安富利 (AVT) 2012 Q3 法說會逐字稿

Our presentation will begin now. I would now like to turn the floor over to Vince Keenan, Avnet's Vice President of Investor Relations Thank you, sir, you may begin.

Good afternoon, and welcome to Avnet's third-quarter fiscal year 2012 business and 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 third-quarter fiscal year 2012, please note that in the accompanying presentation and slides we have excluded restructuring, integration, and other charges from both the current and prior-year periods. And the gain related to the negative goodwill from an acquisition during the current quarter. When discussing pro form sales or organic growth, prior periods have been adjusted to include acquisitions and the impact of a divestiture, as well as the transfer of the Latin America computing components business from TS to EM in the first quarter of fiscal 2012. 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 CEO, will provide Avnet's third-quarter fiscal year 2012 highlights. Following Rick, Ray Sadowski, Chief Financial Officer of Avnet, will review some other financial highlights, our return on capital performance, and provide further 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 Harley Feldberg, President of Electronics Marketing.

With that, let me introduce Mr. Rick Hamada to discuss Avnet's third-quarter fiscal 2012 business highlights.

Thank you, Vince. And good afternoon, everyone. Thank you all for taking the time to be with us and for your interest in Avnet. Similar to the first two quarters of fiscal 2012, the pace of recovery continued to vary by region. However, we did see some incremental signs of encouragement towards the end of the quarter. At Electronics Marketing, the supply chain inventory correction that negatively impacted the first half of fiscal 2012 appears to be nearing an end, as sequential revenue growth returned to more normal seasonal trends and the book to bill ratio finished at parity for the quarter. At TS, which was coming off its seasonally strong December quarter, the continued focus on improving performance and the benefits from restructuring initiatives resulted in a third consecutive quarter of year-over-year improvements in both margins and returns. Despite the challenges presented by the sluggish macroeconomic environment, solid execution at both operating groups led to results that were in line with our expectations and demonstrated the positive impact that our value-based management discipline continues to have on our business.

Enterprise revenue, up $6.3 billion, decreased 6% year over year in reported dollars. While pro forma revenue was down 7% in constant dollars, primarily due to a double-digit decline in our EMEA region at both operating groups. This represents the first quarter in this fiscal year that pro forma year-over-year growth turned negative, as the prior year third quarter was particularly strong. On a sequential basis, revenue declined 6% in reported dollars and pro forma revenue was down 7%, which was at the low end of normal seasonality of down 4% to down 7%.

In the March quarter, gross profit margin increased 29 basis point sequentially to 12%, primarily due to the seasonal mix shift to our higher gross profit margin EM business. On a year-over-year basis gross profit margin increased 21 basis points, driven by the third consecutive quarter of improvements at TS in both the Americas and EMEA regions. Operating expenses of $518 million declined $11 million, or 2.1%, from the year-ago quarter, as the positive impact of restructuring initiatives taken during fiscal 2012 was partially offset by new acquisitions. Excluding the impact of acquisitions and changes in foreign currency exchange rates, operating expenses declined $21 million year over year and $9.5 million sequentially. Or 4% and 2%, respectively. As a result of our targeted cost reductions over the past nine months, we now expect to realize approximately $35 million to $45 million in annualized savings by the time we exit fiscal 2012.

Although our team has effectively managed through the current environment, this quarter's adjusted operating income decreased 8% year over year to $235 million and adjusted operating income margin decreased 10 basis points to 3.8%. Adjusted EPS of $1.03 declined $0.07 from the year-ago quarter, due primarily to the impact of lower revenue, which was partially offset by higher gross profit margin, cost reductions and a lower share count. On a sequential basis, adjusted operating income declined 11%. And adjusted EPS was down $0.12, with approximately half of the EPS decline due to the temporary benefits related to hard disk drives that had positively impacted our December quarter.

Working capital increased $210 million sequentially, or 5.7%, due primarily to the impact of recent acquisitions and a reduction in accounts payable, which was offset somewhat by declines in receivables and inventory. This increase, when combined with our seasonal mix shift to our lower working capital velocity EM business, resulted in a slight decline in working capital velocity to 6.4 turns. At the operating group level, TS experienced its typical seasonal decline while EM improved its working capital velocity meaningfully. Return on capital employed and return on working capital declined 226 basis points and 237 basis points, respectively, from the near peak levels in the prior-year quarter.

Through the first nine months of fiscal 2012, even though our organic revenue was down, our gross profit margin is up. And operating income margin is approximately flat with the comparable period in fiscal 2011. I am pleased with the results our team delivered this fiscal year, while managing through the cyclical supply chain correction and uneven growth environment. As we have shared with you during past corrections, our goal is to adjust and adapt where needed, while remaining focused on our longer-term competitive position in end markets. Given that this supply chain correction has been relatively mild, we believe our results demonstrate just that and we stand poised to leverage future growth and to improved financial performance. Though it is hard to predict with the pace of economic growth may be going forward, the technology markets we serve continue to lead this recovery, and we are very well-positioned to continue growing faster than the markets we serve, and drive higher returns and shareholder value.

