安富利 (AVT) 2005 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for holding. Welcome to the Avnet second-quarter fiscal-year 2005 earnings teleconference. At this time, all lines are in a listen-only mode to prevent background noise. The question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

I will now turn the call over to your host, Mr. Vince Keenan, Vice President and Director of Investor Relations.

Good afternoon, and welcome to Avnet's second-quarter of fiscal 2005 corporate update. If you are listening by telephone today and have not accessed the slides that accompany this presentation, please go to our website, www.IR.Avnet.com, and click on the icon announcing today's event. After registering, please click on the "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 Principals, or GAAP, the Company also discloses non-GAAP results of operations that exclude certain items. Reconciliation 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.

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 second-quarter fiscal-year 2005 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, we'll wrap it 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, President of Electronics Marketing.

With that, let me introduce Mr. Roy Vallee to discuss Avnet's second-quarter fiscal year 2005 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 many of you are aware, we made a conscious effort several years ago to increase the relative contribution of our value-added distribution business focused on enterprise computing. Not only did we feel it offered attractive returns, but we also felt it would reduce the volatility of our results by lessening our dependence on the more cyclical semiconductor business.

This quarter, Technology Solutions' record-setting performance more than offset some softening in the components market. As a result of this performance, we were able to continue our streak of double-digit, year-over-year growth, with earnings growing several times faster than revenue. We expect our exposure to many different end markets, (technical difficulty) combined with our value-based management initiatives to continue to drive earnings improvement in the quarters ahead.

Turning down to the highlights -- in the second quarter of fiscal year 2005, revenue of just under 2.9 billion was 13 percent higher than the year-ago quarter in delivered dollars, and up 10 percent in constant dollars. This represents the fourth straight quarter of double-digit, year-over-year revenue growth per week. This growth was led by Technology Solutions, where sales grew 15 percent year-over-year, aided by foreign currency exchange rates and the impact of the change in HP's channel model to a record $1.4 billion, as all geographies realized strong growth.

At Electronics Marketing, sales grew 11 percent as compared with the year-ago quarter, with the strongest performance coming from the EMEA region.

In addition to its notable top-line performance, Technology Solutions delivered record operating income of over $51 million, or 3.7 percent of sales. The leverage in our TS business model is evident when you consider operating income grew 69 percent year-over-year on 15 percent revenue growth. Although all three regions of TS grew year-over-year operating income much faster than revenue, the most dramatic improvement was in the EMEA region, where our focus on driving good revenue and improved execution yielded a sixfold increase in operating income year-over-year.

At the enterprise level, operating income for Avnet of $84 million in the second quarter of fiscal year 2005 grew 46 percent over the year-ago quarter, excluding restructuring charges, and operating income margin increased 65 basis points to 2.9 percent. Our value-based management initiative, with its focus on returns, continues to drive performance on our balance sheet metrics. In the second quarter of fiscal 2005, improved earnings, coupled with working capital reductions, generated free cash flow of $255 million. Technology Solutions significantly improved its working capital velocity, reaching record levels this quarter.

Also contributing to this performance was our Electronics Marketing group, where, in reaction to the current inventory correction in the supply chain, it reduced inventory sequentially by $87 million in constant dollars, and 46 million in delivered dollars. Although we are very pleased with this improvement, we remain committed to further accelerating working capital velocity at EM.

Sales for the second quarter of fiscal year 2005 of 2.88 billion were up 11 percent sequentially in delivered dollars and approximately 9 percent in constant dollars. This performance represents the eighth consecutive quarter of year-over-year revenue growth at the enterprise level. We believe that spending on IT in the small- and medium-sized business market will continue its trend of year-over-year growth throughout calendar 2005. Our focus on meeting this demand with solutions is a key strategy to our continued success in this marketplace.

In the Electronics Marketing group, the sequential decline was somewhat greater than we expected. Although the price pressure we experienced last quarter did not worsen, we continued to see softness as customers were reluctant to place orders, given short leadtimes at most suppliers. We continue to believe this is a mid-cycle correction, and expect our broad customer base across multiple vertical markets will provide us some revenue stability through cyclical market conditions.

