安富利 (AVT) 2011 Q4 法說會逐字稿

I would now 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 Fiscal Year 2011 Financial Update. If you are listening by telephone today and have not accessed the slides that accompany this presentation, please go to our website and click on the icon announcing today's event. As we provide the highlights for our fourth quarter and full fiscal year 2011, please note that in the accompanying presentation and slides, we have excluded a gain on the sale of assets, impairment charges and restructuring, integration and other items for all periods presented. When discussing pro forma sales or organic growth, prior periods have been adjusted to include acquisitions and the impact of divestitures. In addition, when we refer to the impact of foreign currency, we mean the impact due to the change in foreign currency exchange rates when translating Avnet's non-US dollar-based financial statements into US dollars. And finally, when addressing working capital, return on capital employed and return on working capital, the definitions are included in the non-GAAP section of our presentation.

Before we get started with the presentation from Avnet Management, I would like to review Avnet's Safe Harbor statement. This presentation contains certain forward-looking statements which are statements addressing future financial and operating results of Avnet. Listed on this slide are several factors that could cause actual results to differ materially from those described in the forward-looking statements. More detailed information about these and other factors is set forth in Avnet's filings with the Securities and Exchange Commission. In just a few moments, Rick Hamada, Avnet's new CEO, will provide Avnet's fourth quarter and fiscal year 2011 highlights. Following Rick, Ray Sadowski, Chief Financial Officer of Avnet, will review our progress on growing shareholder value and provide first quarter fiscal 2012 guidance. At the conclusion of Ray's remarks, a Q&A will follow.

Also here today to take any questions you may have related to Avnet's business operations is Phil Gallagher, President of Technology Solutions, and joining us by phone from London, where he gave a keynote address at the ARM Partner meeting, is Harley Feldberg, President of Avnet's Electronics Marketing. Also with us today is Roy Vallee, Avnet's Executive Chairman. With that, let me introduce Mr. Rick Hamada to discuss Avnet's fourth quarter and fiscal 2011 business highlights.

Thank you, Vince, and welcome, everyone. Thank you all for taking the time to be with us and for your interest in Avnet. Fiscal 2011 was an exciting year at Avnet as we started the year with 3 significant acquisitions that expanded our footprint into higher growth markets and strengthened our competitive position in several other important markets. When combined with strong year-over-year organic growth of 17%, Avnet's total revenue grew 38.5% to a record $26.5 billion. While managing multiple integrations spanning both operating groups, the entire Avnet team did an excellent job translating that growth into improved financial performance. As a result of the leverage in our model and expense synergies, adjusted operating income grew 1.4 times faster than revenue and exceeded $1 billion for the full year.

Even as year-over-year growth slowed through the year, after the V-shaped recovery peaked in the fourth quarter of our fiscal 2010, adjusted operating income dollars grew sequentially every quarter and adjusted EPS increased 56% year-over-year to $4.32, easily exceeding our previous record of $3.18 set in FY '08. While the multi-quarter string of records is very impressive, the metrics we are most proud of are economic profit growth and return on capital employed. In a year in which we invested almost $700 million in value-creating M&A our ROCE increased 76 basis points to 15.4%, which is comfortably within our targeted range of 14% to 16%. This combination of rapid revenue growth and higher ROCE resulted in a substantial increase in economic profit. Turning to the fourth quarter of fiscal 2011, although year-over-year organic growth moderated from 16% in the March quarter to 13.5% in the June quarter, our reported revenue was up 33% year-over-year to a record $6.9 billion, and our sequential growth of 2% in constant dollars was in line with normal seasonality. Adjusted operating income increased 25% year-over-year to $270.9 million even though operating income margin declined 24 basis points to 3.9%. The year-over-year decline in operating income margin was primarily due to the impact of the lower margin profile of some of our acquired businesses.

However, gross profit margin, operating income margin and ROCE improved sequentially. On the bottom line, adjusted EPS grew 33% year-over-year to $1.22, which represented a fifth consecutive quarter of record EPS. Return on capital employed of 15.6% was within our target range for the seventh quarter in a row and cash flow from operations came in at a strong $281 million. This financial performance and our strong balance sheet, when measured against our historical investment levels in acquisitions and our current stock value, led Management and our Board of Directors to decide that now was an appropriate time to initiate a $500 million share buyback program. With our strong liquidity position and cash generation capability, we are confident we can continue to invest in organic growth initiatives and value-creating M&A, while opportunistically returning cash to shareholders through this share repurchase program. As we begin fiscal 2012, we remain committed to growing our business profitably and maintaining our targeted returns so that we can continue to grow economic profits and shareholder value.

