安富利 (AVT) 2013 Q3 法說會逐字稿

Please stand by. Our presentation will now begin. I would like to turn the floor over to Vince Keenan, Avnet's Vice President of Investor Relations.

Good afternoon and welcome to Avnet's third-quarter fiscal year 2013 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 2013, please note that, in the accompanying presentation and slides, we have excluded restructuring, integration and other items, as well as the gain on bargain purchases associated with an acquisition and certain income tax adjustments 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 are 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 2013 highlights. Following Rick, our Chief Financial Officer, Kevin Moriarty, will review some additional financial highlights, our return on capital performance and provide fourth-quarter fiscal 2013 guidance. At the conclusion of Kevin's remarks, a Q&A will follow.

Also here today to take any questions you may have relating to Avnet's business operations is Ray Sadowski, Avnet's Chief Administrative Officer; 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 2013 business highlights.

Thank you, Vince and hello, everyone. Thank you all for taking the time to be with us today and for your interest in Avnet. As our team continued to navigate through an uneven economic recovery, we are pleased that our overall third-quarter top and bottom-line results came in consistent with our expectations. The economic recovery that has driven sequential growth rates closer to normal seasonal patterns at the global level continues to vary by region and operating group without as of yet clearly discernible multi-quarter trends.

If you look at our TS business, after a very weak September quarter, the Americas region has clearly been stronger than EMEA over the past two quarters while at EM, our EMEA region experienced typical seasonal growth in the March quarter while the Americas was weaker than normal. As a result, Avnet revenue declined 6% sequentially to $6.3 billion, which was in line with our normal enterprise seasonality for the second consecutive quarter.

On a year-over-year basis, reported revenue was roughly flat and pro forma revenue declined 4.4% in constant currency, primarily due to the slower rate of recovery in our western regions. Gross profit margin increased sequentially at both EM and TS driving consolidated gross profit margins up 53 basis points. However, gross profit decreased $12 million, or 1.6% sequentially, due to the decline in sales typically experienced as a result of the normal seasonal trends at Technology Solutions. On a year-over-year basis, both gross profit and gross profit margin were essentially flat as an improvement at TS was offset by a decline at EM.

The impact of the seasonal operating income decline at TS partially offset by the increase at EM drove operating income down 12% sequentially to $195 million and operating income margin decreased 19 basis points to 3.1%. As a result of these factors, adjusted EPS decreased $0.11 or 11% sequentially to $0.90. On a year-over-year basis, operating income decreased 17.2% and operating income margin declined 65 basis points principally due to the slower rate of recovery in the western regions, particularly at EM. Consequently, adjusted EPS declined 12.6% from the year-ago quarter influenced by our previously mentioned factors, somewhat offset by the benefits of our share repurchase program.

Return on capital employed decreased 132 basis points sequentially to 10.5% due to the seasonal decline at TS and was down 229 basis points year-over-year given the decline in income as working capital velocity was essentially consistent with prior year. Cash flow from operations was $22 million for the quarter as our profitability in the March quarter was somewhat offset by a seasonal increase in working capital at TS.

Our trailing 12-month cash flow from operations at $689 million for the March quarter continues to be above historic levels due to our consistent profitability, combined with the slower market growth and the commensurate relatively flattish changes in working capital.

Even though we met our primary financial goals in the March quarter at the enterprise level, the market volatility and regional differences and the pace of recovery have necessitated incremental resource realignment activities. As a result, we have initiated additional steps, including $40 million of annualized cost reductions that will be completed by the end of our fourth fiscal quarter.

These actions, when combined with actions taken in previous quarters, bring our cumulative cost reductions in fiscal 2013 to approximately $140 million. In this environment, we will continue to react quickly to maintain consistent progress across the portfolio as we strive to deliver improving financial results and visible progress toward our long-term goals.

The macroeconomic conditions we have been navigating have created some short-term setbacks, but we still play an important role contributing to a large and growing technology supply chain that continues to evolve and remains relentless in the pursuit of improved efficiency.

With our strong competitive position, broad geographic footprint and extensive partner relationships, we are confident that we can help our trading partners realize those efficiencies and leverage this growth into improved performances.

Now let's turn to the operating groups. In the March quarter, Electronics Marketing's revenue essentially met our expectations as sequential growth was slightly below normal seasonality. Reported revenue grew 3.4% sequentially while pro forma revenue increased 2.9% as compared with our normal seasonal range of plus 4% to plus 7%. At a regional level, EMEA delivered its typically strong fiscal quarter growing sales 18% sequentially in constant currency while the Americas region was up 3% and Asia declined 8% coming off a relatively strong December quarter.

On a year-over-year basis, reported revenue increased 1.1% while pro forma revenue declined 1.7% in constant currency primarily due to a double-digit decline in the Americas region primarily related to our decision to exit the lower margin commercial components business in Latin America.

EM's gross profit margin increased 44 basis points sequentially due to the seasonal geographic mix shift as the lower-margin Asia region declined from 41% of total revenue in December to 36% in the March quarter. On a year-over-year basis, EM's gross profit margin declined 38 basis points primarily due to increased competitive pressure in our EMEA region, partially offset by an improvement in the Americas related to our previously mentioned decision to exit the commercial components business in Latin America.

