year or even a rolling 12-month book-to-bill, the book-to-bill in Asia is still significantly positive. What we had was a couple of quarters of 1.2-something, 1.3 book-to-bills, and what's happening now is that backlog is getting digested a bit.

And is the book-to-bill in Asia still above 1 now?

It was for the last quarter.

And where does it stand now, at this time?

Well, I think I'd rather report on that as we get through the quarter. I guess I would say our expectation -- we would think that book-to-bill for our components business for the summer quarter will remain positive on a global basis. So it's a little too early to call by region, based on one month worth of data. But we don't believe there's going to be any significant movement in our customer backlog on a quarter-to-quarter basis.

So, just to follow up, are you still generally positive on the cycle here, or are you concerned about some signs?

So, yes, let me step in on that one. From an end-demand perspective, the only thing that even resembles weakness would be the possible effect of a slowing GDP inside of the PRC. But even from that, we have not been able to pinpoint any specific evidence of demand weakness or softer buying or units of sales in things like laptops and cellular telephones, et cetera.

So we still feel good about the consumer side of demand. As you switch over to the business spending in CapEx in general and IT in specific, our business is looking very normal. We are actually seeing slower than we would like, in terms of the growth rate, but we are seeing continued growth in the IT marketplace. So end demand continues to look good. And then, you have the same data we have, but as we study capacity expansion in the component space, there is some coming, but the majority of that expansion is not due to come online until sort of this time next year. So all in all, we are still very comfortable, I guess you would say, with the business cycle and managing our business accordingly.

And, Roy, if I could add one additional comment onto that, to keep things in perspective, I think it's important to note that in all three key geographic regions, we are expecting double-digit year-on-year growth.

And that's over a 14-week fiscal period last year.

Right. And that's in constant dollars.

Steven Fox, of Merrill Lynch.

One quick question. Where's the accounts receivable securitization program stand at the end of the quarter? And then I had a quick follow-up.

There's nothing outstanding on the program.

And in terms of -- Roy, I hate to beat a dead horse, but looking at the September quarter, is it your sense that it is the typical back-end loaded quarter, or do you feel you have to play a little bit of catch-up, given that Asia seems to be lagging a little bit? How would you describe it?

I think, for our Asia business, it will be a back-end loaded quarter, because the weakness that is spilling from the June quarter into the summer quarter. But for EMEA and for America, it looks very normal, and for our Technology Solutions business, it looks very normal. So we are comfortable with the guidance we're providing, based upon having the full month of July results behind us.

By the way, so if you -- one last comment, Steve. If you look at EM Asia as a percentage of the enterprise, it causes us to say the quarter is a normal one from a skewing perspective.

Steve Savas, Goldman Sachs.

This is John Marshall for Steve Savas. I had a quick question about pricing. I know that you guys said in EM that pricing was roughly stable. I wanted to see if you could give us some color on are there various end markets that are having increasing pricing or decreasing pricing that evened out? Or are they roughly stable across all of them?

In every quarter, John, there are products that are up and products that are down, and our sonic (ph) mix also affects our ASP. So in the last quarter, memory was a leader, in terms of price appreciation. We had some mix changes in terms of programmable logic, but there's nothing -- the reason we gave the expression "stable" is that we don't see anything in that data that would cause us to say that the market is anything but stable at this point.

Scott Craig, Morgan Stanley.

With regard to the inventory side of things, Roy, there has been a couple of suppliers who have said that perhaps some of the distributor inventories are at slightly higher levels than we'd like. Is there any way that you can provide us some color? And I'm not asking by supplier, but maybe by product families, where you think there might be a little bit of excess inventory?

And then, my second question is with regard to customers, when you talk about a bit of a slowdown. Is there any particular customer bases or customer families where you're seeing a little bit more of a slowdown? If you can provide that, that would be great.

So I'll take the first part and I'll give Harley the second part. Let me just back up one moment, Scott. If you think -- first of all, remember Technology Solutions. We are at sort of record levels of asset velocity at Technology Solutions. The lowest total net days that we've ever run the business at, it's a nonissue in the technology and equipment side of our business. So this is a component question. And within components, the reality is that our inventory moves up and down for only two reasons. One would be material that we would consciously choose to speculate on, and two would be driven by customer bookings or forecasts where we are engaged in the supply chain management contract. The part that we speculate on is actually the minority of our inventory dollars, and we only speculate where we have a broad customer base. And if we speculate incorrectly, we end up with a 30-day problem or a 20-day problem or a 40-day problem; that's the extent of the inventory volatility.

