安富利 (AVT) 2005 Q3 法說會逐字稿

Ladies and gentlemen, our presentation will now begin. I would now like to turn the floor over to Vince Keenan, Avnet's Vice President and Director of Investor Relations.

Good afternoon, and welcome to Avnet's third-quarter fiscal 2005 corporate update. If you are listening by telephone today and have not access to the slides that accompany this presentation please go to our website www.IR.Avnet.com click on calendar events and click on the icon announcing today's event. After registering please click on the slides only for telephone participant's 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 non-GAAP results of operations that excludes certain items. Reconciliations of the Company's analysis of results to GAAP can be found on form 8-K filed with the SEC today and 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 the slides are several factors that could cause actual results to differ materially from those described in the forward-looking statements.

In just a few moments Roy Vallee, Avnet's Chairman and CEO will provide Avnet's third-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 Roy will wrap up with additional comments after which 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 third-quarter fiscal year 2005 business highlights.

Thank you, Vince and hello everyone. Thank you all for taking the time to be with us and for your interest in Avnet. Looking at the March quarter, we are pleased with our overall performance in a slow growth environment. There have been a lot of question marks about component demand coming off the midcycle inventory correction that started last summer. Although a bit mixed by region, our overall demand was in line with normal seasonality. We are somewhat encouraged by the sequential growth in bookings, which resulted in us finishing the quarter with a positive book-to-bill in all three regions at our Electronics Marketing Group.

In the enterprise computing space demand in the small and medium-sized business segment continues to grow on a year-over-year basis. Businesses continue to spend on ROI justified projects that can enhance their productivity. While it is hard to say what may happen three or four quarters out, component demand appears stable with slow growth while the computing market we serve continues to exhibit moderate year-over-year growth.

Turning now to the March quarter highlights, in the third-quarter of fiscal year 2005 revenue of 2.76 billion was 4% higher than the year ago quarter and down 4% sequentially coming off the Company's traditionally strong December quarter. This represents the ninth consecutive quarter of year-over-year revenue growth.

This growth was led by Technology Solutions where sales were up 11% year-over-year as all geographies participated with moderate growth. At Electronics Marketing sales were flat as compared with the year ago quarter and up 8% sequentially. With its 11% revenue growth, Technology Solutions grew operating income 23% on a year-over-year basis to $31.7 million with an operating income margin of 2.7%. At TS our innovative marketing programs and focus on solution selling are strengthening our competitive position by helping our partners grow. In the third quarter of fiscal 2005 we saw improvements to our balance sheet metrics as we generated free cash flow of $131 million.

At Electronics Marketing we reduced inventory during the quarter by another $100 million while growing revenue 8% thereby improving our inventory turns to near record levels. This cash generation brings our free cash flow year-to-date to $375 million. Although pleased with this improvement, we will continue to drive higher levels of return on working capital in future quarters.

As you can see on this slide, EM revenue of $1.6 billion increased 8% sequentially and was flat compared with the third quarter of fiscal 2004. Although seasonally normal, this performance was at the low-end of expectations, primarily due to the EMEA region where growth of 13% or 11% in constant dollars was below that region's normal seasonality. Sequential growth of 6% in the Americas was in line with expectations while Asia, which grew 4%, returned to positive sequential growth aided by sales to indigenous handset manufacturers in China.

Visibility is still limited, but we are somewhat encouraged by the strength we saw in bookings for the quarter as net bookings were up low double-digits in all regions. We also exited the quarter with a positive book-to-bill in all three regions for the first time since the March 2004 quarter.

Moving to Technology Solutions, sales were $1.16 billion, an increase of 11% on a year-over-year basis and down 17% sequentially following our computer groups' typically strong December quarters. The 11% year-over-year increase represents the second quarter in a row where TS revenue exceeded expectations. Revenue in the Americas was up 11% year-over-year on the strength of storage and software. In EMEA reported revenue was up 4% year-over-year and was down less than 1% if you exclude the impact of the change in foreign currency exchange rates.

Asia revenue grew 69% year-over-year due to a significant increase in sales of microprocessors. We are very pleased with TS's performance globally and believe our results in storage and software validates our solution selling strategy. And now I would like to turn the commentary over to Ray Sadowski, Avnet's Chief Financial Officer. Ray.

Thank you, Roy. Hello, everyone. Let's begin with an overview of our operating results for the third quarter of fiscal '05. This first slide shows a year-over-year comparison with $1 percent (ph) change in the highlighted columns to 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 debt extinguishment charge incurred in last year's third quarter. Starting with the top line revenue in the March quarter increased 4.5% to 2.76 billion as compared with the prior year quarter.

