安富利 (AVT) 2006 Q3 法說會逐字稿

Our presentation will now begin. I will now turn the floor over to Mr. Vince Keenan, Avnet’s Vice President and Director of Investor Relations.

Good afternoon, and welcome to Avnet’s Third Quarter Fiscal 2006 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 (http://www.ir.avnet.com) and click on the icon announcing today’s event. After registering, please click on the “slides only for telephone participants” option that appears on your screen.

In addition to disclosing financial results that are determined in accordance with Generally Accepted Accounting Principles, or GAAP, the Company also discloses non-GAAP results of operations that exclude certain items. Reconciliations of the Company’s analysis of results to GAAP can be found on the Form 8-K filed with the SEC today in several of the slides in this presentation and on Avnet’s Investor Relations website.

As we provide the highlights for our third quarter fiscal 2006, please note that once again we have excluded restructuring, other charges, amortization of intangible assets and integration costs resulting primarily from the Memec acquisition, incremental stock-based compensation expense, and the gain from the sale of businesses from the accompanying slides in order to facilitate comparison with prior periods.

When addressing EM’s result, I would like to remind everyone that the fiscal year 2006 financials include the results of Memec in our Electronics Marketing group. Since the acquisition of Memec was accounted for as a purchase, the periods prior to the beginning of fiscal 2006 do not include the results of Memec, which we acquired on July 5, 2005. However, for more informative comparisons on certain slides, as indicated throughout this presentation, prior-year data has been adjusted on a pro forma basis to include Memec results.

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. 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 third quarter fiscal year 2006 highlights. Following Roy, Ray Sadowski, Chief Financial Officer of Avnet, will review the Company’s financial performance during the quarter. At the conclusion of Ray’s remarks, Roy will wrap up with additional comments, after which a Q&A will follow.

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 joining us from Europe, Harley Feldberg, President of Electronics Marketing.

With that, let me introduce Mr. Roy Vallee to discuss Avnet’s third quarter fiscal year 2006 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.

In the March quarter, we delivered another strong quarter of substantially improved financial performance, aided by better-than-expected growth at Electronics Marketing. This growth, when combined with the Memec synergies and record-setting working capital velocity at EM, drove significant improvements in our results on a sequential and year-over-year basis.

At the enterprise level, revenue grew over 9% on a year-over-year pro forma basis, including Memec sales in the year-ago quarter. Excluding the impact of foreign currency translation, the year-over-year pro forma growth was over 12%.

Gross profit margin, which improved at both operating groups, increased 61 basis points sequentially to 13.1%, excluding certain charges.

Operating expenses as a percent of gross profit, excluding the charges Vince noted earlier, improved 259 basis points sequentially and 916 basis points versus the year-ago quarter to roughly 69%, representing our best performance in five years.

As a result of this strong growth at EM, coupled with disciplined gross margin and expense management across the enterprise, operating income grew seven times faster than revenue on a year-over-year basis, excluding certain charges and including Memec’s results in the year-ago quarter.

Operating income margin, excluding certain charges, grew to 4%, an improvement of 51 basis points sequentially and 135 basis points year over year, including Memec in the prior-year quarter.

Additionally, a fourth straight quarter of record-setting inventory turns at EM drove a 9% improvement in consolidated working capital velocity over the third quarter of fiscal 2005.

Return on working capital increased 883 basis points over the year-ago quarter to over 25%, while our return on total capital employed grew 278 basis points to over 10%, signaling that we are now generating economic profits at the enterprise level. And with TS exceeding our return targets and EM making steady progress, we expect to expand economic profits quarterly as we continue to drive towards our 12.5% ROCE goal.

Now, let’s take a look at some of the operating group highlights.

EM had another quarter of higher-than-expected revenue growth, with strength across all regions and multiple end-market segments. EM revenue grew over 8% sequentially to $2.45 billion.

Year over year, pro forma revenue grew nearly 14% in delivered dollars and almost 18% in constant dollars. With meaningfully positive book to bills in all three regions and firm demand in our end markets, it continues to appear that the supply chain is in an up cycle. While lead times are stretched for some products, there are minimal issues with product availability, and average selling prices have remained relatively stable. As mentioned earlier, EM’s gross profit margin was up slightly sequentially.

EM’s operating income year over year, including Memec in the year-ago quarter, grew five times faster than revenue as operating income margin increased 170 basis points, with all three regions contributing to this improvement. EM operating income margin increased 96 basis points sequentially to over 5%, including Memec in the year-ago quarter.

From an operating leverage perspective, EM’s sequential operating income drop-through, which is the change in operating income dollars divided by the change in gross profit dollars, was greater than 100% for the second quarter in a row.

With the Memec integration nearing completion, I’m pleased to report that we have exceeded our initial projections in every category. From revenue retention to cost synergies to working capital velocity, our team has executed ahead of expectations with positive response from our customers and suppliers.

Going forward, the primary work remaining in the June quarter is the IT conversion in Japan and some remaining real estate consolidations.

EM delivered a fourth straight quarter of record-setting inventory turns, which drove a new record in its total working capital velocity. This performance, when combined with the higher operating income, drove a 510-basis-point sequential improvement in EM’s return on working capital and a 293-basis-point sequential improvement in its return on capital employed.

As a result of the Memec acquisition and the terrific job our team did on the integration, coupled with a positive industry environment, EM has accelerated growth and operating incomes and, again, set new post-bubble records for operating income margin, return on working capital, and return on total capital employed.

With positive momentum in our end markets and continued focus on productivity, we expect to continue to make steady progress towards our stated financial targets.

As you can see on this next slide, we’ve added Memec history to the EM quarterly revenue to give you an idea of what our electronic component sales would have been if Memec had been part of Avnet for all periods presented.

In the third quarter of fiscal 2006, EM’s sequential growth of 8.4% was led by the EMEA region, which delivered over 20% growth in its typically strong March quarter. While RoHS may have added a few percent to the sequential growth in EMEA, we are encouraged by the broad-based growth in our core industrial market segments.

