安富利 (AVT) 2008 Q3 法說會逐字稿

Our presentation will now begin. I would now like the turn the floor over to Vince Keenan, of Investor Relations.

Good afternoon and welcome to Avnet fiscal third quarter fiscal 2008 Corporate update. If you are listening by telephone today and have not accessed the slides that accompany this presentation, please go to our website www.IR.AVNET.com and click on the icon announcing today's event.

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 and several of the slides in this presentation and oen Avnet's investor relations website.

As we provide the highlights for our third quarter fiscal 2008, please note that we have excluded restructuring, integration, and other items from both the current and prior year period in the accompanying slides. Additionally in discussing pro forma sales or organic growth prior periods are adjusted to include acquisitions. In respect of our recent offer to acquire Horizon Technology Group PLC, we note that this offer is regulated by the Irish takeover rules. Under those rules we are required to have a representative of our financial advisors Banc of America Securities present for the duration of this call and we are not in a position to disclose any material new information or express any significant new opinion over and above the information contained in the offer announcement of April 18.

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 SEC.

In just a few moments, Roy Vallee, Avnet's Chairman and CEO will provide Avnet's third quarter fiscal 2008 highlights. Following Roy, Ray Sadowski, Chief Financial Officer of Avnet will review the Company's financial performance during the quarter and provide fourth 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 third quarter fiscal 2008 business highlight.

Thank you, Vince and hello everyone. Thank you all for taking the time to be with us and for your interest in Avnet.

Before we get started with the results for the quarter, I would like to once again express my and our management team's disappointment with our performance this quarter. The impact of lower than expected revenue in some product categories was compounded by other issues at our technology solutions operating group creating a significant shortfall to our expected earnings. We believe that most, if not all of these other issues will prove to be short lived. To compensate for the revenue weakness we began to take corrective actions at the end of March and are in the process of taking other targeted actions in the June-quarter that should facilitate the resumption of progress toward our financial goals. Although no one can be sure of future revenue growth in the current economic environment we remain committed to achieving our stated financial goals and will continue to manage our business accordingly.

In the March-quarter, total revenue of $4.42 billion grew 13.3% as compared with the prior year quarter and earnings per share grew 4.1% over the year ago quarter. We are disappointed with the rate of EPS growth this quarter which does not reflect the financial goals that we have set for ourselves. While some specific issues at technology solutions contributed to this weaker than expected earnings performance, the bigger factor was lower than expected revenue growth in certain product categories namely enterprise servers. Although we did not see a broad based industry slow down, it is clear that macro economic issues are having an impact on our rate of growth in some areas of our business. As a result, we are taking targeted actions to adjust our cost structure at certain business unit that is have been negatively affected.

In addition, we have some acquisition integrations under way that we expect to benefit from in the June-quarter. As with all of our integrations, we will adhere to our policy of best people and best practices and are confident that with the infusion of new talent we will become a stronger and better Company. On a positive note, we generated $156 million of cash from operations this quarter and $498 million over the last four quarters. This performance when combined with our already strong balance sheet, provides us with the financial flexibility to pursue value-creating acquisitions that further increase our global scale and scope advantages and accelerate the creation of shareholder value. As an example, we recently announced an offer to purchase Horizon Technology Group, a distributor of enterprise IT products in the U.K. and Ireland.

Horizon's leading position with key technology vendors and a growing professional services practice offer an opportunity to bolster Avnet's competitive position in Europe. The transaction which is anticipated to be completed by the end of June supports Avnet's return on capital rate and is expected to be accretive to earnings by approximately $0.10 per share in fiscal year 2009 excluding integration charges. And although this was a challenging quarter, I would like to point out that despite the slowing organic growth we have encountered this fiscal year, we have generated economic profit for each of the past six quarters excluding restructuring integration and other items. Our industry leadership position and focus on value-based management has allowed us to weather some market related challenges and continue creating shareholder value. Based on our existing level of revenue, the actions we are taking should get us back on our desired rate of progress toward achieving our financial goals and we will continue to diligently manage margins and returns across our portfolio of businesses.

For the third quarter of fiscal year 2008, technology solutions experienced weak organic growth in enterprise servers which was compounded by lower rebates resulting in a surprising and significant impact on its profitability. For the quarter, operating income margin of 2.3% declined as compared with the prior year quarter and fell well below our stated financial model. We have been analyzing the issues, determining the necessary corrective actions and executing those actions as soon as appropriate. Let me review the major items for you.

To begin, softness in some product areas, most notably enterprise servers resulted in lower sales and gross profit dollars in the quarter. Looking at it on a geographic basis, a rough split of the TS profit shortfall was 60% in the Americas and 40% in EMEA. In the Americas region overall weakness in servers was exacerbated by one of our larger business unit where we saw revenue push outs at the end of the quarter resulting in lower revenues and rebates.