Gross profit of 364.5 million was up $5.9 million or 1.6% over the third quarter of fiscal 2004, and gross profit as a percentage of sales was 13.2%, down slightly from the year ago quarter. In reported dollars operating expenses of 286 million were up slightly as compared with last year. However, in constant dollars expenses declined $4.5 million. Operating income of 78.5 million increased by 4.6 million or 6.2% as compared with the year ago quarter. Operating income margin of 2.85% was up slightly over the year ago quarter. Below the operating income line there is a $2.8 million decrease in interest expense to $21 million, and a $1 million decline in other income on a year-over-year basis. All in all, this resulted in a net income of 41.1 million or $0.34 per share equal to the year ago quarter excluding debt extinguishment costs.

On a GAAP basis our results over last year's third-quarter included approximately 14.2 million of debt extinguishment cost net of taxes. Therefore our GAAP net income improved by 14.4 million or $0.12 per share from the year ago quarter. This next slide highlights the sequential change in our results for the third quarter of fiscal '05. Revenue of 2.76 billion was down sequentially by 4% coming off the Company's traditionally strong December quarter. Gross profit decreased $9.4 million or 3% to 364.5 million and gross profit margin increased slightly from 13% in the December quarter to 13.2% in the March quarter. The sequential increase in gross profit margins was primarily due to the change in business mix as a lower margin TS business declined to represent 42% of revenue in the March quarter versus 49% last quarter when they achieved record revenue.

Operating expenses of 286 million, which included approximately $2 million of severance related to actions taken at EM were down 3.9 million sequentially or 1.3% in reported dollars, and down 5.5 million in constant dollars. Sequentially operating income decreased 5.5 million or 6.5% while operating income as a percentage of sales decreased slightly to 2.85%. At an operating group level EM operating income margin was up sequentially by 64 basis points to 3.85% while TS's operating income margin of 2.73% was down sequentially, again coming off a strong December quarter.

Net income of 41.1 million was down $2.4 million or 5.5% from the December quarter and earnings per share came in at $0.34 per share. This next slide looks at some of the 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 increased sequentially by 31 basis points to 10.4%. The increase was driven by the seasonal change in business mix as the EM group, which has higher gross profit and a higher expense to revenue ratio grew to represent 58% of enterprise revenue versus 51% in the December quarter.

On a year-over-year basis our expense to sales ratio declined 42 basis points with both operating groups contributing to the improvement. As the graph on the right shows, this quarter our expense to gross profit dollars declined 94 basis points versus the third quarter of fiscal 2004. This improvement was driven by TS where expense control and profitable growth combined to achieve its lowest level for a non December quarter in recent years.

On a sequential basis expense to gross profit increased 92 basis points. We are not pleased with this sequential change as this productivity metric requires further improvement to achieve our long-term goals. We expect that the Memec integration and restructuring cost savings will have a meaningful positive affect.

Diluted EPS was $0.34 per share in the third quarter fiscal '05 equal to the year ago quarter excluding debt extinguishment costs in fiscal '04. On a GAAP basis earnings improved by $0.12 per share as compared with earnings of $0.22 in the third quarter of fiscal '04. On a sequential basis earnings per share was down $0.02 from the December quarter as a result of a lower revenue and operating income as Technology Solutions following their seasonally strong and record-setting December quarter.

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 2.85% improved slightly when compared with third quarter fiscal 2004 representing the 11th consecutive quarter of year-over-year improvement in operating profit margin excluding the impact of restructuring and other charges.

In the March quarter Electronics Marketing operating income margin was 3.85%, was 64 basis points better than the prior sequential quarter. Technology Solutions operating income margin of 2.73% was 26 basis points higher than the year ago quarter. The chart on the right depicts working capital velocity, another key performance metric in our return equation. Consolidated working capital velocity improved slightly by 7 basis points sequentially. Business mix coupled with normal seasonal patterns had an impact on this performance, which moves in opposite directions at the two operating groups due to seasonal factors. At EM improvements in both inventory and accounts receivable management coupled with a sequential increase in revenue contributed to a 15% sequential improvement in working capital velocity. This improvement was offset by a 17% sequential decline at P.S. where working capital velocity is impacted by the seasonal revenue decline. However, March's performance was better than the year ago quarter and represents a 14th straight quarter in which TS has improved year-over-year performance in this important metric.