It was a similar story in the Americas, where strength in the industrial, medical, and defense segments drove sequential revenue up almost 5%.

In Asia, sequential revenue growth of a half-percent was in line with expectations, coming off our very strong December quarter.

On a regional basis, Asia had the strongest year-over-year performance, with pro forma growth of 24%, including Memec in the prior-year quarter.

Just behind Asia was the EMEA region, where pro forma revenue grew almost 10% in delivered dollars and nearly 20% in constant dollars.

The Americas region also had a strong quarter with year-over-year growth of over 11%, including Memec sales in last year’s March quarter.

While we’re very pleased with the revenue performance this quarter, we’re also pleased with the trends. EM’s year-over-year pro forma revenue growth accelerated from 11.5% in the December quarter to 13.7% in the March quarter.

Excluding the impact of changes in foreign currency translation, EM’s year-over-year growth rate increased from 15% to 18%, with all three regions experiencing double-digit growth.

With customer-facing teams having been established in all regions for a few quarters now, and as we near completion of the Memec integration, we feel the integration risk is behind us, and we are confident that this sales performance is further evidence that one plus one equals at least two.

Before reviewing the Technology Solutions results, I would like to remind you that we had two transactions that impacted TS in the March quarter.

As we mentioned last quarter, we divested two businesses focused on selling direct to end-users.

In one transaction, we agreed to combine Avnet Enterprise Solutions, a division that specializes in selling network lifecycle management solutions directly to end-users, with [KLS], Inc., to form a new company, [KLS, LLC]. This transaction closed in February 2006; therefore, most of the ES revenues and expenses were excluded from TS’s current quarterly results.

We also sold our U.S.-based HP enterprise end-user business to Logicalis, Inc. in early January. As per the five-year exclusive distribution agreement that Logicalis entered into with Avnet Partner Solutions, we began to ramp up the Logicalis business in the March quarter. We expect to realize the full revenue impact of this new customer in the current quarter.

Moving on to the Q3 performance for TS, March revenue declined 22% sequentially and was up slightly when compared to the third quarter of fiscal 2005. Although TS typically experiences a seasonal decline in revenue coming off the strong December quarter, the decline this year was slightly more than expected due to softness in some proprietary server lines and certain software license sales.

However, TS improved gross profit margin on both a sequential and year-over-year basis. Contributing to this improvement was the mix shift to higher-margin products from lower-margin software license agreements. This higher gross margin contributed to an 18.6% increase in operating income over the prior-year third quarter, even though revenue was essentially flat. This increase in operating income drove a 49% improvement in operating income margin -- excuse me, 49 basis-point improvement in operating income margin when compared to the third quarter of fiscal 2005.

TS inventory turns improved 17% year over year, which contributed to a nearly three-day reduction in the TS cash cycle, as compared with the prior-year third quarter. This combination of higher operating income and improved working capital velocity led to significant year-over-year improvements in both return on working capital and return on capital employed.

Technology Solutions continues to exceed our return targets by a meaningful amount. And with TS generating economic profits consistently, we continue to look for opportunities to expand this business.

In the March quarter, Technology Solutions sales were $1.17 billion, a year-over-year increase of half a percent in delivered dollars, and nearly 3% in constant dollars.

Revenue in the Americas was up 2.7% year over year, driven by 6% growth in our enterprise-focused partner solutions business.

In EMEA, reported revenue was down 2.3% year over year but was up 6.2% if you exclude the impact of foreign currency translation.

Asia, which had significant growth in microprocessors in the year-ago quarter, was down 11% year over year.

At a product level, the strongest growth was in software, storage systems, and industry standard servers.

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

Thank you, Roy, and hello, everyone. Let’s begin with an overview of our operating results for the third quarter fiscal 2006.

This first slide shows a year-over-year comparison, with the dollar and percent change in the highlighted columns on the right. Please note that the prior-year results shown here do not include the results of Memec, which was acquired at the beginning of the current fiscal year.

Also, note that we have included a reconciliation to GAAP net income at the bottom of the slide to account for the restructuring of the charges, amortization of intangible assets, incremental stock-based compensation, and a gain on the sale of the businesses recorded in the current quarter.

In the March quarter, sales of 3.61 billion were 31% higher than the year-ago quarter due to the incremental sales related to the acquisition of Memec and strong organic growth at EM.

Gross profit of 473.5 million, excluding certain charges, was up $109 million as compared with the third quarter of fiscal 2005, and gross profit margin declined 12 basis points year over year to 13.1% in the third quarter of fiscal 2006.

Year-over-year gross profit margin improved slightly at Technology Solutions, while gross profit margin at EM declined.

Operating expenses of $328.1 million, excluding restructuring and other charges, were up 42.1 million, or 14.7% year over year, due to the acquisition of Memec. If you adjust the year-ago quarter to include Memec, expenses declined significantly at EM even though revenue grew double digits. The March quarter’s expenses have been dramatically impacted by the operating expense synergies realized from the integration of Memec.

Memec integration is approaching completion with just a few more items to be completed by the end of fiscal year 2006.

Actions to remove in excess of 125 million of annualized operating expense synergies were completed by the end of the third quarter, and we continue to expect that we will remove the targeted 150 million of annualized synergies by the end of this fiscal year.

Operating expenses were also down at TS year over year, aided by the divestiture of the remaining single-tier businesses during the March quarter. The $328 million of expenses in the third quarter of fiscal 2006 shown here exclude $22.1 million of restructuring integration costs, amortizations of intangibles associated with the acquisition of Memec, and incremental equity-based compensation costs resulting from the new accounting rules.

Operating income of $145.4 million, excluding certain charges, was up 85%, as compared with the third quarter of fiscal 2005, and operating income margin improved 117 basis points to 4.02%.

If we include Memec’s results in the prior-year third quarter, operating income margin improved by 135 basis points.

Below the operating income line, there’s a $4.2 million year-over-year increase in interest expense to 25.2 million, due primarily to rising short-term interest rates.