As you can see on this next slide, EM revenue of $1.48 billion, increased 11 percent over the prior year's second quarter in delivered dollars, or 8 percent on a constant-dollar basis. All three regions delivered positive year-over-year growth, with EMEA growing the fastest at over 21 percent in delivered dollars or 12 percent in constant dollars. On a sequential basis, revenue in Electronics Marketing declined 5.5 percent.

In the December quarter, Asia-Pac revenue was flat sequentially, while both the Americas and EMEA were down roughly 7 percent each. Customers were generally conservative with their purchasing during the quarter. But we are encouraged by the significant increase in bookings in Asia and a reduction of cancellations and rescheduling across all regions during the quarter. Our Asia region was the first to see an improvement in bookings in the December quarter, and given that Asia was also the first region to see the slowdown in bookings in late fiscal 2004, this may indicate that we are starting to come out of the mid-cycle correction, and we will start to see some improvement in EM in the upcoming quarters.

Moving to Technology Solutions -- record-setting sales of 1.4 billion in the December quarter were 36 percent higher than the September quarter, and well above our guidance range of up 20 to 25 percent. Even after adjusting for the strength of the euro, the sequential growth was significant, at 33 percent.

Sales in the Americas region were up 33 percent over the first quarter of fiscal 2005, while EMEA grew 52 percent in delivered dollars and 42 percent in constant dollars. We are particularly pleased with the performance of our TS EMEA team where their focus on good revenue and execution combined to deliver a 200-basis-point sequential improvement in its operating income margin. This is the second quarter in a row that they had meaningfully improved profitability.

Equally impressive was the Americas region, where a greater than 70 percent drop-through of incremental gross margin dollars to operating income drove a 70-plus-basis-point improvement in operating income margin, both year-over-year and sequentially. This leverage is further proof that our value-based management initiatives continue to generate significant improvements in our financial results.

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

Thank you, and good afternoon, everyone. Let's begin with an overview of our operating results for the second quarter of fiscal 2005. This first slide shows a year-over-year comparison with the dollar and percent change in the highlighted columns on the right. As you can see, in addition to the change columns, we have included a reconciliation to GAAP net income at the bottom of the slide to account for the restructuring of the charges incurred in last year's second quarter.

Starting at the top-line, revenue in the December quarter increased 12.9 percent to $2.88 billion as compared with the prior year quarter. On a constant-dollar basis, sales grew 9.7 percent year-over-year. Gross profit of 373.9 million was up 44.8 million, or 13.6 percent, over the second quarter of fiscal 2004, and gross profit as a percentage of sales was 13 percent, up slightly from the year-ago quarter. On a constant-dollar basis, gross profit was up approximately 32.3 million, or 9.8 percent, as compared with last year.

Expenses of 289.9 million were 6.8 percent higher than last year. And if you exclude the impact of changes in foreign currency exchange rate, expenses were up 3.3 percent. As a result, operating income of $84 million increased by 26.3 million, or 45.6 percent on a year-over-year basis, excluding restructuring charges recorded in last year's second quarter. A translation impact from changes in foreign currency exchange rates had roughly a $3 million positive effect on operating income on a year-over-year basis. Operating income margin of 2.91 percent is our best December quarter performance in three years, and represents a 65-basis-point improvement over the year-ago quarter.

On a year-over-year basis, 59 percent of the delivered, incremental gross profit dollars, dropped through operating income. Below the operating income line, a $1.9 million decrease in interest expense to $21.3 million was offset by a $1.8 million decline in other income. Interest expense declined year-over-year through the combination of lower average debt outstanding and a lower effective interest rate. Other income declined primarily due to lower interest income and higher foreign currency losses as compared with last year's second quarter.

All in all, this resulted in net income of $43.5 million, or 36 cents per share. This represents an 18.2 million or 71.9 percent improvement over last year's net income, excluding certain charges.

On a GAAP basis, our results for last year's second quarter included approximately 16.4 million of restructuring and other charges net of taxes. Therefore, our GAAP net income improved by 34.6 million, or 29 cents per share.

In summary, year-over-year revenue growth of 12.9 percent produced a 71.4 percent growth in earnings per share, excluding certain prior year charges, meaning that the year-over-year earnings increased 5.5 times more rapidly than revenue, clearly demonstrating the leverage in our business.