At TS and EMEA, lower sales measured in euros drove lower rebates, which when combined with a rebate program change by a large IT supplier resulted in gross profits in that region being significantly below our expectations. Based upon support from both suppliers, we believe that the rebate programs and goals for the June-quarter are appropriate. TS profitability was also impacted by higher than forecasted expenses in the EMEA region due primarily to integration synergy cost savings from our latest acquisition taking a quarter longer than originally expected to achieve. And due primarily to negative organic growth in some businesses segments of TS EMEA, planned progress towards our financial goals have fallen behind. As a result, we are taking cost production actions where appropriate and we expect to substantially complete the integration of ACAL in the June-quarter.

Please remember that TS had delivered 18 consecutive quarters of year-over-year operating income and operating income margin expansion prior to this quarter's shortfall. Although this was a particularly challenging quarter, we are optimistic that we can regain those margins once our integrations and restructuring actions have been completed. And while our Americas region has historically been more profitable than our EMEA region, we continue to believe that our strategy in TS EMEA will result in achieving our long-term target for return on capital of at least 12.5%.

It wasn't that long ago that our EM EMEA region was also struggling with profitability issues as they had to integrate acquisitions, streamline processes and expand geographically. Just as EM EMEA has grown to be a major contributor to Avnet's overall success we expect TS EMEA to do the same thing in the not too distant future. We plan to continue to invest in that growth opportunity and build on our position as the leader in value-added IT distribution. In the March-quarter, technology solutions sales of $1.8 billion were up 23.2% year-over-year on a reported basis and up 18.3% when adjusted to exclude the impact of changes in foreign currency exchange rates. On a pro forma basis to account for acquisitions completed in prior periods, TS sales were 10.2% higher than a year ago. While overall revenue in dollars was in line with management expectations, as I stated earlier, there were specific short falls at a product level that negatively impacted gross margin and operating income.

All three regions delivered positive year-over-year revenue growth at the Americans, EMEA and Asia were up 2.9, 72.4 and 78.9% respectively. On a pro forma basis, adjusting for acquisitions, EMEA grew 21.4% and Asia was up 32.4%. Strong double digit growth in storage solutions, networking, software and services was somewhat offset by negative growth in servers. We also saw a strong growth in processors and memory modules on a year-over-year basis although I would remind you that last year was a relatively easy compare for those products.

Looking ahead to the June-quarter, we expect slightly less than normal seasonally for the technology solutions business which is expected to grow sequentially due to the Sun Microsystems fiscal year end. While we are not convinced that the push-outs experienced at the end of March are part of a larger trend due to the strength we see in other products we are a bit cautious and will be closely monitoring the market for any signs of a broad based slow down.

Turning now to the results for electronics marketing, the third quarter of fiscal 2008 can be characterized as another quarter of steady improvement in key financial metrics despite a sluggish demand environment. In the Americas region where we are now delivering modest year-over-year growth, both operating income margin and return on working capital grew sequentially and year-over-year. Operating income margin improved 28 basis points as compared with the year ago quarter and return on working capital was up 104 basis points above our 30% target for both the quarter and the fiscal year-to-date.

Even though sequential sales growth of 3.2% at EM Americas was a bit below normal seasonality and our expectations for the March quarter, our team did an excellent job improving gross profit margin and managing expenses driving year-over-year operating income drop through to 82%.

In the EMEA region, EM continues to face a challenging market as year-over-year pro forma sales growth in local currency declined for a fourth straight quarter. Despite this challenging environment our team has done a good job of focusing on profitable revenue, expense control and asset velocity. Even though EM EMEA revenue was down 6% in local currency, gross profit margin was up 48 basis points and operating profit margin was 7 basis points higher as compared with the year ago quarter. Working capital velocity was up both sequentially and year-over-year which, when combined with the improvement in operating income margin drove return on working capital 102 basis points higher, as compared with the third quarter of fiscal 2007. Two more than 30% for the quarter.

In Asia, where we recently strengthened our position in the IP&E market with our acquisition of YEL year-over-year organic growth has continued in the high single digits for the past four quarters. As a result of the scale and scope we have created EMEA Asia, year-over-year operating profit margin as expanded in every quarter of fiscal year 2008. This performance when combined with disciplined working capital management has resulted in steady year-over-year improvement in velocity and return metrics.

EM Asia's operating margin increased 7 basis points year-over-year which when combined with improving working capital velocity drove return on working capital up 78 basis points. Through nine months of fiscal 2008, EM Asia's working capital velocity has improved 14% and its return on working capital has grown 378 basis points as compared with the comparable period in fiscal 2007.