Taxes, excluding the tax related to certain charges previously discussed, increased $22.2 million due to the combination of higher pre-tax income and a higher effective tax rate in the current fiscal year. The tax rate increase from 31% in the third quarter to almost 34% in the current-year third quarter [was] due primarily to the change in geographic mix of profits following the acquisition of Memec.

Net income, excluding certain charges, increased 38.4 million, or 93%, to $79.5 million, driving diluted earnings per share to $0.54 in the March quarter, as compared with $0.34 per share in the year-ago quarter.

Current quarter earnings-per-share calculation was impacted by an increase in shares outstanding due primarily to the issuance of 24 million shares in connection with the acquisition of Memec.

On a GAAP basis, our results for the third quarter fiscal 2006 included 12.6 million pretax, 8.3 million after-tax of net expenses relating to the items mentioned previously, as well as the one-time gain on the divesture of the TS single-tier businesses.

Taking these into account, our GAAP net income was $71.2 million, or $0.48 per diluted share, as compared with net income of 41.1 million, or $0.34 per diluted share, in the prior-year third quarter.

This next slide highlights a sequential change in our results for the third quarter of fiscal 2006.

Revenue of 3.61 billion was down sequentially by 3.8%, coming off of TS’s seasonally strong December quarter. Gross profit increased $4.1 million, or 1% sequentially, and gross profit margin improved 61 basis points to 13.1%.

Sequential improvement in gross profit margin was delivered by both operating groups, particularly by TS, where the mix of business mentioned by Roy earlier contributed to a 49-basis-point sequential improvement in gross profit margins.

Operating expenses of 328 million, excluding certain charges, decreased 9.2 million from the December quarter. At an operating group level, expenses were down at TS, primarily due to the divestiture of the remaining single-tier businesses and lower variable cost.

Operating expense also declined at EM as a result of additional Memec synergies being realized during the quarter.

Operating income, excluding certain charges, increased 10.2% sequentially to 145.4 million, and operating income margin increased 51 basis points to 4.02%.

Taxes increased slightly by $2.3 million as a result of the increase in pretax income.

All in all, this resulted in net income of 79.5 million, or $0.54 per diluted share, as compared with 73.6 million, or $0.50 per share, in the December quarter, excluding certain items in both periods.

On a GAAP basis, net income was 71.2 million or $0.48 per diluted share, as compared with net income of 49.6 million, or $0.34 per share, in the December quarter, including certain items in both periods.

This next slide looks at some of the productivity metrics that we use to monitor our business.

As you can see here on the graph on the left, our expense-to-sales ratio, excluding certain charges previously discussed, increased slightly to 9.1%. This increase was due to business mix as the higher expense to sales’ EM business grew to represent 68% of total revenue, as compared with 60% in the December quarter. The expense-to-sales ratio was down 129 basis points year over year, with both operating groups experiencing a significant improvement.

As the graph on the right shows, this quarter, our ratio of expenses to gross profit dollars, excluding certain charges, improved by 259 basis points sequentially versus the December quarter and 916 basis points year over year. Both the sequential and year-over-year improvements are driven by the reduction of operating expenses realized from the integration of Memec and our continued focus on expense productivity, both of which contribute to the operating leverage in our model.

At Electronics Marketing, the expense-to-gross profit ratio of 640 -- improved 641 basis points sequentially and 973 basis points from the year-ago quarter.

At Technology Solutions, the expense-to-gross profit ratio improved 484 basis points on a year-over-year basis. This is another metric where we expect future synergy benefits and additional expense productivity will help to drive meaningful improvement.

This next slide portrays operating income margin performance, where the core metrics are a value-based management initiative. Operating income margin of 4.02%, excluding certain charges, improved 51 basis points when compared with the second quarter of fiscal 2006 and improved 117 basis points on a year-over-year basis.

At Electronics Marketing, operating income margin of 5.02% improved 96 basis points versus the prior sequential quarter and 117 basis points as compared with the year-ago quarter and represents a new post-bubble high.

This is the second quarter in a row when we’ve made significant progress toward achieving our long-term financial goal of 5.5 to 6.5% operating income margin at Electronics Marketing. As we continue to realize the operating expense synergies from the Memec acquisition and the resulting leverage in our business model, we expect to see continued improvement in operating income margin.

Technology Solutions’ quarterly operating income margin of 3.22% was 49 basis points higher as compared with the year-ago quarter but was down 46 basis points sequentially. The sequential decline was typical for a March quarter. We do expect that with the divestiture of the single-tiered businesses behind us, TS should be able to continue to post improvement in operating income margin on a year-over-year basis as we focus on our core two-tier businesses.

TS continues to operate above our long-term hurdle rate for operating income margin and continues to exceed our return on working capital and return on total capital targets.

This slide portrays two key velocity metrics -- working capital velocity and inventory turns. Consolidated working capital velocity of 6.3 represents a 9% improvement on a year-over-year basis and a 10% decline sequentially. The sequential decline was primarily due to the change in business mix as the higher-velocity TS business declined from 40% of revenue in the December quarter to 32% in the March quarter.

At Electronics Marketing, the inventory was up just over 1% from the December quarter, although sales are up by over 8%.

EM’s inventory turns, which improved sequentially from 5.8 to 6.3, set a new record for the fourth consecutive quarter.

On a year-over-year basis, working capital velocity, Electronics Marketing, improved 20.7%, and its cash cycle improved by over 16 days. On a sequential basis, EM improved working capital velocity another 2.8% as a result of record inventory turns in the March quarter.

In the March quarter, Technology Solutions’ inventory turns improved 17.1% as compared with the year-ago quarter. Technology Solutions improved working capital velocity over the prior-year quarter by 16.5%, representing the 18th consecutive quarter in which TS has improved year-over-year performance in this important metric.

On a sequential basis, TS working capital velocity and inventory turns were down as this business exited its seasonally strong December quarter.