This next slide highlights the sequential change in our results for the second quarter fiscal 2005. Revenue of 2.88 billion was up 283.2 million, or 10.9 percent in delivered dollars, and 8.8 percent in constant dollars, from the September quarter due to strong sales of Technology Solutions. Gross profit increased 24.3 million, or 7 percent to 373.9 million, and gross profit margin dropped 48 basis points from 13.5 percent in the September quarter to 13 percent in the December quarter, with roughly one-third of the increase in gross profit dollars resulting from the impact of foreign currency translation.

The sequential decline in gross profit margins was due primarily to the change in business mix, as the lower margin TS business grew to represent 49 percent of revenue in the December quarter versus 40 percent last year. Operating expenses of 289.9 million were up 13.4 million sequentially, or 4.8 percent. Nearly half of the increase was due to the impact of foreign currency translation, while the remainder was primarily due to higher expense at Technology Solutions to support its record sales and profit in the quarter. However, the sequential growth in operating expenses was significantly lower than the growth in revenue at the enterprise level, reflecting greater efficiencies in the business model following the restructurings of recent years.

Sequentially, operating income increased 10.9 million, or 14.9 percent, while operating income as a percentage of sales improved 10 basis points sequentially to 2.9 percent. At an operating group level, Technology Solutions' operating income margin was up sequentially by 101 basis points to 3.7 percent, while EM's operating margin dropped 55 basis points to 3.2 percent.

Net income of 43.5 million was up 7.2 million, or 19.8 percent from the September quarter, and earnings per share of 36 cents was 6 cents higher on a sequential quarterly basis.

Consolidated gross profit margin dropped 48 basis points from the September quarter to 13 percent in the current quarter. As I mentioned earlier, the sequential decline was primarily due to business mix as the lower margin and lower expense Technology Solutions business grew from 40 percent of enterprise revenue in the first quarter fiscal 2005 to 49 percent in the December quarter. At an operating group level, gross profit margin in Technology Solutions was down 20 basis points sequentially due to a higher percentage of lower margin software sales, while Electronics Marketing gross profit margin improved by 34 basis points from the September quarter.

On a year-over-year basis, consolidated gross profit margin was up 8 basis points from 12.9 percent in the year-ago quarter and Technology Solutions delivered improved gross margins in all three regions. Electronics Marketing's gross profit margins were down slightly as compared with the second quarter of fiscal 2004, largely as a result of the price pressure created by the midcycle inventory correction previously mentioned.

This next slide looks at some of productivity metrics that we use to monitor our business. The graph on the left reflects operating expenses as a percentage of sales, and the graph on the right reflects operating expenses as a percentage of gross profit dollars. As you can see on the graph on the left, our expense to sales ratio dropped year-over-year and sequentially by 58 basis points to 10.1 percent, the lowest level in four years. The business mix had an impact on this ratio, since the TS business has a lower spend to revenue ratio, just as it had a lower gross profit margin as compared with Electronics Marketing. Although business mix contributed to the sequential decline this quarter, Technology Solutions delivered a significant improvement as its expense to sales ratio dropped 121 basis points sequentially. Year-over-year, EM improved this metric by 62 basis points, and TS by 40 basis points.

As the graph on the right shows, this quarter, our expense to gross profit ratio declined almost 500 basis points year-over-year, and 156 basis points sequentially, to 77.5 percent. Improving this metric was due primarily to the strong performance at Technology Solutions. Our focus on operational excellence has driven significant improvement this quarter, and we expect to continue to build on that success going forward.

Diluted EPS was 36 cents per share in the second quarter of fiscal 2005, representing a 15-cent per share, or 71 percent improvement as compared with 21 cents per share in last year's second quarter, excluding certain charges. On a GAAP basis, earnings improved 29 cents per share as compared with earnings per share of 7 cents in the second quarter of fiscal 2004. On a sequential basis, earnings per share increased 20 percent from the September quarter as a result of the record performance at TS, partially offset by weaker than expected results at EM.

