安富利 (AVT) 2009 Q4 法說會逐字稿

Please stand by. Our presentation will begin now.

I would like to turn the floor over to Vince Keenan, Avnet's Vice President of Investor Relations.

Good afternoon, and welcome to Avnet's fourth quarter and fiscal year end 2009 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.

As we provide the highlights for the fourth quarter fiscal 2009, please note that we have excluded impairment charges and restructuring, integration and other items from the current year period in the accompanying presentation and slides. When discussing pro forma sales or organic growth, prior periods are adjusted to include acquisitions. And finally, when addressing working capital, it is defined as accounts receivable plus inventory, less accounts payable.

Before we get started with the presentation from Avnet management, I would like to quickly review Avnet's Safe Harbor statement. This presentation contains certain forward-looking statements, which are statements addressing future financial and operating results of Avnet. Listed on this slide are several factors that could cause actual results to differ materially from those described in the forward-looking statements. More detailed information about these and other factors is set forth in Avnet's filings with the Securities and Exchange Commission.

In just a few moments, Roy Vallee, Avnet's Chairman and CEO will provide Avnet's fourth quarter and fiscal year 2009 highlights. Following Roy, Ray Sadowski, Chief Financial Officer of Avnet, will review the Company's financial performance during the quarter and provide first quarter fiscal 2010 guidance. At the conclusion of Ray's remarks, Roy will wrap up with closing comments after which a Q&A will follow. Since we've added a new new analysts to our coverage universe, I would ask that you limit yourself to one question, and if we have time at the end of the call we will take any follow-up questions. Also here today to take any questions you may have related to Avnet's business operations are Rick Hamada, Avnet's Chief Operating Officer, Harley Feldberg, President of Electronics Marketing, and Phil Gallagher, President Technology Solutions.

With that, let me introduce Mr. Roy Vallee to discuss Avnet's fourth quarter fiscal 2009 business highlights.

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

Overall business conditions remain challenging for the fourth quarter of fiscal 2009 as weak end demand outside of China continued to impact our top and bottom lines. Despite the difficult market environment, both of Avnet's operating groups grew revenue sequentially, aided by strength in the Asia region. At the Enterprise level, revenue in Asia grew close to 20% sequentially, and both operating groups improved their Asian operating income margin over 50 basis points sequentially. Both our teams in Asia also substantially improved ROWC, demonstrating that our VBM principles apply everywhere Avnet does business.

In total, revenue of $3.77 billion for the June quarter was up 1.8% sequentially, and down 19.5% year-over-year. After adjusting to exclude the impact of changes in foreign currency exchange rates, revenue was down 14.7%, as compared with the prior year quarter. The negative impact on gross margin, resulting from the regional mix shift to Asia, was further magnified by business mix changes within the regions, and market conditions. In the June quarter, the volume decline at EM was concentrated in our industrial end markets, where we typically realize higher gross profit margins.

In addition, some of EM's commodity products experienced margin declines due to what we believe were late cycle market-driven pressures. Overall, gross profit margin declined more than we anticipated, at 74 basis points sequentially and 132 basis points from the year ago quarter. Although we are comfortably on track with our cost reduction initiatives, the reduction in operating expenses during Q4 was not large enough to offset the decline in gross profit entirely. Ray will update you on our cost reduction progress to date and the impact on our results later in the call. In the June quarter, operating income, excluding charges, was $85.3 million, down 3.3% sequentially, and down 57.1% as compared with the year ago quarter.

Turning to the balance sheet, the Avnet team globally continued to do an excellent job managing working capital. In the June quarter, working capital declined $438.9 million, or 17.8% sequentially, excluding the impact of currency. Approximately 75% of the sequential decline was attributable to accounts receivable and inventory, with both operating groups contributing to this improvement. Since the end of September 2008, we have reduced working capital by 31%, and improved our cash cycle by over nine days.

As a result of this performance, working capital velocity improved 21% sequentially to 6.5 and ending working capital as a percent of revenue was a record low 13.8%. Return on working capital improved 189 basis points sequentially, to 14.7%, after three quarters of sequential declines. This improvement is further evidence that we can improve returns, hence shareholder value, despite lower margins. Finally, in the June quarter, we generated roughly $330 million of cash from operations our third consecutive quarter of cash generation exceeding $300 million. With revenues stabilizing and our working capital velocity at appropriate levels,, we believe that cash velocity at appropriate levels, we believe that cash flow generation has peaked for this cycle.

Now, let me turn to the operating groups. In the fourth quarter of fiscal 2009, Electronics Marketing sales of $2.13 billion were up 1.5% sequentially, driven by 20% growth in Asia, where the China stimulus package is having a positive impact on end demand. Due to continued weakness in the Western regions, EM's year-over-year revenue decline was over 20% for the second quarter in a row. While there still appears to be weakness in end demand outside of China, we are somewhat encouraged by the recent strength of bookings globally. EM's book-to-bill ratio was 1.02 globally for the fourth quarter and exiting July was well over 1.1, with all regions in positive territory.