On this graph, we have shown both return on working capital as well as return on total capital employed, two significant metrics that Avnet -- that have become very important to Avnet in how we drive our business since the adoption of our value-based management initiatives.

During the last quarter, we made significant strides towards reaching our stated goals for return on capital employed and return on working capital of 12.5% and 30%, respectively.

The improved financial performance at Electronics Marketing drove Avnet’s return on working capital up 77 basis points sequentially to 25.2%.

On a year-over-year basis, return on working capital was up 883 basis points, with both operating groups contributing to this improvement.

On a year-over-year basis, return on capital employed improved 278 basis points to 10.2% as EM improvement and return on capital drove a significant impact at the consolidated level.

On a sequential basis, the improvement was 55 basis points.

With return on capital greater than 10%, we are now generating economic profits at the enterprise level.

Now, let me turn it back over to Roy, who will provide our outlook and guidance for the June quarter. Roy?

Thanks, Ray.

Looking forward to Avnet’s fourth quarter fiscal year 2006, we expect sales for Electronics Marketing to be in the range of 2.47 to $2.55 billion and anticipate sales for Technology Solutions to be in the range of 1.2 to $1.25 billion. Therefore, Avnet’s consolidated sales should be in the range of 3.67 to $3.8 billion for fourth quarter fiscal year 2006.

We expect earnings to be in the range of 57 to $0.61 per diluted share, excluding the expensing of stock-based compensation and the amortization of intangibles related to the acquisition of Memec, combined, amounting to approximately $0.02 per share.

The earnings-per-share guidance also does not include the estimated additional future synergies associated with continued restructuring activities and the integration of Memec or the costs associated with the exiting of two small non-core EM business units. These other charges are expected to amount to approximately 5 to $0.10 per diluted share in the upcoming fourth quarter. These non-core EM businesses we are looking to exit have combined annual sales of approximately $150 million, and there will be no material impact on operating profits as we exit these operations.

With that, let’s open the lines up for Q&A. Jennifer?

Thank you. [OPERATOR INSTRUCTIONS]

Brian Alexander, Raymond James.

Roy, just wanted to have you elaborate on where you think we are in the cycle. You’ve been through many cycles, obviously. You know, some of the commentary you’ve made today seems a little bit similar to 2004. So maybe if you could kind of compare and contrast how you feel today relative to that time period and maybe elaborate a little bit more on lead times and book to bill. I think you said book to bill is strong, but if you could quantify that, that would be helpful.

Okay. Brian, we’ve got Harley on from Europe, so, Harley, why don’t you go first, and I’ll keep track and fill in any blanks.

Okay, Roy. Thank you. Can you hear me?

Absolutely.

Great. Good afternoon, everybody.

You know, Brian, it’s a great question, and we talk about it quite a bit, especially as we enter the planning phase for fiscal ’07 period. And we are coming to believe that, indeed, we could be in a period that really would signal a different paradigm from what we all have been used to over the last number of years, and that is that we just don’t see any indicators that would warn us that, indeed, we should start preparing for a downturn. We believe that this degree of growth should continue into the foreseeable future. We manage our inventory very closely, as you heard, I believe, Ray say, and we’re managing our backlog voraciously, watching the quality of the backlog, looking for any duplication of bookings, and we really don’t see anything. Cancellation rates are well within range. So we don’t see anything, Brian, that would indicate that we should start preparing for a lessened environment.

So, Brian, if I could just kick in, the cycles in this industry are obviously driven by supply and demand imbalances. And so when you think about where we are in the cycle, you’ve got to think about both ends of that equation. You can draw your own conclusions about demand, but I think, overall, including emerging markets, demand for consumer goods, which have now grown to be over half of the components industry, still seems to be quite strong. There is some risk there, of course, related to oil and interest rates. But, again, you can draw your own conclusions. What we see right now is a very firm and rising demand environment.

Now, the other concern in these cycles has always been supply. And when you look at supply today, it’s being extremely well managed. And when you look at inventory in the supply chain, it says that the demand that we’re seeing is real demand because there’s not a significant amount of inventory accumulation taking place in the supply chain.

So as Harley said, I think the punch line is we feel comfortable that we’re in a strong sustainable semiconductor up cycle. I say that tongue and cheek because we don’t really know for sure, but it just feels different, and we’re comfortable that we could be in for a sustained period of reasonable growth here.

You asked about the book to bill. On a worldwide basis, it was in the 108 range, 1.108 -- 1.08 to 1 book to bill ratio.

Great. Thanks for that great explanation.

Just one other question for Rick on the Technology Solutions side. Obviously, you were flattish year over year, some impact from divestitures. You talked about some weakness in proprietary service, as did your major competitor. Just help us understand a little bit more how temporary you think that weakness on the server side is, was it concentrated in one vendor who has already reported some product transition issues, or is this across your vendor portfolio? Thanks.

Hello, Brian. Good morning. I would say that, first of all, the enterprise computing business in North America, in aggregate -- so server, storage, software, etcetera -- was up 6% year on year. And it was not -- the proprietary weakness was not confined to one particular brand or individual unit. It is really the overall battle between industry standard products versus more proprietary in aggregate.

So in the outlook that we’re projecting at this point for Q4, we -- the midpoint of our growth, we’re projecting about 4.5 to 9% growth off an AES-adjusted Q4 last year. So we still feel good about an overall mid- to high-single-digit overall year-on-year growth rate that we can sustain.

Thanks a lot.

You’re welcome.

Steven Fox, Merrill Lynch.

Just on the heels of that answer, I was wondering if you could also bake in how the Asia region should grow for you guys and where you are in terms of profitability relative to the overall profits of the EM group.

And then, lastly, just an update specifically on Japan and Memec and how that’s progressing.

Okay. Harley, do you want to take the lead on that, expectations for Asia growth?

Sure, I’d be glad to. Hello, Steven.

Hi.

We’re pleased with our Q3 results in Asia. We squeaked out some growth, which we’re pleased with. And we believe we’re in a pretty seasonal pattern right now, with Asia going into its normal cycle into June, and as we approach into the summer months.