As a result of the seasonal top-line growth and gross margin expansion, EM's sequential operating income grew 4.6 times faster than revenue and operating income margin increased 46 basis points to 4.3% with all three regions contributing to this improvement. Operating income margin declined 90 basis points year-over-year, strongly impacted by the lower operating income in the western regions related to the slower pace of recovery.

Return on working capital, or ROWC, increased 362 basis points sequentially with all three regions contributing to the improvement. On a year-over-year basis, EM's ROWC declined 375 basis points due in great part to lower operating income in the western regions, partially offset by a 3.4 day improvement in our cash conversion cycle.

Our EM team has done a good job managing their balance sheet through a challenging fiscal 2013 as working capital was essentially flat with the December quarter even though sales grew approximately $124 million sequentially.

After adjusting for acquisitions and changes in foreign currency exchange rates, EM's working capital decreased by 5.5% year-over-year as inventory decreased 10.7% from the year-ago quarter and inventory velocity improved by half a turn. This effective inventory management helped drive EM's working capital velocity to its highest level in seven quarters.

Although it was encouraging to see EM's revenue growth move closer to normal seasonality in the March quarter and a book-to-bill ratio slightly above parity for the second consecutive quarter, we continue to operate in an electronic component supply chain characterized by relatively short and stable leadtimes that is encouraging customers to take a conservative approach to managing their inventory. These actions have led to some short-term pressure on gross margins, but similar to previous downturns, we expect a certain level of recovery here once growth picks up and leadtimes begin to increase.

While any rate of recovery will certainly be impacted by macro trends, we are confident that a return to some positive momentum in our core industrial markets, when coupled with our initiatives to efficiently align resources by region, will help drive further leverage in EM's model and improve financial performance going forward.

After a stronger-than-expected December quarter, the TS revenue decline in the March quarter was within our typical seasonal range across all three regions. At the global level, reported revenue declined 17% sequentially to $2.5 billion as compared with a normal seasonal range of down 16% to down 20%.

At the regional level, both our Americas and EMEA regions declined 19% sequentially while Asia was down 10%. When compared with the year-ago quarter, reported revenue was down slightly while pro forma revenue declined 8.3% in constant currency. In our EMEA region, which has been dealing with weak demand for two years, pro forma revenue was down 15% year-over-year while the Americas region declined 8%.

In the Asia region, pro forma revenue grew only 3% year-over-year as we continue to focus on leveraging our investments in the region to grow operating income faster than revenue. On a year-over-year basis, growth in storage, services and networking and security was partially offset by declines in servers and computing components. Despite the inconsistent growth TS has faced in the western regions, the team has done a good job on focusing on higher margin products and services as both regions expanded gross profit margins sequentially and year-over-year.

As a result, TS has improved gross profit margins sequentially in each of the last two quarters with the March quarter's gross profit margin increasing 25 basis points sequentially and 54 basis points year-over-year.

Even with this gross profit margin improvement and the benefits from cost-reduction actions, operating income declined 7.5% to $63 million year-over-year and operating income margin was down 18 basis points primarily due to a decline in the EMEA region as a result of the multi-quarter double-digit year-over-year declines in organic growth.

Return on working capital declined 439 basis points year-over-year due to the decrease in profitability and a lower share of TS revenue from the higher-margin Americas region. Even though margin levers are still below a year ago, the combination of gross profit margin improvement and cost reductions implemented earlier this year have contributed to steady year-over-year improvement, supporting our objective that TS can build on this performance and return to year-ago levels of profitability in our June quarter.

While TS has been focused on improving bottom-line performance across the portfolio, they have also been investing in expanding the products and services they offer to improve their competitive position in high-growth technologies. In the Americas, our VAR partners are embracing the investments we have made in new service businesses that enhance the value they deliver and expand the breadth of opportunities they can address.

In the EMEA region, we have completed the integration of Magirus's customer-facing resources and are poised to capitalize on cross-selling opportunities in the combined customer base with enhanced offering in converged solutions.

While it appears spending on IT has somewhat stabilized since the setback in the September quarter, we are prepared to react quickly and adjust to changes in demand trends as businesses continue to adjust their IT investments in light of the current macroeconomic environment. Now, I would like to turn the commentary over to Kevin Moriarty to provide more color on our financial position and economic profit performance.

Thank you, Rick and hello, everyone. Despite two quarters of near seasonal growth at the enterprise level, the uneven recovery by region has resulted in continued negative year-over-year pro forma growth in our higher-margin western regions. Just as a point of reference, if you combine our two groups, year-over-year pro forma revenue has declined in all three quarters of fiscal 2013 in the western regions as the Americas and EMEA regions were down 10% and 7% respectively in the March quarter. Even with these challenges, our team has done an effective job of reacting to the choppy growth and delivered on our interim expectations with a focus on accelerating progress towards our long-term targets.

Disciplined working capital management and consistent profitability combined to drive our 12-month cash flow from operations to $689 million, well above historic levels. Working capital, excluding acquisitions and the translation impact of changes in foreign currency exchange rates, is down 3.1%, primarily due to a 10.2% organic decline in inventory even as revenues remained flat with the year-ago quarter.

