安富利 (AVT) 2007 Q4 法說會逐字稿

Welcome, ladies and gentlemen. Please stand by. Our presentation will now begin. I'd 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 fourth quarter and fiscal year end 2007 corporate update. If you're listening by telephone today and have not accessed the slides that accompany this presentation please go to our website www.Ir.Avnet.Com and click on the icon, announcing today's event. 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 operation that exclude certain items. Reconciliations of the Company's analysis of results to GAAP can be found in the Form 8-K filed with the SEC today in several of the slides in this presentation and on Avnet's Investor Relations website at www.Ir.Avnet.Com.

As mentioned in the third quarter with the acquisition of Access Distribution and reflecting recent industry trends, the company is recording supplier service contracts on a net revenue basis rather than on a gross basis. While the change reduced Technology Solutions sales and cost of sales in second half of fiscal 2007, it will have no impact on operating income, net income, cash flow, or the balance sheet, thereby positively impacting margins. As we provide the highlights for our fourth quarter and fiscal 2007 please note that we have excluded certain items from the prior period in accompanying slides in order to facilitate comparison with the current periods. These items include restructuring, integration and other charges resulting primarily from the acquisitions of Memec and Access and the divestitures of some non-core businesses. Additionally, in the pro forma results, prior periods are adjusted to include acquisitions and exclude divested businesses as well as reflect the revenue change from gross to net for the sale of supplier service contracts.

Before we get started with the presentation from Avnet management, I'd 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 fourth in Avnet's filings with the Securities and Exchange Commission. In just a few moments, Roy Vallee, Avnet's Chairman and CEO will provide Avnet's fourth quarter and fiscal year end 2007 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 remark, Roy will wrap up with additional comments and provide first quarter fiscal 2008 guidance after which a Q&A will follow. Also here today to take any questions you may have related to Avnet's business operations is Rick Hamada, Avnet's Chief Operating Officer; Harley Feldberg, President of Electronics Marketing; and John Paget, President of Technology Solutions. With that let me introduce Mr. Roy Vallee, to discuss Avnet's fourth quarter fiscal year end 2007 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. When discussing the highlights of fiscal 2007, I really have to start by taking you back to early 2001 when we embraced value based management or VBM. Our driving value initiatives were focused on creating shareholder value by managing the financial performance of all Avnet's business units to a return on capital employed of at least 12.5%. From this return metric, we developed appropriate business metrics across the enterprise that became the basis for our operational and compensation plans. We've made steady progress toward our financial goals and the fourth quarter of fiscal 2007 represents a significant milestone as it is the first quarter since our VBM journey began that we achieved proceeds of 12.5% for the Enterprise.

Equally significant is the fact that all of our key financial metrics, including operating margin, excluding certain charges, asset velocity, and return on working capital were within our target ranges. This balanced performance across both the income statement and the balance sheet is further evidence that our VBM approach is building a business model and culture that can continue to create shareholder value for years to come.

We set sales records for the year and the fourth quarter but another important highlight of fiscal 2007 was the operating leverage that we realized even though growth in some of our businesses slowed. On a pro forma basis after adjusting for the change to net revenue for the sales of supplier service contracts at TS and the impact of acquisitions and divestitures, revenue grew by 5.7% over fiscal 2006. Operating income dollars which were not impacted by the change to net revenue accounting grew more than three times faster than revenue as increases in productivity allowed over 90% of our gross profit dollar growth to drop through to the operating income line. This allowed us to also set operating income records for the year and quarter excluding certain items. Strong execution at both operating groups combined to drive Avnet's operating margin up 84 basis points over fiscal 2006 to 4.4% with 10 basis points of the improvement resulting from the change related to the sales of supplier service contracts.

With return on capital consistently well above our cost of capital, another benefit of our VBM initiative is the cash generation inherent to our new business model. For those of you who were at our analyst day last December, you may recall that I highlighted several structural changes that have reduced volatility in the electronic components markets. Ray Sadowski also devoted part of his presentation to reviewing how our higher asset velocity combined with improving margins allows us to self-fund growth resulting in better cash generation through the cycles. Fiscal 2007 was an exemplary proof point as higher profits and stronger working capital velocity combined to generate free cash flow of $746 million before cash used for acquisitions. Prior to VBM, we only generated that magnitude of cash during severe cyclical downturns, when working capital was declining in absolute terms in concert with sales.

For fiscal year 2007, over 80% of the cash flow from operations was generated by profits after adding back noncash items with the remainder coming from working capital efficiencies. Since the bubble, we have used much of our free cash flow to pay down debt and deleverage our balance sheet, but now, with our investment grade credit statistics achieved we are using this cash flow to invest in value creating M&A.