From a profitability perspective, as we have discussed in the past, we manage all of our regions through similar return-on-capital goals, but the various elements of how we compute that are different. As you would guess, our cost structure in Asia is different. Our velocity -- our internal velocity is higher. So, overall, we remain profitable in Asia, as we have been now for a number of years. I’ll leave the exact figure to Ray. And we continue to make excellent progress towards achieving our economic profit goals in Asia.

Steve, it’s Roy. Just to build on that, operating income in Asia is running at roughly 60% of the EM global operating income, so it is a lower-margin region, as you know. However, from an asset velocity point of view, it’s leading from a worldwide perspective, and from a return on capital point of view, as Harley said, focused on achieving our 12.5% after-tax returns there and are comfortable that we’ll be able to drive to that.

The book to bills are quite positive, and as Harley said, we’re expecting pretty much normal seasonality in the June quarter, which would imply further sequential growth. As you mentioned, we had slight sequential growth coming off the big December, but we had year-on-year growth, including Memec, in the prior year of 24%.

As you shift over to Japan, you know, the market growth, of course, is much lower there. It’s a very mature market. We have a small presence. We have the [gun] adding product lines. We announced the addition of the [on-semiconductor] product line, and we have other planned product additions so that the organic growth path there, I think, is big and long, but I expect it to be a slow, steady path, as opposed to a skyrocket, if you will.

Okay. Thank you very much.

You’re welcome.

Matt Sheerin, Thomas Weisel.

Just a question regarding Europe. You talked about the strength partly due to RoHS. Is it possible that there’s some inventory build ahead of that in that, seasonally, things may be a little lighter in September as customers adjust to RoHS?

So, Harley, you’re in Europe. Do you want to take the first shot at that one? Harley, are you there?

Yes, Roy. Can you hear me?

I can now.

It’s an interesting question. We watch it very closely in Europe. Obviously, Europe is ahead of the other regions, so we’re trying to learn from their experience.

We don’t believe the Q3 results were impacted very dramatically by RoHS. We did have a very strong book to bill, so we’re analyzing that to try and understand what impact RoHS had on it.

The challenge I have, Matt, in predicting an impact it could have in the near term is that -- and I’ll speak only for myself personally -- I don’t view RoHS as a one-time event. In fact, different industries at different times, there are still various exemptions being debated. The regions will be coming up at very different levels. You may have seen some announcements out of the Chinese government this week. So I don’t believe it’s a -- it’s a Y2K-type event where we’re heading to a specific day. I think we’ll be talking about RoHS for a number of quarters and possibly a couple years into the future. That’s my personal input.

And then, Matt, two other things I would add. You know, the inventory build part of your question, for us, we grew inventory about 3% sequentially in Europe, and we grew sales about 20%, so as we mentioned for EM worldwide, we set an inventory turns record in Europe in the third quarter. So the inventory build is not happening with us.

When you think about it from a customer’s perspective, what strikes me as -- the customer’s got a warehouse full of material, some of which is compliant and some of which is not compliant, and it’s looking at this looming deadline that will impact at least some of their shipments. And it seems to me that there’s got to be some RoHS purchasing to replace the noncompliant material, which one might consider to be over and above the normal buy rate for that customer, and as all the noncompliant material is worked out of the system, then the buy rate would resort to the normal demand level.

So we do think that maybe something like a low single-digit portion of our sequential growth relates to RoHS, but we don’t think it’s more than that. And we also believe that it isn’t all over as of July 1. As Harley just said, there will be exceptions and extensions that will cause this to be really feathered in over a few quarters. So we think there’s a little bit of froth in the bookings in Europe, but it’s not affecting our inventory. And I think to the extent that customers are swapping out compliant materials in lieu of noncompliant, that it’s not actually an inventory build there either, but it is a little bit of a bubble in procurement.

Okay. And then just a related question on that then. What’s happening to the stuff that customers in Europe don’t need?

And then on the customers that are exempt, I would imagine that there’s some concern about obsolete parts as suppliers to go lead-free only. So are they asking you to build inventory? And is that something that we should be looking out for down the road?

Yes, that’s a very good question, and the punch line is that this is a lot of work on our part to get this right, but we should not have any inventory exposure or liability as a result. The reason that is, two-fold, one, we’ve known about this for a long time, and of course, we have people who manage this material all day, every day, and we’ve been working our way out of the noncompliant material, ensuring that we have fresh, compliant material to the greatest extent possible.

In addition to that, for the most part, our franchised contracts, supplier contracts, allow us to return material that actually becomes obsolete. So when it does become obsolete, we’ll have the right to make that return.

And then regarding customer demands, to the extent that we get them, we will treat noncompliant material the same way we treat other noncancellable, nonreturnable materials and will require written contracts from the customers that transfer liability to them.

Okay, great. And just one quick last question, if I may, just regarding the gross margin. Looks like everything worked in your favor, with Asia growing slower than the rest of the regions and the [indiscernible] Technology Solutions down. So I would imagine that gross margins should come down, particularly as Asia keeps up seasonally, and Tech Solution also has seasonality.

Matt, at the enterprise level, you’re saying?

Yes.

I think -- we think that it could be down slightly for both reasons -- TS growing, although we’re pretty much thinking in line with EM, you know, maybe even a little bit slower. That could be a slight positive. But Asia will grow faster this quarter. That would be a slight negative.

Okay, great. Thanks a lot.

You’re welcome.

Michael Walker, Credit Suisse.

Question on inventories, a more macro one. They were going down all last year on a day’s basis. They’ve picked up a little bit, which I think was probably expected. But I’m wondering if you could contextualize this a little bit. Is this a one-quarter blip up? Should they head back down or flatten out in September, or were we kind of over-leaned, if you will, on the supply chain at the end of last year, and are we starting to work our way back from that towards a more normal level of inventories in the channel?

And, Michael, just a question. Are you asking for our opinion about the supply chain or specifically what’s happening at Avnet?