EM's consolidated pro forma revenue, adjusted to exclude the impact of acquisitions, was down 27.3% year-over-year in delivered dollars, and 23.3% in constant dollars. Although we cannot be sure when global growth will return, the combination of inventory turns returning to desired levels and positive book-to-bill ratios suggest that we may be at the bottom of this economic cycle. In the June quarter, gross profit margin at EM declined for the second quarter in a row, as the combination of geographic mix, customer mix and late cycle margin pressures combined to drive gross profit margin down sequentially and year-over-year. While gross profit margin was down sequentially in all three regions, the decline was more severe in the Americas, due to lower fulfillment margins.

Our demand creation business continues to deliver targeted margins, and we have protected our technical resources throughout our cost reduction efforts. As market growth resumes, we expect to recover most of the decline in gross profit margins by region, with geographic and group mix driving our Enterprise margins. In the June quarter, EM continued to implement the cost reduction initiatives previously announced, which allowed them to offset approximately 85% of the sequential decline in gross margin dollars. As a result, EM's operating income declined slightly sequentially to $57.1 million, and operating income margin came in at 2.7%.

In the Americas and EMEA regions, where operating income and margins were down, we are still in the process of completing our cost reduction actions and acquisition integrations. In Asia, operating income more than doubled on a 20% sequential increase in revenue, and we believe this performance is indicative of EM's operating leverage once growth resumes on a global basis. Our EM team continued doing an excellent job reducing inventory, despite the sluggish demand. In the June quarter, EM inventory was down $178 million in delivered dollars and nearly $200 million in constant dollars with all three regions contributing. With EM inventory turns near record levels, the bulk of our inventory reduction appears to be behind us.

Furthermore, we believe that inventory throughout the supply chain is now reasonably aligned with end demand, which is evidenced by the strong sequential performances of most electronics components suppliers. EM's working capital velocity hit a record in Q4 and the cash cycle improved over 18 days from the March quarter. This significant improvement in working capital velocity helped drive a 131 basis point sequential improvement in ROWC, despite the decline in margins. EM's higher ROWC supports the belief that the market is bottoming, and is a testament to our VBM culture. While the downturn has had a significant impact on EM's financial results over the last three quarters, we remain confident that the actions we are taking are allowing us to gain profitable market share in the short term, while increasing operating leverage in each of of our regions.

In the fourth quarter fiscal 2009, Technology Solutions met its revenue expectations for the second quarter in a row, furthering our belief that the markets we serve have stabilized. Revenue of $1.64 billion grew 2.1% sequentially, driven by the Americas and Asia regions. On a reported basis, revenue declined 15.8% year-over-year and 10.3% adjusted to exclude the impact of changes in foreign currency exchange rates. Both the Americas and EMEA regions were down double-digits year-over-year, while Asia was up 23%, driven by the investments we have made in organic growth. Our TS consolidated pro forma revenue, adjusted to exclude the impact of acquisitions, was down 20.9% year-over-year in delivered dollars and 15.7% in constant dollars. Our server business, which was the first to experience weakness back in the third quarter of fiscal 2008, was well below normal seasonality for a June quarter. However, server revenue did grow 6% sequentially, driven by double-digit growth in industry standard servers.

Similar to Electronics Marketing, the EMEA region continues to be the weakest, while July billings in the Americas region provides some indication that the September quarter will experience typical seasonality in addition to benefiting from two quarter ends due to our fiscal calendar. Technology Solutions' gross profit margin was down 39 basis points sequentially, and 50 basis points year-over-year, primarily due to regional mix and lower margins in the Americas region. Operating income declined year-over-year to $41.2 million, and operating income margin of 2.5% was down 66 basis points from the year ago quarter. Operating income margin was down slightly at 11 basis points sequentially, as the cost reductions initiated over a year ago and stabilizing revenues were offset somewhat by lower gross margin.

In the June quarter, TS reduced working capital by 26%, and improved its cash cycle by over five days, driven by improvements in both inventory and receivables. Perhaps more importantly, TS accounts receivable days were down significantly from last quarter and down a couple of days from last year's fourth quarter. We continued to experience a normal level of credit defaults during the fourth quarter. As a result, TS return on working capital increased 618 basis points sequentially, and was up 49 basis points over the year ago quarter. In addition, TS Global, ROWC, was above our 30% threshold for the quarter, due to the strong performance of our TS Americas team.

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

Thank you, Roy and hello everyone. Let's start with a review of Electronics Marketing. In the fourth quarter of fiscal 2009, EM's revenue of $2.13 billion was down 22.2% year-over-year on a reported basis and down 17.8%, adjusted to exclude the impact of changes in foreign currency exchange ratings. Pro forma revenue after adjusting for the impact of acquisitions and foreign currency exchange rates, was down 23.3% year-over-year. Sales in the Americas region were down 27.2% on a reported basis and down 28.5% after adjusting for the impact of acquisitions.