In summary, our EM team around the world has been doing a good job of driving performance and generating positive economic profits in the face of sluggish organic growth. This steady improvement is evidence of our strong market position and the value we are delivering to our customers and suppliers. In third quarter fiscal 2008, EM revenue of $2.62 billion was up 5.8% sequentially on a reported basis and up 3.8% pro forma after adjusting for the YEL acquisition completed on the first day of the quarter. This sequential growth was slightly below normal seasonality with all three regions finishing below our expectations. On a year-over-year basis, EM revenue was up 7.3% in deliver dollars and 2.5% excluding the impact of changes in foreign currency exchange rate. The Americas region delivered another quarter of year-over-year growth with sales up 4.3% as compared with year-over-year growth of 3.7% in the December-quarter.

On a reported basis, the Asia region grew 13% as compared with the third quarter of fiscal 2007 and 6.6% on a pro forma basis. As I mentioned earlier, the EMEA region continues to be the most challenged with year-over-year revenue declines in constant currency for the fifth consecutive quarter. After adjusting for the acquisitions of Flint and Medtronic in the first half of fiscal 2008, EMEA pro forma revenue grew 4.6%.

Looking ahead to fiscal Q4, we currently expect all regions to experience typical seasonal trends which would produce another quarter of mid single digit EM growth rates year on year. Customers have remained cautious with their purchases. Channel inventory appears lean and stable lead times provide little incentive to order beyond current consumption. Similar to December we exited the quarter with a 1 to 1 book to bill ratio and we continue to monitor incoming orders, cancellations, and push outs for any signs that the current macro economic environment is meaningfully impacting our business. While there are legitimate concerns about market growth we are confident that our focus on delivering value globally through our design and supply chain services will continue to benefit us as evidenced by the fact that several suppliers have changed their channel strategy and rewarded Avnet with a greater share of their business. Now, I would 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 a review of our operating results for the third quarter of fiscal to '08 as compared to the prior year quarter. Please note that we have included a reconciliation to net GAAP income at the bottom of the slide to account for the restructuring, integration, and other items recorded in both the current and prior year third quarters.

In the March 2008-quarter sales of $4.42 billion were up 13.3% in reported dollars and up 8.4% in constant dollars as compared with the year ago quarter. Organic revenue growth was roughly 7.1% over the year ago quarter. Gross profit of $578.7 million was up by $43.9 million or 8.2% as compared with the third quarter of fiscal 2007 due primarily to the impact of acquisitions and the year-over-year weakening of the U.S. dollar against the euro. Year-over-year consolidated gross profit margins was down 61 basis points. However, electronics marketing gross profit margin was up 25 basis points year-over-year due continued focus on the growth of profitable revenue.

While EM America's gross profit margin was flat year-over-year, EM EMEA and Asia saw margin improvement. Technology solutions gross profit margin was down 150 basis points year-over-year primarily due to the rebate issues that Roy addressed earlier and other factors. Operating expenses of $401.1 million were up by $47.4 million or 13.4% year-over-year, largely due to the acquisitions that occurred during the year and the impact of the weakening of the U.S. dollar against the euro. We expect the impact of ongoing acquisition integrations and the corrective actions addressed by Roy earlier will have some positive impact in the June-quarter, further benefit in the September-quarter with the full benefit being realized in the December-quarter. Operating income of $177.6 million decreased $3.5 million or 1.9% as compared with the prior year quarter. Operating income margin declined 62 basis points year-over-year to 4%. Again the decline in both operating income and operating income margin was due to some sales weaknesses compounded by rebate issues.

Below the operating income line, year-over-year interest expense was down $1.2 million due to lower average short-term debt outstanding and lower short term interest rates. Other income was down $1.9 million sequentially and $3.8 million higher than the year-ago quarter primarily due to foreign currency gains and the income from our share of earnings from Calence LLC which is accounted for as a nonconsolidated investment. The sale of Calence LLC to Inside Enterprises Inc. was closed on April 1, 2008, and we received approximately $60 million in cash during the fourth quarter which resulted in a fourth quarter fiscal 2008 nonoperating gain of approximately $39 million. In addition, we could receive potential future proceeds from amounts to be held in escrow and potential earnouts up to approximately an additional $30 million in cash.

Taxes on income before restructuring integration and other items decreased $3.9 million year-over-year due primarily to a lower effective tax rate. The effective tax rate in the March 2008-quarter was 100 basis points lower sequentially and we currently estimate that our effective tax rate will be between 30 and 32% for the fourth quarter of fiscal 2008. Excluding restructuring, integration and other items, net income in the third quarter of fiscal 2008 increased by $5.4 million or 4.9% to $114.8 million increasing diluted earnings per share to $0.76 up 4.1% as compared with $0.73 per share in the year ago quarter. GAAP net income increased $2 million to $107.2 million or $0.71 per diluted share as compared with net income and earnings per share of $105.2 million ad $0.70 million respectively in the prior year quarter.