Now let's turn to our operating groups. In the March quarter, Electronic Marketing's global book to bill ratio improved for the second consecutive quarter and finished the quarter at parity, with EMEA being the only region to end the quarter below 1 to 1. With the inventory correction nearing an end, growth returned to more normal seasonal trends, as revenue increased 5% sequentially in reported dollars and 4% on a pro forma basis in constant dollars, compared with typical seasonality of up 4% to 7%. EMEA was the strongest region with revenue growth of 16%, or 19% in constant dollars, following two quarters of double-digit sequential declines. The Americas region, which has shown more relative strength through this correction, was up 4% sequentially, while Asia was down 3.5%. Reported revenue of $3.8 billion was down 4% year over year while pro forma revenue was down nearly 9% in constant dollars.

Gross profit dollars grew 4.7% sequentially and gross profit margin was flat as the mix impact of the growth in the higher-margin EMEA region was offset by a decline in the Americas embedded business, which had benefited from a temporary lift from hard disk drive shortages in the December quarter. The gross profit improvement, when coupled with continued expense management, resulted in sequential operating income growing 2.5 times faster than revenue. Operating income margin increased 31 basis points sequentially to 5.2%, strongly influenced by the EMEA region which is back above its margin and return goals. Operating income declined 13.6% year over year and operating income margin was down 56 basis points as the prior-year quarter represented near cyclical peak profitability as the V-shaped recovery in electronic components was nearing an end.

Turning to the balance sheet, EM increased working capital 1.7% sequentially, due primarily to acquisitions and the impact of changes in foreign currency exchange rates. On an organic basis, working capital was flat with the December quarter, as an increase in accounts receivable to support the higher revenue levels was offset by a decrease in inventory and an increase in accounts payable. Excluding acquisitions and foreign currency, EM inventory declined $44 million sequentially. And inventory turns increased nearly half a turn to 6.1. The increase in operating income and working capital velocity combined to drive return on working capital up 379 basis points sequentially, although it was down 484 basis points from the strong third quarter in fiscal 2011.

We are pleased with our performance as the EM team has reacted quickly to prudently manage expenses and working capital while continuing to pursue organic growth initiatives during the supply chain correction. It is worth noting that through the first nine months of fiscal 2012, EM's operating income margin is within our target range despite the negative impact that the correction had on revenue growth. We are confident that EM can continue to leverage future growth into higher operating profit margins and drive returns back above our long-range goal.

As expected, TS experienced its typical sequential revenue decline in March, coming off its seasonally strong December quarter. For the third quarter of fiscal 2012, revenue of $2.5 billion declined 19% sequentially on a pro forma basis in constant dollars, as compared with normal seasonality of down 16% to down 20%. Reported revenue declined 8% year over year while pro forma revenue was down 4% in constant currency, with EMEA experiencing a decline in pro forma revenue of 11%. At a product level, both industry standard servers and services grew double digits year over year, offset by a decline in microprocessors and other computing components. As is typical for a March quarter, both margins and returns declined sequentially, driven by the double-digit decline in revenue.

Even though revenue was down 8% year over year, TS managed to improve gross profit margin by 80 basis points year over year and operating income margin by 60 basis points to 2.7%. In the EMEA region, where pro forma revenue and constant dollars was down year over year for the fifth consecutive quarter, gross profit margin improved over 100 basis points year over year for the third consecutive quarter, due to our focus on improving the overall performance within this region including revenue selection. Higher gross margins and cost reduction actions in EMEA combined to drive a third consecutive quarter of year-over-year improvement in returns and operating income margin. Our Americas region achieved a 94 basis point year-over-year improvement in gross profit margin, while operating income margin was up 67 basis points. In our Asia region, year-over-year pro forma revenue growth dropped into single-digit territory this quarter. However, Asia's operating income margin through the first nine months of fiscal 2012 is 37 basis points higher than the comparable period in 2011 and return on working capital has increased significantly. As a result of the improved profitability at TS globally, return on working capital increased 564 basis points year over year, led by EMEA and the Americas.

In addition to the year-over-year improvements at TS this quarter, I would like to highlight the steady progress the team has made in driving increased profitability during this fiscal year. If you exclude the seasonally-strong December quarter, when you compare the March quarter to the September quarter, gross profit margin and operating income margin are up 16 and 20 basis points, respectively, even as revenue was down 3%. As we make progress toward our long-term goals, TS continues to invest in expanding and enhancing the suite of services it offers.