As you can see on this graph, our return on working capital was down 19 basis points sequentially due to business mix as the lower working capital, higher return TS business dropped to 42% of total revenue versus 49% in the December quarter. On a year-over-year basis return on working capital improved 39 basis points to 16.3%. The rate of year-over-year improvement has slowed in Electronics Marketing due to the well-publicized midcycle correction and is not consistent with the goals we have set. Although our velocity metrics have continued to improve, operating income margin has not kept pace. We remain focused on profitable growth and operational efficiencies to drive this number higher and expect further improvement in the quarters ahead.

As Roy mentioned earlier, we had another strong quarter of cash generation as our focus on working capital productivity continues to produce results. Driven primarily by earnings and working capital reductions, we generated 131 million of free cash flow during the quarter. As a result of this strong performance, we ended the quarter with $594 million of cash and cash equivalents and net debt of $656 million, the lowest net debt has been since the fourth quarter of fiscal 1999. In February 2005 we paid off 87 million of maturing notes with cash on hand. This reduced our debt to total capital from 38.3% at the end of December to 36.8% at the end of March. We are particularly pleased with the performance in our team in generating $375 million of free cash flow through the first nine months of fiscal 2005.

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

Thanks, Ray. Before I move on to guidance I would like to review some business highlights for our operating groups. Turning to Electronics Marketing, the highlight of the quarter and perhaps the fiscal year, even though we've got two months left, is the proposed acquisition of Memec that we announced two days ago. Once the deal is complete in 60 to 90 days, we will add $2.3 billion of annual revenue and a sizable number of talented employees to our Company. This acquisition will enhance EM's competitive position in all three regions and provide significant opportunities for synergy cost savings.

We will also significantly strengthen our position in Asia, as well as gain entry into the large Japanese market. Most importantly this transaction will accelerate the achievement of our long-term return on capital goals. In another important move for EM Stephen Long was named as our President of Electronics Marketing Asia. Stephen joins Avnet from Freescale Semiconductor where he most recently served as Vice President and Director of Freescale sales for Asia-Pacific. Over the course of a 28-year Motorola/Freescale career in the region, Stephen has held a variety of jobs spanning IC design, application engineering, business development, marketing and sales. With the addition of Stephen Avnet gains a proven leader with intimate knowledge of the nuances of doing business in Asia.

Finally, Electronics Marketing's continued focus on working capital efficiency has driven impressive free cash flow generation. Through the first nine months of fiscal 2005 EM has reduced inventory by 114 million in delivered dollars or close to 10% and by 138 million in constant dollars. Last June when they saw early indications of the midcycle inventory correction, the worldwide EM team reacted quickly and now have their inventory turn metrics near the record levels of a year ago. As a result, we generated free cash flow through the midcycle correction and our working capital as a percent of revenue is now at an all-time low for Avnet Inc. and for Electronics Marketing.

At Technology Solutions we are seeing positive results from several new programs that enhance our value proposition by simplifying processes and making it easier for our VAR partners to succeed. We recently introduced quick leasing options that simplify the lease application process for small dollar transactions which apply to our small to medium-sized customers. We are also beginning to realize more benefits from our proprietary request to order or R2O (ph) portal as more VARs are transitioned to this service. By utilizing R2O our VAR partners can submit configuration requests and quotation requests across all Technology Solutions brands and product lines. This system allows our VARs 24/7 visibility to all potential deals which facilitates communication and simplifies the order management process.

In addition to the significant efficiencies we realized, suppliers also value the market intelligence it provides through tracking and validating their marketing programs. During the quarter TS also announced expanded relationships with several key vendors. We expanded the software products we offer to include additional products from Novell, Microsoft and EMC. These relationships expand our portfolio of solutions which are quickly becoming the key to success in the SMB market. We also expanded our geographic coverage in Europe with the extension of our HP relationship in Italy.

And now for our guidance. Looking forward to Avnet's fourth quarter of fiscal 2005, we expect revenues for both Electronics Marketing and Technology Solutions to grow from 1% to 5% sequentially. Therefore Avnet's consolidated sales should be in the range of 2.8 to 2.9 billion in the fourth quarter of '05, and we expect earnings to be in the range of $0.35 to $0.39 per share. This guidance does not take into account any potential impact on the proposed acquisition of Memec, which we announced earlier this week.

So with that, we have tried to leave plenty of time for Q&A, and operator let's move into the Q&A session.

(OPERATOR INSTRUCTIONS) Matt Sheerin with Thomas Weisel Partners.