Now let's turn to the operating groups. Electronics Marketing had another strong year as revenue grew 37% year-over-year to $15.1 billion, with organic growth of nearly 22%. With gross profit margin improvement for the last 3 quarters, and continued expense efficiencies, operating income grew 1.8 times faster than revenue to $832 million. Operating income margin increased 105 basis points year-over-year to 5.5%, which is at the high end of our target range of 5% to 5.5%. The growth in operating income and continued working capital vigilance combined to drive the full-year return on working capital up 460 basis points year-over-year. Return on working capital was above our stated goal for the full fiscal year for the first time at EM, since we instituted our value-based management back in 2001. While the entire EM team deserves recognition for this significant accomplishment, I would like to thank EM Japan team for their heroic efforts in bringing our Japan operation back on line and serving customers despite the natural disasters that disrupted both their lives and communities, in addition to the business environment.

Now, let's take a look at the fourth quarter. EM closed out the fiscal year with a record-breaking performance as revenue grew 26.8% year-over-year to $3.96 billion. Pro forma growth was 11.8% year-over-year, or 7% in constant dollars, with both EMEA and Asia, excluding Japan, delivering double-digit organic growth. Gross profit margin improved sequentially for a third consecutive quarter and operating income margin improved 13(Sic) basis points sequentially to 5.9%. With this performance, EM has delivered operating income margin within or above its target range for 6 straight quarters.

Turning to the balance sheet, working capital increased 1% sequentially in constant dollars, primarily due to a 6% increase in inventory, partially offset by an increase in payables. With working capital velocity holding well above pre-recession levels, the strong growth in operating income resulted in return on working capital improving 68 basis points sequentially.

More importantly, all 3 regions excluding the impact of Japan in our Asia region, are performing at or above their long-term ROWC targets. EM saw a drop in its book-to-bill at the end of the June quarter as concerns over supply chain disruptions related to the national disasters in Japan have dissipated and lead times have begun to normalize. It appears that these factors, as well as concerns over slowing economic growth, are influencing customers to be cautious in placing new orders. While some of the slower bookings are due to inventory and/or backlog adjustments at some customers, it is not clear what impact real demand had on bookings for the quarter. In this dynamic environment, we will continue to vigilantly monitor our dashboards and inputs from our customers and suppliers and react quickly to align our working capital and expenses to current market conditions.

Following the strong quarter and year at EM, we kicked off the new fiscal year by announcing 2 acquisitions serving greater China that will strengthen EM Asia's competitive position while increasing our scale and scope advantages in the region. The addition of Prospect Technology and J.C. Tally will add approximately $250 million of annualized revenue, as well as provide additional cross-selling opportunities as we look to build upon the profitable growth we realized in fiscal 2011.

In fiscal 2011, the impact of acquisitions, combined with double-digit organic growth, drove Technology Solutions revenue up 40% year-over-year to $11.47 billion. The acquisitions also changed the profile of the business as international markets grew to represent 53% of total revenue in fiscal 2011, versus 40% in the prior year. With a new presence in the major markets of Latin America and an expanded footprint in Asia, TS has increased its exposure to high growth markets where demand for ID products is growing, along with the local economies. Operating income grew 14% year-over-year as the positive impact of synergies was somewhat offset by the tepid recovery in Europe and investments in Asia. TS enters fiscal 2012 with significantly increased potential and the momentum to capitalize on the myriad of new profitable growth opportunities in all 3 regions.

Looking at the June quarter, sequential growth of 7.4% was at the high end of typical seasonality. However, double-digit year-over-year organic growth in Asia and the Americas was partially offset by continued sluggish growth in Europe. Revenue increased 41.2% year-over-year to $2.95 billion, with industry standard servers, storage and software leading the way. Operating income grew 17.8% sequentially and operating income margin increased 20 basis points sequentially with all 3 regions contributing to this improvement. TS Asia operating income margin increased year-over-year for the third consecutive quarter, as we continue to apply our VBM discipline to both organic growth initiatives and acquired businesses. Overall, TS operating income margin and return on working capital were down from the fourth quarter of fiscal 2010, primarily due to the impact of acquisitions, as portions of the recently acquired businesses have historically had a lower margin profile than the TS legacy business.

While TS has made progress on many fronts this quarter, its overall operating results did not meet with expectations. As a result, we have taken a number of actions to improve performance and meet our long-term commitments. We remain committed to our long-term financial model for TS and will continue to manage the business accordingly.

In addition, we decided to transfer the computing components business in Latin America from TS to EM Americas. This business has an annual revenue run rate of approximately $400 million to $500 million. We already had the North American computing components business included in EM Americas embedded business and as we integrated the TS acquisitions in Latin America, it became clear that by transferring this business from TS to EM, we could better leverage the infrastructure and resources of the embedded group, while allowing TS Latin America to focus on Enterprise IT Solutions. These actions are incorporated into the guidance Ray will cover next.