That leads right into our next highlight, the continued execution of our acquisition strategy. In fiscal 2006, EM substantially enhanced its competitive position and financial performance with the acquisition and integration of Memec. Over the past 12 months, Technology Solutions expanded its position as the global leader in providing Enterprise computing solutions from the world's leading Enterprise IT manufacturers by announcing a strategic acquisition in each region. While each of these acquisitions brings unique attributes including talented employees, complementary customers and new suppliers, all of them support our rosy threshold of 12.5%. With TS consistently exceeding our return hurdle rate, we have been focused on growing this business and thereby economic profits. Collectively, the three acquisitions announced, Access, Azure, and Magirus will enhance our competitive position in all three regions and add approximately $2.6 billion to Technology Solutions top line while accelerating economic profit dollar growth.

With our strong balance sheet and consistent cash generation, we will continue to pursue value creating acquisitions that will expand our geographic coverage, broaden our product portfolio, and/or increase our scale and scope competitive advantages. The combination of applying VBM principles to managing our existing operations and a disciplined approach to M&A is is allowing Avnet to create more shareholder value than ever before. We are clearly in Avnets value creation era.

In fiscal 2007, Electronics Marketing once again realized year-over-year improvement in key financial and productivity metrics with contributions coming from all three regions. While growth slowed from the high single digits in fiscal 2006 to the mid single digits in fiscal 2007, EM's focus on profitable revenue coupled with expense and working capital productivity resulted in significant progress toward our long term financial goals. After adjusting for the divestiture of some non-core businesses in fiscal 2006, EM increased gross margin 53 basis points from the prior year and 33 basis points as reported with all three regions contributing to the improvement. As a result of the continuing focus on expense efficiencies, 90% of the incremental gross profit dollars flowed to EM's operating income line. Operating income margin at EM of 5.5% for the year was up 95 basis points over fiscal 2006 and at 5.8% for the last two quarters was within our target range of 5.7 to 6.2% for the entire second half of fiscal 2007.

On the balance sheet, EM's working capital at the end of the year as a percent of sales dropped 185 basis points year-over-year to a record low 20.5% of sales. Finally, EM's operating income per employee increased over 30% for the second straight year. This performance demonstrates that our focus on profitable growth, operational excellence, and people development is having a transformative impact on our financial performance.

Looking at the quarter for EM, the highlights read like a continuation of the fiscal year with expense discipline working capital efficiencies contributing to further expansion in operating income margin and returns. At 5.8%, operating income margin was up 31 basis points over the year ago quarter. This is the seventh consecutive quarter that EM has increased operating income margin year-over-year. Through ongoing process improvements and further collaboration with our trading partners, EM reduced inventory by $48 million sequentially while growing sales slightly which resulted in record working capital velocity and a reduction in this cash cycle by more than five days from the fourth quarter of fiscal 2006.

This increase in profitability combined with record working capital velocity resulted in a 258 basis point year-over-year improvement in return on working capital with all three regions making significant strides. For fiscal 2005, just two years ago, EM was less than halfway toward our goal of 30% return on working capital and with this most recent performance, they are now well within reach of that target.

In the June quarter, EM revenue reflected typical seasonal trends and was up 0.9% sequentially. Year-over-year, revenue grew 0.8% and was up 1.3% after adjusting for divestitures in the year ago quarter. The Americas region grew 3.6% sequentially and was down 3.4% when compared with the fourth quarter of fiscal '06. Asia which began to pick up momentum after the Chinese New Year was up 10.2% sequentially and 7.3% year-over-year. In the EMEA region, after several strong quarters of growth, revenue was down 0.6% year-over-year on a reported basis and up 2.3% on a pro forma basis. Excluding the impact of foreign currency translation and divestitures, the EMEA region declined 4.6% year-over-year.

We were encouraged by the activity at our large EMF customers where sales were up globally by over 3% sequentially. This appears to indicate that the excess inventory situation at our large EMS customers which significantly impacted the Americas region in fiscal '07 may be improving. While EM's book-to-bill ratio for the quarter finished just slightly below 1 to 1, we are encouraged by the strong showing for the month of July where our book-to-bill ratio ended at the highest level in the past year.

Turning to Technology Solutions, the fiscal 2007 highlights start with the acquisition of Access Distribution. By integrating the world's largest value-added distributer of Sun Microsystems products, TS enhanced its position as the global leader in providing Enterprise computing solutions while adding other important complementary franchises. The combination with Access is providing tangible cross-selling opportunities as TS now has an expanded network of value-added resellers supported by a very talented team of people with deep technical expertise and enhanced capabilities. The integration was completed at the end of June and we have realized annual synergy cost savings in excess of $15 million.

On the financial front, Technology Solutions had another strong performance in fiscal 2007 with revenue growing over 20% to $6 billion. Pro forma revenue growth of 5.5% was dampened primarily by soft microprocessor sales. On the bottom line, operating income grew 40.1% to a record $232 million for the fiscal year. Operating income margin for the year grew 55 basis points to 3.9% with roughly 40% of the improvement resulting from the change related to the sales of supplier service contracts. If you were to assume that fiscal 2007 sales were on a gross basis for all four quarters, consistent with how our financial targets were developed, TS's operating income margin would have been 3.64% which is near the high end of our projected range of 3.2 to 3.7%.