My first question has to do with the demand picture in components, your big competitor Arrow sounded a little bit more cautious about the demand environment and also talked about pricing pressure and margin pressure across most regions. Could you talk about the pricing environment there?

Okay, I am going to ask Harley to take that.

Good afternoon, Matt. We finished the March close quarter in a shape that leads us to believe that the growth should continue although in a modest pace into the current quarter. All three regions finished with a positive book-to-bill, and we enter with a very strong customer backlog into Q4 and we are not seeing any end demand concerns, end customer demand concerns that lead us to believe that this pattern of modest growth that we experienced in the March close will not continue into the current quarter.

And on pricing general ASP trends and margin pressures?

ASP trends appear to be very stable. Lead-times are stable to even possibly reducing a bit. And therefore clearly there is significant pressure in the market, competitive pressure in the market really driven primarily, in my opinion, by the modest growth opportunities that exist out there. We are clearly in a tough market, Matt.

Okay, and just Roy or Ray on inventories your inventories were down again given that you are seeing a modest pickup in bookings, do you think you will start to build, or can you take them down even lower here?

I think at this particular point in time we would expect that inventory will stay relatively flat or maybe rise slightly depending upon what kind of growth we do see in the quarter, but I guess the best way to say it is we will not see significant change in inventory in the upcoming quarters.

Okay, great. Thank you.

Stephen Fox with Merrill Lynch.

Roy, can you talk a little bit about the growth rate, up 1 to 5% sequentially like you said is a slow growth environment, and typically the business has not grown at a slow rate. It has usually accelerated or decelerated significantly. Is this sustainable this type of environment? And as a follow-up what do you think that means for pricing over say a two to four quarter period?

Steve, I think that is a very interesting question, and it is one that I'm not sure I know the answer to, but as usual I have an opinion, so I'll share it with you. I think that we are in an environment now that is different from the past. First of all, the demand side of the equation is in a broader set of customers and a stronger balance of consumer versus business spend. So this notion of proliferation of the industry is in fact a reality. In addition to that, we've got much faster reaction time taking place in terms of changes to demand, which is balancing supply and demand much more rapidly than it has in the past. And I think that is also aided by the movement to wafer boundaries, outsourced wafer fabrication. And the foundries are probably more efficient allocators of capital on the manufacturing side of the semiconductor industry.

So when you put it all together it seems to me that we are in a relatively stable, perhaps slow growth environment for electronic components, and it is unusual for our industry to be in this position. What it means is that product lead-times are actually going to be somewhat stable. They have -- they dip down to zero 0 in the summer. They stretch back out to maybe as high as six to eight weeks, and as Harley said we are seeing stability in a few product areas even contraction of product lead-time, and that is leading to stable pricing. As Harley said, the environment is competitive. It is very tough. Prices are not rising, but we are not seeing either the other edge of that sword, which is classic lead-time collapse, excess inventory and price erosion.

So I think as we look out over the next several quarters we don't really know we have limited visibility, but I would not be surprised if we see stable to slow growth in our components business; relatively stable pricing in lead-times and the ability for us to generate profits through operational excellence initiatives. That is the image we have in our minds at this point.

That's very helpful. And then just as a follow-up, you had mentioned some of your key metrics dipped down, your growth expense to gross profit. Was there any specific reason for that, or was it just a slower environment and you have to do a better job of blocking and tackling?

It varies a bit depending on which operating group and then whether you look at it as sequential or year-on-year. And of course as you know there is extreme seasonal pattern in the TS business. There is some seasonal pattern in the EM business. If you zoom up for a minute and just ask for a qualitative perspective I would tell you that our TS business continues to execute well, both numerator and denominator, income as well as asset velocity. Electronics Marketing was on a terrific trajectory until this midcycle correction hit and we ended up with lower revenues and a slightly lower gross margins. We are seeing a little bit of erosion in the gross margin line, as well.

Last quarter is the first quarter that we have resumed a sequential growth rate at Electronics Marketing and on 8% revenue growth we got 30% operating income growth. And I think the perspective we have is that in essence we have long-range financial targets that we're striving to achieve. This midcycle inventory correction has cost us a few quarters in the achievement of those objectives, and we are looking at all the actions required to get us back on track and specifically a successful integration of Memec and the attraction of the synergy cost savings will make a major contribution in that regard.

Thank you very much.

Brian Alexander with Raymond James.

Of the 65 basis point improvement you saw sequentially in your operating margins in EM, can you just talk a little bit more about how much of that was OpEx leverage versus gross margin improvement? I'm assuming that virtually all of that was on the OpEx line, which is where I want more clarification there.