For the EMEA region, sales were down 31.2% on a reported basis over the prior year quarter, and down 19.2% after adjusting for the impact of changes in foreign currency exchange rates. On a pro forma basis, EMEA sales were down 39.8% year-over-year, and after adjusting for the impact of changes in foreign currency, sales were down 29.3%. And finally, for EM's Asia region, sales were down 3.5% as compared with the prior year and down 7.4% on a pro forma basis. In the June quarter, Technology Solutions sales of $1.64 billion were down 15.8% year-over-year on a reported basis, and 10.3%, adjusted to exclude the impact of changes in foreign currency exchange rates.

Pro forma revenue, after adjusting for the impact of acquisitions, was down 20.9% year-over-year. At a regional level, revenue in the Americas was down 17.6% on a reported basis year-over-year. In EMEA, revenue was down 20.8% over the prior year quarter in reported dollars, and down 4.8% if you exclude the impact of changes in foreign currency exchange rates. On a pro forma basis, EMEA revenue was down 34.4% year over year in reported dollars, and 21.2% in constant currency. Sales in the Asia region were up 23.3% as compared with the year ago quarter, and were up 21.6% on a pro forma basis, due in part to the investments we have made to drive organic growth in China and India.

Now let's look at the Enterprise results for the fourth quarter fiscal 2009 as compared with the prior year. For the June quarter, Avnet sales of $3.77 billion were down 19.5% in reported dollars and down 14.7% in constant dollars, as compared with the year ago quarter. On a pro forma basis, revenue was down 24.7% over the year ago quarter. Gross profit of $442.8 million was down $169 million or 27.6% as compared with the fourth quarter of fiscal 2008, due to the decline in revenue and the decline in gross profit margin mentioned earlier. Gross profit margin declined 132 basis points year-over-year, with the largest percentage decline in gross profit coming from Electronics Marketing's Americas region.

Operating expenses, excluding charges, were $357.6 million, down $55.6 million or 13.5% year-over-year and more than 16% after adjusting for the impact of foreign currency and acquisitions. On a sequential basis, operating expenses declined $16.7 million, or 4.5%, and if you exclude the impact of foreign currency, operating expenses were down $23.2 million or 6.2% due to the impact of cost reduction efforts and integration synergies. Operating income, excluding charges, was $85.3 million, down 57.1% as compared with the prior year quarter, and operating income margin declined by 199 basis points to 2.3%.

Below the operating income line, interest expense was down 2.8% as compared with the prior year quarter. Primarily due to the retirement of the $300 million of convertible notes that were put to us in March of 2009. The other income expense line was a net expense of $3.4 million, an increase in expense of $2.6 million over the prior year quarter, primarily due to the impact of foreign currency losses.

The negative impact on income of these higher than usual other expenses was somewhat offset by lower than anticipated effective tax rate. The effective tax rate on income excluding charges was 28.7% in the current year fourth quarter, as compared with 28.9% last year. For the full fiscal year, the effective tax rate on income excluding charges was 29.9% versus 30.6% in the prior fiscal year. At this point, our tax rate guidance for fiscal 2010 is between 30 and 32%.

Let me take a couple minutes to explain the goodwill impairment charge we recorded in the June quarter. The impairment charge of $62.3 million related to additional goodwill recognized in two reporting units, for which goodwill had initially been determined to be impaired as of the end of the second quarter of fiscal 2009. You will recall that in the December 2008 quarter, we recorded a significant goodwill impairment charge, driven by the decline of the Company's stock price since September 2008, which was primarily due to the global economic downturn and the turmoil in the equity markets. This resulted in a market capitalization that was significantly below book value.

Although we impaired all of the goodwill that existed at the end of December, related to our EM, Asia and TS EMEA reporting units, it was not sufficient to close the gap between fair value and book value of those reporting units. During the fourth quarter of fiscal 2009, we performed our annual goodwill impairment test, which indicated that the EM Asia and TS EMEA reporting units continued to have fair values as determined in accordance with GAAP below their carrying values. As a result, the Company was required to recognize the impairment of additional goodwill, which arose subsequent to the second quarter of fiscal 2009 in EM Asia and TS EMEA reporting units. Net income, excluding charges was $48 million or $0.32 per share. GAAP income was a loss of $30.9 million or $0.20 per share for the fourth quarter of fiscal 2009.

During the quarter, we generated $330 million of cash from operations and for the full fiscal year, we generated more than $1.1 billion. As a result of our solid working capital management, including lowering inventory of both operating groups, we were able to continue to generate strong cash flow from operations. This significant cash flow generation over the trailing 12 months has further strengthened our balance sheet and improved our liquidity, thereby positioning us to make organic investments and take advantage of value creating acquisitions as they become available. At the Enterprise level, our net days were down seven days as compared with the year ago quarter on substantially lower sales.

Despite the current recession, we continue to manage working capital exceptionally well, with quarter ending working capital as a percentage of annualized revenue down more than 200 basis points year-over-year. Working capital velocity improved 7.6% over the year ago quarter and exceeded the low end of our long-term business model goal. In addition, we were able to improve our receivable days and no meaningful issues with delinquencies.