This cash flow generation has allowed us to make investments in value-creating M&A and our stock without negatively impacting our strong balance sheet and liquidity. Through the first nine months of fiscal 2013, we have invested $244 million in strategic acquisitions that have expanded our capabilities and competitive position in all three regions. In addition, we have returned $207 million to shareholders through our stock repurchase program and still have approximately $225 million remaining of the $750 million authorization.

Now let's turn to our return on capital and economic profit performance. As you can see from the chart, both metrics are down sequentially and year-over-year primarily due to lower operating income in our higher-margin western regions, which, as we have noted, have been dealing with a slower pace of recovery. As Rick mentioned earlier, we are initiating additional actions, including cost reductions, to align our resources with the current market conditions and as we further integrate our recent acquisitions.

While the macroeconomic environment continues to present challenges, we remain confident that our strong competitive position, deep engagement in supporting technology markets and strong liquidity will allow us to improve profitability that would create, drive and sustain long-term shareholder value creation.

Moving to slide 10, looking at Avnet's fourth quarter of fiscal 2013, we expect EM sales to be in the range of $3.7 billion to $4 billion and sales for TS to be between $2.45 billion and $2.75 billion. Therefore, Avnet's consolidated sales are forecasted between $6.15 billion and $6.75 billion. Based upon that revenue forecast, we expect second-quarter fiscal 2013 earnings to be in the range of $0.90 to $1 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 139 million average diluted shares outstanding used to determine earnings per share and an effective tax rate in the range of 27% to 31%.

In addition, the above guidance assumes that the average euro to US dollar currency exchange rate for the fourth quarter of fiscal 2013 is $1.31 to the euro. This compares with an average exchange rate of $1.28 to the euro in the prior-year fourth quarter and $1.32 to the euro in the third quarter of fiscal 2013. With that, let's open the lines for Q&A. Operator?

(Operator Instructions). Steven Fox, Cross Research.

Thanks, good afternoon, guys. Just one big-picture question just looking at the charges you just discussed. So this year, now, you are talking about $140 million in charges. The margins, particularly on the EM side, still remained relatively depressed and the revenue base is sort of, I guess I would call it sort of flattish to maybe marginally a little bit better versus a year ago on an organic basis and also your returns on invested capital don't seem too terrible.

So what exactly are the charges accomplishing in the last six months? What are the new ones aimed at? And why is any of this not related to maybe some other secular pressures that we are not discussing yet? I know that is a big question, but any help would be appreciated.

Yes, Steve, this is Rick. I will start and maybe ask Kevin or Harley or Phil to chip in. It is a big question overall. If you try to separate how much of the expense actions are due to what is going on in the macro versus what is going on at execution or performance at one of our businesses, how much of it is incremental actions due to underperforming new acquisitions, etc., it is very, very difficult to try to break that out overall.

I would tell you at a very high level -- so our strategy has been -- we have talked about these interim goals and progress back to certain performance characteristics. And most often, in the last few quarters, we have been mentioning a certain operating margin return profile for both operating groups in a certain timeframe. And what we do is we assess and drive through each quarter everything we are learning. We are making decisions and making changes as the quarters unfold. We keep those longer-term goals in mind to cross over and get back on track for the [LRPT].

So it is really an ongoing continuous effort and what we are reporting on right now, as an example, the $40 million that will be done by the end of the fourth quarter, there has been a substantial part of that already accomplished actually through the third quarter. We just didn't want to get into breaking out between those two quarters as we go.

So think of it as an ongoing continuous process where we are constantly trying to manage and adjust to the realities of the current market conditions, but at the same time walk that fine line to maintain our service levels with our existing customers and not stress capacity to the point that we are unable to respond to any return to positive momentum.

And hopefully, over the years and quarters of the past, we have demonstrated a clear capability of trying to manage that pretty much down the middle of the fairway and working to balance all those competing issues overall and understanding what we would normally expect in a return to positive momentum. All those factors impact and effect the type of scorecard and report out to you and it is very difficult to try to decompose beyond that and it is very simple to say one overall number, but it is an absolute multidimensional combination of those factors that contribute to the net scorecard that we report out to you on this kind of basis.

That is helpful, Rick. And maybe just at the analyst meeting, if we could figure out a way to sort of get a little bit more color for what shareholders are getting from the investments, the charges that you are taking.

And then just a more specific question, just looking at the EM margins going forward, what kind of -- I guess what kind of recovery do you now plan on over the next few quarters if this is the market and you have made some business adjustments along the way? How quickly can you recover from 4-3?

Harley, do you want to jump in on that one?

Sure, Rick. Hi, Steve. So obviously, as you suggested a moment ago, we will go into more granular detail next week at the Analyst Day, but be clear, we still view 5% or greater as a very achievable goal for EM. So don't expect to see anything next week that suggests that we no longer view that as the proper productivity measure for EM. Clearly, certain factors, as Rick outlined in his script, have changed the timing of when we anticipate we will cross back over that milestone.

I don't want to give you a date today because honestly I don't know it and I would rather have the luxury of going through the logic and detail next week, but I would say I see no reason, short of obviously a significant macro event that I can't predict, why we wouldn't still believe that that goal is achievable at some point in our new fiscal year.