Your assumption is correct, Brian.

Were gross margins relatively stable sequentially, or were they down?

They were down slightly.

They were down modestly.

Okay. And then in terms of your overall guidance for the June quarter it looks like if I just use the midpoint of your revenue guidance and your earnings guidance, you are looking for a little bit of an uptick in overall operating margins, yet I think in this quarter typically you would see your computer business grow a little bit faster and that's lower margin. So I'm just trying to understand are you implicitly assuming that your operating margins in the components business are going to expand sequentially, or is that mostly going to come from the TS side?

Brian, first of all for us the computer business is not typically strong this quarter because of normal seasonality in microprocessors. We have an Oracle supplier fiscal year end in this quarter, but we don't have, for example, Sun Microsystems who ends in the June quarter. So this is not normally a strong revenue quarter for TS. However, based on what we're seeing around the world and Rick, maybe you would want to comment on this -- we are projecting a 1 to 5% growth there. We expect leverage in that growth, and then we are projecting the same kind of growth in Electronics Marketing with leverage in that growth, as well. So Brian, we are actually expecting some operating margin expansion at both of the operating groups.

And just to follow on to that, Roy, historically I think your TS business has been down sequentially. You just alluded to the fact that it is typically not strong in June. Help us understand how maybe the business mix within TS has changed over the last few years such that you will grow sequentially in the June quarter, and historically you haven't. And clearly the overall environment is probably not a lot better now than it was over the last couple of years.

So, Rick, you want to take that?

Yes, thanks Roy. Hello, Brian. You're absolutely right that the last two years we are bucking the trend a little bit, but in FY '03 if I remember correctly I think the sequential decline into Q4 was 10 to 11%. But last year it was only down 1%. And a lot of this is a consequence of the discipline we had applied to focusing on first of all profitable business and second of all growth engines. And we feel confident looking into Q4 of FY '05 that that focus will give us a little bit -- a little reversal of that trend, but again last year it was a very very slight sequential decline.

Brian, just a couple of anecdotes. If you remember two years ago we had chosen to exit some low margin revenues in Europe. And that affected our top line but not our bottom line. And a year ago you might recall that IBM was having particular difficulty with their iSeries product line. In other words AS400 and IBM is a major supplier of Rick's (ph) and iSeries is a very important product family for us. And it would appear that most of those problems are behind IBM at this point.

Those are exactly the points I was driving at Roy, thanks for that. And the last thing, just I don't know if you said this earlier, but your guidance to be up 1 to 5 in EM sequentially, are you expecting growth in all three geographies given the strength in bookings that you saw exiting the March quarter?

Yes, Brian first let me tag on to Rick's comment on your previous question relative to the prospect of EM accelerating its operating income performance in Q4 in light of the modest revenue growth projection. And I think I would simply add-on that we will continue to manage our business aggressively looking for productivity gains and efficiency gain opportunities. And we are very confident that in the quarter we will again produce an operating income performance, growth performance in excess of our revenue performance.

Now going on to your specific question, we are seasonally, EM EMEA our European business, is generally flat to down slightly. In our fiscal fourth quarter. And we believe we will be in that general range possibly a bit better, but very modest expectation based on our historical patterns there. And our other two regions in the Americas and in Asia, we are looking for growth and feel very confident that growth probably led by Asia which we believe will have the highest sequential growth performance of the three.

Thank you very much.

Scott Craig with Banc of America Securities.

Rick can you get into a little bit about cash flow expectations as we start to work out over the next few quarters and where we can potentially drive some of the working capital metrics to? And then just a question on the Memec acquisition as you start to integrate that on a balance sheet perspective, what are your expectations for adding to goodwill? Just adding to your net operating asset base so to speak, so we can start to work some potential return on invested capital numbers?

As you know, we had a very good cash flow quarter this quarter and last as well. So for the year we've done very, very well. We would expect that to moderate quite a bit as we're moving into the fourth quarter the fiscal year as you heard earlier, to the question relative to inventory levels we don't expect any significant change in that. And therefore cash flow will be driven primarily by income. So it is certainly not going to be in the 100 plus range I wouldn't think; it is going to be that high. So it is more likely in the range of plus or minus $25 million or relatively flattish from a cash flow expectation as we go through the December quarter.

In terms of the Memec goodwill I don't have the exact number with me but it is in the mid 200's if I recall correctly, I can follow-up with you on that pretty quickly right after the call. But it is roughly in the 250 range, if I recall correctly.

Okay that's great. Thank you.