Now I would like to turn the commentary over to Ray Sadowski to provide more color on our return on capital deployed and how that contributed to the Board's decision to institute a share repurchase program. Ray?

Thank you, Rick, and hello, everyone. As Rick mentioned, this morning we announced a $500 million share repurchase program. As we reviewed with you on our most recent Analyst Day in December, our long-standing capital allocation strategy has been to invest in organic growth first, followed by value-creating M&A and, when we have excess liquidity, return cash to shareholders since our counter-cyclical balance sheet generally negates the need for significant cash reserves. Our business has grown significantly with revenue up 48% from pre-recession levels and adjusted operating income now exceeding $1 billion. As this slide clearly demonstrates, we have been consistently delivering return on capital within our target range and generating rapid growth in economic profits. With better returns on a larger business base, we can also generate higher levels of cash flow than we did prior to the recent recession, as evidenced by the fact that cash flow from operations was $470 million in just the past 2 quarters. With moderating growth rates resulting in lower working capital investments, we are confident we can fund organic growth initiatives and pursue our acquisition strategy, while strengthening our already strong liquidity position.

This expectation of higher cash flow generation, coupled with our strong balance sheet and our current stock valuation, were the primary factors leading to the decision to initiate a stock buyback. Similar to how we have been allocating capital for growth initiatives, we'll allocate cash to the share buyback program when financial returns are appropriate. While I've used this slide to demonstrate why we are in a position to initiate a stock buyback, there is a far more important point I would like to make. When we started our value-based management journey in 2001, our intent was to transform the business and focus on returns and economic profit generation as the best way to grow shareholder value. While the tech bubble and the Great Recession slowed our progress along the journey, this slide clearly demonstrates the positive results of that effort. In fiscal 2001, the combination of organic growth, additional scale from acquisitions, as well as expense efficiencies, resulted in economic profits growing 72% year-over-year. VBM is embedded in the culture of Avnet and our discipline around value-creating M&A ensures that acquired companies embrace that culture and deliver shareholder value as they add to and leverage the scale and scope advantages of the Avnet enterprise.

Despite the recent uncertainty in the market, with our strong and competitive position and improving financial performance, we are confident that we can continue to execute on our strategy of profitable growth and create additional shareholder value going forward. Looking forward to Avnet's first quarter of fiscal year 2012, we expect EM sales to be in the range of $3.75 billion to $4.05 billion, and sales for TS to be between $2.5 billion and $2.8 billion. Therefore, Avnet's consolidated sales are forecasted to be between $6.25 billion and $6.85 billion. Adjusted for the transfer of Latin America computing components business from TS to EM and the impact of acquisition, these numbers reflect below normal seasonality at both operating groups. Based upon that revenue forecast, we expect first quarter fiscal year 2012 earnings to be in the range of $0.90 to $0.98 per share. The above guidance does not take into account any potential restructuring charges, any charges related to acquisition and post-closing integrations, or the impact of any share repurchases.

The guidance also includes a typical sequential increase in stock-based compensation and assumes an effective tax rate in the range of 29% to 31%. In addition, the above guidance assumes that the average euro to US dollar currency exchange rate for the first quarter of fiscal 2012 is $1.44 to EUR1. This compares with an average exchange rate of $1.29 to EUR1 in the prior year first quarter, and $1.44 to EUR1 in the fourth quarter fiscal 2011. With that, let's open the questions for Q&A. Operator?

(Operator Instructions) Amitabh Passi from UBS.

Rick, I was hoping maybe you could just give us a broad level view of what you're seeing out there in the marketplace, what the sentiment is amongst your customer base? And maybe related to that, or as you respond to that, just some sense of how orders progressed during the quarter and then what you might be seeing to date in this quarter?

Yes, Amitabh, I would characterize it as the customers, certainly there's some caution based on the current outlook in the global economic growth sectors here, and all the various things around the world that -- I won't go through the list here. But we mentioned, as part of the book-to-bill, we saw for EM in the June quarter that was an influence as well. But other than that, there's no direct behavioral change or distinct difference in the customer base in the short term that gives us any other cause for longer term disruption overall. I'd just tell you it's a cautious customer base out there. They're keeping an eye on things, like everybody else, but outside of just, I would say, normal caution here, no other major change that we've sensed at this particular point.

Maybe Harley can comment on the book-to-bill through the quarter, but I would tell you what we've seen thus quarter to date is pretty consistent with what we were seeing coming off the June quarter. Harley, I don't know if you'll make a comment on that?