Fair enough. I appreciate all the color. Thanks.

Shawn Harrison, Longbow Research.

Hi, I just wanted to follow up on EM, but more on the book-to-bill ratio. So I guess, Harley, this is your cue to jump in. I guess where have they been in April and maybe if you could give I guess April relative to March and then maybe some regional perspective as well.

Sure. Book-to-bill in April has continued along the same pattern as the March quarter and indeed the December quarter. So one of the factors that does provide a degree of confidence for us as we attempt to look forward is the fact that we now are in essence six months, and let's call it three weeks of positive book-to-bill widespread across all regions. So we feel good about that. I think you probably saw that called out on a number of the commentaries and transcripts from the many EM suppliers that have announced over the last 48 hours. A couple of them I recall specifically made note of some beginning of an inventory refresh from their channels. So we can validate that indeed our book-to-bill continues positive, and of course, that will drive some adjustment to our pipelines of inventory.

Okay. And then as a follow-up question, servers are weak, there has been some news about maybe one of your large TS customers maybe divesting that business. I guess if you could update in terms of the IBM, I guess on the high end and if you have seen any disruption as they have added some incremental players, and then also just kind of how you think about your server exposure going forward.

Yes, Shawn, this is Phil. I will jump in on that. Certainly anticipate the question around the IBM. And it's really two parts. So let me answer that one first. Obviously, we are in regular contact with IBM on what they are going to be doing with their server business and there is nothing, as you know, that is official there at all. So we are in contact with IBM. We feel good obviously with where we are with IBM and roughly that that server business for us represents in the 5% to 6% of our total TS business worldwide.

So if you look at it that way, it is somewhat limited exposure and we will react and do what we need to do if, in fact, something comes to fruition there, but I don't think it is going to happen that quickly. We are in contact with all of our partners obviously around that as they contact us. And again, there has been very little disruption at this point in time; it is only been a week or two.

With regards to the additional distributors that IBM added, I have got to say there has been no impact at all, no disruption to our customer base, the partners as we see it today and we really don't expect that to be any issue moving forward either.

Okay, good to hear. Thanks.

Amitabh Passi, UBS.

Hi, thank you. Rick, maybe just another bigger-picture question. If I look at the drivers of return of capital, whether that be margins or asset velocity, you have done well on behalf of the velocity side; you are probably in the eighth or ninth inning. Yet, on the margin side, we seem to be stuck in the sort of cyclical ebbs and flows and I just want to revisit is there any concerted effort to structurally drive margins higher outside of cost cutting in your two core businesses? A few quarters ago, we were talking about iPad, we were talking about services and I haven't heard much lately. So I just wanted to see if you could address the margin question. Is there a concerted effort to try to restructure and enhance margins outside of your two core segments?

Yes, so great question and actually it is a bit of a tee-up for our conversation next week. We are looking at adjusting and turning some dials in a variety of our investment areas, for example, M&A and bringing some more sensitivity to prioritizing activities that do lead to margin expansion, both organically and M&A, by the way. So if you don't mind, take a rain check on the big answer there because we want to be careful to present the context of the overall strategy and then talk about -- think of it as taking our VBM philosophy to the next level.

Okay, perfect. If I could just follow up then, cash flows and buybacks for the June quarter, if I look at the trend last year, you had a nice snapback in the June quarter. Should we expect something similar and Kevin, when can we expect you guys to resume your buyback? I'm a little disappointed to see that you didn't procure any shares in the March quarter.

Sure, sure. I will take the two questions. In terms of cash flow for the Q4, based on the guidance we are providing, we expect to generate approximately $150 million in free cash flow this quarter and then on the buyback, you are right; we did not buy back any shares. We still have approximately $225 million outstanding on the previously announced program. As we have highlighted in the past, we have become more interested around book value and have become more aggressive when it gets closer to tangible.

So we do have a standing authorization in place. So depending on the ups and downs in the market that we could be participating again and of course, we will report out on Q4 in the August timeframe. So just to let you know, we do have a standing authorization and schedule in place.

Okay. Thanks.

Scott Craig, Bank of America-Merrill Lynch.

Yes, thanks. Good afternoon. Two questions. The first question, how is pruning businesses, so to speak, or focusing on better profitability businesses and letting some go in both TS and EM impacting you guys, Rick? And then from a pricing perspective, you have mentioned the Europe competitive pressures on a year-over-year basis. Have you seen any changes there quarter-over-quarter or recently I guess? Thanks.

Yes, Scott, let me start with the pruning and the overall. Then I will maybe ask Harley and Phil to chime in on Europe. So Scott, when it comes to portfolio management, you would understand that probably our starting point on any investment we would begin is that we are going make it successful. However, as part of our commitment to VBM, I would tell you that we have come to the conclusion in some small segments of the overall business and sometimes you get a segment with a large acquisition that maybe isn't going to make it in the long run and you give it a certain amount of time to demonstrate a certain amount of performance. And if it is not there and we do not believe that long term we can sustain the committed returns on capital that we show, avidly share with you, then we make the decision to exit.