We have continued to expand our TS global footprint with the completion of the Azure acquisition and the announcement of the Magirus acquisition. The Azure acquisition which closed in April 2007 expands our value-added distribution of Enterprise computing solutions into Singapore, Malaysia, and other countries. With an annualized revenue run rate of $90 million and a highly skilled team dedicated to delivering comprehensive IT solutions, Azure provides a platform for Avnet to expand in Southeast Asia.

The Magirus acquisition which is expected to close in early October will enhance Technology Solutions competitive position in Europe and the Middle East, making Avnet the largest value-added IT distributor in the region. Magirus will significantly increase our presence in the two largest European markets Germany and the UK. While expanding our existing operations in six additional countries. With approximately $500 million of additional annual revenue, TS will have unique scale and scope advantages that further enhance our value proposition to our trading partners.

TS delivered its 16th consecutive quarter of year-over-year expansion of operating income and operating income margin as operating income grew 70.5% to a record $68.7 million and operating income margin increased 42 basis points to 3.9% or 4 basis points adjusted for the benefit of the change to net accounting for sales of service contracts.

In the fourth quarter of fiscal 2007, Technology Solution sales of $1.77 billion were up 52.1% as compared with the year ago quarter on a reported basis and up 8% on a pro forma basis. At a regional level, organic revenue growth was 115% then 20.9 in Asia and EMEA respectively, while the Americas was down 0.9%. Sequentially, Technology Solutions grew reported revenue by 21.3% and pro forma revenue by 20.6%. This strong sequential growth was driven by the Sun Microsystems year-end as pro forma sales of Enterprise Computer Products were up by 23.9% with all three regions delivering growth both sequentially and year-over-year. We continue to see strength in the SMB market with demand for storage products and industry standard servers driving the year-over-year growth. Now, I'd like to turn the commentary over to Ray Sadowski , Avnet's Chief Financial

Thank you, Roy, and hello, everyone. Let's begin with an overview of our operating results for the fourth quarter fiscal 2007. This slide shows a year-over-year comparison with $1 in percent change in highlighted columns on the right. Please note that we have included a reconciliation to GAAP net income at the bottom of the slide to account for the restructuring and other items for both periods presented. As previously mentioned beginning in the March quarter of fiscal 2007, our method of recording revenue related to the sales of supplier services contracts has been adjusted to record those contracts on a net basis rather than on a gross basis, while the prior quarters remain as reported.

In the June quarter reported sales of $4.24 billion or 17.3% higher than the year ago quarter. Organic revenue growth adjusted for the change of our method of accounting with services revenues related to supplier contracts and the impact of acquisitions and dispositions was 4% over the year ago quarter. Gross profit of $551.6 million was up by $69.7 million as compared to with the fourth quarter of fiscal 2006 while gross profit margin decreased 32 basis points year-over-year to 13% in the fourth quarter of fiscal 2007.

The year-over-year gross margin decline was primarily due to the change in business mix as Technology Solutions grew to be a larger percentage of consolidated revenues with the addition of Access. Remember Technology Solutions has a lower gross margin than Electronics Marketing although it does have significant higher asset velocity and returns on capital. Including Access, TS revenue grew to 42% of Enterprise revenue from 32% of the total in the year ago quarter. For the fourth quarter, EM's gross profit margin increased 38 basis points year-over-year while TS gross profit margin decreased 18 basis points on a year-over-year basis. Operating expenses of $355.8 million were up by $25.7 million or 7.8% year-over-year excluding restructuring and integration charges in both the current and prior year fourth quarters, primarily due to the addition of Access Distribution at the beginning of the calendar year. As of the end of the fiscal year, the Access business has been fully integrated into the organization, again ahead of our expectations.

We continue to benefit from ongoing improvements in productivity at both operating groups as they reduce their operating expenses as a percentage of gross profits and thereby improve their operating income margins. The continued focus on operational excellence initiatives is having a positive impact on our customer service levels, employee engagement and our bottom line.

Operating income of $195.8 million was up 29% as compared with the prior year quarter excluding certain items from both periods. Operating income margin improved 42 basis points year-over-year to 4.6% benefited by roughly 20 basis points from the change in the services revenue treatment. Below the operating income line, year-over-year interest expense declined 29.4% due to lower debt and a lower effective interest rate as a result of our cash flow generation and refinancing activities. Taxes increased $15.2 million due primarily to the increase in pre-tax income. The effective tax rate for the year came in at 33% resulting in a 31% effective tax rate for the fourth quarter of fiscal 2007 due to the trueup impact which added roughly $0.02 per share to our quarterly earnings. We currently estimate that our effective tax rate will be between 31 and 34% for fiscal year 2008.