In the June quarter, total capital employed of 7.9% improved 48 basis points sequentially and was down 351 basis points as compared with the prior year quarter due to the ongoing impact of the downturn. On a trailing 12 month basis, return on capital employed was 8.7%. Despite our current financial results, we continue to maintain our investment grade credit statistics, reflecting our strong financial position and our healthy balance sheet. On a trailing 12 month basis, debt to EBITDA was 1.7 and EBITDA coverage was 8.7. We exited the quarter with $944 million in cash, leaving us with approximately $1.8 billion of available liquidity.

Turning to our expense reduction efforts, to date, we have announced $225 million in comprehensive cost reduction actions, and are not announcing any additional large scale cost reductions at this time. We remain well on track to complete the announced cost reductions by the end of our September quarter, with the full benefit of these actions to be realized in our December quarterly results.

The rough estimate of these efforts and the annualized benefit to our bottom line is outlined on this slide. Through the end of our June quarter, we have completed a little more than 90% of our announced cost reductions, the vast majority of which have been realized in our results to date. The $225 million cost reductions are in addition to approximately $40 million of synergy cost savings related to businesses acquired in fiscal 2009. We expect to complete our integrations by the end of December, with full benefit entering calendar 2010. So from the Q4 fiscal 2009 run rate, we expect an additional reduction of $25 million annualized to be realized by the March quarter.

Corporate expenses, which were $13 million for the fourth quarter, are expected to rise to around $26 million for the first quarter of fiscal 2010, due primarily to higher non-cash equity compensation expenses, and the impact of the fiscal calendar's 14th week. The equity compensation charge in Q1 follows a similar pattern we experienced since we started expensing stock compensation a few years ago. We expect corporate expenses to return to roughly the 13 to $14 million range for the December quarter fiscal year 2010.

Looking forward to Avnet's first quarter of fiscal 2010, we expect normal seasonality at both EM and TS on a normalized basis, in addition to the impact of the 14th week due to our fiscal calendar. Therefore, EM sales are anticipated to be in the range of $2.05 billion to $2.35 billion, and sales for TS are expected to be between $1.55 billion and $1.85 billion. Avnet's consolidated sales are forecasted therefore to be between $3.6 billion and $4.2 billion for the first quarter of fiscal 2010. Based upon that revenue forecast we expect first quarter fiscal 2010 earnings to be in the range of $0.29 to $0.37 per share.

First quarter fiscal 2010 guidance includes approximately $0.07 per share related to the expensing of stock-based compensation, as compared with $0.02 and $0.05 per share respectively in the fourth and first quarters of fiscal 2009. The above EPS guidance does not include any potential restructuring and integration charges related to the cost reductions noted earlier in this release and integration of businesses acquired. In addition the above guidance assumes that the average Euro to US dollar currency exchange rate for the fiscal first quarter is 1.43 to 1. This compares with an average exchange rate of 1.51 to 1 in the prior year first quarter and 1.3 to 1 in the prior sequential quarter.

Now let me turn it back over to Roy to provide closing comments for the quarter. Roy?

Okay, thanks, Ray.

In summary, while the fourth quarter of fiscal 2009 continued a multi-quarter trend of year-over-year declines in revenue, there are data points that suggest we are at the bottom of this cycle. EM exited July with a strong book-to-bill ratio in all three regions. July billings at TS also suggest we have bottomed and should see normal seasonality for the September quarter, in addition to the impact of an extra week. While we can't be certain when growth will return, or what the rate of growth will be, we are, however, encouraged by the state of inventory at Avnet and throughout the supply chain. We are comfortably on track with our productions and the integrations of Abacus and NDI are proceeding well.

In Europe, the addition of Abacus has significantly strengthened our market position in IP and E and embedded computing, contributing to organic growth in the region. In Asia, we have continued to invest in our TS growth initiatives in China and India while expanding from Singapore into other Asian markets. Although we have been reducing expenses to align them within demand, we have been careful to maintain our customer service levels and technical staff. Our vision for Avnet is intensely focused on adding value and we continue to look for innovative ways to grow organically and earn profitable market share during these challenging times.

Our VBM culture demonstrated its benefits once again last quarter. Throughout our business, the entire Avnet team continues to react quickly to market changes and manage the things within our control. We will continue to monitor gross profit margin, and expect improvement as the markets bottom and inventory destocking runs its course. Some of the improvements in our working capital velocity are directly tied to managing assets to achieve our return on working capital hurdle rates even with lower gross profit margin.

In fact, our working capital velocity is near record levels, and quarter ending working capital as a percent of revenue is at a record low. Bottom line, we remain steadfastly committed to our return on capital goals by group and by region, and are prepared to take further cost actions if market conditions warrant. Finally, we remain confident that our organization is poised to emerge from this downturn a stronger, and more focused competitor. We continue to enter new markets, expand our suite of products and services, improve our talent base, and add value to the technology supply chain. At our Analyst Day last December we told you that we want to be premier faster. While this recession has slowed our progress towards reaching our financial targets, we are confident that our leadership position and VBM culture have positioned us to accelerate this progress once again as economic conditions improve.

With that, let's open up the lines for Q&A. Operator?

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. (Operator Instructions). Our first question comes from the line of Shawn Harrison, with Longbow Research. Please proceed with your question.

Hi, can you hear me?

Yes, we can.