This next slide portrays operating income margin performance and working capital velocity, two core metrics of our value-based management initiative. The graph on the left details our operating income margin performance over the past two years. Operating income margin of 2.9 percent improved 65 basis points when compared with the second quarter of fiscal 2004, representing the tenth consecutive quarter of year-over-year improvement in this operating income margin, excluding the impact of restructuring charges.

In the December quarter, Technology Solutions' operating income margin of 3.7 percent was 116 basis points better than the year-ago quarter, and 101 basis points higher than the prior sequential quarter. Electronics Marketing operating income margin of 3.2 percent was 19 basis points better than the year-ago quarter, and 55 basis points lower on a sequential quarterly basis.

The chart on the right depicts working capital velocity, another key performance metric in our return equation. Working capital velocity charges improved from 5.2 in the September quarter to 5.7 in the December quarter, through a combination of business mix and better working capital management. As I mentioned earlier, the lower working capital, higher-turns Technology Solutions business grew from 40 percent of revenue in the September quarter to 49 percent of revenue in the December quarter. In addition, TS working capital velocity improved to near record levels.

Consolidated net working capital, defined as trade receivables plus inventory less Accounts Payable, declined 5 percent in delivered dollars and declined 9 percent in constant dollars during the December quarter. The sequential working capital decrease was due in part to an inventory reduction at the Electronics Marketing group. In the December quarter, Electronics Marketing reduced the inventory $87 million, or 7 percent in constant dollars and 46 million, or 4 percent, in delivered dollars. Approximately half of the inventory decline was in the Asia-Pacific region, where both inventory turns and asset velocity improved nicely over the prior sequential quarter. Overall, consolidated inventory declined sequentially by approximately $90 million, or 6 percent on a constant-dollar basis.

As you can see on this graph, our return on working capital resumed its trend of quarterly improvement as a result of the record profitability at Technology Solutions, and an improvement in consolidated working capital velocity. In the December quarter, return on working capital grew to 16.5 percent, a 204 basis point improvement over the prior sequential quarter. This performance, which was 277 basis points above the prior year's second-quarter, represents the tenth consecutive quarter of year-over-year improvement. We remain focused on driving improvement in our returns and shareholder value creation.

In the December quarter, we strengthened our balance sheet and liquidity as a result of the significant cash generation that Roy already mentioned earlier. Cash from net income before non-cash items of $100 million, along with 145 million of cash generated from working capital, combined with other items to generate $255 million of free cash flow in the quarter. As a result of this strong performance, we ended the quarter with 547 million of cash and cash equivalents, and net debt of 797 million, the lowest net debt has been since the first quarter of fiscal 2000. When cash and cash equivalents is combined with our available credit lines, on which we currently have no drawings, we have more than $1.2 billion of total liquidity. In the December quarter, our debt to capital ratio declined to 38.3 percent.

Our cash flow generation for the quarter exceeded our expectations for two primary reasons. First, the greater than expected sequential decline in sales at Electronics Marketing, as previously discussed, allowed the components group to reduce its working capital more than forecast -- specifically, on receivables collections and a larger than anticipated reduction in inventory sequentially. Second, the business model for Technology Solutions also contributes to positive cash flow at the end of the calendar year -- specifically, the computer business does not require as significant an ongoing investment in the inventory as the components business. As a result, the more significant than expected volume at the end of the calendar year, which resulted in Technology Solutions' record operating income performance this quarter, passes through to generate positive cash flow, some of which will be invested back in the business in the third fiscal quarter when the larger Accounts Receivable and Accounts Payable balances as of December are settled.

Now, I would like to turn the commentary back over to Roy Vallee. Roy?

Thank you, Ray. Before I move onto guidance, I'd like to review some business highlights for the operating groups. At Technology Solutions, we continue to enhance our portfolio of products and services, focused on solutions. As the IT demands of small and medium-sized businesses grow increasingly complex, our VAR customers are challenged to meet the requirements for total solutions. By providing a full suite of software and services, TS enables our resellers' ability to meet those needs. From pre-sales, consulting services and training, to post-sales implementation, Avnet Partner Solutions has been investing in flexible tools and systems that support multi-vendor offers. This investment is paying off, as Technology Solutions further solidifies its leadership role in value-added distribution while accelerating the success of their customers and suppliers.