Yes. Hello everybody, hello Rick. I hope everyone can hear me okay. The book-to-bill through the early part of this current quarter has really been essentially consistent with what we saw towards the end of the June month, which was below 1. So, we have not seen that change at this point this early into the quarter.

Just maybe as a follow-up, Harley, any sense of what book-to-bill is across geographies? And maybe just specifics on trends you're seeing in some of the geographic areas?

Oddly, the book-to-bill is fairly consistent across all of our regions, which is a bit surprising because you would expect at this point for the Asia book-to-bill to be above 1. That's what traditional trajectory would tell us. But at this point, at least -- actually for the early part of the quarter, all of our regions are similar in where they are book-to-bill-wise.

Got it. My final one for Ray, $500 million buyback plan announced. If I look at where the stock is today assuming earnings power gets to $45.00 in the next 3 to 4 years, the return looks pretty attractive. Can we assume that you'll be fairly aggressive in the marketplace?

Based upon where we are today relative to stock price, which is, as you know, approaching book value, I guess I would answer that by saying we'll be reasonably aggressive and depending upon which way the stock price goes from here, either more aggressive or less aggressive as we move forward. But it's safe to say we'll be reasonably aggressive based upon the price of the stock today.

Okay. Great. Thanks.

Sherri Scribner, Deutsche Bank.

I was hoping you could give us a little bit of detail on the TS business. You mentioned some changes and I know that you moved some of the revenue into the EM segment for fiscal '12. But wanted to get a sense of, are those changes on the European side, where I know you've been trying to improve the profitability in that business, or just a little more detail?

It's Rick. Let me offer some overall comment on the change we announced, then I'll let Phil give you color on TS overall. The shift in business for the beginning of fiscal '12 was a computing components business in Latin America moving from TS to EM. And again, we've sized that at roughly a $400 million to $500 million business annualized and that's the only change as far as moving something from one reporting unit to another as we head to FY '12. We did make some comments about actions in the business as well and I'll let Phil talk about a more regional breakout for TS.

Just to further elaborate on that, the move in Latin America is really consistent with the move that we made in North America when we acquired [Bell]. So it really was the next logical step to move that components volume business, if you will, and embedded business back in EM where it's core and so TS can focus in Latin America on the Enterprise side of the business which is different. In Europe, we still have that volume and that components business on the TS side of the business and we did that when we acquired Bell. We kept it there and are continuing to evaluate that business as we move forward.

Last quarter definitely was a little softer than we anticipated in both the components as well as in the disc drive area which has had the little bit more of an impact on us than we anticipated and are making the appropriate adjustments as we mentioned in the script. We did make some beyond the synergy adjustments that we committed to and executed on. We made some further adjustments in the June quarter from an expense modeling standpoint and we'll continue to model that this current quarter as we watch that business closely.

Okay. That's helpful. And then, just thinking about TS Europe, when we've talked in the past, that's really been a segment that needs more revenue growth and it sounds like Europe continues to be sluggish and clearly there's some issues there going on. Is that still a revenue growth story? When do you expect returns to get back to the corporate average margin level?

We're still committed -- I'll answer it. This is Phil again. Working backwards, the long range planning targets although appear aggressive at this point, are still the long range planning targets we had for the European marketplace that we committed to in December at Analyst Day. There are pockets of Europe, I want to really emphasize, that are performing at or above those targets already. There are other pockets that we're having a bit more challenges with and we're working those as we move forward. The growth in Europe, again, when you start to break it out, certainly has been a bit softer than we've anticipated or expected. Some of that driven by your previous question in the segment around components and drives, some of the enterprise has actually done very well in Europe, including software and including power, by the way, as well as storage.

So it really is Europe. When you talk Europe as one entity, it really has to be broken down subregions within Europe to see what's really happening. But long and short, we're committed to the LRPTs that we committed to in December. We have some work to do. We made some good progress, we think, in June in making some of those adjustments and we'll continue to model it moving forward in September.

Sheri, I would add part of our growth strategies for TS EMEA include continuing to build out the franchise as we have on a Pan-European basis and when the opportunity is right, even as we are reconstructing that business to get to the right model, we'll take the opportunity to invest, as we did with the [Emesdeck] acquisition. That really helped solidify presence for us in France, a major country over there of course. So we're still looking to make sure that we do our part to help invest into that growth.

Okay. Great. Hopefully things are getting a little bit cheaper over there in terms of acquisitions. (laughter) Thank you.

We'll see.

Craig Hettenbach, Goldman Sachs.