Well, both, I guess.

Okay. Harley, why don’t you take the first shot?

Okay, Roy. Can you hear me?

Yes, we can.

Our inventory, as I think you mentioned earlier, Roy, grew at a rate well below our sales growth. So I don’t really consider our inventory as building at this point.

Our inventory velocity metrics continue to improve each quarter, and, Michael, that’s really the measure by which we manage the selling organization. It has never been our goal to race to zero inventory. Our goal is always to improve our metrics. We’ve done that now, I believe, about six quarters in a row. But we continue to focus on that. We’ll manage our inventory based on the available market. So I really don’t view our performance in the March quarter as being an inventory build at all.

And then, Michael, on a more subjective level, I understand the question; is the inventory in the supply chain so lean that it’s at an unsustainable level? It’s a bit of a tricky question, but my answer would be, no, I don’t think so. I think what you’re seeing is part of this new paradigm that Harley talked about earlier, where finished goods inventories, meaning component finished goods, are being extremely well managed by every participant in the supply chain, and what you see happening is as a result of that, the component vendors that have somewhere between 8 and 13-week cycle times to build these components are the ones that are being left with the inventory accumulation. I think that’s a new paradigm that’s probably unlikely to change.

As we go forward, the simple reality, though, is that as volume rises, that will tend to put upward pressure on inventory in absolute terms, and as product lead times continue to extend, that will put more pressure on the supply chain to carry more inventory. If things stay healthy, neither of those should cause an inventory velocity decrease, but they could cause, and most likely will cause, an inventory volume increase.

Okay, I had a follow-up question, which is that earlier in your comments, you said that there really weren’t any availability issues, but we have heard a number of your customers on the EMS side complain about component constraints not being able to satisfy demand because they weren’t getting enough components. So help me reconcile those two comments.

Well, so I guess it’s -- again, these are subjective or qualitative comments. So we have seen lead times moving out pretty steadily now since the summer of ’04, and I think as we’ve talked before, the interesting observation is that it seems like they’ve been moving out around one to two weeks per quarter. I think what’s new news is that while that has continued on an overall basis, the standard products -- standard logic, standard linear, some of the [discretes] -- have been more extended due to back-end problems in the package and test industry -- back-end constraints, I should say. And so as a result of that, we are seeing some extended lead-time on some of those products.

The reason we didn’t say that it’s a problem is because we’ve been managing through it, and we’re not aware of many critical lying-down situations. There are a little bit of those occurring, but we seem to be able to react and get them resolved reasonably well, and we don’t see that creating extra buying on behalf of the customers. We see people maintaining discipline and working their way through the issues on a case-by-case basis.

Okay. Thanks a lot.

You’re welcome.

Bernie Mahon, Morgan Stanley.

Question for you on the margins. So, Roy, the last couple of quarters, you’ve been talking about on the component side of the business getting to, say, 5% operating margins, and you achieved that target this quarter. I think you had previously said it would be more in the June quarter. Could you just update maybe where you think those margins can go to over the next, say, couple of quarters as we’re in pretty strong demand environment and you still have some restructuring benefits left, and as long as pricing, I guess, doesn’t get too bad?

Well, since we’re in the budget season, maybe I’ll take that question instead of asking Harley to answer it and commit himself.

So we still have some synergies to play out, Bernie, and in addition to that, we still feel that we’ve got some interesting operating leverage in the EM model. And so we would expect operating margin to expand again this quarter. That’s baked into our forecast. And then you’ve got to make a revenue projection in order to think about op margin in the September and December quarters, which are, from a seasonal perspective, the weaker quarters for electronics marketing.

As you look out, though, for all of FY ’07, we would expect EM’s drop-through, you know, meaning that the operating profit dollars that drop through as a percentage of gross profit dollars, to be well over 50%, and in fact, over 60% drop-through for electronics marketing.

So what I would suggest is create your own revenue model and then think about expenses at EM this quarter being literally flat to down in absolute terms, and then think about drop-through as you go forward, and we’ll continue to demonstrate the leverage, the operating leverage, in the EM model.

I would certainly expect that in fiscal ’07, we will be at EM’s operating targets, our stated goals.

Okay. That’s helpful. Thanks a lot.

You bet.

Tom Dinges, J.P. Morgan.

A couple of quick ones for Rick. A little bit more clarity, if I could.

Rick, can you go through what happened in Asia? I believe the comp was down in Asia for your business there, and obviously, you guys have had some pretty good success with your vendors over there for -- especially for microprocessors. But maybe just some thoughts there on what happened there this particular quarter and kind of what the outlook is there.

And then, also, just a little bit more color on the U.S. enterprise business being up six. I know you talked about strength, software storage, industry standards, but perhaps where you saw the strongest growth there. And I’m assuming inherent in that is the weakness in proprietary is assuming that this probably was down year on year.

And then I have a quick follow-up for Roy.

Okay, Tom. I’ll try to keep the scorecard straight. So, remember, Asia for TS is about 5% of overall revenues. So in round numbers, if you have a quarter that goes from 70 million to 62, that looks like about a 11% decline, but in the big scheme of things overall, it’s [indiscernible] 8 to $10 million overall impact. And I think that what that represents for TS this particular quarter was a particularly strong quarter a year ago versus a particularly weak one this year. So it’s sort of a lot of small numbers that really plays into that.

On the U.S. enterprise business, the 6% year on year, in overall aggregate, hardware was down while software and services were up. But the hardware story, where servers may have been down, there is still strength in other segments of the hardware business, such as storage solutions, and to a lesser extent, some of the industry-standard components, such as processors and disk drives for the OEM space.

So, in aggregate, hardware was down, but there are always winners and losers in the story there.

Okay, that’s helpful.