I the December quarter, Technology Solutions signed an agreement with Computer Associates to distribute C.A.'s Unicenter operations management, eTrust Security Management, and BrightStor's Storage Management software products throughout the United States. By expanding our software portfolio to incorporate world-class management software from C.A., TS will enable its VARs to be more responsive to the specific characteristics of their end-user customers' computing environments.

In addition to software, TS also expanded their Services+ (ph) offering that allows VARs to private-label pre-sales and implementation services, including storage, server, and financial assessment tools. New services introduced this quarter include a consolidation impact assessment tool that analyzes total cost of ownership and Project Connect, which provides certified project management services. With Services+, Avnet Partners can reach more customers and provide more solutions with less investment.

Although it can be difficult to measure strategic success, we feel our results at TS this quarter validate our focus on solutions and their importance to our customer base. The strong, double-digit sequential revenue growth in TS this quarter was across all enterprise computing product categories and major suppliers, from server growth to 46 percent, to storage and networking growth of over 30 percent, we were able to deliver on projects of varying size and scope.

Even more impressive than revenue growth was TS's 76 basis point improvement in gross profit margin compared to the year-ago quarter. In a marketplace characterized by increasing standardization and open systems, this increase in margin speaks volume about the value we deliver to our customers and ultimately our shareholders.

Turning to Electronics Marketing, we continue to invest in new systems and services to deliver ever-more value to our customers and suppliers on a worldwide basis. As products are designed in one region, manufactured in another, and sold in yet another, the technology supply chain becomes increasingly complex. As suppliers struggle with forecast accuracy and shrinking margins, they are reevaluating how they go to market. In many instances, they turn to a franchised distributor like Avnet with the global scale and scope to provide economic channels to a broad customer base. In the past year, we have signed many agreements to add new product lines and geographies. Five of these agreements were with new suppliers for global distribution rights. This line card expansion not only strengthens our customer value proposition, but also provides a competitive advantage over regional and niche distributors.

The combination of our investment in state-of-the-art systems and the intellectual capital of our global team allow us to react quickly to changing market conditions. When orders slowed in the late spring of 2004, we were able to react by reducing our purchases and rebalance our inventory as customers canceled and rescheduled orders. As other participants up and down the supply chain began to acknowledge we were in a mid-cycle inventory correction, we were already taking action. That swift action produced positive results in the December quarter, as the Electronics Marketing group decreased inventory 7 percent in constant dollars and 4 percent in delivered dollars.

Asia-Pacific, which was the first and most severely impacted region, exceeded that performance, with a 19 percent reduction in inventory on sequentially flat revenue. Although the mid-cycle inventory correction is not yet complete, we are confident that our quick reaction and broad customer base has gotten our inventory in equilibrium with expected demand going forward. On a constant dollar basis, the vast majority of our EM inventory accumulated since the peak inventory turns quarter of March 2004 has now been turned.

Looking forward to Avnet's third quarter fiscal 2005, we continue to believe IT spending in the small- and medium-sized business segment will maintain its trend of year-over-year growth. Coming off the record revenue in the December quarter, we expect revenue for Technology Solutions to decrease 20 to 24 percent sequentially. In the component sector, although we see some lingering impacts of the mid-cycle inventory correction at certain suppliers, we believe our broad exposure to multiple vertical markets amongst small and medium-sized accounts will lessen the impact on our top-line growth. Based on these factors, we expect Electronics Marketing to grow revenue by 8 to 12 percent sequentially.

Therefore, Avnet's consolidated sales should be in the range of 2.67 to 2.77 billion in the third quarter of fiscal 2005. Given this revenue outlook, we expect earnings to be in the range of 33 to 37 cents per share for the third quarter of 2005.

And with that, let's open up the lines for Q&A.

(Operator Instructions). Matt Sheerin, Thomas Weisel Partners.

So, lots of information there, and a few questions. Let's just get back to the Electronics Marketing and -- you said your guidance was for revenue up sequentially 8 to 12 percent?

That's correct.

Okay. And does that have to do with the fact that there are just more selling days, less holidays, things picking up after the new year? Or are you seeing customers replenish stocks a little bit?

Matt, we have got Harley here, so let me just ask Harley to take that one.