Net income excluding certain charges in both periods increased by $36.9 million or 42.4% to $123.9 million, driving diluted earnings per share to $0.81 for the June quarter as compared with $0.59 per share in the year ago quarter. GAAP net income increased by $65.9 million to $124.7 million or $0.81 per diluted share as compared with net income of $58.8 million or $0.40 per diluted share in the prior year fourth quarter. As I noted earlier, earnings per share in the current quarter were positively impacted by approximately $0.02 per share due to the decrease in the effective tax rate. Earnings per share was also impacted by increase in diluted shares outstanding from [150] million in the March quarter to 153.1 million in the June quarter.

This next slide looks at our key productivity metric of expense dollars to gross profit dollars over the last four years. The bars represent the individual quarters while the trend line depicts the performance over a trailing 12 month period at the end of each quarter. On a trailing 12 month basis, our ratio of expense to gross profit dollars excluding restructuring and other charges declined from 72.8% at the end of last years June quarter to 66.5% in the current quarter. The 625 basis point improvement since last year is further proof of the operating leverage we have built into our business model at both operating groups. On a year-over-year basis, Electronics Marketing improved its expense to gross profit ratio by 111 basis points while Technology Solutions improved its ratio by 488 basis points. Profitable growth and operational excellence strategies are being executed well by the Avnet team as clearly shown by achieving our long term financial metrics that Roy mentioned earlier.

Similar to the last slide, we are providing both quarterly and a trailing 12 month trend line which portrays operating income margin over the last four years. The trailing 12 month operating income margin improved from 3.5% in the fourth quarter of fiscal 2006 to 4.4% in the current quarter, benefited by approximately 10 basis points due to the change to net revenue treatment on the sales of supplier services contracts. As we look at the June quarter on a stand alone basis, operating income margin of 4.6% improved 42 basis points year-over-year benefited by roughly 20 basis points due to the change related to the sales of supplier service contracts, with both operating groups contributing to the improvement. At EM, operating income margin of 5.8% improved 31 basis points and a TS operating income margin of 3.9% improved 42 basis points as compared with the year ago quarter with the majority of the improvement coming from the change in service revenue treatment, roughly 38 basis points.

On this graph, we have shown return on capital employed which is a key metric in our value based management philosophy that we introduced more than six years ago. As is evident on this slide over the past few years, we have made steady progress to achieving our stated target of 12.5 to 13% as we ended the fiscal year within our long term business model range well ahead of our projected time frame. From 3.2% at the end of September 2003, our trailing 12 month return on capital employed has increased by more than 3 times to 11.3% in the June quarter. This multiyear trend is all about our focus on profitable growth, operational excellence, and returns on capital throughout our business. On a year-over-year basis, the quarterly return on capital employed increased 191 basis points to just over 12.5%.

As depicted on this next slide, pro forma cash flow, that is cash flow generation before taking into account cash use for acquisitions was $297 million for the quarter and $746 million for the trailing 12 months. In conjunction with the last components down cycle, which began in the second half of calendar 2004, we generated over $400 million of pro forma free cash flow on a trailing 12 month basis; however the combination of higher margins and faster asset velocity have improved the cash generation characteristics of our business model. With this significant cash flow generation, we have been able to fund several key acquisitions during the year and anticipate funding additional acquisitions with cash.

Based upon current interest rates and anticipated cash flow, we expect interest expense to be roughly between 70 million and $80 million for the upcoming fiscal year. With the recent acquisitions and refinancing of our long term debt completed during the year we have continued our trend of maintaining what we believe to be investment grade credit statistics. On a trailing 12 month basis at the end of the June quarter, debt to EBITDA was at 1.6 and EBITDA coverage was at 9.9 times. Over the course of the fiscal year 2007, we have strengthened our balance sheet substantially providing us with greater flexibility to fund growth and accelerate the creation of shareholder value. Now, let me turn it back over to Roy who will provide our outlook and guidance for the September quarter. Roy?

Thank you, Ray. Looking forward to our next fiscal year, let me provide some commentary on our guidance for the September 2007 quarter and for the entire year. For Avnet's first quarter fiscal 2008, management expects sales at EM to be in the range of 2.4 billion to $2.5 billion, and anticipate sales for TS to be between 1.6 billion and $1.7 billion. Therefore, Avnet's consolidated sales are forecasted to be between 4 billion and 4.2 billion for the first quarter of fiscal 2008. As a result, management expects first quarter fiscal 2008 earnings to be in the range of $0.65 to $0.69 per share up 18 to 25% as compared with last years first quarter. In addition, full year fiscal 2008 earnings per share are currently expected to grow approximately 15 to 20% as compared with $2.76 in fiscal 2007, excluding certain items and the impact of acquisitions not yet completed.