Okay. Wanted to get back to some of the cost headwinds you're facing and maybe if you could elaborate just on when you would potentially sort of see those bottom. Second, if there's any other potential headwinds, either from a further mix takedown or more aggressive pricing that could come on over the next two or three quarters that we should be paying attention to or that are a potential risk that just eliminates some of the cost savings that you still have to come.

Yes, Shawn, this is Roy. I'll take the first shot and offer Harley, Ray and Phil the opportunity to chime in. We believe that the market is bottoming here. Outside of China, we are not clear that there is end market growth but as we commented in the script, it does appear that inventory throughout the supply chain is now in reasonably good shape.

We think that a lot of the pressure that we experienced in the June quarter was related to industry-wide large scale inventory liquidation taking shape in various forms and the reality is that most of that is behind us now. Obviously, there will be some residual carrying forward but we think in aggregate, we can begin to improve gross profit margins going forward. So our expectations would be that there would be no further degradation in gross profit margin and if we're right about the market and successful with all of the activities that we have under way, we think we can begin to show progress in gross margins as soon as the current quarter. Any -- guys, any additional?

I think, Roy, what I would add maybe to reinforce your comment about the late cycle margin pressure is that we continue to monitor very aggressively lead time movement and parts that have entered an allocation or limited supply phase and we do see some movement in the direction that suggests that in addition to what Roy said, those factors are contributing as well. So as the lead times expand and as more parts become more difficult to get, coupled with the late cycle margin pressure that Roy talked about, we take those signs to mean that we do believe we've hit a bottom.

Okay. Then just as a quick -- real quick follow-up, doesn't sound from the commentary that the Americas or Europe, the growth there is accelerating faster than the growth rates you're seeing in Asia, so that mix headwind just from a geographic perspective is still out there?

Yes, actually, you asked that in the first question and I forgot to respond, Shawn. So we honestly don't know how to forecast regional mix, or for that matter even the group mix so the way we run the Company is we focus on the ROWC targets by group and by region. A lot of our commentary regarding margins are in essence on a same store sales basis, if you will. And then the mix actually will take care of itself from an ROWC point of view, because we're driving all of those various areas to the same sort of after tax return on capital goals. But I think on a long-term basis, on a secular basis, it would be reasonable to assume that emerging markets, which are most prevalent in Asia, are likely to grow faster than the mature markets and, therefore, you could see that shift occur over a long period of time. The only caveat there that I would mention is that M&A of course could swing that either accelerating it or decelerating it, depending on where the M&A took place.

Thank you very much.

Okay, thanks.

Our next question comes from the line of Sherri Scribner with Deutsche Bank. Please proceed with your question.

Hi, thank you. Roy, you made a comment on the call that you thought that your cash levels had seen their peak and I just wanted to understand a little bit better in terms of the cash conversion cycle. Would you expect the cash conversion cycle to stay relatively consistent over the next couple of quarters, or would you expect that number to tick up as we move further into the year and as demand picks up? Sort of what do you expect to do with accounts receivable and inventory?

Sheri, so generally speaking, at this point in the cycle, now that we have the velocity where we want it, we've got inventory turns sort of in line with revenues, AR days are at an appropriate level, normally I would tell you that we would expect relative stability here with asset growth in line with revenue growth. Now, there is one bit of an anomaly that could occur in the first quarter that would impact accounts payables. So we've had a -- let's call it an interesting fiscal calendar over the last year or so, where most of our supplier quarter ends and the calendar quarter ends have occurred outside of our fiscal quarter. And in the current quarter, as you know, we're going to have 14 weeks, which means that we're going to have sort of two end of quarter payment cycles coming due.

We don't yet know exactly how that's going to impact payables but it might cause a decrease in payables, which would have an impact on overall net days. Okay ? So inventory and receivables, fairly stable. The potential is there for some decrease in payable driven by the

In 2Q and 4Q, would you expect it to stay at these levels?

Yes, I would, with the intent for that to slightly improve over time. We have constant efforts, primarily in the inventory area, to find ways to operate with higher and higher levels of productivity and for the most part, our suppliers are very cooperative with that strategy. The second thing I would point out is, back to Shawn's point about the secular change in growth rates by the regions, while that has a negative impact on margins, potentially, that very same shift has a positive impact on velocity. So you could see downward pressure on margin, upward pressure on velocity, as we drive all the businesses to our return targets.

Okay. Great. Thank you.

You're welcome.

Our next question comes from the line of Brendan Furlong with Miller Tabak. Please proceed with your question.

Thank you. Good afternoon, guys. On the cash again this quarter, the net cash of $26 million as it pertains to interest expense going forward, how should we think about that over the next quarter, certainly over the next three, four quarters, if you could?

Sure. Hi, Brendan, it's Ray.

Hey, Ray.

Not a lot of change, only because the debt will stay outstanding so the interest expense that we present on our financials is gross. So the interest expense you see is actual interest expense, not net and interest income is buried into other income so I just want to clarify that. So what you saw in the June quarter, the only thing you'll expect going into the September quarter is due to our fiscal calendar, interest expense will move up just because of the one extra week, and then as we go through the balance of the year, we'll come back down again and stay roughly at the levels you're seeing in the June quarter since our debt is at this point pretty low with only a small amount of short-term debt outstanding. We would expect interest expense to -- I'm sorry, interest income to move up a little bit, unfortunately at 50 basis points or there about. We're getting on our money. It's not going to move the needle too much.