I would answer you by saying it's really a combination of both. Clearly, there is a seasonal pattern there that will benefit us. But I believe we also are seeing slightly better buying patterns, as well. So the answer would be a combination of both.

And would you expect growth in all your regions?

We are projecting growth in all three regions.

Okay. And I guess you would have a positive book to bill at this time?

Are you asking if we are projecting a positive book to bill?

Is your book to bill positive right now?

Our book to bill finished the December quarter at very close to parity.

Okay. And then on the gross margin there, I know it was down sequentially. Was part of it because you were trying to move inventory and be competitive in the market? And what's your expectation for gross margin there in the March quarter?

If memory serves me correctly, our gross margin was up sequentially.

At Electronics Marketing.

In Electronics Marketing -- okay. Okay. And what is your expectation for the March quarter, then?

Matt, I think it will probably be pretty stable. I wouldn't expect a lot of movement in either direction.

Okay, great. And then just one quick question on the inventories. It sounds like you're going to be down in actual dollars in inventories -- is that correct?

Sequentially?

Yes.

We were indeed down in actual dollars.

No, do you expect to be down again?

Oh, looking forward. Difficult to project at this time point. Obviously, we need to fuel the revenue growth that we have projected. But we are very comfortable that we will continue to improve our inventory velocity metrics.

Okay. Thanks very much.

And Matt, let me just add on one thing. In constant dollars, EM ended the December quarter with the same inventory they had in March of '04, which was that all-time peak for inventory velocity.

Brian Alexander, Raymond James.

Hi. This is Bob Grundyke (ph). I work with Brian. Brian is on another call, so he is unable to make it. But I have a couple of questions.

You said -- in terms of pricing on the EM is segment, at the analyst day, you said that you saw the worst of the pricing in the September quarter. And you felt that as we moved into the March quarter, we would improve a little bit. Do you still feel pricing is on a flat to upward trend? And how should we think about pricing going forward?

I would agree with your statement. I think it's fairly flat to slightly upward trend.

Could you provide a little bit more color on the overall -- or on the book to bill for each region, and if it varied much?

It really doesn't. I don't have the specific book to bill numbers broken out by region in front of me. But there really is very little variance across all three regions.

Hey Bob, this is Roy. The only thing that might be noteworthy there is that -- you know, we mentioned Asia was the most impacted in this correction. So if you asked the question differently and said was there a significant change sequentially by region, the answer would be not much change in America and Europe; a slight improvement. But in Asia, a big change in bookings. For Asia to get back to the near-parity level that Harley talked about, that's a big improvement from where they were in the September quarter.

Okay, that's helpful. I know you said that Asia accounted for over half of the inventory reduction. What about the other regions? This is Electronics Marketing segment, specifically.

Again, don't have the numbers broken out in front of us by region. But all three regions were successful in reducing their inventory.

America and Europe were probably pretty close, right?

They were. The point of that comment was the significance of the Asia reduction.

That's all I had. Everything else was answered. Thank you.

(Operator Instructions). Patrick Parr, UBS.

Okay, so I apologize if you have answered some of this before. But in terms of your current cost structure, Roy, are you in the midst, or do you intend to take any further structural cuts to your headcount or physical capacity or anything like that? Are you happy with where you are now?

Well, I'm not happy with our absolute level of profitability or our returns. But I think if you look at our business, Technology Solutions is already performing well relative to our financial model for them. The issue is Electronics Marketing. Within Electronics Marketing, the issue is more in the West than in the East. And so over time, you can look for us to continue to drive for productivity gains at EM in America and in EMEA, while we continue to invest in Asia.

But in terms of -- are we looking at any structural changes that would involve special charges and such? At this point in time, the answer is no.

Okay. Now, it looks like the guidance for EM is pretty strong, certainly in light of what we are hearing from a couple of component manufacturers. Was this what you were expecting, say, a few months back -- that you would be up as much as 8 to 10 percent sequentially? Is that a normal seasonal uptick for you in that business? Or do you feel like there is some catch-up going on in the customer base, and you are seeing some of that?

Well, Harley, what would you describe as a normal sequential change for the March quarter?

As I mentioned earlier, Roy, it's fairly normal and I'd say to add color, slightly better. We are feeling somewhat better. So a little bit better than normal.