Now, the part about the customers -- if the customers over-forecast, and we end up staging the inventory for them, we could end up with more inventory than we would choose to have on the shelf and our vendors would choose for us.

All of that said, I would like to keep in mind where we are. Although we are not at the literal peak of inventory velocity, we are substantially above where we were a year ago, where we were in the last cycle. And so, if you think about is inventory out of line in the supply chain, you've got to say we are still on the lean side of inventory, not on the heavy side, even though there is this very tactical current-quarter adjustment that's got to take place.

And then my last comment, and I'll flip it to Harley for the second part of the question. So, when we see a slowdown in bookings, as we're seeing predominantly out of China, we would automatically react with a slowdown in vender orders, and if the slowdown was dramatic, we would react with cancellations and reschedules on those orders, and that's exactly what's happening. And I'm very, very comfortable that, based on our value-based management initiatives and the training that we've done throughout the organization, we will adjust our inventory levels back up close to that all-time high in velocity in a relatively short period of time, a quarter or two. Right, Harley?

Yes. I was going to say thank you for that direction, Scott. I would add on to what Roy said relative to the customer side, please keep in mind, Scott, that the nature of the breadth of our customer base makes it very difficult to see dramatic swings by industry in our results. When you think of us selling product globally to something in the neighborhood of 100,000 customers, we are not affected by swings in any given industry as, for example, our suppliers would be.

What I would say to you is the only area, if I wanted to come up with a response relative to an identifiable industry where we have seen more effect than normal, it would probably be the cellphone industry, which I think has been well talked about for the last number of weeks. Other than that, we really don't see any significant permutations across our customer base.

And, Harley, that's the indigenous Chinese cellphone company?

Primarily, yes.

Okay, Scott?

Patrick Parr, UBS Warburg.

So historically, I guess, in your business you tend to generate a lot of cash in the downturn and use cash in the beginnings of an upturn. Based on that, where do you see the near-term falling out in terms of cash flow generation, including the first quarter of this year?

Well, I think where we are right now, my expectation, Pat, would be that for the first quarter we will probably use a little bit of cash. I don't think a significant amount, but I do think, just based upon where we are today, we will use a slight amount of cash. And at this point, I don't have specific projections in front of me, but I would kind of guess in the range of $50 to $100 million, maybe a little bit less than that.

And, Ray, is that coming mostly from inventory investment, or something else in working capital?

Well, it would be a combination of the impact. It's all on the working capital -- certainly would be some inventory investment, but it would also be the impact of accounts payable, and I think to a lesser extent, probably accounts receivable.

Carter Shoop, Deutsche Bank.

Sales increased 3 million sequentially, and operating income was up roughly 12 million. Can we kind of walk through the main drivers there? In particular, I wanted to touch on restructuring in past quarters, how much of a benefit we saw there, in 4Q. And then, also, how much of a benefit did we see from rising ASPs in the quarter?

So, Carter, what happened -- it's actually pretty straightforward. We had an increase in gross profit margin sequentially, and as we tried to point out in the past, when Electronics Marketing grows as a percentage of the total enterprise, it automatically bumps up the gross profit margin. It's a favorable product mix, if you will, or business mix whenever that happens. In addition to that, within Electronics Marketing and Technology Solutions, the gross margins expanded at the operating group level. So the big change was gross profit, which grew by $10 million sequentially on that relatively modest revenue growth. And then, from an expense point of view, we actually did essentially hold the expenses flat. There was a slight decline in delivered dollars, and it's a combination of those two things that drove the operating income.

Okay. So we didn't see a benefit from past restructuring charges in this quarter?

Well, it depends on if you are comparing year over year versus sequentially.

Sequentially.

If you are comparing sequentially, the answer is no. For the most part, all the restructuring has been completed, really, in the first half of the year, other than there's a small remaining piece from Technology Solutions which will really have a benefit in our first quarter fiscal '05, and that's the piece that relates to consolidating the OCM and AC (ph) business over in Europe, where we just completed -- as we mentioned in our remarks, completed the integration of computer systems. And that will allow for, I would say, some relatively minor cost savings. That really is the completion of our restructuring.