Ray, nice to see the buyback here. Can you just talk about, in terms of capital allocation relative to the M&A environment you're seeing today, does that mean that M&A for the near term will be put on hold a little bit? What are you seeing out there for M&A?

No, I don't think I would characterize that we would put M&A on hold. I don't think that's our style. That's first, number one. So first going back just on the buyback overall, as I mentioned in my prepared remarks, we're in a very strong liquidity position with good, consistent cash flow which puts us in a position, from our perspective, to do all the things we'd like to do. Which is fuel organic growth, continue our M&A strategy and now take the opportunity to also give back some money to shareholders, especially in light of the stock price valuation today. But by no means should you take this as a view that opportunities within the M&A pipeline are in any way diminished.

It's an active pipeline. We'll continue to vigorously pursue those value creating opportunities that we think are out there as we move forward. It's hard to tell what's going to happen in the environment with businesses slowing down, but as you know, that does create some opportunities every once in a while from an M&A perspective. Overall, I would say no change in our approach to M&A as we move forward.

Okay. Then if I can follow up for Rick, given you noted some of the caution out there in the marketplace and some slower growth, can you just talk about the operating model as it stands today? Areas where you could potentially flex or where you could cut back if need be to a slower environment?

Craig, that would be a very specific answer working through our portfolio. We tend to try to match our resource allocation, number one, to where the growth is and take it away from where the growth isn't overall. On a macro basis, we are committed to, on a go-forward performing basis, we would expect a 50% drop-through from our performing businesses. Non-performing, we might expect a little bit higher drop-through as they get back to their models. From a high level perspective, that's the way we manage and organize the business. But to get more specific as to what's happening with this particular segment, region, business unit or speed boat, that I don't think is typically something we get down to those details.

Will Stein, Credit Suisse.

I'm going to be the maybe tenth one to ask about the share repurchase. Until -- I should say, when is the expiry of the repurchase and how are you going to think about allocating between the two ways to invest, buybacks versus M&A?

Will, this is Rick. I'll take a stab and Ray can add on as well. The priority scheme stays the same. Number one is organic growth, number two is value creating M&A and number three was, we discussed and evaluated a variety of opportunities to return capital to shareholders. We've committed to this buyback because we believe, if you take a look at the total profile of Avnet today, the scope, the returns, the cash flows, as well as the capital structure that we have today, and you take a look at our historical use of capital for M&A, we believe it's time that we're going to find ourselves in a position of excess liquidity. Something we referred to before, but we were never there.

However, another reason we did a buyback I think was to allow us to make these investments opportunistically. And should a blockbuster M&A deal that was very compelling for us and we saw an opportunity to invest the cash to create future value and cash flows, that might dial us back on the buyback and we would allocate the capital accordingly. Given everything we know today and with a normal steady state of the capital that we've had generally dedicated to M&A, we feel pretty comfortable about the commitment. Ray, if you want to add anything?

No, I think that's -- I would agree everything that Rick said. Just to respond to your other question, from a time limit perspective, we did not put a time limit on it, intentionally, in essence. A lot will vary, number 1, based upon what Rick just said but I think equally important what happens to the stock price overall. If we think it's an attractive investment, as I mentioned earlier in response to a question, we'll be fairly aggressive buyers. If the stock price moves up to a degree and that becomes a little bit less attractive, then we'll allocate capital a little bit differently.

That's helpful. As my follow up, the margins in the TS segment a little bit disappointing, relative to what I was modeling anyway. In the past, maybe go back a couple years to remember this, but there had been rebate threshold issues in the past. This isn't a dramatic shortfall but I'm wondering if that was an issue in the quarter at all?

No, that really wasn't part of the story. We were, as we noted in the script, Will, we were disappointed as well and we've taken some actions accordingly to get that back on track.

And Rick, let me jump in on that as well. This is Phil Gallagher. We were definitely disappointed. The bulk of the portfolio and the brands, however, and by countries made very good progress towards our goals. The one area that we've got some isolated challenges on and again, are isolated within the region, if I was going to summarize it, would be EMEA and we've got plans in place to do that. But this was not anything due to a rebate issue or anything along those lines.

Great. Thank you.

Brian Alexander, Raymond James.

Back to the components business, guys, your largest competitor talked about a bounce back in book-to-bill in the month of July. It doesn't sound like you saw that. If that's the case and book-to-bill is still below 1 through July, what has to happen in August and September in terms of revenue trends within EM to hit your revenue guidance? Do you need to see a big snapback in bookings in August and September or do you need to see normal linearity off of this lower run rate? Thanks.

Brian, I'll let Harley jump in. I can start by confirming we did not see anything like the major positive July book-to-bill that was reported from other sources. So Harley, I don't know if you want to make more comment on the outlook for the quarter?