Now that also has impacts, as you will see if you look at the details of our special charges and that is real money. We treat it that way, by the way. However, as we evaluate our entire portfolio, it is not just always about how to make it better. There is sort of a start/stop continue philosophy and in some cases, we have come to the conclusion we needed to stop and then we want to reallocate those resources somewhere that they can now generate the acceptable return.

So just part of the overall portfolio management philosophy and like I said, look through the details of the special charges and you will see segments where we have decided we are getting out and moving on and reallocating the resource. Europe, Harley or Phil, do you want to jump in?

Sure, Rick. Hi, Scott. I was thinking, as you asked the question, in a way, it ties back to the question asked earlier by Steve Fox around the charges and what we are getting and the intent. And I will use America, and obviously I am speaking specifically to EM as an example. If you look at the way we categorize the region, we correctly categorize America as being below typical seasonality and EMEA being above.

But one of the drivers to that aggregated result in America is the pruning of some of the business that we deemed not long term and not strategic for us and we have been moving away from that in a very premeditated way. If I pull that out, for example, our core component business in America really would be better categorized at maybe low end of seasonality as opposed to below.

So when you take it down a detail lower, it gives you a bit better view on how the business in total is acting. Reinforcing what Rick said, when we think about these pruning decisions, on the EM side, we think about is it a business that is permanently changed and therefore, we should adjust investments to match the reasonable volume and profit expectation of that business. And inside of a portfolio as large as ours, there are some.

But in addition to that, there are some businesses that are not altered in a sense, as I mentioned on the previous, but more so, we have determined that, over time, the opportunity for us to achieve the long-term goals we need to aggregate up to our total goals are not predictable. Therefore, we are moving away from them in total. So our moves are really a combination of those two tactics.

Yes, from a TS perspective, Scott, and I think this is a great question, particularly surrounding Europe and next week, at the Analyst Day, Graeme Watt will be there, who is our leader in Europe and we can do a lot more deep dive formally and informally during the Analyst Day. Obviously, from a TS perspective, a little different than EM. This is our noted public challenged market that we need to, as we like to say, move the bubble up on the returns.

So the team is working diligently. Rick touched on expense reductions. We have been managing expense reductions in Europe throughout the year quarter-on-quarter. Sometimes you don't see those necessarily based on new acquisitions coming in like Magirus. You don't see the apples-to-apples. It almost goes back to Steve Fox's question. There is a lot coming in and a lot going out.

But from a revenue de-selection, if you will, this is happening. Some of these are more public in nature, if you will, like when we decide to pull out of Italy. Others are just where the team in managing the business day in and day out. But part of the challenge is, once you do get out, then it hits your organic growth for the next year because that revenue is not in your business. So some of these do tend to haunt you a little bit as you look at the top-line growth. But as long as you are seeing the benefit on the bottom line and we find a business that is terminally ill, if you will, then we are going to manage out of it.

We can go into more detail next week and there is a few cases we can share with you. But it's got to be -- it's everyday operating of the business.

Okay, thank you.

Ananda Baruah, Brean Capital.

Hi, guys. Thanks for taking the question. I guess along the same lines, if the demand environment stays relatively as is through the balance of this year, so say softer kind of -- seasonal -- just softer than seasonal, at what point do you expect the cost actions that you are sort of taking fairly regularly now to begin to drive leverage again?

It's Rick. I will ask Kevin maybe to comment as well. So it is always -- remember, as we take the actions, they will be realized and impacted in the following quarters. Normal seasonality, as you follow our patterns for the rest of the -- we don't provide multi-quarter guidance, but if you go with your assumption of the normal seasonality going forward, typically September quarter is a little bit of a sequential down and then, of course, we head into the big year-end for TS with some -- a very mild growth I think for EM typically in that quarter overall.

If you are planning for those particular environments -- if you said normal seasonality going forward, the $40 million we are talking about today will kick in in the first half of the year, and, of course, any adjustments that we are adding along the way, including, by the way, if the $40 million ends up being a different number when we are done, we will report on that when that is finished and you will know exactly how to model that out into the first half of our fiscal year.

It is an ongoing process; it is constant evaluation. And again, we are trying to balance between the need to have cost reductions be a part of the margin improvement plan while at the same time, as I said, staying sensitive and being able to respond to the marketplace and provide the proper service levels for the business that we do have today. So it is that full combination that is keeping us busy and is a constant evaluation quarter in and quarter out.

And Rick, to amplify a little bit more, I think the other thing we would look at is obviously we take into account the impact of the completed acquisitions, the past quarter, over the last 12 months that clearly we are continuing to work on. Clearly, though, the weakness in the business we are seeing due to the market environment has lasted much longer than we have seen historically. The team here knows what needs to be done and we are going to keep at it.

Thanks, guys. And is it your intent to pass all of the cost savings through to the bottom line?

With the $40 million we are announcing today, yes, that should be 100% through to the bottom line. We will net you out on the puts and takes and any other influences to the total cost factor, of course, when we report out on the fourth quarter.

Got it, got it. Thanks a lot.

Brian Alexander, Raymond James.