In the March quarter we announced the acquisition of Canvas Systems, which focuses on providing services that span the IT life cycle. We also announced the acquisition of Ascendant Technology which specializes in developing end-to-end IBM services and solutions that help organizations optimize their IT investment and achieve business results. As demand for data center solutions and cloud computing create more opportunities for the channel, we are continuing to increase the value we deliver to our VAR partners and strengthening our supplier partnerships with new services focused on high-growth technologies and vertical markets. With an expanded global footprint and supplier coverage, we are leveraging the opportunity to extend these strategies across the portfolio to accelerate profitable growth as TS continues to make progress towards its long-term goals.

Now I would like to turn the commentary over to Ray Sadowski to provide more color on our shareholder value creation. Ray?

Thank you, Rick, and hello, everyone. Before we move on to our economic profit performance, I would like to provide a brief update on our share repurchase program. As you probably noticed in our press release, our purchases this quarter declined significantly as the stock price was consistently in the mid-$30s for most of the quarter. As we told you when we introduced the repurchase program back in August, we will maintain our discipline and only repurchase stock when the capital allocation affords appropriate returns. We'll continue to monitor our stock price and adjust our purchasing activity, as appropriate. Although the program to date has represented a good utilization of capital, we continue to see many opportunities to invest in both organic and value-creating M&A that can deliver higher returns and cash flow for multiple years.

Now let's take a look at the economic profit and shareholder value creation. In the third quarter fiscal year 2012, both return on capital employed and economic profit dollars declined sequentially, due primarily to the impact of the seasonal decline in revenue. As you can see on the slide, year-over-year comparisons are also down as return on capital was over 15% in the second half of fiscal 2011, concurrent with the peaking of the V-shaped recovery in the electronics components industry. Similar to how Rick highlighted TS's progress this quarter, I'd like to point to the improvement from the September quarter when margins and returns bottomed. In that time frame, return on capital employed has increased 64 basis point to 12.8% and economic profit dollars grew nearly 30% to $37 million. Although we don't forecast macroeconomic conditions, sustained improvement in global economic growth would clearly accelerate our progress in reaching our profitability goals. We remain focused on improving our performance through the market cycles and generating additional shareholder value going forward.

Looking forward to Avnet's fourth quarter fiscal 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 $2.55 billion and $2.85 billion. Therefore, Avnet's consolidated sales are forecasted to be between $6.3 billion and $6.9 billion. Based upon that revenue forecast, we expect fourth-quarter fiscal 2012 earnings to be in the range of $1.05 to $1.13 per share. The above EPS guidance does not include any potential restructuring charges or any charges related to acquisitions and post closing integrations. The guidance assumes 147.2 million average diluted shares outstanding used to determine earnings per share, and 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 fourth quarter of fiscal 2012 is 1.31 to 1. This compares with an average exchange rate of 1.44 to 1 in the fourth quarter of last year, and 1.31 to 1 in the third fiscal quarter of fiscal 2012. Using the midpoint of fourth-quarter guidance, our forecasted sales and earnings per share would be roughly $185 million and $0.05 per share, respectively, higher if exchange rates had remained constant with the fourth quarter of last year.

With that let's open the lines for questions. Operator?

(Operator Instructions) Scott Craig with Bank of America.

Just two quick questions here for you. Can you talk about the TS operating margin. And as you look out over the next few quarters the progress that you expect to make there. And then, just secondly, in the EM business I think you noted in your script that you had shown an improvement on the book to bill throughout the quarter. So just wanted to make sure that that was the case, as it kept ramping up through the end of the quarter so that we actually finished the quarter and worked into early April probably above parity. So thanks.

Scott, it's Rick. I'll start with a couple comments and turn it over both to Phil and Harley. On the TS operating margin, as we discussed back at the December analysts day, we're on a long-term journey and trajectory there to get to the stated long-term range for that business. A number of moving parts going on with that. But we're still on a multi-quarter journey and we were pleased with the progress for this quarter. But we still know we have a ways to go with that. And I don't know, Phil, if you have anything to add to that.

I'll just add on that at the December analyst day we talked, Scott, a lot about of course, we always look at the year-on-year compare. But we really focused, as was in the script on the July, August and September, it was quoted that it was looking like it was aligning very similar from a revenue standpoint. We targeted to beat that operating margin for the July, August, September quarter, as well as year on year, and we achieved that. And we're very optimistic that sequentially, that's about as far as we'll go out, we'll be at the typical increase again in 20 or 30 basis points or so from an operating margin improvement. Which will continue on the trajectory, to Rick's point, to attaining the LRPTs we talked about in December.

The journey continues to TS, Scott. We liked the progress we saw here in this quarter. We got a few to go. And, Harley, on the book to bill, do you want to add some color there?