Sequentially, non-GAAP earnings per share is being impacted by normal seasonality as well as by some additional items. Remember historical normal seasonality includes sequential weakness at our higher margin EM Western regions and strength in our lower margin EM Asia business. In addition, the following items are impacting our sequential guidance. One, earnings per share in the fourth quarter 2007 was positively impacted by the year-end effective tax trueup of approximately $0.02. Number two, greater than expected profitability at EM EMEA including higher year-end supplier bonuses. Number three, historical seasonality being amplified by the impact of the acquisition of Access, which has a particularly strong June quarter coinciding with its largest suppliers fiscal year end resulting in a negative impact to our sequential results by approximately $0.02 to $0.03. And four, stock based compensation expense of $0.04 in the first quarter versus approximately $0.02 in the fourth quarter. With that, let's open up the lines for Q&A. Operator?

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Matt Sheerin with Thomas Weisel Partners. Please proceed with your question.

Yes, thanks. Good afternoon, everyone.

Hi, Matt.

A question really just regarding Europe. It looked like it was down around 8.5% sequentially in your Electronics Marketing, it looked like a little bit more than you were expecting and we were expecting. Could you tell us what's happening in Europe and what trends do you see going into the Summer?

Sure, Matt. I think I'll flip I'll flip that Harley and let him take the first shot.

Yes, hi, Matt. Yes, I think it was a little bit deeper than we had expected , but it doesn't cause us any concern actually. We see the business continuing at a very healthy rate up to and including into the Summer

So, Matt, just slightly more than we would have expected with corresponding weakness in bookings, but it does not appear to be impacting the Summer and we're looking for normal seasonality out of that region this Summer.

Okay, and Roy, you mentioned the book-to-bill was pretty high at the end of July. Could you tell us at least approximately what it was and by region? Was it across-the-board or was it just by Asia or U.S.?

Well, clearly, the bulk of the strength, Matt, is coming from Asia, and by the way, if you look at cycles, really since the beginning of this decade, Asia has been the leader of the cycles, whether they be up or down, and we have seen continuing strength in Asia since Chinese New Year, so the largest positive book-to-bill is clearly in Asia; however, all three regions are positive book-to-bill.

Okay, great. And my last question for now is your guidance for FY '08, the EPS guidance, what revenue growth assumptions do you have there and should we expect gross margin on a year-over-year basis to be down because you're going to have some more acquisitions on the computing side and then also as the EMS business comes back, that should work against you in gross margins, right, because that's a lower gross margin business?

So, yes. The growth expectation we have in the guidance that we gave is in the midteens. Now, bear in mind that we owned Access for one half of fiscal year '07 so if you look at it more from a pro forma or organic growth rate, it's in the high single digits which we believe to be slightly faster than the overall market that we serve. We do expect revenue coming from these large EMS customers to continue to expand during the fiscal year '08 period and that should have a negative impact on our gross margin but should not have a negative impact on our operating margin. And as far as the TS EM mix, Matt, what's baked in is the mix as we know it today. We have not factored anything for acquisitions which have not yet been completed and that would include the Magirus transaction.

Got it. Thanks a lot.

Or if I could add to Matt's question on the EMS, please also keep in mind that that segment for us makes up about 10% of our total components revenue.

Okay, thanks.

You got it.

Thank you. Our next question comes from Brian Alexander with Raymond James.

Thanks. Roy, just to pick up on that last question, when you referred to the organic or the pro forma growth that you're embedding in your guidance for FY '08 and you said if you back out the Access acquisition you're looking for high single digit growth. Were you referring to the EPS growth or the top line growth?

That's the top line growth, Brian, and the EPS growth, we don't try to differentiate between organic and inorganic because by the time you get to EPS, all the interest expense is in, if any equity was used it's in the dilution of share count, and we think EPS growth is EPS growth.

Okay, no, I just wanted to clarify that the expectation was for high single digit organic top line growth.

That's correct. And as we've stated we're looking at midteens to 20% EPS growth year on year.

Yes.

And again, excluding transactions which have not yet been completed.

Right. I think when you originally gave the accretion for Magirus, that was about $0.08 but that was for the calendar '08 year so for the fiscal year it's probably something around $0.05 or $0.06 is that what you're embedding in that guidance as well?

Yes, I think that's fair--.

Not in the guidance.

Sorry. I think it's fair to assume something like $0.06 for Magirus because although we won't, frankly, there are not a lot of synergies in Magirus because this is a carve-out and we're buying predominantly only the assets that we want to retain, but in addition to that, just as a matter of coincidence, the transaction is scheduled to close just prior to the fiscal year ends of Hewlett Packard and IBM, the two suppliers so we're going to have a good revenue quarter the first quarter of ownership and then by the second half we should be well down our path towards integration and then just final comment, that is not in the EPS guidance. That is incremental to the guidance that we have given.

Right. And then on the, just on the expenses you did another great job this quarter controlling expenses and if you drill down on profitability by segment, it looks like the Corporate expenses were down about $5 million sequentially despite revenue being up. Could you just walk us through any actions you might have taken during the quarter to reduce overhead and is this the right baseline to be modeling going forward?