Okay, thanks. Good afternoon, guys. Hey, if I could go back to EM profitability and if I look at the March quarter and compare it to March of 2008, I know that is a long time ago, but a five-year period, EM revenue is up by I think $1.2 billion. Operating income is only up about $8.5 million. So we have seen an incremental margin of less than 1% over five years.

I realize regional mix has gone against you, but it seems like there might be other factors at work here outside of cyclicality and mix. And I was just wondering if you can talk about that and why we haven't seen more margin expansion over the last five years and is any of it structural in your mind or is it all really mix and cyclical?

And Harley, related to that, I think you said earlier you're striving to get back to 5% operating margin with an undefined timeframe and I know we will talk about that more next week. But I just wanted to make sure the goal was still 5% to 5.5% or has that come in? Thanks.

Go ahead, Harley.

Hi, Brian. Yes, what I said was 5% and above. But yes, we will give definitive detail on that next week. So, Brian, I can't add a lot of intelligence to a contrast of the current quarter to five years ago quarter. I can next week, if you like, but I don't have that data in front of me.

But I think your question was a more general question about, from a secular perspective, are the things that are fundamentally changed in the industry over that multiyear period that are additionally impacting our ability to drive proper margin and dropthrough, is that fair?

Exactly.

Yes, the difficulty I have here is that the benchmark of comparison, the March quarter to a previous period, is very difficult to contrast for many reasons. Now, I was looking at some data actually this morning in preparing for this. One of the data points that I track, for example, is design win revenue growth as a comparison to overall revenue growth. And in periods of exciting dropthrough and margin production, there was -- there will be, I shouldn't say there was, there will be because historically it has happened this way a fairly significant gap between those two data points -- design win revenue contrasted to overall revenue.

One of the impacters and one of the reasons why you see us talk often about revenue de-selection is if there is a secular trend that has driven or created a higher degree of profitability, not only with EM, but in the channel, it is that ratio changing of fulfillment and lower margin revenues to demand creation revenues.

And in many ways, when we talk about de-selection, we are not saying that this is bad business. We are saying that the ratio and the balance is out of whack from where we need to drive the portfolio. So one of the things I'll talk a lot about in my talk next week is premeditated balancing of the portfolio and a number of the decisions, and, by the way, a number of investments that we are making to create a better balance. And indeed, it is that balance that is out of whack.

We talked in the script, for example, about gross margin pressure in Europe. And we will also have our European President there next week so he can talk in more intimate detail. But one of the factors that has driven those results, because our performance there is still quite good and the sequential growth was what we were indeed looking for, but even in Europe, an area that we really have heretofore not experienced this to a great degree, our percentage of revenue coming from high-volume fulfillment is higher than it has been in the past and quite candidly, it is higher than I like from a portfolio management standpoint. So that is probably the biggest secular change that I could offer you up here impromptu to your question.

That is very helpful, Harley. Maybe just one follow-up on cash flow. Was there anything unusual from a timing standpoint that impacted cash flow in the quarter or is this just a natural result given the mix shifted toward EM and within that toward western regions? And Kevin, did you say free cash flow next quarter would be $150 million? Was that for the June quarter or did I misunderstand?

Cash flow from operations will be $150 million in the fourth quarter and Brian, nothing from a timing standpoint on the Q3 cash flow from operations number and in fact, it is very comparable to last year.

So the $150 million, I think that is down year-over-year versus what you did in June of last year. So I guess my question is, on an annualized basis, do you think you have hit a plateau in cash flow or do you think that can reaccelerate as we move beyond Q4?

I think it really depends on the market and growth and where we are in terms of the end markets.

Okay, all right. Thanks a lot.

Sherri Scribner, Deutsche Bank.

Hi, thanks. I just wanted to dig a little bit into some of the P&L numbers in terms of looking at the SG&A. A bit higher than I would have expected. Was that related to acquisitions and what type of levels would you expect SG&A to be going forward? And then thinking about the restructuring actions you are undertaking, will you see any benefit to SG&A from the restructuring or do you think that will all be in the COGS line? Thanks.

Hey, Sherri, it's Kevin. I think as we were talking about a little bit earlier, a number of factors when we look at the change in operating expense sequentially and year-over-year. Obviously with the complexity of the business, a few moving parts, but we have to take into account the impact of the completed acquisitions in the past quarter, the M&A over the last 12 months, coupled with the impact of foreign currency, exchange rates and inflation.

But we do believe, based on the actions we have taken previously and what we have teed up to have completed by the end of this fiscal year, we are expecting a sequential reduction of $5 million to $10 million in our fiscal fourth-quarter operating expenses versus Q3, assuming no changes in foreign currency, exchange rate or acquisitions.

And then going forward, do you think you'll be able to keep the SG&A flat?

I think based on -- again, assuming M&A activity -- that that would be our kind of objective as we go forward, but we have to balance with M&A, foreign currency and those type of elements.

Okay, thank you.

Just to remind you, in Q1 next year, in our fiscal year, we have a Q1 spike on the executive compensation.

Right, okay. Thanks a lot.

Mark Delaney, Goldman Sachs.

Great, thanks very much for taking the question. I was hoping you could maybe help us understand the inventory dynamics a little bit better. I understand your inventory is down 10% year-over-year organically. Could you maybe put into context your view of inventory levels across the supply chain and then what your plans are for your own inventory in the June quarter?