Okay. And do you attribute that to any one particular product area or customer end market area? Or is it just generally broad-based?

I think what I would say is that if you think back to the session we all had recently in New York together, we talked a lot about the breadth of our customer base. And we asked you all to think about that as it relates to the announcement that you would be seeing out of our suppliers. And clearly, what we are seeing is that the customer base that we primarily service appears to be quite stable and actually is feeling fairly positive going forward. So we think we are going to -- we think that growth will be a little bit better than seasonality, as we suggested in the quarter.

Okay. And then one final question. Harley, I don't know if you've given any detail on this. But can you give us any color on pricing within some of the EM component subcategories?

Let me respond as a distributor. Pricing, which from our perspective is really from our suppliers, has been very stable over the near-term. And we see no indicators that it is going to change in the short-term, nor do we see any dramatic changes in leadtimes from our principal suppliers.

Okay; that's what I was looking for.

Hey, Pat, this is Roy. The comment I'd make -- if you think about the semiconductor industry and the direct portion in specific, as we all know, it's been heavily influenced in this cycle by strong consumer demand. And the March quarter is typically not a good quarter on a seasonal basis for that type of demand. And so our vendors could be more affected by that than us when you consider we have this broad base of industrial customers and a relatively small exposure to consumer.

Okay. That explains it. Great. Thank you, guys.

Jason Gersky (ph), JP Morgan.

Good afternoon. I am stepping in here for Tom Dinges. Just a quick question on the balance sheet, in looking at Accounts Receivable and Accounts Payable -- both of them were up pretty significantly on a quarter-over-quarter basis. And then just trying to get a sense of directionally where these things are headed in the future. I have noticed that some of your customers seem to be stretching their payables a bit. And I am just wondering if there's some sort of shift that may be going on here that we ought to be looking at going forward?

I guess I will respond to a couple different things. One, keep in mind that in the December quarter, a significant amount of activity takes place in the month of December within the Technology Solutions business. And therefore, because they had a record performance in the quarter, their activity late in that quarter is significant. And all of the receivables that are generated through those sale transactions, as well as payables that are generated that we (technical difficulty) suppliers will tend to hit and stick in the balance sheet as of December. So that if you were to do an analysis of receivable days and payable days at the asset consolidated level, you would see that payable days are not significantly different from what they were a year ago. And similarly, the receivable days are slightly lower than where they were a year ago, as well. So this is more of a seasonal pattern as opposed to the result of any stretching out of either receivable days or payable days.

Okay, fair enough. And then just a quick follow-up, if you don't mind. I was wondering if you can just add a little bit more detail on the success of the Technology Solutions in Europe and whether it can be attributed to sales into a particular segment or any particular products that were selling well this year in Europe?

Rick, would you like to take that one?

Yes, I will offer some color. Overall, the European business, Jason, had the strongest performance to plan of the three regions for TS. And among the businesses there, there was strength in both the ACC, Avnet Computer Components business, and strength in our APS, Avnet Partner Solution segments. Those are one for the system builder base, and one for the VAR two-tier business in Europe.

And Jason, just to be succinct, so the receivable days are actually down slightly sequential and year-over-year. And the payable days are really flat year-on-year and down slightly sequential. So from our productivity perspective, no issues with either one of those numbers.

Okay, great. Thanks, guys.

You are welcome.

Carter Shoop, Deutsche Bank.

Just, if I may, a little more clarification on the guidance. I was a little bit surprised by the magnitude there.

I guess starting off, how many more shipping days do you guys have in the March quarter versus the December quarter for EM?

In which country?

In aggregate.

I don't know how to run that math. So you have got to think something like 3 to 5 percent growth in days, something like that.

Okay, fair enough. And then when you look at the order of growth that you guys are seeing right now, where you seeing more of it? Are you thinking more of the kind of top tier OEMs and EMS vendors? Or are you seeing it more amongst your Tier 2 and Tier 3 customer base? And also, by which geography are you seeing the orders pick up more so?

Could you repeat the question, please?

Yes, sure. Just in general, trying to better understand the order of growth that you guys are seeing and the strength in orders by your customer base, be it the larger, top tier OEM (inaudible) vendors, or the Tier 2 and Tier 3 vendors?