Sure, Rick. Hi, Scott. Yes, your comment was accurate. The book to bill for March in total was stronger than we saw in December. And the strengthening did occur as the quarter progressed. And I think the last part of your comment was -- and did it continue into April? And at least through three weeks we have seen it continue in a positive way.

Okay. Thank you.

Matt Sheerin with Stifel Nicolaus.

Yes, thanks. Just wanted to follow up on Scott's question regarding EM. You talked about negative book to bill in Europe. Was that just for the quarter? But is that what you're seeing right now? Because it looks like you had fairly seasonal demand or order trends in the March quarter. And as you look at your component guidance, it looks like rolling it up it's seasonal. And are you expecting seasonal trends across all three regions or will Europe still be a laggard there?

Hi, Matt. I think what we said is that all regions finished the March quarter positive other than EMEA. But I would point out that, where they did finish was stronger than what we had seen in December. And if memory serves me correctly, stronger than we saw prior to that, as well. So the progression has been positive, though it didn't quite make it to positive for the March quarter. In April it has exceeded 1 to 1. So we are above parity at least again through the first three weeks of the quarter. And so each of the regions continues at a positive, at least through the beginning of this quarter.

And would you say, Harley, that visibility has improved or is it still fairly cloudy because generally speaking, semiconductor and component lead times are still pretty short?

Matt, our view is that, from our vantage point, it appears that most of the correction that was a derivative of inventory excess has played through. And one of the data points that we think helps illustrate it is that we have seen a modest -- I would emphasize modest -- expansion of lead times. So we think that is telling us that primarily we are probably at the bottom of that supply chain correction and now starting to see positive movement there.

Okay. That's quite helpful. Just as a follow-up, tieing that into your own inventory positions, given that lead times are stable or maybe starting to stretch, is this sort of it in terms of your own correction in terms of inventories? Are you going to start layering on inventory or remain at this turn level until you start to see either lead times stretch or demand get better?

Exactly. As you know, our inventory strategies, obviously, are derived from many different data points, one being lead times. Based on what we know today, and based on the modest expansion of lead times I mentioned before, our principal goal remains the same, which is continue each quarter to focus on improving our velocity. We saw nice improvements in the March velocity metrics sequentially. So our goal for June will be to continue to focus on improving that velocity. If you consider the fact that we're projecting some growth, it probably suggests an inventory estimate for the June quarter somewhere in a very flattish area.

Okay, great. That's helpful. Thanks a lot.

Shawn Harrison with Longbow Research.

I wanted to just focus in on EM margins. Here in the low 5%s. And given that we haven't had normal quarters the past few years heading into the June quarter, would the March quarter typically be the peak for operating margins within EM? Or should we see another seasonal uplift into the June quarter and that would potentially be the peak for the calendar year?

Well, I'm not sure, Shawn, I'm going to predict what would be the peak for full calendar year. I would estimate margins in the June quarter will be similar to what we saw in the March quarter. But keep something in mind when you're doing your year-on-year compare is that there are a couple drivers to that. The principal one being that the region, for us, that has the highest op margin, being EMEA, is a fairly significantly reduced portion of our overall portfolio as a ratio when compared to a year ago. And that likely is to be the case in the June quarter, as well. So if you add that plus some degree of currency effect, that really gives you -- and, of course, the revenue being smaller than a year ago -- that gives you the principal drivers to the year on year. So, again, I'm not sure I'm comfortable speculating on what we can do for the balance of the year. But for March and June that's how we see the numbers adding up.

Okay. And then just thinking about cash flow into the June quarter, with inventory holding stable sequentially, at least at EM, should we expect a decline in the cash cycle and working capital days so we should see a step up sequentially in cash flow?

Yes, hi, Shawn, it's Ray. Yes, that would be our expectation, based upon the profitability levels. And as Harley just mentioned, with overall inventory trends, we would expect to be in a positive cash flow position for the quarter.

Thank you.

Jim Suva with Citigroup.

Thank you and congratulations there to you and your team at Avnet. When we think about the current environment on the mergers and acquisition topic or field, with interest rates so low where they are, and a seemingly recovering economic environment, is it fair to say that prices are starting to go up a little bit higher? Or the pipeline is starting to get a little bit more tighter? Or has anything changed on that front on both, A, on the pricing and pipeline, seeing that the interest rates and the GDP environment appears to be stabilizing and improving and favorable?

Jim, it's Rick. I would comment that M&A remains -- value-creating M&A, in particular -- remains a very integral part of our overall very profitable growth and strategy. We still have a small number of larger deals, a larger number of small deals. And I cannot point to any evidence that would suggest that any of the current either fiscal policy or interest rate environment is causing any particular changes in either the activity levels or the valuations associated with that.

Okay. Then as a quick follow-up, last year we had two very unfortunate natural disasters happening in Japan and Thailand. As a result of that, have you seen any shift or change from your customer base as far as people wanting more global ops? And if so any potential share gains or any smaller companies realizing in their risk mitigation that they have too much physical footprint and therefore want to roll up and be part of Avnet?