Carter Shoop with Deutsche Bank.

Thanks. I wanted to focus on the TS solutions, maybe Rick you can help me out here. It looks like overall profitability was pretty disappointing on a year-over-year basis and I was wondering if we could kind of dig inside a little bit. Given the strength you had in the quarter and also I would like to look at maybe the breakouts between some of the hardware divisions and software and better understand the software impact in the quarter to profitability.

Okay, Carter. First of all I'm not sure I follow the disappointing part of it. We grew off income faster than revenue, so we are always pleased with that, can always do better, but maybe help me understand where that is coming from a little bit but I will give you the breakouts. Hardware software and services for the quarter hardware at 67%, software at 20%, services at 13%, if you don't have the year ago in front of you -- that is a slight shift from a year ago where it was 71, 16 and 13, which if you think about marketshare it was really a shift 4% from hardware into software as the overall mix and services keeping pace overall. So if you what to go back to the --.

Sure, so if I just look at your operating margin it was for the computer division, it was up at 2.5% in March, and up -- I'm sorry March '04 at 2.7% and March '05 on some revenue growth there. And we expected a little bit more leverage there given the growth and also given some of the restructuring you guys have been implementing.

Correct.

Also let me compared to last quarter 3.6%, so it pretty steep drop off sequentially compared to last year where it was actually flat on a sequential basis.

Now I understand; yes, as I said always looking to do more. But again on the year-on-year basis we were very pleased with the overall growth and there is absolutely no way to escape. We've got continued work to do, and looking forward to keeping up the trend of sequential and year-over-year performance improvement as we go forward. So always more to do, but definitely as a bottom line rule of thumb, we've got to be growing that up margin faster than the revenues otherwise the revenue is not worth it.

Carter, this is Roy. Let me just add something for you. TS is operating at or above our long-term goals for return on capital. And so we are primarily driving there is profitable growth. And if you look year on year they grew gross profit dollars by roughly 11 million. They grew operating income by 6, and therefore had a drop through that was greater than 50% year on year. And the way that I manage Rick as long as that backthrough is greater than 50% and as return on capital is greater than our hurdle rate, then he is doing a pretty good job. So he had 23% operating income growth on 11% top line.

Maybe if you look at that on a sequential basis last quarter we had operating margin of 3.6%, that went down to 2.7%, compare that to the previous year where it is flat on a very similar revenue decline. Why do we see such a big drop off this year versus last year on a sequential basis?

It's interesting. Last year your data is correct, and Rick the only thing I can think of is that last year we had a substantial amount of lower margin software that held the op margin in the December quarter down.

That was certainly one factor. We also had some spillover from -- we had a bigger gap between the close I think of the year and the quarter on the fiscal calendar, and had some more carryover in the previous year as opposed to this year. So there were a couple of influencing factors there. But on a 17% sequential decline here the fact that there was a decrease in op margin, again always looking to improve it, Carter, but.

I'm just trying to better understand in how to model going forward. Maybe one last question here on TS. It looks like inventory was roughly flat on the pretty large sequential decline in sales. Any reason for that in particular?

Was that an enterprise statement or TS statement?

TS. If you strip out the 100 million dollar reduction sequentially in EM it looks like Technology Solutions inventory would be roughly flat.

Right, but overall working capital was down, so there was some also some payables to offset some of that investment as well from a total working capital point of view. And there will be continued progress on the inventory part of the equation.

Okay. Thank you.

Thomas Dinges with J.P. Morgan.

A couple of real quick ones for you. Roy, maybe a little bit more color just walk us around the world, what you guys are seeing broadly across the two groups in EMEA and in Asia. And then a real quick specific one for Rick. Obviously you saw some really strong growth in Asia, just a little bit more color there are on either new linecard, new relationship, is there some share gain going on there or so forth, but maybe just start with Roy on some qualitative comments first. Thanks.

So, Tom, interestingly we will start here in America. You know ironically when GDP growth rates are falling and there seems to be some concern about a stall in the U.S. economy we are not seeing that in either our components business or our computer business. So it is not uncommon historically for the technology industry to not necessarily run in sync with the overall economy. But I would have expected that as it becomes a bigger and bigger share of the economy it would become more synchronized with overall GDP. We are not seeing that. Our business here is in the computer business, I would call it moderate to reasonably good. And in the components business I would call it stable to growing slowly.

If you shift over to Europe overall conditions are weaker. You know the GDP growth rates are sort of half of what the U.S. is clocking at even with these new low rates. And yet our component business and our computer business is performing reasonably well, not in today's terms I would describe it not as good as America, but not far behind.