Could I just have a quick one on the SG&A, looking into next quarter, I might have missed it in the preamble but you talked about the $13 million extra in corporate overhead for the September quarter. Did you talk about anything outside of that, how should we thing about the SG&A?

So again, Brendan, it's Ray. So the corporate piece overhead predominantly is going to relate to, as I mentioned in the prepared remarks, stock compensation. In addition to that, we would have expenses going up again due to the 14th week. As well as the fact that currency is moving up as well. The net of those two I'd say roughly at this point in time is probably another 10, $12 million, thereabouts. It's hard to be very precise with so many moving pieces but it's in that range.

Perfect. Thanks a lot.

Yep. And then Brendan of course coming right back down in the second quarter.

Thank you.

You're welcome.

Our next question comes from the line of Brian Alexander with Raymond James Financial. Please proceed with your question.

Thanks, good afternoon, guys.

Hi, Brian.

Just back to gross margins, Roy, I appreciate the comments you made about late cycle pressure and it seems like you're fairly confident that gross margins get better from here and almost return to previous levels within each geography. If I analyze your gross margins in the end they appear to be down by almost 200 basis points year over year and I estimate geographic mix is maybe half of that decline. Why do you suppose the non-mix related pressures and specifically the non-geographic mix related pressures have been so much more severe this cycle relative to prior cycles, especially considering the industry is more consolidated now and we've had better supply demand balance from an inventory perspective this cycle relative to history, thanks.

Why don't I -- I'm going to give Harley the first shot at that because he's closer to it and then I may fill in behind that.

Hey, Brian, how are you?

Hey, Harley.

When we look at the gross margin deterioration and you are very close to accurate on your estimate of 50/50 between regional mix and otherwise, so when we look at the non-regional mix gross margin deterioration, and then we dissect it one level further, look at our demand creation business, we notice that that margin has had -- that segment has had nominal margin reduction. So the gross margin pressure in this particular cycle is very heavily weighted to the non-demand creation portion of our business. Which today is still approximately 70% of our volume. So what is different about this particular cycle as compared to the last is that we see the pressure primarily in that area.

Obviously, the question is why. And that is obviously a very difficult one to calibrate specifically. What we do know is that the margins seem to be -- the margin pressure indeed tracks also with what's happening to the lead times in those products. With a lot of margin pressure around those commodity type products with very short lead times. Thereby, really not allowing us to speculate on purchases, to make quantity purchases in advance, to get volume upside margin due to buying taking risk. So the margin clearly, margin pressure and the deterioration has been in that portion of our business, primarily.

So Brian, this is Roy. Let me throw a couple of factoids out and then also a subjective perspective. For EM, globally, for our prior fiscal year, gross margin was up from the previous year. We actually gained 10, 15 basis points year on year. This year, for the year, we lost about 70.

If you focus on the quarter just ended, your estimate was a little bit high. It's about 160 basis points year on year. So obviously the pressure for the entire year really manifested itself here in this June quarter.

So I'm going to make two comments. One, I don't have the data here in front of me that goes all the way back to the 2001 cycle but I think that we had more margin pressure in that cycle than we are seeing in this cycle. I think the decline was actually worse. I do think, though, my second point is that this inventory correction in the supply chain and I guess you could substitute inventory liquidation in the supply chain has been as dramatic as I have ever seen in my history in this industry. So the bad news is, that puts a lot of pressure on a short period of time.

The potential good news is that it could get into the rear view mirror pretty quickly. That it could be over as Harley commented, we're already seeing extended product lead times and in some cases we're getting spot shortages of products. So we're not forecasting a rapid recovery in the margin but I think you asked for an explanation versus the prior cycle and I would say A, I'm not sure that it is less severe -- or more severe, and B, it could be more concentrated and, therefore, quicker to correct.

Very helpful. Thanks, Roy.

You're welcome.

Our next question comes from the line of Craig Hettenbach with Goldman Sachs. Please proceed with your question.

Yes, thank you. Just following up on the comments on the strong month of July for bookings across all regions, can you talk specifically to Europe and then maybe give a little more color as you progress through the June quarter, how linearity was there and then going into July, to Europe specifically.

Harley, you want to take that?

Sure, Craig, you're talking specifically about components?

Yes, I am. Thank you.

The July book-to-bill was stronger than we anticipated, although we typically expect some ramp-up coming into a slower August. This year really showed an even stronger, more positive book-to-bill than previously, so we see that as encouraging and we actually also finished June in Europe with an improving book-to-bill ratio as well.

Craig, this is Roy. I'll throw a couple of more thoughts at you. First of all, for the month of July, Europe was our top book-to-bill region as an individual month. Now, I want to caution everybody on the call, as you know, there's a significant August holiday period in Europe and we could be experiencing a pull-in of bookings in Europe, driving this number. However, the reason that we're talking about it out loud is because relative to other Julys, it is still a very strong number. So we've got sort of some late-breaking indications that Europe may be stabilizing.