I would like to remind you that as a services company, the vast majority of our expenses are variable in nature. As we have communicated to you last week and today we will continue to expand and contract appropriately to closely align our expense structure and working capital investments with market conditions. This ne slide looks eight key productivity to gross profit dollars over the last four years. The bars represent the individual quarters while the over a trailing 12 month period at the end of each quarter.

This next slide looks at 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 expense -- our ratio of expense to gross profit dollars improved 69 basis points from 67.6% at the end of last year's March-quarter to 66.9% in the current quarter. At the operating group level electronics marketing improved its year over year rolling four quarter expense to gross profit ratio by 20 basis points. However, Technology Solutions increased its ratio of 134 basis points due to the items discussed earlier relating to both gross profit and expenses. For third quarter fiscal 2008 the ratio of operating expense to gross profit dollars increased 317 basis points year-over-year due to the reasons discussed earlier at technology solutions.

Similar to the last slide we are providing being 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 remained flat year-over-year at 4.3%. As we look at the third quarter fiscal 2008 on a stand alone basis, operating income margin of 4% decreased 62 basis points other the prior year. At electronics marketing, operating income margin improved 6 basis points to 5.9% while Technology Solutions operating income margin of 2.3% was down significantly by 185 basis points as compared with the year ago quarter.

As we mentioned earlier, we are taking corrective actions to address the decline in operating income margin. The impact of these adjustments should have some positive impact on our operating expenses in the June-quarter. However we also expect that business mix will have an impact on the overall improvement of these ratios as TS and EM Asia should represent a greater percentage of the enterprise revenue in our June-quarter. TS and EM Asia both have lower gross profit margins and operating margins but have higher working capital velocity and returns as compared with the rest of electronics marketing.

Going into the fourth quarter we expect an increase in technology solutions revenue with the fiscal year end of Sun Microsystems, one of our largest suppliers.

In third quarter fiscal 2008, return on capital declined 123 basis pines to 10.2% as compared to the 11.4% in the third quarter of fiscal 2007. On a trailing 12 month basis, return on capital employed declined 88 basis points to 11.6% in the third quarter fiscal 2008. As we communicated on our analyst day in December we are committed to our long range plan of 12.5 to 14% in a 2 to 3 year time frame. Just as we communicated this week about our acquisition of Horizon Technology Group we will continue to pursue value-creating acquisitions as long as they meet our three key criteria, cultural, strategic and economic fits so that we can drive shareholder value creation and increase our scale of scope advantages.

As depicted on this next slide, cash flow from operations, that is cash flow generation before taking into account cash used for acquisitions, capital expenditures, and other items was $498 million for the last four quarters. In the third quarter of fiscal 2008, we generated $156.4 million of cash from operations, due to the combination of earnings and prudent working capital management. Even with relatively soft revenue, we are able to increase inventory turns and working capital velocity over the prior year.

On a sequential basis, inventory was up $140 million with currency and acquisitions accounting for close to 60% of that increase. Excluding acquisitions and changes in foreign currency exchange rate, inventory was up $50 million at EM and approximately $9 million at Technology Solutions. At the enterprise level our net days were flat as compared with the third quarter of fiscal 2007 and we have not seen a deterioration on our receivables despite the well publicized concerns in the credit markets. Again, with another solid quarter of significant cash flow generation, we continue to strengthen our balance sheet and improve our credit statistics. On a trailing 12 month basis at the end of the third quarter fiscal 2008, debt to EBITDA remained at 1.5 and EBITDA coverage was 11.5. Since we exited the quarter with $381 million in cash and over 1 billion of liquidity we can withstand continued tightening in the credit markets and are in position to continue to fund growth and pursue value-creating acquisitions as long as they meet our criteria.

Looking forward to Avnet's fourth quarter and fiscal year end 2008 management expects normal seasonality at EM with anticipated sales to be in the range of 2.60 billion to $2.70 billion and sales for technology solutions slightly below normal seasonality with sales between $1.95 billion and $2.05 billion. Therefore, Avnet's consolidated sales are forecasted to be between had $4.55 billion and $4.75 billion for the fourth quarter of fiscal 2008. Management expects fourth quarter fiscal year 2008 earnings to be in the range $0.79 to $0.83 per share. This EPS guidance does not include the amortization of intangible assets or integration charges related to acquisitions that have closed or will close in the June quarter and restructuring charges which will be offset by the previously announced gain on the sale of the Company's interest in Calence LLC. This guidance is identical to that given last week and is based upon an additional week of analysis and positive sales results for the first three weeks of the quarter. With that, let's open the lines for Q&A. Operator.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from William Stein with Credit Suisse, please proceed with your question.