Sure, Rick. As you would have noticed from our guidance, we took a fairly cautious approach to the quarter based on multiple factors, one being the book-to-bill. But from my perspective, more dramatically, just a general terrifically cautious feeling relative to concerns about the macro environment overall. With that said, Brian, it would not be unusual for us to have the type of quarter where we exit the holiday season in August and start to see a rebuilding of our backlog and stronger growth coming out of September. Obviously, we can't predict that and we took a cautious tone because of the macro concerns. But it will not take a gigantic snapback for us to achieve the forecast we gave as they stand today.

Adjusting for the [lat-tan] transfer, if we do that it looks like the midpoint for September is down about 4% sequentially which would be a little bit lower than the low end of seasonality. Is that the right way to read your outlook for EM?

Indeed.

Okay. Thanks.

Ananda Baruah, Brean Murray.

Just wondering if on TS, if you could go through what you saw in terms of pricing as we went through the quarter, then how this quarter has started? Then any pricing comments around components that you might have visibility into as well, hard drives and such? Thanks.

Phil, any thoughts on that?

Just, again, we have the volume business, components business both in Asia-Pac, that I have visibility to that's more processor-driven, as well as in Europe. We do not have drives in Asia-Pac. But from a components standpoint, as the market -- and in Asia-Pac actually we saw relatively good growth last quarter so it's really a tale of two cities. But as far as the margin pressures in components, I think that's just based on supply and demand and right now with the market being down, you're going to get some additional pressures in the components and in the drive area. But nothing dramatically out of the ordinary. It's more a volume issue being lower than what we anticipated.

Okay. Got it. And then on the system side, if you could just talk about what you saw from a pricing perspective across the different systems segments or I guess the different product segments in TS?

Nothing really overly significant in the Enterprise space. The market's naturally competitive, but there's nothing that really has changed that much since the past several quarters or even the year-on-year. Even if you look at -- when you get into the regional P&Ls and you look at it by country and then by brand. Margins, when you break out the geographic mix and some technology mix of the products, some of the margins are holding up okay. Nothing really to speak of there.

Industry standard servers are naturally competitive. I'll just make a note, it usually gets asked, we even saw with the growth in storage and networking and even proprietary, we actually saw industry standard servers, as a percentage of our server business, actually decline quarter-on-quarter, which is a positive for us.

Ananda, I would just add that on TS on a global level gross margin basis was very stable sequentially.

That's helpful, guys. If I could just ask one quick clarification. It sounded like on hard drives you said maybe a little bit softer but nothing too dramatic. Is that correct?

That's correct. The volume was down more than we anticipated, but the pricing pressures would just be normal with that type of volume swing.

I got it. I got. That's helpful. Thanks a lot.

Matt Sheerin, Stifel Nicolaus.

Just sticking to Tech Solutions here, it sounded like in your guidance, you're guiding for that division as well as components to be less than seasonal. But it also looks like North America has been holding in very well; you had good growth there organically. Are you seeing weakness now in North America, as well, in Tech Solutions?

Matt, this is Phil. Yes, our normal seasonality is minus 1 to minus 5 when you adjust for Latin America, you're right, we're coming in just outside that at about a minus 6% in total. Back to Harley's point, may be a bit conservative, but that's the route we wanted to take. The Americas or North America, specifically, is actually looking pretty good. Now that our pipelines look well, [hosted] a team recently, just before this call. I've met with some suppliers recently, a couple partners. And as we sit here today, business activity looks good and month-on-month, quarter-on-quarter. From a bookings standpoint, incoming business and opportunities looks healthy.

It sounds like Europe is still the biggest concern here.

That's correct. Asia continues to be in line and Europe, as I mentioned earlier, is the one that we're continuing to watch very closely.

And I know you went through an IT integration with Bell Micro in Europe in the first quarter and that created some hiccups on margins and also on sales. Was that a distraction as well this quarter or was it more demand-related?

We got through the IT integration actually was in the February, March timeframe when we effectively flipped the switch, if you will, on the systems. So you definitely have a little bit of drag into the next quarter just from an education and process and still moving some buildings and whatnot. I would say there's definitely a bit of a disruption. But it's as much demand as it is -- as we see it, okay -- demand as it is the integration at this point in time. Keep in mind again, we combine the revenues at this point, the components/volume side was down well more than normal, which then drove Europe in total down more as well from a revenue standpoint.

Okay. Just lastly on inventory, Ray, I think you said that component inventories were up 6% sequentially. Do you expect to work that down this quarter and into the December quarter?