And then, Roy, more of a philosophical question here because you’ve mentioned this kind of relatively new paradigm that you feel that we’re in with the way the supply chain is managing inventories, and it’s different from the way that it has in the past and, therefore, makes it a little bit more difficult. But how are you guys changing the way that you look at various metrics, and perhaps there’s new metrics that you’re looking at that would actually provide you with the insights to say, you know, we probably do need to button down the hatches a little bit more, maybe cut some more costs because it does look at if we’ve got ourselves a slowdown coming, because, obviously, you’ve been around the semiconductor industry long enough that we don’t keep rising forever, but maybe just a little bit of help there on kind of what’s changed from your perspective and from the corporate perspective as to what you’re looking for.

Well, Tom, I think that in the category of what’s changed, we are now very much VBM -- Value-Based Management -- based, so we’re watching things like return on working capital, and that leads us to watch things like working capital velocity and inventory turns, and we even have drilldown metrics like gross profit volume per inventory SKU, and we call that return on material. So we have a set of metrics that are driven by our VBM initiative that are different from where we were, let’s say, five years ago.

The only other thing that’s really different for us -- we’re looking at the same metrics, like net bookings, book-to-bill ratio, customer cancellation rates, you know, how much volatility is there in the backlog. The only thing different is that now we get a world view of that. We’ve got a substantial presence in all regions, and so if there’s movement anywhere in the world, we can see it. And the way we’re organized, all of our components’ businesses report to Harley Feldberg. Harley’s in constant communication with his team, and we’re able to react on a -- react locally based on global intelligence. And that’s proven to be very helpful for us.

Okay, thank you.

You’re welcome.

Roy? This is Harley. Can you hear me?

Yes, we can.

Yes, I wanted to add one comment that I was going to make earlier that I think fits with what you just said when we were talking about the RoHS situation. One of the things that we’ve worked very hard on this year and we’ve invested in is the ability to have a much more responsive and immediate view of our global inventory usage across all regions. And we do believe -- and some of our confidence in our ability to work through the RoHS situation and possibly even create competitive advantage is due to the fact that we are able to watch it at a multi-regional and global level. And similar to what you just said, we think that helps smooth out a lot of the previous permutations that wreaked havoc with our metrics in the past.

Okay?

Thank you.

You’re welcome.

Amit Daryanani, RBC Capital Markets.

Just a question on the inventory thing again. When you look at some of the component companies that have reported so far and just listening to what you guys are saying, sounds like lead times are starting to stretch out. Some of the component guys have talked about utilization rates going north of 90%. Just given the scenario, are you seeing your customers starting to get a bit anxious and asking you to build some buffer inventory?

Harley, do you want to take it?

Sure. A very large percentage of our business is of the supply chain nature. So we operate in that environment very much today already, where we manage their pipeline, so we are addressing those lead-time concerns on a day-to-day basis, in most cases.

But, yes, I do think customers are concerned. Part of why you don’t hear the anxiety from us, I believe, that you might hear outside is that the area that has shown the most significant -- really, the only area other than some isolated situations -- but from a product portfolio, the area that’s shown the most significant expansion is really in standard products. And because we carry such a broad portfolio of standard products, we have been able to insulate our customers, in most cases, by managing multi-suppliers, whereby there are multi-suppliers on their bill of material.

So, yes, we do see customers getting concerned about that, but it tends to be in the product area that doesn’t get their greatest attention relative to the price of the parts and the technology of the parts.

All right. And I guess on the same note then, would it be reasonable to think that in these standard products, you’re starting to see ASPs move up nicely as well, or are those remaining flat?

Our experience so far is that they have been fairly flat. The movement, the bias, would be up, but I wouldn’t want to suggest that it’s dramatic.

All right. And you guys gave the book to bill number of 1.08 to 1. Could you just give us some granularity on -- for each of the geographies, too?

Sure. We had a very strong book to bill in all regions. As Roy mentioned, all of them were over one. And the strongest, actually, was in Europe, where we were over 1.1. And Asia and America were both just under 1.1.

And then just in Europe, I know you said a very small part of the 20% sequential growth was from the RoHS and the [indiscernible]. Are you able to quantify how much was the book to bill positively impacted due to that?

Very difficult to do. Our perception, and I have to say it that way because it’s almost impossible to measure, is that it’s not more than a middle to low single-digit effect.

All right. Thanks a lot.

You’re welcome.

Carter Shoop, Deutsche Bank.

Wanted to follow up on that last question there. I was wondering if we could walk through how you guys think about that RoHS initiative, and when you guys are doing your analysis, kind of what you guys are thinking about, what kind of assumptions you guys are making [indiscernible] 20% growth and just about 2 to 3%. Seventeen percent (17%) sequential growth still seems pretty hot to me. So I was curious in how you guys do your analysis and what gives you comfort in thinking that RoHS is only 2 to 3% of that 20% growth.

If you look at our EMEA sequential growth in March quarters versus December quarters, it turns out that those numbers are actually very much in line. Last year was a 13% growth. The prior year was actually 36% growth, somewhat aided by currency but still a very strong growth. So, actually, Carter, I think we would consider 20% growth to be pretty much in line with seasonality.

Fair enough. A couple quick housekeeping questions. What are your expectations for other income and interest expense next quarter?

I think right now for interest expense, we’re expecting a slight increase more due to the increase in rates, but we’re bringing down debt a little bit, so it’s really a slight increase. And right now, for other income, we typically look at it as being slightly positive unless something unusual comes up during the quarter, which, in many cases, usually relates to foreign currency. So absent that, which is very difficult to predict, it should be $1 million, in that kind of range.

Okay. Two more quick ones here. Do you have the Technology Solutions breakout between hardware, software, and services?

Rick, have you got it?

Yes, I do, Carter. Hardware, 71%; software at 18; services at 11.

Last question. Have you guys seen any of the lead-times for standardized products, particularly in the active side, the standard veneer, standard logic, start to come in at all in the March -- or the June quarter after extending in the March quarter?

Harley, have you heard anything like that?

I have not.

I have not either, Carter.

Great. Thanks a lot, guys.

You’re welcome.

Kevin Sarsany, Foresight Research.