If we zoom back up to the EM global, you were asking about the quarter, the month of June had the best book-to-bill for the fourth quarter but each month of the quarter at a global level was also positive book-to-bill. So we have four months in a row of EM positive book-to-bill, after a string of negative book-to-bills, although not severely negative. High nines kind of book-to-bills but quite a few months in a row of those, followed by the last four now moving into positive territory and seemingly accelerating here through July.

Roy, if I could, Craig, one additional piece of color on EMEA so that we don't create the wrong impression. Indeed, the book-to-bill ratio that we gave you is obviously factual, but please keep in mind, EMEA was the region that was hit the most severely over the fiscal year relative to a year on year downturn. Going back to Roy's comments earlier about the inventory situation, inventory correction, clearly in Europe we believe what is happening is they are moving quicker than we would have expected to correct that inventory and demand imbalance. In other words, they really reacted strongly to get their inventories in line, both obviously on our shelves but also our customers' over our fiscal 2009 so that's what we believe we're seeing today.

I really appreciate all the color around that. If I could just have a quick follow-up. You mentioned that inventory in the supply chain is now in balance. Can you comment specifically about your end customers. Sounded like you touched a little bit at the end of the last question there but just how the inventory is at your end customers'.

Craig, this is Roy. The way I would think about that is that out at the OEM level, and remember, our EM business is about 2/3 OEM and 1/3 EMS and ODM. On the OEM piece, I believe inventories are in excellent shape. I think the OEMs have done a very good job of moving with us to supply chain services and outsourcing to EMS and ODM companies who in turn are carrying the inventories. So I think they are in very good shape. I think that one of the more problematic areas in the industry is the EMS and it's a function of their business model, but relative to other cycles, it seems as though they've made substantial improvements in inventories here this quarter as well. So that's -- on an overall basis, I would tell you that inventories at the customers appear to be in reasonably good shape and then of course the pattern that has been playing out now over the past few year is that the bulk of the inventory accumulation in the supply chain is occurring at the component suppliers, and even there, there was significant improvement in the June quarter.

Great. Thanks again, guys.

You're welcome.

Our next question comes from the line of William Stein with Credit Suisse. Please proceed with your question.

Thanks, good afternoon.

Hi, Will.

Hi. Trying to dig into this extra week a little bit, try to identify really how much it should help. My understanding is in the component business it's a relatively linear daily sales rate kind of business, so you would expect an extra week to help, I don't know, about 8%, something like that. When I'm looking at the systems business, I would expect that's very much back-end loaded and in the first week of your customers or suppliers quarter, you typically wouldn't really ship a lot or sell a lot and if that's right, are we really getting a benefit by having the extra week in the September quarter?

So this is Roy. Let me start by saying we're not sure, but I can tell you how we've thought about it relative to the projection or the guidance and it's sort of a -- let's call this best effort, if you will. So I think your point about the EM business being more of a run rate business than TS is very, very accurate and valid, Will. However, even within the EM business, we've got a significant amount of scheduled type orders as well as supply chain contracts where customers have monthly build schedules and we're providing materials against those build schedules and as you might imagine, they didn't change those based on the fact that we have 14 weeks. So we really think the impact at EM is in the turns business category and the turns business typically runs 30, 35% of our total bookings, somewhere in that ballpark. So our best guess is that EM's going to benefit in revenue by the 14th week, at about one-half of run rate.

So you're right, run rate would be just under 8%. We're thinking 3.5, 4% is going to be the EM benefit. And of course, we'll report all this back to you in October when we actually know. On the TS side, again, your comment I think is very valid. We tend to be very project-oriented there. End customers have capital budgets and quarterly cycles and they don't really care that we had 14 weeks.

But here's the big gotcha. You recall over the past few quarters we've been trying to guide and update you quarterly on the impact of our fiscal calendar. So in the first week of July, we had about $130 million of sales that really applied to the industry's June quarter, but they fell into our fiscal month of July. And then of course we're going to run through the end of September, so we'll get another quarter end at September. So in essence, TS is going to benefit from two fiscal quarter ends or at least the carry-over from June, coupled with a normal September. So we think in round numbers, the TS benefit is about $130 million, which I guess is in the 6, 7% range.

Got it. The better the seasonal and TS is more because you have two quarter closes as opposed to an extra week at the end?

Yes. Well, it's that. You know what? There's one other factor, and that is June was worse than seasonal so we're coming off of a weaker or easier compare as well. I think if you actually run the numbers, we're actually guiding to better than seasonal in the TS business, but that is -- that's if you assume a normal June. We had a less than seasonal June. Therefore, we probably will get a better than seasonal September.

One follow-up, if I can, Roy. Wondering if there were any rebate issues in the quarter, there was a big problem a little over a year ago now I'm guess, I'm wondering if we're still dealing with that. As you say, June was a little bit less than was you would expect. Did that affect margins in a big way, related to rebates?