I think, hi, Brian, it's Ray. There's a number of actions that were taken throughout the business from an expense perspective that primarily relate to the integration of Access, so if you look at just the Corporate expenses and you exclude any restructuring items, I think on a go forward basis you will see corporate expenses move up a little bit primarily because of the stock based compensation. We do book all of our stock based compensation on corporate and so with another year of stock compensation expense coming on, keep in mind that stock compensation expense covers a multitude of years and since the new accounting rules have come into play, we're adding new programs but no old programs are falling off because our programs typically go over a four year average period of time so that's causing an increase overall.

And then just finally on the improved book-to-bill that you saw in July, can you just talk about generally changes in end markets that you've seen within the components business? I know Telecom has been a drag for you as well as the overall industry for the last few quarters. Is that something that you saw picked up in the month of July and can you just comment on industrial and some of the other end markets? Thanks.

Sure, hi, Brian, this is Harley. Overall, as we said previously with the global EMS guys, typically there's a pretty strong overlay with that customer base with our communications business, so we did see a moderate increase as Roy suggested earlier in that segment and that's helping, and that continues into the Summer so our booking activity there is encouraging. In Asia, we're seeing very strong growth and it's widespread across multiple industries there, most of which tend one way or another to tie back to digital consumer.

Thank you very much.

You're welcome.

Thank you. Our next question comes from Bernie Mahon with Morgan Stanley.

Hi, good afternoon.

Hi, Bernie.

A question for you on just kind of a two part question. So, over the last say three quarters you've done a really good job of generating cash from operations so I guess first , what would your expectations be there say for fiscal '08 and then along the same lines, how much cash do you think you need on your balance sheet to kind of run the business and then with kind of this excess cash you have, it sounds like you're going to be looking to make further acquisitions and could you just talk a little bit about geographically where you see the opportunities for acquisitions? Like are there a number of attractive acquisitions that you can make right now and also what segment I guess you would make

Okay, so the cash flow in fiscal '07 was pretty dramatic, as we talked earlier, the kind of numbers we haven't seen since a major downturn in revenue. I think if you normalize and look at our internal business plans, we would expect the annualized cash flow to fall out in the 300 million to $400 million range and just keep in mind that any given quarter could be very volatile because based on the size of our working capital, the change of one day could make $150 million of difference, so quarterly I think it will be volatile but on an annualized basis, we should be in the 300 million to $400 million range.

As far as how much cash we need to operate the business, as you know, our balance sheet is countercyclical, so we tend to not need to keep a lot of cash; however, managing all of that working capital all over the world requires a reasonable amount of float, and when you add it all up, we think on average, it's a 200 million to $250 million flow that we need to keep in our accounts. Anything over that, you could I guess consider to be excess and then of course the question is how are we going to put that to work. As we stated, our primary goal here is to invest it in value creating M&A, and it turns out that our pipeline for M&A is reasonably strong or fairly active depending on how you want to call it, and Bernie, we have opportunities in all three regions and in both operating groups, and so while we've got some priorities around M&A that provide us with growth as well as with cost synergies, we have a variety of sizes, geographical locations, and operating groups in our M&A pipeline.

Okay, so it wouldn't be surprising at all to see over the next year say a handful of acquisitions? I mean that's not really out of the question, given say 3% global GDP or 4% global GDP number?

Yes, it's hard to forecast M&A because you don't know until it's over, quite honestly. We have a very disciplined approach. We've got our three magic words of culture, strategy, and economics, that must pass muster before we'll complete any deal so it's really hard to forecast the number but if your question is would we be surprised a year from now if the number were a handful, I think my answer would be no. No surprise there.

Okay, thanks a lot.

You're welcome.

Thank you. Our next question comes from Steven Fox with Merrill Lynch.

Hi, good afternoon.

Hi, Steve.

Two questions. First of all on the Access acquisition since you just went through the seasonally strongest period with it, can you talk about any other surprises, positive or negative that cropped up? And Roy, I know it's not a cost play that you did with this one, but is there anymore costs that could come out in '08? And then secondly, Ray, on the SG&A expense line, where do you think the SG&A can go as a ratio to gross profits in '08?

Okay, I'll let Ray think about that while we talk about the Access deal. Steve, in terms of surprises, look, there's degrees of surprise. I can tell you that revenues in the June quarter were maybe a little bit less than we had hoped for but on the other hand, profitability was a little bit better than we had hoped for, and so all in all, we're very very pleased with what we've seen so far in our second quarter of ownership, so now we'll have a pretty significant sequential decline but then, Sun will also experience a reasonably strong December quarter and that will be part of our TS sequential gain in the second quarter as we come out of the Summer.