Jim, I appreciate the intro on that very much. It obviously makes logical sense to us and we believe we're in a great position to assist those that would have that perspective. I'm not sure I have data in front of me where I can specifically point to any particular share gains or growth efforts just based on those strategic decisions. But the rationale and the logic you lay out certainly makes sense to us.

Thank you, and congratulations again to you and your team at Avnet.

Ananda Baruah, Brean Murray.

I was interested in getting -- maybe, Phil, from you -- a sense what TS linearity was through the quarter, how we started out the April quarter. And any thoughts by geo be helpful, as well. Thanks.

Sure, Ananda, thanks. As far as through the April, we're still going through it. But as far as how we look at the quarter, right now each of our regions are right in line with our typical seasonality. Which is in that 4% to 7% range, varying degrees of variability there. But overall we're feeling good about the quarter and what our current guidance is. And again, it's a little bit of a mix by region. Certainly we're still watching EMEA very closely based on the economic indicators there. Asia-Pac, we're seeing growth there. We're as much controlling the growth. Frankly in Asia-Pac there's some economic concerns but we're controlling that because of our focus on operational and drop-through in Asia-Pac. And we're very comfortable with our position in the Americas and there's continuing optimism on the climate here.

Great. And if I could just ask a quick follow-up on that. I think last quarter you guys didn't have a clear view yet on the potential for service cycle. I'm sure you had demand, but you didn't want to make comments yet on potential for consumer refresh cycle. Has your view changed yet? Do you have a cleaner sense if we could have a meaningful service cycle this year?

Probably not prepared to answer that, really, Ananda There's certainly some things from a technology standpoint that are coming out there that we're updated on, more on the industry standard around Intel and some of the dialogue around Romley. Tough for to us make that call, how big an impact that is going to be. Certainly there is a lot of talk about it and that could certainly drive a refresh at a certain level. But beyond that it's really tough to make that call for the year.

Great. Thanks a lot. Congrats on a solid quarter.

Brendan Furlong with Miller Tabak.

Just a quick question on the gross margins at the corporate level. Looks like, looking into the June quarter it's going to hold pretty flat sequentially.

Yes, that's correct. That's right.

Okay. And then I don't know if you addressed this on the call. If you did, I missed this, my apologies. On the TS, is there any market color you can give us in terms of server, storage, software, security? Just a general sense of what's going out there on the technology market because some companies that have reported so far have been mixed, to say the least. Thanks.

Brendan, I'll jump in, and, Phil, you can add. We highlighted in the script, Brendan, that we continue to see strength in industry standard servers and services. And to anticipate a follow-up question -- does that mean storage hasn't been a good story? No, we just didn't put it in the headlines. Storage was a solid, upper-single-digit grower for us. And keep in mine that's in a situation where TS globally was down about 5%. So a lot of familiar stories there, but we didn't capture storage in the headlines, just on a relative basis.

Okay. That's it for me. Thanks.

Craig Hettenbach with Goldman Sachs.

Yes. First, Ray congratulations and best of luck going forward. If I could ask just on Europe, it looks like most of the business by geography is inflecting up, and Europe is dragging a bit, Rick. Any sense in terms of things you're watching for, or any signs to look for in inflection in Europe, particularly on the demand side for systems?

Craig, it's a good observation. As we talk about the sequential guidance going forward, I think both Harley and Phil reinforced that going forward the sequential guidance looks good for their European businesses. But year on year they're both also negative double-digit down, so they've got the lower base to come from. One pattern we've watched in the past has been, if we look at Europe, just self-contained within Europe, our European components business has generally been performing better than the systems business. Which we attribute to the contributions from exports for our components business. And then we're watching the TS business in Europe, in particular, as more indicative of what's going on with the indigenous demand. And then that would help support what's going on from an overall industrial base there. And then if EM continues to do well, we would continue to subscribe that the exports are driving that overall. So those are the various parts and pieces that we watch in between them. In general, we haven't had a lot of direct correlation between those businesses because of this export differential. But we do think TS is a very strong sign of what's going on in the region from a consumption point of view.

Okay. And then if I could follow up with Harley, can you talk about just pricing as a cycle has bottomed out, now turns up. Have you've seen anything? And then any implications to gross margin on the component side?

No, I don't think we've seen anything really significant from a pricing perspective yet.

Okay. Do you expect it to stay stable or --?

I believe it will continue to stay stable.

Okay. Got it, thanks.

Brian Alexander from Raymond James.

Yes. Could you guys talk about the reasons for the deceleration in growth in Asia that you saw in both segments? It looks like EM was down almost 13% pro forma which is almost as much as Europe was down. And TS Asia only grew 4%. It had been growing double digits. How much of that is the slower macro in Asia versus potentially more competition that's causing you to slow the growth rate?