And then as you shift over to Asia-Pac, you know we had this really spectacular growth rate for two years in a row up until this inventory correction that hit about last summer. It was around June last year. And what we are seeing is a clear sign of recovery in Asia, a return to growth, but it seems obvious at this point that the growth rates going forward at least for the foreseeable several quarters, are going to be lower than the growth rates that we had going back a year and two years ago. And then I would say our exposure there in the computer industry is too limited for me to give you a macro comment on that region. I think we are just too small of a data sample there.

Sorry, for Rick, you are talking about clarification of my question to Rick there at the end?

Yes.

Okay, then one other question specific to what you're doing over in Asia, maybe talk a bit qualitatively about the difference between the indigenous demand that you are seeing from the local vendors over there and what you are seeing in terms of the transfer business and so forth. Has there been any changes there over kind of the last quarter or two, or what are your expectations going forward there? Are we going to see stronger growth from indigenous or stronger growth from transfer business, or is it the other way around?

Specific to Asia, I believe the trend over the last quarter -- and I believe that will continue going forward as far as we can see, which isn't obviously that far -- is the significance of the transfer business into Asia has diminished as a percentage. It still continues as a general global trend. But as a percentage of our growth the higher degree each quarter is coming from indigenous growth.

So Tom one might conclude that part of the reason for hypergrowth in Asia above and beyond what their GDP's would have warranted, was related to this massive transfer. And while there is still some transfer going on it would appear that the majority of the large shifts have already occurred.

Okay, thank you.

Which is really why we are seeing a return to modest growth in the Americas.

That is also right because the reverse affect hits America and to a lesser extent Europe. And then Rick, did you want to throw out anymore commentary? About your processor growth in Asia and how you read the market there?

Roy, just echo off your comments again the total Asian business for TS at 6% is roughly 70 million in size. So that's why the percentages can sound very impressive. But we are expanding our coverage and our partnerships particularly in the microprocessor space by extending into some of the emerging markets. One of the most notable for us recently had been into China. So some good things going on over there but as you said small sample, small data point today and we would look to try to keep that trend going as well as increase our opportunities there.

Okay. Thank you.

Bernie Mahon with Morgan Stanley.

I had a question for you. First could you just go through the number of selling days in North America and Europe for both the March quarter and then the June quarter? For the EM business?

Do we have that?

I believe, Bernie, I wouldn't swear this in court but I believe generally it is one or two days less than the June quarter than the March quarter.

That's helpful.

But we'll get the numbers for you and call you later.

Okay, and then secondly, could you talk about the -- from your semiconductor suppliers have you seen any change in the pricing now that you are paying maybe on a blended ASP rate in the March quarter? And then also what's kind of your expectations for the June quarter?

Bernie, very minimal change on a blended basis, slightly down but very minimal change. And we believe that will continue stable in calendar Q2.

All right. That's great. Thanks a lot.

Bernie, this is Roy. One thing I want to add that one of the things that sticks out in this cycle is this relative stability in pricing. And I think that it connects back to the better management of capacity expansion. So historically in semiconductors, in the up cycles capacity gets expanded. That is essentially sunk (ph) capital, empty airline seats, if you will. And as a result when business softens usually ASP drops dramatically. With a more dynamic adjustment of capacity and more outsourcing of wafer fabrication, we are seeing a more stable pricing environment in the industry.

That's interesting. That's very helpful. Thanks, Roy.

Patrick Parr with UBS.

Long time no talk, guys. Regarding the geographic breakdown for EM I guess primarily, you talked about the sales trends. Are there -- can you remind us what the profitability is in each of the regions roughly and if there were any notable changes during the March quarter there?

Patrick, could you repeat that question again? I'm sorry.

The EM business profitability on an absolute basis where it is and on a relative basis where it is trending from December to March.

There's no anomalies there, Patrick. The operating margins today in Europe and America are comparable. It turns out Europe is running slightly higher than America, and then Asia is clocking lower. And actually a year ago Asia would have been roughly 50% of that level. And today since the correction cycle hit, it has dropped to maybe 60% lower.

60% lower, okay.

Okay? And we expect this revenue -- the thing in Asia, whereas in America and Europe we need to get the cost structure in line with the current level of revenue and modest growth rates, in Asia we are choosing not to take expenses down. So margin has suffered a bit as the revenue growth eroded. And we expect as revenue growth resumes now we will be able to leverage that into higher operating margins again.

But Roy with this Memec acquisition and your Asian footprint growing, does that propose some sort of a counter weight to that?