Thanks. Good afternoon. I am trying to address the push outs and the rebates again. I know we discussed it kind of at length a few days ago. But were these related to the same suppliers in both U.S. and Europe, different supplier, one in each region or are we seeing this in a mix of customers across the supply base?

Hi, Will, it is Roy. The revenue weakness in servers is across multiple suppliers and across both the Americas and the EMEA region. The specific customer push outs that were referenced regarding Americas were with one of our largest suppliers and the change in the rebate program in Europe was with a different but large supplier as well.

Okay, great. One other -- on the -- on the weak enterprise server issue, also is that industry standard, in other words are you also seeing a mix shift away from one to the other. Was that part of the rebate issue or was this across both types of industry standard and proprietary?

There was a decrease across all of the server decks. We did not see a significant change in the mix between industry standard and enterprise in this issue.

Okay. Great. Thanks very much.

You're welcome.

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

Great. Thanks very must have. The push outs, did those then come in and get booked and closed in the first part of April here or did they get they pushed out until the end of June? And I have some follow ups.

Jim, this is John Paget. We have already seen a fair number of those push outs be booked and shipped already in this month. Certainly, tracking some of those others, but at this point we are beginning to see those close and move forward into the quarter.

Great. On SG&A, I guess it came up more than what I would have thought especially considering that things kind of fell apart here in the last part of the quarter. Can you talk about SG&A, why wasn't it more flexibility, why weren't you able to be more nimble around that and what should we expect going forward on SG&A line?

Jim, it is Roy. I want Ray to see if we can dig out for you -- I don't know if we have it handy here, Ray, what portion of that increase would be attributable to currency and what portion would be attributable to M&A and therefore what's left as organic changes in operating expense.

Okay. Then maybe later on during the Q&A he can chime in with that because I thought you only closed one thing during the quarter and that was YEL but maybe I am misspoken. Let me ask my question while they look that up and move it on to the next caller. For June the EPS outlook despite all of the changes it still looks like we are going to be down year-over-year despite sales going up year-over-year. How do I reconcile that with when you talk about how you are able to renegotiate in rebates. It seems like you are getting the short end of the stick with again EPS being down year-over-year yet sales being up year-over-year plus your restructuring and cutting costs.

Yes. So, Jim, let's walk down the P&L, okay. So sales are sales and we have given the guidance you guys have that number. Gross margins, we talked at the EM level, gross margins were actually up slightly and our big challenge was at TS and the real issue in the margin was rebate-related. Certainly when you look at gross profit dollars you would say it is volume and rebate related but on the gross margin it is rebate related.

I want to make sure we are all talking about the June-quarter. outlook.

I am with you. So as we look at the June-quarter we believe the rebates that are in place now are fair and reasonable. They are appropriate. What we don't know of course is what will our sales be and what will the mix of those sales be and therefore we don't know if our TS gross margins will come all the way back to where they were prior to the March-quarter. So we have baked into our forecast some improvement but not 100% recovery at the gross margin line.

And then as you go to operating expenses, what's happening is yes we have got some integrations that still need to occur and the synergy cost savings extracted. That is happening during the June-quarter which will not actually get to full benefit as ray said until December but some impact in June, more in September and then full impact in December. And then, the last piece, and I apologize for the complexity but I am trying to walk you through this. In addition to all of that, we simply are getting lower sales than we had anticipated in local currency from Europe and in certain product categories from America. That is where the restructuring actions are taking place, but the actions that will be executed this quarter once again will have a light impact in June, a bigger impact in September and we would think a full impact by the December-quarter. So you should expect EPS to move back in a growth mode as we get gross profit margin normalized and we complete both the integrations and restructuring actions that we have announced.

So is that September or December?

Both. You will see a large impact in September. There may be some spillover based upon things like notice periods and works cancels in Europe and that sort of thing.

Okay. Now real quick clarification John, did competition in the server area, did it increase since rebate and volumes didn't come through? Are you seeing more competitive environment?

We haven't seen a significant increase in the competitive environment, no.

So another way to answer that, Jim is that we have a material gross margin which you might think of as the transaction gross margin and then we have a net that includes the rebates along with some other adjustments and we have not seen a significant change in our material gross margin. It is essentially flat. The big change was in the net gross margin.

I was just wondering if competition heated up since you weren't making the volume.