Yes, I think at this stage, if inventory came in, as we mentioned, modestly higher. Based upon the tone in business right now, we'll have to see how things progress. I would say that inventory is more likely to be on the flattish side for the quarter going forward, as opposed to any dramatic movement either up or down. But that will depend upon what we see as we go through the balance of the quarter.

Ray, was that Enterprise level or was that EM specific?

That's EM specific.

Got it.

EM specific.

Thank you.

Rick, this is Harley. Could I add a little color to Ray's comments?

Yes. Please do.

I think the point I'd like to make on inventory, because of course with our below seasonal guidance for the September quarter, we want to be very, very careful relative to managing our inventory and our expenses, to be quite blunt. We are watching them very, very carefully. Of course, we've already adjusted our pipelines commensurate with our backlog, which we would do on a natural basis. We also are watching very, very closely, going back really to the question that Brian asked around what do we think the quarter's going to shape up. If the quarter doesn't show some rebound and stronger incoming levels, then we'll make more dramatic adjustments toward the end of the quarter. If it plays out the way we believe, then we'll continue and I think Ray's prediction that will come in around flat or so is probably correct.

Okay. Because if bookings don't pick up, then you're going to be looking at another below seasonal quarter for the December quarter, right?

It could be -- I wouldn't forecast that today but that would be logical. One thing to keep in mind is that when you talk about book-to-bill, don't lose sight of the fact that the March quarter was actually the eighth of 8 positive book-to-bill quarters in a row. As a matter of fact, I was actually looking at the numbers before the call. For our fiscal '10, for example, our book-to-bill was in the neighborhood of 1.2. It does make sense that the permutations in the book-to-bill will smooth out a bit and I think we're seeing that now. One has to wonder if indeed the Japan issues caused a bit of a kink in what the overall market was doing and caused a bit of a delay, which now, quite frankly, coupled with the strong caution in the market and the macro concerns is probably, at least from my perspective, causing what we're seeing today. Our belief continues to be that we'll manage through it and we'll adjust as we need to, as the quarter further develops.

Okay. Makes sense. Thank you.

Jim Suva, Citigroup.

Thank you and congratulations to you and your Avnet team. The question I have is specifically to the outlook, the forward-looking guidance. When we look at the outlook for your sales, let's take for example, just to make math easy, at the midpoint of your range you've got sales that are going to be up year-over-year mid-single digits pretty easily, maybe 6% or so. Yet earnings per share are not growing at the midpoint and to be pretty blunt there, people would like to see the sales and the EPS both growing together. Are there some things that you're working through in the September quarter that are pressuring that earnings? And if so, when will those be resolved or when should we look to see some leverage to the bottom line on the forward-looking numbers?

It's Ray, Jim. The first thing I would probably mention is one of the things from an expense perspective overall that impacts us in the quarter each year, but a little bit of an anomaly this year -- and we've talked about it in the past -- is our incentive compensation, our equity incentive compensation. And the way that gets expensed, where it's fairly front loaded in the quarter. You may recall what happened last year. Essentially, we wound up splitting a significant amount of that expense between the September quarter and the December quarter simply because we didn't have enough shares.

What that means is that, in essence, if you look at it from a year-over-year perspective, last year's expenses, from a normal type perspective, were understated versus what they are today and the impact of that overall is, I'd say, roughly $8 million. In essence, last year's first quarter probably could have been about $6 million, $7 million higher and this quarter, just because of increases, it's $1 million or $2 million higher. So the net of that is roughly about an $8 million number overall. That's certainly one of the things that's impacting the overall leverage that you appear to be seeing overall when you look at things.

In addition to that, as we work through the softer environment, some of the drop-throughs will get adjusted as we move forward, just dealing with the overall mix of business by region and where we see declines and what we see our expense structure looking like at this particular point in time. But we are still managing our business overall to what I guess I would characterize as a TP dollar drop-through of no less than 50% and we'll manage that as we go forward.

When we look at operating expenses, your SG&A and admin expenses, given that we've had several tuck-ins of acquisitions and things, are we at a run rate of revenues now currently where you see things? Or given your changes to the macro environment, should we be looking at that coming down? Or are there actually some step-up features due to the acquisitions? Just trying to help us look at the operating expense line.

Yes, I think that's a couple comments. One, if we're looking at it sequentially, so we did announce a couple acquisitions earlier in the year and that will cause a little bit of a step-up expense. The companies are not huge, but of course they'll add some multiple millions of dollars of expenses going forward. In addition to that, we have taken some limited expense actions targeted around the world, which will pull expenses down. At this particular point in time, in terms of whether we're looking at doing something from a much larger scale, I guess I'd say it'll depend upon what we see as we go through the quarter.