Yes, hi, Brian. It's Phil. I'll go first and let Harley follow up on EM. I started to answer the other question with regards to regional flavor. In Asia-Pac, part of it, probably some of the macro and economic. But on the TS side, frankly, as we continued to grow and we have pretty much publicly stated, that we're going to look to continue now to start, when we get to a certain size, drive more drop-through, and not just drive volume. Not that we're just trying to drive volume. But as we pave a new path for value distribution. Of course, Asia-Pac, we need to be sure we're, frankly, selecting and driving the appropriate growth in the appropriate type of business. So ours has been as much the market, as well as us cooling it down, getting our operations a little bit tighter. And going from there. But we are still optimistic about Asia-Pac and are continuing to make the appropriate investments across the board.

Brian, it's Harley. As you know, our Asia business, our Asia components business, you could loosely split it into two segments. One being those products we supply into Asia that ultimately end up in exports back to the west. A significant amount of that into America. And then the other part being for indigenous Asian growth. Both are down year on year. The larger piece that would be down clearly would be the export-driven piece, building products shipped back into the West.

It is clearly the riddle in our overall global forecast. And at this point, it's particularly difficult to predict what we'll see going forward for the rest of the year. Only because it's a little bit early. I probably like a May, June type timing to start to see what the build to back-to-school season looks like. We are seeing a positive book to bill. Asia was our highest book to bill in the March quarter and that continues through the beginning of April. Although, that is what you would expect. So we appear to be heading into some growth. Difficult to quantify when we will get back to year-on-year growth. Maybe the wilder card is indeed what's going to happen in China relative to indigenous growth and indigenous consumption. So I think the way I would probably categorize Asia is clearly it's down from the euphoria we saw a year ago, but we're still seeing some growth. We still feel positive about the region. And I think we'll know a lot more, Brian, in the next 60 days.

Okay. Let me just follow up on the EM operating margins. They're in the correction here. And at the bottom here, they're still above the low end of your targeted range of 5% to 5.5%. And in two quarters of the cycle they were actually above the high end of your range. So I'll just ask the question. Is 5% to 5.5% the right range for EM in the next cycle or do you think you can do better than that?

My aspiration is always to do better. But I don't think that was your question, was it? I will allow myself the disclaimer of saying we review that officially every December at our annual day. With that said, I would go out on a limb and say that if we continue to see modest improvement, if June does come in a bit better than seasonal, and that continues through the year. And if the back-to-school is encouraging over May or June, I see no reason why EM can't get back to the high end, if not the top of the range.

Great. Thanks a lot.

Amitabh Passi from UBS.

Just a clarification. I wanted to find out if there was any lingering positive impact from the HDD situation in the March quarter. Or did you really not see any benefit?

Yes, Amitabh, net-net there really was not any benefit there.

Okay. And then, Ray, perhaps a question for you. I'm still a little perplexed that we didn't see more aggressive buyback. I appreciate the fact the stock was in the low $30s. But assuming earnings power approaching somewhere between $5 and $6, it still seems like you can get a high teens return on your stock today, even at current levels. So I just wanted to understand why we're not seeing you be more aggressive.

Yes. It's a great point and it's under discussion. There's two important variables here. Number one is the current valuation of the equity. And second is what our internal financial projections are. And as we committed when we announced last August, when we see a compelling value, then we'll be active in the market with the buyback. We still have not quite half of it to go at this point. And so I just want you to know we're continuing to watch it, and we're not stuck on a certain fixed absolute number because of the August announcement. We're watching our numbers. We're watching our projections. And when we feel it's a compelling value, we would feel free to execute again.

Okay. Just a clarification. The savings from your restructuring, did you say it was $35 million to $40 million annualized? And how do we think about that flowing through your P&L?

It should be $35 million to $45 million on an annualized basis. And that's cumulatively from the actions we've taken so far this year. I don't have right in front of me the exact amount, but a meaningful part of that has already flowed through the P&L. But we will have a little bit more coming through in Q4 and maybe a little bit more in the September quarter. But a lot has already gone through and that's what's helped our margins improve year over year.

Okay. Thank you

Steven Fox with Cross Research.

Just a question on TS. Just stepping back from the numbers for a second and thinking through the rest of the calendar year. It seems like you're seeing some seasonal patterns that are normal in the last couple quarters. But year-over-year growth is still pretty challenged. I was wondering how you would portray your customers at this point in terms of what they're looking to spend in the second half of the year. Do you see an improvement in terms of their ordering pattern for projects, et cetera, and whether that could drive some accelerated growth and get back to some decent year-over-year organic trends?