Yes, hi, Mark. It's Rick. I assume it's primarily related to the component inventory.

Correct.

All right, Harley, do you want to jump in?

Sure, Rick. Hi, Mark. As you probably saw in the release, we achieved another -- actually a good performance. I am hesitating. I don't know if it is a record, but a good performance in the March quarter on our velocity, inventory velocity, which is really what we track far more than dollars.

It is an interesting question because we are all trying to decide if we are at an inflection point or if we are going to be having the same conversation three months from today. We watch leadtimes by commodity closely. There have been a couple where we have seen a little bit of stretch. Hard to declare yet if that is an indicator of a broader trend, so we will watch that aggressively through the quarter.

At this point, our guidance implies that we will manage inventory similar to the way we did in the March quarter, but we are eagerly watching it because, indeed, one of the areas where we have been denied a degree of profitability that we typically enjoy in a healthier market, a market with longer leadtimes and to be candid some volatility in leadtimes is some upside margin on multisource commodity type products. And in this environment, that has not been an area that has produced a profit that we typically would look for.

So we watch it eagerly because we feel very confident about our financial position and if we see some opportunities to invest, we will indeed do that. But to be clear, our guidance, based on what we see this quarter, does not suggest a significant investment. But as they say -- make my day. We would love to do it.

So Harley, probably fair to always remind it is probably two key signals we are looking for. Demand signals are one thing and then any movement in leadtimes would be another, right?

Right.

That is very helpful perspective. I appreciate that. As my follow-up question, on the TS side, first, can you guys give us an update on how big within TS the PC component business is currently? And then related to that, maybe tell us within the other -- within all your different product categories, which ones are going to be most important to drive gross margin?

Yes, let me look at the -- the PC components -- this is Phil, by the way -- the PC components business is roughly in the $500 million to $700 million range. That's a range for you. I don't have that exact number right in front of me here, but that is about accurate. And the second part of the question, was that within the PC components or driving margins in general?

Store -- more generally storage, services, software. (multiple speakers)

Yes, we are real pleased with the past two quarters' performance in margin increasing both sequentially and year-on-year. Most of this is going to be driven by mix. As we have been stating, and we will talk more next week at Analyst Day, it is going to be a busy day, by the way. The drive to mix with services and software is a greater percentage. That has been a drive and a strategy for us that the team is executing on.

And storage, you just mentioned storage. Storage continues to be the lead technology for us and our success rate with the storage productlines is extremely positive, so that is good news. I would just say those couple of key areas -- mix, drive the services, software and then, of course, geographic mix. We are pleased with the margin levels in Europe and the Americas, by the way, as well as Asia for the level that it runs. So we get -- as I said earlier, we get the European team operating a bit more efficient. We should see a good dropthrough and any kind of growth is going to see good dropthrough as well.

Just to be clear, we are pleased with the gross margins.

Gross margins.

We have got some work to do on the (multiple speakers).

Yes, thanks for the clarification. I hope that helps, Mark.

Yes, that is very helpful. Thank you. Good luck.

Matt Sheerin, Stifel Nicolaus.

Yes, thanks. First question for Harley on components, you talked about book-to-bill being slightly above 1 in all regions; yet you just came off of a below seasonal quarter in North America, better in Europe. How do you look at trends because your guidance for the next quarter, it is within that 1% to 4% seasonality range for the overall business. So are you still expecting North America to be down again -- rather -- to be below seasonal?

Hi, Matt. No, I think I probably would categorize North America as low end of seasonal as I likely would for all regions. I hesitated because the one question that evolves this time of year is around Asia. And we are all waiting to see the incoming booking levels in Asia through into May actually tell us a lot about the upcoming business environment over the summer.

And why Asia is so important because Asia does have an impact, dependent on the strength of our business there, the business overall, it can have an impact on lengthening leadtimes, creating a degree of volatility around leadtimes for the balance of the industry as well. So today, based on how we view the business, I would categorize the west as low end of seasonality. I would categorize Asia as a question mark.

Okay, fine. And earlier, I think your point on the design revenue versus fulfillment revenue was important. And I know in past cycles, increase in design activity has often been a good leading indicator of forward demand. Are you seeing any pickup at all on the design side?

Well, it is interesting, Matt. I will give you data; it won't mean a whole lot to you, but we are a pretty broad barometer of the market. Year-to-date, so, for us, that is nine months, our design win -- now let's be clear. It's design win, not design registration; they are two very different things. Our design wins are up 12.5% year-to-date, but our design win revenue is up really consistent with our overall revenue numbers, which, as I am sure you would guess, is somewhere approaching flattish year-to-date. So there is a real disconnect there and that was the point I was trying to make earlier is as that gap changes, historically speaking, that has meant good things for us from a profitability perspective.

Are there signs? Well, I like the bookings. I saw some positive comments in some of our suppliers' transcripts. TI, for example, who also is a relatively broad barometer, singled out some improving conditions they have seen in their broad industrial base, which is where we connect with them as their largest distributor partner. So there are some encouraging signs. I saw one actually this morning that somewhat obtusely gave me some encouragement and that is Teradyne reported extremely strong bookings in their announcement this morning, which is encouraging because I think the overall semiconductor equipment industry was down double digit in 2012.