We did just come off a very, very strong quarter with record results. We certainly do see a slowing, as has been indicated in discussion today and in our prepared remarks. We will do the things as we have done in the past, consistently, and respond accordingly. But I'd say at this particular stage, it's a little bit early. We'd like to see a little bit more in terms of what happens as we go through the quarter and obviously over the next few months and we'll take the appropriate actions that we think are necessary in order to maintain a certain level of profitability.

Thank you and congratulations to you and your team.

Shawn Harrison, Longbow Research.

Just first, clarification, Ray, the $8 million, that's a sequential increase in the September quarter for the equity compensation; correct?

It is a sequential increase --. No, I'm sorry, it's year over year. The $8 million is roughly year-over-year, $7.5 million, $8 million year-over-year. Sequentially, you're looking more at about a $11 million, $12 million, $13 million number sequential increase.

Okay.

That would be more in line with what we typically would see other than our expenses up a little bit. But again, not dramatically so. $8 million was year-over-year.

Okay. Thank you. And in case I missed it, the actions that are being taken in regards to TS EMEA and improving returns, what are the exact savings that are forecast from those actions? When should we see that? On top of that, where are the full synergies from Bell Micro that we expected hit exiting the June quarter as well?

I'll jump in here. Here's how I'd characterize it. The synergies are done and the magnitude of the actions that have already been planned and executed are in the neighborhood of $16 million annualized, $4 million a quarter, roughly.

US.

Yes.

Okay.

As we've indicated, we're still staying close to the business and monitoring what we need to do to get it back on track.

And those actions actually were taken in the June -- this is Phil -- in the June time frame, by the time we executed them. So it drifted a little bit into July, so we should start to see the benefit this quarter.

Okay. And then, were there any costs associated with those actions in the SG&A this quarter? It was maybe a little higher than I thought it would be or maybe just some M&A for the June quarter that was in the SG&A because it did tick up probably more than I thought it would with sales growth.

There were some charges. I think we've outlined some restructuring integration charges. I don't have the exact number in front of me, but it was not huge in the scheme of things, very simply because we also had some reversals of over-accruals related to past restructuring charges. The net of the two turned out not to be a huge number overall.

I think that was, say, $4 million, but within the SG&A, ex that call-out item was there anything else that led to the sequential inflation? Seems just a little bit greater than I would have expected with the sales growth.

No, nothing that sticks out. Just that one -- the $4 million that we noted in the special charge section. Nothing else that I can think of sticks out as being any one particular item.

Okay. Thanks so much.

Amitabh Passi.

Ray, just a quick question for you. If we were to assume sales kind of stay flattish for fiscal year '12, is it fair to assume that OpEx or SG&A should stay flattish? Just trying to get a sense of what levers you have to contain spending? Should we expect, under a scenario where sales are flat, can you hold OpEx relatively flat?

Obviously a challenging question. We'll see as we go through the environment but the question in terms of -- as you know, our expense structure overall is, I'd say, reasonably variable. Depending upon what does happen overall to top line, we'll adjust the expenses accordingly. But I think once you bake in all the M&A and everything else, I would not see a significant shift in expenses one way or another unless we decided to take overt actions. Again, that will depend upon what do we actually see as we go through the balance of the fiscal year.

Okay. And then just one for Phil, quickly. I apologize if you touched on this. Just curious what your expectations might be for a typical IT budget flush at the end of this year?

Amitabh, thanks for the question. I'm probably not really qualified to answer it, to be candid with you. It's a tough one to call at this point. With everything going on around the world, I'd be remiss in trying to respond to that.

Okay.

We'll give you a better idea on next quarter's call.

Okay. Appreciate it.

Mona Eraiba, TCW.

Congratulations, guys, on a great execution in a difficult time. Could you just give us color like some -- your competitor was saying things got weak at the final 2 weeks of June and then improved somewhat. Is there any change, variance between, on a weekly basis just the color, if things are getting softer, stabilizing, or what do you see?

Mona, this is Rick. Maybe I'll ask Harley to jump in as well. Typically, again, coming off the June at 0.95, we've seen a continued less than 1 to 1 through the first 5 weeks of the quarter here, but not dramatically different than how we ended the quarter. Harley, I don't know if you want to add anything?

Hi, Rick, I would agree completely.

Is that both in the components and the system business or is it --?

On the systems business, Mona, that typically is almost always a 1 to 1 book-to-bill type of business, very quarterly driven. Not really a supply chain business, per se. But the incoming business for the month of July was very consistent with our outlook.

At TS.

At TS, yes.

There are no further questions in the queue. I'd like to hand the call back over to Management for closing comments.

Thank you for participating in 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 reconciliation, can be accessed in downloadable PDF format on our website, under the quarterly results section. Thank you very much.

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.