In many cases for example in America, this is just sort of a reminder that there is a system in place in America for -- that applies to the vast majority of our server revenues, whereby resellers can only elect to change distributors on a periodic basis. In some vendors it is annual, in other vendors, it is every two years. But the resellers essentially can't shop the servers from distributor to distributor. On the other hand, in Europe they can, but the stickiness involves our marketing programs our technical support, the things that we are doing in cooperation with the reseller or in partnership and it makes switching difficult at the enterprise level.

So you have--.

Not impossible but difficult.

So you haven't seen Ingram Micro and TechData start to be more competitive in this area?

Once again, Jim, that, we don't directly compete with them.

Right.

In most of our categories. Server categories the difference is we would be building an integrated solution versus selling a product out there.

Great. Thank you, gentlemen.

Okay, Jim just responding to your question relative to expenses, if we look sequentially, expenses increased by roughly $12 million and of that $12 million about 4 million, $4.2 million related to currency so it is just a translation effect of currency and then roughly $7 million related to acquisitions. All right. And so the acquisitions. Keep in mind the biggest one being ACAL which we acquired towards the mid part of December and therefore we had a little bit of expenses in there and then a full quarter of expenses in this one as well as some of the smaller acquisitions. So virtually all of the increase quarter to quarter was either currency or sequentially it was either currency or acquisitions-related.

Thanks. That's very, very useful. Thank you, gentlemen.

You're welcome.

Thank you. Our next question comes from Brian Alexander with Raymond James, please proceed with your question.

Yes, I'm afraid we are beating a dead horse here, Roy, but you started by saying that most if not all the issues will be short lived and you also said you think rebate levels for June are appropriate and reasonable. What has to happen for the margin short fall related to the rebate piece which I think is about 100 or 120 basis points so it is fairly significant. What has to happen for all of that to come back? Do you have to see growth reaccelerate to levels that you were experiencing before? Is it not really dependent on growth and more dependent on these other variables that you get rebated on or as it continues negotiations with these vendors? I am just failing to understand how we get tack to where we were if the server environment remains depressed for a period of time?

Okay. Let me -- I am going to take a stab at that and I will ask Rick or John if they want to correct me or add collar to it. But here is the view. Brian, let's step back first of all and remind everyone that some of the rebates -- let me back up even one more step. Rebates for technology solutions, this is not electronics marketing, for technology solutions on average approximate the total operating income for technology solutions. Okay. Now, within the rebate category, there are fundamentally two kinds of rebate, one that we described last week as infrastructure and one that was described as performance based. The infrastructure is not variable based on revenue. Okay.

So the piece that is variable based on revenue for the most part gets reestablished on a quarterly basis. The goals get reset. Then we had this anomaly last quarter, the March-quarter where we also had a program change aside from the goal resetting. So when you ask the question what needs to happen, it's simply this, from the time the rebates get set until the time the quarter is over we need to realize a normalized environment. There needs to be not much change to the negative during that time frame. Once we get reset at a lower level and we can achieve the goals set forth in the rebate plans, gross profit margin will be normalized. Okay.

So it is conceivable in the June quarter. Let me say it to you this way. If we do not encounter further weakness in either servers or other parts of the TS portfolio, we should get to a more normalized gross profit margin. So as soon as we get there -- as soon as we get to that normalization from the time the rebate goals are set until the time the revenues are counted for the quarter that's when we get back to is 100% achievement.

So we are still very comfortable that this is not secular and once we get back to normalized growth or at least no more disappointments we will get back to the margin structure we are all accustomed to.

Brian, again, and then I'll ask John or Rich to chime in but we have seen very open and very collaborative dialogue with our key supplier partners. There's no intent to harm us financially. They still appreciate the value we are delivering to them, we're integral to their strategy and we feel like the conversations that have taken place and rebates are fair and reasonable. If this was a secular shift, we would feel uncomfortable with either the program or the goals and we are not uncomfortable with either.

Okay. Good. And then just a follow-up, and I know we have talked about this in the past. But maybe as you have done some digging over the last few days you have come up with a different answer if it is applicable but under the assumption that servers will continue to shift toward industry standard, just remind us how the margin profile varies between industry standard and proprietary? In the past you have talked about the margin structures at the operating level being comparable. I am just wondering if that is still the case.

I would say that is still the case and I would, just as we have talked about in the past, industry standard servers, we sell in an integrative solution. So as an example virtualization consolidation and the services and the intellectual property, that we add to that, bring that to relatively the same return.

And Brian, one more thing, industry standard servers as you know, spans a big range of products, right. From one ways to multiple way enterprise hardware, and we essentially don't play at the one ways, the two ways, we begin to get involved at four ways and then above, and so it is the more complex, more technical hardware plus what John said about them in a solutions environment.