Yes, Steven, thanks for the question. And best feedback I can give you is on the last several weeks I've done a couple of road shows myself with some of the team, visited eight of our top partners across North America. And also had a global council with some of our top buyers worldwide. And the sentiment is very positive? They're all very optimistic around the opportunities in the marketplace. By the way, in services, things that Rick talked about earlier -- storage, the networking security. So the sentiment is positive. How do I quantify that exactly? It's always difficult, but the partners are very optimistic. And again, I was a few in from Europe, a few in from Asia and the balance was from North America.

Outside of just the obvious technical requirements into the second half and just looking where the technology is going, is there anything tangible that they're hanging their hats on for why you could see a second half tick-up in enterprise spending?

A big part of it, there's a lot of conversation around mobility. That's just one area. I was going to touch on this earlier. But in mobility, whether you're playing direct mobility in the handset is one thing. But what mobility is driving from, a network infrastructure, security over to network. It's driving more storage solutions, server. That's a big topic on a big opportunity that we're seeing and working with the different partners. And you're also seeing more converged infrastructure. So a lot of opportunities in the areas of integration. So that's also been a really hot topic for many of the partners who are excited about some of the products that our suppliers are putting out on the marketplace. And then the other thing with the recent acquisition we made of Ascendant, we're excited about that, as well, because where they may lack and we can help them from the standpoint of scaling, is in the services play. So how can we help them go drive in the services end more to drive the total solution? That's just a couple hot points that came out of the different visits and the, really, consensus from the different partners.

Yes. And, Steve, this is Rick. I would just add, having formerly been in Phil's chair, as well, in that computer business, it really is very much a 90-day, quarter-by-quarter-driven business. They often work on sales cycles that will span quarters. But very often, and particularly our clear visibility on what they're doing, is generally focused around what they're trying to close for June. So we look at the forecasts like you do as far as other broader-based economic projections on IT spend, et cetera. And we try to factor those into our strategic plans, of course. But when it comes to the dashboard that we built around this great business at TS, it really does tend to have a quarter-to-quarter focus.

That's helpful. Thank you very much.

Sherri Scribner with Deutsche Bank.

Just thinking about the improvements in the TS margins that you've talked about happening over the next couple of quarters, and clearly you've seen some nice improvements there. It seems like Europe has really seen a big improvement. I'm curious how much more benefit you think you can get out of Europe as we move forward. Or are there opportunities in other geographies to improve the margins at TS, as well?

Yes, hi, Sherri. This is Phil. I'll take the first shot at that. We've seen actually margin expansion in all the regions, so that's a positive. Europe is clearly, as we stated in the script, has led the way. They also had the biggest opportunity, to be very candid with you. And as we talked at analyst day, again we're driving more careful revenue selection. And making, for example, decisions like around Italy. The business mix we're continuing to work on. Frankly, we're driving a discipline in the business and managing the business to the market opportunities. We call it BBM. We're very focused on that, if you will, denominator to be sure we're getting the right drop-through on the business that is there.

So we think there's still further opportunity for sure in Europe. And we're proud of the team there, what they've done in the tough circumstances. But there's no question the trajectory, as Rick pointed out, overall to the global long-range planning targets we're moving in the right direction and we plan to continue to do that. A little bit of organic growth on top would certainly help accelerate that, but we're going to play the hammer out, and continue to make the right decisions to drive the right goals.

Great. And then, just thinking about moving out of this inventory adjustment that we've been through over the past couple quarters, and now being at parity or above parity as we moved into April. What is your appetite for holding inventory at this point in the cycle when we are hearing that visibility is very limited and customers aren't really sure where their end demand is? I'm just trying to get a sense of are you comfortable holding inventory? You think your inventory levels will pick up after declining over the past couple of quarters? Or what are you thinking about?

Hi, Sherri. This is Harley. I assume that's an EM-directed question.

Yes, Harley. Thank you.

I think that, as I said earlier, our principal driver is working on velocity. I added the disclaimer early that obviously any shocks to a market, for example, what we saw in the HDD business with drives, and what we've seen at times over the years from all kinds of products, going all the way back to tanalum capacitors. We'll react to them in a way that obviously tries to advantage ourself from a profitability standpoint, as well as availability to our customers. But today, the expansion in lead times is really too modest for us to react in a way that would distract us from our desire to continue to improve our velocity metrics to bring them back to where they were at a year ago. So our appetite is always there to inventory when it's required. Today we don't see signs that tell us that we should change our strategy and move off our desire to continue to improve our velocity.

Great. Thank you very much.

Mona Eraiba, TCW.

Great quarter. All my questions were answered. Can you give us more granularity about Europe overall for the system business by country? Or other than environmental stuff, but what is the key trends that you see?