I was wondering, you made a comment about margin expansion and EM. Were you talking sequentially? I assume you were.

At EM, yes.

Okay.

TS was both sequential and year-on-year.

Okay. But, no, you talked about looking out next quarter, and I couldn’t tell if you were talking year over year for EM as in margin expansion or sequentially.

So let’s be clear. Year on year at EM, margin was down. Sequentially, margin was up. And then looking out into the June quarter, you know, given that Asia grows faster than Europe and America, if that’s a correct assumption, you could see a very slight decrease in EM’s gross margin.

Okay. No, I was talking operating margins.

Ah.

Sorry.

Okay. And the question is regarding the June quarter?

Yes.

We would expect it to expand in the June quarter.

Sequentially or year over year?

Yes, both.

Okay. All right. And you talked about further expansion into 2007. Obviously, sounds like you’re done with Memec. Are you basing that on volume, which we believe the cycle’s pretty good for what you’re talking about, or are you still continuing to drive down costs on certain projects, or just -- is it just ongoing kind of cost controls?

So we are thinking it’s going to be a growth year, and there is -- there are specific projects that we have that should yield additional savings, and just a reminder that EM global is not yet achieving our return hurdle rates, although as of the March quarter, EM America is now over our thresholds. And so given that, we will manage them with this drop-through effect that really determines how much money they can reinvest back into their business, and as a result of that, we would expect to expand their margin to our targeted levels.

Okay. And this new paradigm, you’ve been talking [indiscernible] kind of stuff, what is the biggest concern? What I’m seeing out there, second-half capital expenditures by semi companies, looks like there’s going to be a pretty big increase. Doesn’t that usually put a wrench in the whole dynamics?

Yes, there are actually theories about CapEx spending as a percent of semi revenues, and if it gets over a certain threshold, you -- it’s time to be concerned. But even when that happens, I think the old paradigm is you’ve got about a four-quarter head start at that point before that equipment actually gets installed and affects output.

I have to tell you, from my perspective, in the big picture of supply and demand, if you forced me to rank them, I would say the risk is in the demand side at this cycle, not the supply side. Supply is being so well managed, and there’s so much of it in the hands now of wafer foundries, which are more efficient allocators of capital than an integrated device manufacturer, that I just feel like it’s not likely to be a capacity over-expansion problem. I think it’s more about macroeconomics and demand.

Okay. All right. And in this new paradigm that you can see things faster globally, do you think that what you’ve done over the last five years has enabled you to react faster?

No question about it. From an information perspective, as well as from a systems perspective, we are much better poised to react rapidly to changes in the industry environment.

Okay, thank you.

Okay. Operator, how many more questions?

There are two more questions in queue, sir.

Okay. I know we’re over our scheduled time, but if there are only two left, I think we’ll try to take them.

Scott Craig, Bank of America.

Roy, I’m having a little bit of difficulty on the pricing side of things because if I look at in the environment, what you’re telling me is we’re seeing lead times increasing in some products. Clearly, raw material prices are increasing, in general, globally. Freight’s increasing. Asia wages are going up. It just seems like there’s inflation out there. But you guys aren’t seeing any changes in the average selling prices to your consumers. So can you help me understand why we’re not seeing price increases, given that the environment seems to be getting better and you guys sound pretty bullish on the outlook, also? Thanks.

Yes, so I think that’s a long conversation, Scott, but let me make two points.

One is as long as there is capacity, there’s a theory that says the component maker would rather have more units than less. When the capacity is fully consumed, that really puts pressure on ASP, which then flows through the supply chain.

In the case of most components, yes, we are in the 90% range on capacity utilization rates, and, therefore, pricing has been relatively stable -- not dropping, but not actually rising yet.

More recently there’s been constraint on the back end, package and test, for some of the standardized components, and as Harley mentioned, we are seeing a little bit of upward pressure on pricing there. But the back-end capacity can be expanded much more rapidly than the front-end capacity can be expanded. And so there’s a reluctance on behalf of the suppliers to get too aggressive on ASPs there.

The second thing is when measuring ASP, it is really difficult because there are a lot of moving parts, if you will -- you know, generation shifts, you know, lack of same-store sales data, so to speak. And one of the macro factors that’s been driving the industry is that consumer has been growing much more rapidly than the traditional business consumption. And consumer, by nature, is higher volume and, therefore, lower price. So while the industry’s growing and getting more healthy, more of the business is flowing into the consumer segment, and the consumer segment is typically lower ASP devices than, say, high-end [indiscernible] infrastructure, for example, or medical instrumentation. But I think those are all factors in ASP.

The last comment I’ll make is -- but if your question is where is it going from here, if capacity utilization continues to rise and product lead times continue to extend, I think we should expect some pricing expansion on a same-SKU basis as you get into the back half of the year.

Okay. Thanks.

You’re welcome.

Henry Naah, Lehman Brothers.

Excellent, good quarter.

Thank you.

Just real quick, I’m wondering if you could help me understand the year-over-year decline in gross margins on the EM business with pricing being relatively stable?

Well, year over year, I’m not sure the prices were that stable going back that far, and you’ve also got the geographic movement to Asia in a pretty big way. So I think, as we said in prior quarters -- I’m thinking back here to sort of summertime and last spring, but I think we talked about how competitive the environment was amongst the manufacturers and the distributors and that it was putting downward pressure on our margins, and that seems to have now abated and stabilized.

So year over year, the comparisons are still negative, but sequential, they’re looking quite stable.

Okay, great. Thanks, guys.

You’re welcome. Okay, Vince, I think we’re well out of time.

Okay. As we conclude today’s quarterly analysts’ call, we will now scroll the slide mentioned at the beginning of our webcast that contains the non-GAAP to GAAP reconciliation of results presented during our presentation, along with a further description of certain charges that are excluded from our non-GAAP results.

This entire slide presentation, including the GAAP financial reconciliation, can be accessed in downloadable PDF format at our website.

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.

This concludes today’s conference. Thank you for your participation. You may disconnect your lines at this time.