As a follow-up question, I know you don't speculate a whole lot in regards to inventory. But can we talk about the impact in the quarter? How much of the sequential increase in inventory was from speculating? And then also, how much of a benefit did you guys realize from rising ASPs with that speculation?

How much did we benefit, Carter?

I'm trying to understand how much of a benefit, if anything, did you guys realize from increasing ASP's in the quarter on inventory that you speculated on?

Again, the inventory increase was almost all Electronics Marketing. Within Electronics Marketing, as we look at where the inventory grew, I can tell you that I think in the last quarter, something like one-third of the growth was speculation and two-thirds was customer. It's very difficult to measure, and then, to what extent did we benefit? Well, in general, we've already established that ASPs were fairly stable, but we've also established that gross profit margins expanded at EM on a sequential basis. And there's no doubt that some of those inventory purchases led us to some of that margin expansion. But, Carter, it's just actually literally impossible to track the specifics down to a SKU level, to give your hard data on that.

Jason Gersty (ph), JP Morgan.

Just a quick question on operating expenses. As you're looking at revenues being roughly flat and EPS coming down, obviously gross margins, it sounds like, will be coming down. But I'm just wondering how much flexibility you are going to have in your operating expenses on a go-forward basis to allow you to get back to perhaps a run rate of 40 cents on the EPS line?

Well, you know, in general we are sitting today with roughly 70 percent, Ray, of the SG&A in people and people-related costs?

65 percent (inaudible).

Somewhere between 65 and 70 today. And you could think about that as fixed, or you could think about that as variable. Quite honestly, if we felt that revenues were down and were going to stay down, then we have the opportunity to go into that SG&A and reduce costs in an effort to get the EPS back. And we will certainly manage that, as we've done in the past, on a quarter-by-quarter basis. Right now, we are not expecting that revenues are going to go further south, and in fact, we should have a typical seasonal up quarter in December in our IT business that should help EPS meaningfully.

So the flexibility is there, if we chose to go after it. And at this point in time, other than our operational excellence initiatives, we are not planning on reducing SG&A from a restructuring or cost-down perspective.

Keith Dunne (ph), Peking Capital (ph).

Talking about mix, earlier in the opening comments, you talked about that within the TS group. Can we just get a little update on how you would split the TS sales between software, hardware and other services? And then, within hardware, can you give us some color of what shifts you have been seeing between servers, storage and other hardware?

Hardware-software services broke down for the quarter at 68 percent hardware, 20 percent software and 12 percent services. Within the hardware/servers/storage/networking, also tracked processors and other, servers were about 42 percent of that, storage at about 22, networking at about 9, processors at about ten. I think that leaves 15 or 16 overall. And the blend of the mix we're seeing -- I'll give you year-on-year numbers. Servers were down 10 percent even though, within that segment, industry-standard servers were up over 30 percent, storage was up 28, and networking was up 50. This is North American number; that's where our Cisco relationship is. And it sounds big, but just keep in mind that's moving from roughly like a $30 million number to 45. But it was nice growth. And processors, based on some of the decisions we made about focusing on overall profitable business, that's down 25 percent year on year.

And how do you see that changing with the way you see the quarter evolving in this current quarter coming up, please?

Some consistent trends -- strong growth in storage overall, in software overall. I forgot to mention that software number represented a growth of 40 percent year on year. And within the server story, even though it's flat to slightly down, some interesting substories going on with industry-standard servers continuing to emerge as a preferred building block for solutions.

And, Rick, your processors will be up sequential?

Yes. We're expecting that at this point as we get into the seasonal uplift heading into the holiday season.

As we conclude today's quarterly analyst call, we will quickly scroll through the slides mentioned at the beginning of our webcast that contains the non-GAAP to GAAP reconciliation of results presented during our presentation. This entire slide presentation, including the GAAP financial reconciliation, can be accessed in downloadable PDF format at our website, www.ir.Avnet.com. We would like to thank you for your participation in our quarterly update today. If you have any questions or feedback regarding the material presented today, please contact me at Avnet's investor relations department by phone or e-mail. Thank you.

Thanks, everyone.

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