You know what is interesting -- the response may sound canned. But it is quite interesting (inaudible) I would admit. The increase is coming across the board.

That does sound canned.

Yes. If you look at Asia, for example, how we break it out between South Asia and Taiwan and China and you look at our country breakouts in Europe -- almost every single divisional breakout that we track is showing -- is projecting -- an improvement in the March quarter.

Okay, one more question on the visibility for EM. How much of the growth is coming from more shipping days and improved orders versus actual share gains -- that customers or suppliers (technical difficulty) sorry (technical difficulty) like ADF (ph) for example? Do you need me to try that one again?

No, I think as we mentioned, obviously, a portion of it is as a result of a better calendar, a calendar that advances us. I would point out, as well, though that there is a holiday of some significance in the calendar in this quarter, as well, in Asia, with Chinese New Year, which has its impact, as well, which tends to discount, quite frankly, the variance when you look at December closing quarter. But clearly, it's a healthier quarter, and it has been traditionally for distribution. But we do believe, as a general comment, we are gaining share amongst our peer group. And we do believe business will be somewhat better than the December quarter. It's really a combination of all three factors.

Okay, great. And one last question for Rick, if I may. when you look at the strength in TS in the quarter on a sequential basis, was that pretty broad-based, or did you see it more with some suppliers than others, in particular, if you could comment on maybe IBM and HP, that would be great.

Yes, Carter -- don't typically comment on them. But again, the strength -- in other words, why were we 36 instead of 20 to 25? The European performance was stronger than expected on an aggregated basis. And if I slice it by business, again, globally, ACC, which -- there is a big relationship there with AMD, but not exclusively to AMD -- that was strong for us overall. And then APS, which is the HP, IBM, EMC, NetApp, Oracle distributor was very strong performance overall. That's where the upsides came from.

Great. Thank you.

Mark Reider.

You have a significant amount of cash on the balance sheet now. I am just curious what you are planning on doing with it. I know you have got the 7-7/8 that come up, the 87 million come up just in February. But it's not until November of '06 that you've got the other 400 million. So if you could just talk to that a little bit?

Hi, Mark; it's Ray Sadowski. At this point, we do have $87 million that's due in February. And we will use, obviously, cash to pay that off. In addition, there are pockets of short-term debt that we have globally, which we will also attempt to pay off.

Other than that, we will just sit with the cash at this particular point in time, as we are evaluating, really, what our options are relative to upcoming maturities. So I would say at this particular point in time, we are happy to be sitting with cash, and we will look at how we will finance our ongoing business when we look at the upcoming maturities in '06. And we will probably start looking at that pretty shortly. But at this particular point in time, no specific plans to do anything else other than pay off whatever short-term debt we possibly can.

And also, I know it's really tough to say how your working capital is going to trend. But can you give us an idea whether it's going to be a source or use in the second half of fiscal year '05?

It's a very tough call, quite frankly. But I would say at this particular point in time, it's going to be pretty close to I'll say breakeven. We could use a little bit. You know, a lot of it is impacted by the calendar, quite frankly. And as you can imagine, any business with this kind of volumes -- cash comes in and out in clips of hundreds of millions of dollars, the way we pay bills and collect receivables. So a lot will be dependent upon timing. But I would say overall, our expectation right now is to be pretty flattish, possibly some to the downside, meaning, using a little bit of cash.

And lastly, your credit statistics continue to improve. And I'm wondering if you've had any conversations with the ratings agencies about maybe moving your ratings up a little?

You know, we have ongoing dialogues with the rating agencies. But nothing specific as of recently. But our plans right now as we look to evaluate our go-forward capital structure possibilities in light of maturities that are due in calendar '06 -- we plan on visiting the agencies and having dialog relative to our rating. And clearly, our expectation is based on continued improvement and performance and rather significant improvement in our credit statistics that some upside to the ratings should be in the cards for us.

Great. Thank you very much.

Gentlemen, there are no further questions at this time.

Okay. 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 mail. Thank you.

Thanks, everybody.

Ladies and gentlemen, this concludes today's teleconference. Thank you for your time and participation.