I would say from a synergy point of view, Steve, as you said it wasn't really a synergy driven deal per se. We did remove or we said we would remove about 20% of the Access SG&A and still maintain the Sun business unit as a stand alone business unit similar to IBM and HP, and so we exceeded that by a few million dollars. It's small though in the big scheme of things. If it's $1 million a quarter, it's not a big event in Avnet's P&L, but as far as any synergies going forward, I think that there of course will be ongoing productivity and efficiency gains and further integrations with our business, but on a relative basis I think they will be hard to identify in the Avnet P&L. Okay, so Ray, you ready?

Sure, hi, Steve. From a expense and GP perspective if you look back over the last couple years as you probably know we went in '05 to almost 78%, in '06, down to 73% and the year just ended down to 66.5% expense of GP dollars. As we look forward to '08, we're right now estimating roughly a 200 basis point improvement which will get us down to about 64.6%, again, wouldn't factor any acquisitions or anything like that but that's roughly the magnitude that we're looking at. Again, if another Memec transaction came along or something like that certainly could change it but based upon what we see right now we're looking for about a 200 basis point improvement over the entire year.

And Steve, just a reminder on that, remember what we've said in the past, businesses within our portfolio who are achieving return on capital in excess of our hurdle rate, we will typically allow them to budget one half of their gross profit dollar growth for additional SG&A fuel, if you will, and the other half goes to operating income, so as you model that, you can see that this expense to GP ratio should continue to decline on a year-over-year basis with a theoretical goal out there at some point in the future of 50% expense to GP.

Great. Thank you very much.

You're welcome.

Thank you. Our next question comes from Jim Suva with Citigroup.

Great. Thank you very much and congratulations. Can you talk a little bit about recently the credit markets and interest rates have been very volatile. Can you talk about your appetite for acquisitions? Would you primarily use the cash on your balance sheet in cash flow or would you be looking at potentially levering up the Company some more?

So maybe I should go first, Ray, what do you think?

Sure.

Okay, so, Jim, the primary economic metric that we use to gauge acquisition is return on total capital, and if you're a purist regarding that, you don't really have a lot of concern about whether it's equity capital or debt capital. The issue is if we drive the right return on capital then the acquisitions will ultimately create shareholder value and that will ultimately flow through to EPS so that's my theoretical white board answer. As a practical matter, based on our existing cash on hand and our projected cash flow, we would expect to fund the bulk, if not all of our M&A activity through cash and the exception would be if we found a particularly large transaction in which case we would probably end up using some equity to preserve our credit statistics.

Keep in mind we do have from a cash perspective short-term our credit lines, we have roughly $1 billion available, so dealing with what's going on the credit markets today, we still have plenty plenty of access to whatever cash we need to close a transaction and as Roy just said not really looking to use any equity to do a transaction so if we need to wait for the markets to stabilize in order to go into the marketplace and add some more permanent leverage we certainly can do that because our short-term facilities are pretty significant.

And Jim, we tend to maintain at least a $0.5 billion and typically more like $1 billion of liquidity at all times for that purpose.

And then as a quick follow-up, your outlook for, as it compares to Europe and the seasonal softness that we experience now, as you sit there in your chair and it's already into August, does Europe look better than normal? Does it look normal, worse than normal? How should we kind of gauge Europe right now demand?

Well, I think first of all so you're five weeks into a 13 week period, and Jim, we say this every quarter, how important the last month is, so when you talk about Summer in Europe, the importance of September just can't be overstated, so it is a heavily back end loaded quarter in Europe this quarter. All that said, I would tell you that I think our computer business is very much in line with our expectations and our components business, coming off the June quarter we might be a little ahead of our expectations for the summer quarter.

Great. Thank you and congratulations.

Thanks again.

Thank you.

Our next question comes from Thomas Dinges with JPMorgan.

Hi, good morning, guys.

Hi, Tom.

A quick one for Ray just to follow-up on the cash flow items. Three out of the last four years it looks like you usually consumed just a little bit of cash in September because you probably got tax payments and some bonus payments and so fourth. Any reason to think that's going to be different this year?

I don't think dramatically different. I'm not sure we'll actually consume cash but it will certainly not be the robust cash quarter that the other quarters have been.

Okay, and then one for you, Roy. One of the things that has come up part on the acquisition funding is obviously the credit markets are a little tough for some of the non-strategic buyers like yourself in certain instances now. Has that done anything on the acquisition front in terms of when you go head-to-head with any of those guys that perhaps it's maybe a little bit easier for you to get something done because you've got available dry powder right now and then I have a last quick follow-on.

Tom, so it is revenge of the strategic buyers right now, so we are back. I will tell you that in most of our deals, because of the nature and the size, maybe all of the characteristics, we haven't seen a lot of private equity competition. Typically when we do, it's on the larger transactions, but interestingly enough, the observation I have is that once we engage and we go to work on a transaction, our hit rate is very high, and so our projections on our M&A pipeline are such that we may be in fact seeing less competition than in the last year or so.