Great. And then just to shift gears on the Horizon acquisition if we look at the public disclosed numbers they have out there it seems very difficult to get them to that 12.5% hurdle rate. So what are you assuming to get them to that hurdle rate? It almost implies in the margins there would need to double or maybe there's some assumptions about cross selling that we should be aware of.

Brian, unfortunately and this is a unique case for us. This is a public Company traded in Ireland. We are literally being regulated on what we can say until we own the Company. As soon as we own it, we will lay forth for you the integration strategy, the synergy cost savings and our rationale for why we believe the numbers are the numbers but at this point we are restricted from commenting.

Understood. Thanks, Roy.

You're very welcome.

Thank you. Our next question comes from Matt Sheerin with Thomas Weisel Partners, please proceed with your question.

Thanks I promise to ask no more questions on the computing business. Just a question actually on components and you were pretty clear last night -- last week sorry, on what you are seeing, but there is a little bit of a disconnect between what Arrow said yesterday regarding Europe on the component side where they're saying, looks like a pretty weak book to bill below 1 and softening conditions whereas you folks although I know you have talked about some pricing issues, surrounding the euro and other competitive issues, it doesn't seem like you know you have seen that kind of softening or not as bearish on that market. So could you talk about what you are seeing and why that might be different from Arrow?

Sure. Harley, why don't you take that one?

All right. Clearly, we -- there are concerns that we are are watching European markets. As Roy mentioned in earlier script we've had a couple of quarters of declining revenue in local currency, but we just don't see the market deteriorating at an accelerating rate at all quite frankly. It is a difficult question to answer. You asked me to comment on our competitors view. I would say that from what I can tell we are doing an excellent job of gaining market share in the market. We are managing it very prudently and we don't see it with the degree of alarm you described.

Okay. Thanks. And then, again on components, you did announce a couple of key exclusive wins with semiconductor suppliers in late fall I know that some of your other competitors recently have lost some key lines namely in future electronics. So, are you starting to see benefits from those improved relationships or will that come later?

We are absolutely starting to go see benefits from that and those benefits will accelerate moving into the June-quarter.

Matt that's part of what's in our guidance for the June-quarter. We are guiding normal seasonality but we have some uplift from the supplier moves that is supporting us along with the impact of the Azzurri acquisition kicking in in the June-quarter.

Lastly and more so for you, Harley, on the IP&E side we are hearing of some of the connector suppliers and maybe even some of the passive guys talking about passing along some raw materials price increases they have seen. Are you starting to see that yet, and are you generally pretty successful in passing those prices along to your customers?

Generally, Matt we are. We haven't seen it to the degree that was discussed in a major calls I think you are referring to just a couple of days ago.

Yes.

I think they tend to talk about the largest customers, but we are seeing some of it and yes generally speaking we are able to pass that on.

Okay.

Matt, another way to think about that is our gross margin and our product set, and Harley, correct me if I am wrong but I think it has been pretty stable as we watch the numbers our margins are flat so we are passing along what we are getling.

We are. We are. We have seen no deterioration in our gross margin over the last couple of quarters.

Very consistent.

Okay great. Thanks.

You're welcome.

Our next question is from Steven Fox with Merrill Lynch. Please proceed with your question.

Hi, good afternoon. Just to follow-up on the question about European components in Arrow's comments. So I guess the concern is that the industrial base in Europe is becoming less competitive with their exports. And you are saying that that is not an issue that's coming up in your numbers at this point, is that a concern of yours or do you see some other trends? Can you just speak a little more specifically on that question?

Sure. How are you? This is Harley again.

Hey, Harley.

One data point of value is that we did close the quarter with a 1 to 1 book to bill ratio in Europe. So we feel pretty good about our backlog, we feel very good about our backlog going into June. One of the areas that we are also growing is in IP&E. We just mentioned that with Matt's comments. That's a good part of our growth in that region as well as globally. So that has been included in our guidance as well.

And Steve, our European leadership team, we have been talking about two concerns, one of them we can track. We know for a fact which is average selling price erosion as measured in euros. The other one that you asked about relating to exports we have been anticipating this problem; however, according to the published data that we have been looking at on a regional basis, we have not yet seen a decline in exports from Europe on electronic equipment.

Okay fair enough and I guess, well, I don't know what to make of the difference in the concern level. Is there anything in the customer base in Europe that would, between you and that you could differentiate between?

I wouldn't think so. Harley? So Steve it could be, first of all, there are some slightly different seasonal patterns between our two companies, especially in Europe. Arrow for whatever reason has tended to have a little better December-quarters and components in Europe, we've tended to have a little better March-quarters. It might be how we deal with the January 1, scheduled order volumes and then the issue Matt brought up earlier about some supplier changes, that's probably one of the factors. Recall also that in Europe we operate what we refer to as the speedboat model. That model may be allowing us to grow in some niche technical product lines that might also be making a difference. So, I think it is really not any one thing. It is just a variety of things.