I think what happens is we get leverage in Asia in the same way that we get leverage in America and Europe. So our expectations are that operating margins in all three regions will rise. However, we still expect that the model, the business model in Asia will continue to be different from America and Europe, and the op margin will be in round terms sort of half of the West and then the asset velocity will be higher, and we will continue to hold them accountable for the same sort of after-tax return on capital that we do the Western regions.

Okay. That's fair, and then a final question. You mentioned that overall you are seeing stability, modest growth, various subscriptions of that. From an end market perspective could you highlight perhaps some of the areas where you are seeing relatively better things and relatively worse things? Thanks.

Yes, I think broadly speaking we are seeing weakness, more weakness on a relative basis on the consumer side of the equation and relative strength on the business spending side, or in other words CapEx expenditures. So this is why we are returning to slow growth rates in the Western regions and a slower growth rate in Asia-Pac, and it is consistent also with our 11% year-on-year growth for the last couple of quarters at Technology Solutions. So a little better on business CapEx and a little weaker on consumer.

Okay. That's helpful. Thank you.

So I believe that was our last question -- oh, there is one more.

Actually, gentlemen, we have one more question from Amit Daryanani.

Thanks a lot. I was wondering if you could just give us the book-to-bill number on an enterprise level and also if you'd provide that on each of the segments on a geographic split basis, too.

Do we have it? Well, Amit, we'll have to come back to you.

All right. And then just a question on your cash flow from operations. Given relatively flat ASP to lead-times that you folks are talking about that you should see in the next quarter also, you should be able to generate the cash flow from operations comparable to the level you have done in the last few quarters. Is that a fair assessment?

No, I think we will not -- you may have missed the question earlier, but no, I don't think we are going to generate that kind of cash. I think inventory levels, for the most part, and therefore working capital levels will stay relatively flat, maybe trend up a little bit, and therefore our expectation is that cash flow generation is really going to be slightly positive, but nothing as significant as we just experienced in the last two quarters.

And Amit, back on the book bill, the global book bill for EM was in the range of 102. So we had sort of double-digit booking growth, 8% revenue growth, and the number by region does not vary substantially. Americas was a little on the high side, and EMEA was on the low side.

Thanks a lot.

You're welcome. So one thing I want to do before we close, there has been a lot of material written about the Memec acquisition. Harley, something I would like you to do is clarify the statistic around 1800 sales and marketing personnel, and maybe provide a little bit of detail around our synergy cost savings.

Great, Roy. Thank you. You may recall on our initial Memec call we announced a target of $120 million of synergy savings, and there was also a comment made about 1800 customer-facing people that would stay in place, and I wanted to add a little detail to that number so you better understood our objective here. Of the 1800 people, roughly 1500 of those people are in revenue-generating roles, roles such as technical selling people, FAEs and other similar roles. The other 300 people, the balance of the 1800 are primarily in management roles and in marketing roles in support of those selling efforts. I wanted to clarify what was inside that 1800 number.

Relative to the $120 million that we mentioned, I would add a little color that says that roughly 70 million of that 120 is in people related costs. Seventy out of 120 people related costs. The other $50 million are projected to come from areas such as facilities, systems, fixed assets, etc. Both of these projections are results of a detailed analysis done for both organizations, both the Avnet EM organization, as well as the Memec global organization. In addition to taking into account an overlay that could occur in them global groups or the Inc. groups at Avnet that support EM. That's how we came up with the analysis. Is was really detailed analysis of both organizations and that data was really collaborated and comingled with the results that we've experienced over the numerous acquisitions we've done prior to this one.

And maybe one comment I would add Harley, is that number is, one way to look at the 120 million and put it into perspective is this is a global integration, global of a global scale and affects all parts of the Avnet business other than Technology Solutions. So if you were to look at calendar '04 expense numbers for all of Avnet plus all of Memec and subtract out Technology Solutions which will be unaffected, the rough number is $1.1 billion of expenses. So the $120 million of synergy savings is roughly slightly less than 11%. So just to put that on a scale of magnitude of the dollars we're talking about.

Thanks, Harley. Thanks Ray. Vince.

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 included in the GAAP financial results reconciliations can be accessed in downloadable PDF format at our website www.IR.Avnet.com.

We would like to thank you for participation in our quarterly update today. If you have any questions or feedback regarding the material presented today please contact the Avnet Investor Relations department by phone or e-mail. Thank you.

Thanks, everybody.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your time and your participation. You may disconnect your lines at this time.