Will, first of all, the TS margin issues were confined to the Americas region. We did not have issues in Europe and Asia. First point. Second point, as we do the drill-down, there's actually a variety of issues that are affecting the margin. Every quarter there's rebates, plus and minus on the rebate category. So there obviously was some rebate impact in the margin. But nothing that we could consider to be out of the ordinary or unusual.

Okay. Thank you.

You're welcome.

Our next question comes from the line of Matt Sheerin with Thomas Weisel Partners. Please proceed with your question.

Yes, thanks. Hi, Roy.

Hi, Matt.

So just looking to the December quarter because it sequentially have one less week, obviously you don't have a ton of visibility going into that quarter, although you probably do have better visibility than you did a quarter ago, so right now as you look at it, are you looking at seasonal trends minus a week because of that one less week in the period?

So we are clearly not providing guidance for the December quarter at this point in time. However, if you exclude the impact of the 14th week in the current quarter, I think that we would expect more or less normal seasonality in Q2. That's our current view.

Okay. And then specifically in Europe where you granted the component side sounds like, but in tech solutions you continue to have less than seasonal trends for a few quarters now. How is that shaping up going into September which How is that shaping up going into September which I know is very back end loaded in EMEA, and your take on what may happen year end in terms of IT spending there.

Yes, I actually don't know. I'll ask Phil if he's got any comments. I don't know that we have any particular insight there, Matt, because whereas in EM, we can see this pick-up in bookings simply as a result of the supply chain getting inventories where they want them and then resuming purchasing to the actual consumption rate. The IT business is not driven that way. The bookings come in after the project has been won and so we don't have visibility via bookings into where the billings are going.

All we have really is the activity levels within our reseller community. So I think our perspective on the EMEA IT market that we serve is that it has been the weaker of the markets we serve. We have not yet seen signs of stability there, like we have seen in America. Nor growth like we have seen in Asia and so, therefore, I'm not sure yet how to call what we expect in December out of that region. Phil, anything you want to add?

Hi, Matt, it's Phil. Not really, Roy. It's really tough to say. Is it worsening, not sure, is it getting better? Not sure. There's not a whole lot of signs either way right now. We have some work to do. We're certainly challenging our team in Europe to do everything we can to outperform the market but I wouldn't say we're going to see a whole bunch until next year until things settle out. We're on it. We're not pleased with where we are.

Just to summarize, I think our point of view is that Asia is a little bit of a balloon for our TS growth rates. America seems stable and solid. EMEA might still be a little bit of a drag but the expression, the rate of decline is declining. We think we're getting close to a bottom there but we don't have evidence yet.

The margins are holding in EMEA.

Okay. That's it from me. Thanks a lot.

You're welcome.

Our next question comes from the line of Ananda Baruah with Brean Murray.

Thanks, guys for taking the question. I guess I just wanted to focus on margins and so I guess the first question is do you guys have the expectation that the margins by geography can eventually get back to where they previously were once we get going and growth starts to resume?

Are you asking about gross or operating?

I'm sorry, operating margins.

Yes. I think the answer is at this point in time, that is our assumption. We are committed and confident that we're going to get back to our ROWC goals, which may mean a little bit different working capital velocity, if necessary, but Ananda, more or less we believe that we can get back to our operating margins at our targets by group and by region and of course we have our annual Analyst Day coming in December. We have a few more months to work our way through this recovery and see what the shape is. If we have any different feelings, we'll present them then.

I guess just a quick follow-up on the operating margin. If we take a look at where SG&A is as a percent of revenue today and you provide a lot of great detail with what to expect from OpEx dollars over the next couple of quarters. I guess it's a little bit on the high end of where you've been historically and you're saying that we're through, I mean you're showing that we're through most of the cost savings efforts so I guess the question is what should our expectation be for the means to drive that back down as a percent of revenue? Is it really just going to be revenue-driven from this point? I know you've said you're not going to publicly sort of talk about future stuff you might do but you did say that you wouldn't be predisposed to not doing anything in the future.

Yes, so, look, it's a fair question. Let me answer it as candidly as we possibly can. We still have some cost reductions to go and some integrations to go which will continue to lower the cost run rates, say once we get through this 14th week and get into the second quarter where we have a normal 13 week period and we believe that all of that, cost reductions and integrations, will be baked into our March quarter results. When we look at that and we do our own internal projections, that says that we will be on track to recovering our ROWC targets by group and by region.

When we look at the trends, the incoming trends, the revenue trends, we believe that the markets we serve either have stabilized or are stabilizing. We see growth coming out of Asia. And we believe that this would be the time to announce any widespread large scale cost reduction efforts. However, what we've been doing quarter by quarter and those of you that have followed us know this well, we manage this business to a very disciplined portfolio management process, and as we watch revenues and margins by group and by region, if any further actions are required, we will take those actions without hesitation.

Okay. Great. Thank you. I appreciate that. Thanks.

You're welcome.

There are no other questions in the queue at this time. I would like to hand it back over to management for I would like to hand it back over to management for closing comments.

Thank you for participating on our earnings call today. As we conclude, we will scroll through 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 on our website under the quarterly results section.

Thanks, everybody.

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