Okay. Then just a quick one for Ray. Total Company growth excluding acquisitions and currencies, do you have the year-over-year growth number handy?

Say that total.

Year-over-year -- organic growth after, not only after acquisitions but also excluding the benefit of currencies for the total Company. I know you gave it by different regions and segments but I didn't see a roll up there.

Well, we didn't provide it on a pro forma basis but I will tell you that from a total Company perspective roughly 2.5%.

Year-over-year.

Year-over-year.

Thank you.

Thank you. Our next question is from [Sean Conner] with FAS Advisors. Please proceed with your question.

Just a couple of quick once. First of all, with where your stock price is now versus even a month or two ago, does it at this point make sense to start considering buying back your stock versus buying or doing additional acquisitions?

It is Roy. A couple of things. One is, certainly the lower the stock price goes the more we think about a buyback. So I think there's a, obviously a very fair question. On the other hand, we are thinking about two other things which is one, our acquisition pipeline which is quite robust. It may be as strong as we've seen it since we actually started tracking an acquisition pipeline and to the extend that the acquisitions are in fact meeting and exceeding our hurdle rate for return on capital. We continue to think that that's actually a better way to create shareholder value than to use the capital for a buyback.

The other thing I will say is that we have a Board meeting coming up in May regularly scheduled. I am sure this will be on the agenda for at least discussion topic and whether it is buyback or M&A we also are going to be a little bit on the cautious side related to liquidity. We are going to want to make sure that until we see a turn in the credit markets that our Company is just rock solid from a liquidity point of view. So those are the things we are thinking about. We are biased right now to try to be direct in the answer. Our bias is to continue to use our funds for value creating M&A as long as we feel we can generate more shareholder value in that direction.

Just to follow-up on the acquisition side of things it seems like, and especially now that the pipeline has gotten more robust, the one concern is is management getting too spread out or too thin in the sense of you can't focus on getting the synergies out of one acquisition. For instance, like maybe last summer when there was only one acquisition going on at the time, it was much easier to worry about and get the synergies. Now you have got four, five, six acquisitions going on at once, hence it is going to take a lot longer to draw the synergies out because you can't focus on just one.

Yes, Sean, again it is a very good and very fair question. Let me just make a point. The only acquisition in recent memory here where we have delayed the synergies is the ACAL acquisition that we talked about here in the latest quarter. The delay was not related to management bandwidth it was related to market issues. We made a decision there that was in support of protecting the revenues. Now, all that said, we do need to be mindful of the number of acquisitions by group and by region. So in other words if we were to do a TS oriented acquisition in Asia that doesn't have much of an effect on EM integrating Azzurri in Europe for example. But we are mindful of that, we keep that in mind, and we want to be careful that we can actually execute everything we pull the trigger on

Then just one last question and I will let you guys move on, the one metric that you guys used to talk to a lot was the incremental gross profit drop through or how much gross profit, OpEx is a percentage of gross profit dollars and obviously it moved up this last quarter when gross margins probably or gross profit dollars didn't come through. What is kind of -- has your goal or your range changed as far as what that drop through you are expecting to get it through? And just refresh us on what the goal is?

The goal is when a business unit is operating at or above our return on capital threshold, so that's at least 12.5% after tax return, then we look for a 50%, 5-0 drop through, incremental gross profit falling to operating income. At the enterprise level, we have a substantial portion of our revenues now in that category but we still have a meaningful piece that is below. So, as a result of that, the enterprise drop through of all things, all other things being normalized if that's possible should be in the range of 60%, Ray, does that sound right?

That's right.

About a 60% drop through. And then Sean, I do want to at the risk of maybe adding a bit of confusion, I just want to point out an anomaly that's occurring right now due to this radical currency shift. So in Europe, our EM business is up in dollars on a year-over-year basis but their operating margins are essentially flat. In euros we are down on a year-over-year basis and the operating margins are essentially flat. In other words our team there is doing a very good job of managing through a difficult environment here for the last few quarters however, the enterprise level drop through appears to be lower than we would like it to be due to the impact of currency in Europe.

Great. Thank you guys for taking my questions.

You are welcome.

Mr. Keenan there are no further questions at this time. Would you like to make any closing comment.

Yes. 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 non-GAAP results. This entire slide presentation, including GAAP financial reconciliations can be accessed in downloadable PDF format on our website under the quarterly results section. 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 Avnet's investor relations department by phone or e-mail.

Thanks everybody.

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