Yes. Mona, this is Phil, thanks. That's what you're probably reading about. It's not much different really. I'll give you our perspective. We're seeing some improvement in Germany in our business. Eastern Europe has continued to do well for us on a relative basis to the balance of Europe. And outside the UK for us, which is a large business, is somewhere in between that. We made the decisions in parts of southern Europe as we talked about earlier in Italy. It's just a tough market for IT and for us to find the appropriate value and returns. When we find out, we're going to make those decisions. But overall we're not seeing much different than what the trends are you're reading about. And it's not by any specific product or technologies, from that standpoint.

And can I have a follow-up about hard drives? There was a lot of talk about the pricing in first quarter. What did you guys see happening?

Yes, hi, Mona. It's Rick. We've seen -- you've probably seen the same comments from our suppliers, as well. Supply has come back a little quicker than anticipated. It seems that the units are catching up, particularly in more the mobile and desktop space. I'd say it's very much recovered in that space. And the enterprise drive space appears to be still a little bit of constraint and tightness overall. But obviously the windfall, if you want to call it that, the $0.05, $0.06 that was attributed to the EPS performance for us in the December quarter, that was completely dissipated and gone out of the equation from our participation in the hard disc drive business for the March quarter.

Okay, but did the prices goes back to the pre-slot level?

On the mobile and desktop area I believe the prices have come down. I'm not sure I could tell you they're all the way back down to where they were pre-Thailand floods. I don't know if Harley would have any color on that. But yes, they certainly have come back down.

Okay, thank you.

Clifford Fulton with UBS.

You made the comment that you'd buy back more stock if you thought it represented a compelling return. And I thought it might -- since it's one of the larger uses of cash for the business over time -- I thought it might be worth discussing what your hurdle is for a compelling return. Because any shareholder who owns the stock presumably believes that it represents a compelling return at the present price. And you guys are actively making acquisitions. So I hope you could spend a few moments discussing what your bar is for a compelling return.

I'll offer some comment, Cliff, and maybe ask Ray if he wants to add anything on top of it. So hopefully well-known to all of our owners and investors is our commitment to try to maintain -- we're making investments where we can see a sustained return, generally 250 to 300 basis points above our cost of capital. So we lay that out as a 12.5% ROCI target. And if you looked at that in terms of multiple, Cliff, then I think you could reverse engineer into it. At 8 times multiple or below, you would be able to get a 12.5% return. It's just inverse math along the way. So, without going into specific numbers around that, as I said, we take a look at where the equity is currently valued, we take a look at our internal financial projections. And we'll be making judgments and assessments when we believe that we have a range that makes sense based on those types of commitments and criteria. In the last round of our execution on this, we also took a look at the relationship to book value as another parameter, or another influencer on our aggressiveness and level of activity. So I don't know, Ray, if you want to add anything.

I think the only thing I would add is what we've talked about in the past is our prioritization of use of capital, which is essentially to drive further profitable growth in the business overall. So it's always a waiting factor of the acquisition opportunities that are out there and the returns that they can bring versus the stock price. And obviously the stock price is different levels of value, different levels of return, so to speak, depending upon what actual level the stock price is. And as we've indicated, and as Rick just said, levels approaching book value and a little above that we'll be fairly aggressive, as we demonstrated in the first and second quarter. But as the price starts to move up a little bit, we'll just relook at what the right perspective is from a valuation overall in term of alternative uses of capital from an M&A perspective and organic growth opportunities

We clearly remain committed, Cliff. We continue to prefer creating future EBITDA and cash flow, if and where possible, with our capital.

Great. And if I could just follow up. The Company has become increasingly delevered, both in an absolute sense and as compared to Arrow. And I was hoping you could comment a bit on how under-levered you think you are. And how much dry powder that leaves you potentially for acquisitions or, I suppose, share buyback.

I don't know if we'll quote some numbers here, but we certainly do recognize the fact that we are a little bit under-leveraged. We're committed to an investment grade credit rating. That's something that's very important to us. And even looking at that, we recognize the fact that we are under-leveraged to some extent. I won't throw out exact numbers, but we certainly have room to move. And that does give us the flexibility to manage through any potential acquisitions out there. It's particularly challenging to use that kind of opportunity, as an example, to go buy back stock, which I know some people think about. The challenge with that with severe pressure on our ratings, increase leverage, and use that to go buy back stock. So it's not a card we would typically play. We'll play the card in terms of buying back stock out of free cash flow at appropriate levels, as we just discussed. But certainly would take the opportunity to increase leverage a little bit if the right opportunity came along from an M&A perspective.

Thanks, guys.

Gentlemen, there are no further questions at this time. I would like to turn the floor back over to you 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 results presented during our presentation. Along with a further description of certain charges that are excluded from our non-GAAP results. This entire slide presentation, including the GAAP financial reconciliation, can be accessed in downloadable PDF format at our website www.IR.Avnet.com under the quarterly results section. Thank you.

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