Okay, and then one quick one on the TS business. Obviously between yourselves and your largest competitors, you guys have consolidated many of the largest companies that are out there, especially when you include the Magirus transaction that's left to consolidate. But you have seen some of the broad line distributors at least sign up some franchise agreements and the view there has generally been they can kind of go after new VARS and so forth but what's kind of the view from the VAR community with some of the new entrants that you have out there in that business because it's a closed loop system. I'm just kind of curious to get your view what the VARS are thinking and how the competitive dynamic could change possibly over the next two, three years in that market?

Well, I have my opinions about that but we have John and Rick sitting in the room who actually know what's going on so why don't we ask them to talk. John, do you want to comment?

Sure. We continue to add product sets and suppliers and specific technology situations like Voice-over-IP and we recently added VMware and the virtualization consolidation business so we continue to push from a technology standpoint in growing those adjacent markets to the markets that we have, certainly utilizing the primary vendors that we have from an overall server software standpoint, so I see us being in very good position to compete across all of the technology verticals that are going on in the marketplace where the growth segments are today.

Rick do you want to add anything to that?

No, I would just tell you anecdotally from the VARS, both us and our big competitor you mentioned have built a different kind of relationship way beyond just typical time and place utility or extension of credit line. They expect value added distribution to really be a part of their developing their growth strategies. We don't grow if they don't grow. They understand that link, and the expectation of the service level, the involvement in the business, et cetera, is just something that the more volume oriented IT players have a hard time trying to invest in based on their models.

Okay, thank you.

Tom, this is Roy. I'll make one last comment because I think it's a very good question. The last comment I'll make is bear in mind that the two A's have been growing their business in the open sourced product area, such as industry standard servers. In addition to that, you've got companies like Scan Source and Wescon who have been operating in a specialist model but in an open sourced environment, and I think if you look at the future for value add distribution, it's a lot more about focus, a limited number of suppliers focused on a relatively limited number of customers and the kind of value as Rick was trying to describe, the kind of relationship that we build with that set of trading partners compared to the role that a broadliner plays given hundreds of vendors and tens of thousands of customers. So we're feeling as you see for 16 quarters in a row, we're not just surviving. We're expanding our Technology Solutions operating margin and we feel comfortable that we have plenty of growth and plenty of value left to add.

By the way, Roy, just a final point. Europe has always been open source, but Magirus was able to thrive and build quite a business there and we'll be adding that so the closed source model mentality is really a North America phenomenon.

Okay, thank you.

You're welcome.

Thank you. Our next question comes from Harry Blount with Lehman Brothers.

Thanks, guys. A couple questions. First, on the electronics side of the equation, have you guys seen lead times start to extend in any particular component segments that represents a little bit of a shift in direction?

Hi, Harry. I would say that as a macro answer, the answer would be no. There is typically an expansion that will occur this time of year, each year, as it relates to to a build up of the holiday season so we are seeing some tightness in some sporadic areas but it can almost always be tied to a ramp up in Asia and we don't see anything significantly different than what we experienced over the last couple quarters.

Okay, and then on the Technology Solutions side, probably for John. We've seen some fairly mixed results out of the storage vendors over the last few quarters. The server side seems to be generally okay, software seems to be holding up generally okay. Any comments on just in general how you guys performed in that segment of the market and your outlook there?

Harry, our storage business continues to grow pretty significantly quarter-over-quarter, year-over-year, as we're bringing that new technology to the marketplace in open storage, so while yes, we're seeing some of the vendors perhaps not perform up to expectations, our business continues to grow at or well above the expectations that we have.

Okay, and then lastly on the cash flow side of the equation I just wanted to come back to that question from earlier. I guess in just doing some rough math on the cash flow based on your net income guidance and taking some kind of expectations around D&A and CapEx and working capital, I guess I was coming up with a normalized cash flow number that might have been a little bit higher than the 300 million to 400 million that you guys were thinking about, so is there a backstep in the working capital side of the equation that you're expecting or some other slide backwards?

Harry, did you build additional working capital for the additional revenue?

I did build some in, Roy, but I'd probably take it off line I guess but I did build some of that in but I guess I didn't build quite that magnitude in.

Yes, I think the numbers should tie out. If you look at income growth, offset that by working capital to sales, say if you use the current level and assume we're reasonably close to being efficient, and then a little factor for add backs on D&A minus some new CapEx, you should get pretty close.

Got it.

We can circle back and go through it a little later.

All right very good. Thank you very much.

You're welcome.

Thank you. (OPERATOR INSTRUCTIONS) Gentlemen, there are no further questions at this time.

Okay, as we conclude today's quarterly Analyst call we will now scroll through 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 reconciliations can be Accessed in downloadable PDF format at our website. We would like to thank you for your participation in our quarterly update today. If you have any questions or feedback regarding the material presented, 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. You may disconnect your lines at this time. Thank you for your participation.