So I will be looking for the other big semiconductor equipment guys' note this quarter to see if indeed they are seeing increased booking activity on their end, which to me would be another sign that people are preparing for a better environment coming forward.

Okay, that is quite helpful, Harley. And just a quick one for you, Kevin. On the June quarter, you gave us sort of a ballpark for your OpEx number. So that would imply that gross margin for the whole enterprise would be down 10 to 15 basis points give or take. And is that just a function of seasonality in the computer business and also a stronger revenue in Asia versus the western markets in the component business?

That is correct, Matt.

Okay, thanks very much.

Jim Suva, Citi.

Thanks, guys. First, a housekeeping question, then two questions. The housekeeping question is could you let us know on the tax rate outlook, and then my real question is, on M&A, can you help us understand your M&A view this year say last year as we think about your cash levels and where they sit today versus say, for example, a year or two ago -- sorry -- a year ago or so ending last year? Your cash levels are down quite a bit. Does that mean you are going to take your foot off the M&A level or would you actually consider using debt to do so? Or is it just a matter of timing of the seasonality for the cash flows, but now look on M&A?

And then the second question is, a while ago, both yourself and ARROW mentioned a focus on aftermarket services, such as recycling or repair/refurbishment and the profitability was materially above your corporate profitabilities today. Can you let us know if that is still a focus, what are the margins like in that business and how big of a percent of your business it is today and looking ahead?

A lot of questions there, Jim. This is Rick. Let me start and see if I can get your answers. I think a couple of things we have already covered in the script. But just to reiterate, on the tax rate, I think we set expectations of 27% to 31%.

That's correct.

And then M&A, we are not out of the M&A business. I think we shared in the script that we've put $244 million fiscal year-to-date into new M&A. We maintain an active pipeline. We consider M&A still a very relevant and important part of our overall profitable growth plans. And we will have more details on that next week and some of that M&A has included investments into providing lifecycle services. And I will just say we are going to have a much more robust update on that specific topic also next week at our Analyst Day overall.

So we have got the tax rate, M&A still part of our profitable growth plans. We like the financial footprint that we have, the cash flow characteristics, the total liquidity that we have available today. We feel we are rested and ready and investment-ready to take advantage of opportunity and then where specifically we see those opportunities and what they do to us longer term from a margin perspective and growth perspective, that is what we will give you more details on next week if that is okay.

Well, I guess we will look forward to next week. Thanks very much, gentlemen.

Lou Miscioscia, CLSA.

Okay, great. I got on a little bit late, so I apologize if someone else asked this already, but maybe you could give us a little bit more granularity on the TS side, just which areas you saw a little bit more strength out of, if you saw strength anywhere, maybe in the storage or maybe in the areas of virtualization please?

Yes, I will take this from a technology standpoint. Thanks, Lou; this is Phil Gallagher. We actually saw very good growth in the double digits and storage continues to be strong year-on-year. We saw good growth in networking and security. Also double-digit virtualization continues to be strong. Converged in general as a focus in a market that is continuing to evolve, we are seeing great success in all the converged solutions that we have to offer the marketplace.

And also in our own services, so back to Jim's question, which was a good one, Jim, on the whole services offerings. We are seeing good growth in that space. We are really doing a lot of work to impact the whole IT lifecycle. So we will expand on that again next week in much greater detail as to what we are doing from -- as I always say -- womb to tomb in the IT lifecycle of the products. But, anyway, that is, in general, where we saw the growth and very pleased with it.

And to the question a little bit earlier where we saw some of the weaker growth was in the computing components space. So that was a good question. That is an area that we did see some decline in growth, which makes sense because a lot of that is tied to the TC and more the consumer space that we still have that small business operating, but it was down pretty significantly.

Just in the storage, just the overall topic of converged solutions overall, it's interesting to see some traction there with the customers as well gaining momentum in the marketplace.

Okay, great. And then just one quick follow-up, which is very quick to answer in just a short sentence or two, but obviously there is a tremendous amount going on with the cloud, especially with a lot of SMBs putting more of their applications up on AWS or maybe with Rackspace. Maybe either now or if you want to hold it till next week, if you could just maybe give us a thought as to how you are sort of trying to express those new applications possibly shifting off of a normal VAR over to the cloud. That is it. Thank you.

Go ahead, Phil.

Yes, Lou, this is Phil. I have never had anyone ask me to answer the cloud in a sentence or two. So it's a little tongue-in-cheek there because it is so complex. We are right in the middle of this and this is will be touched on again next week, so we don't want to sound like we are differing everything. This one's definitely a strategic position for us in the marketplace. We feel we are really well-positioned. We are working with many partners, obviously and building alliances with a lot of service providers. We will talk about that next week. (inaudible) like [Sabas] will be going public with Amazon, as well as our current supplier base.

So even when you talk about converged solutions and whether you are talking about Vblock, Pure, VCE, Cloud Matrix from HP, a lot of those are being marketed and sold as private clouds. So we are right smack in the middle of that one as well and we are really playing the role of the great aggregator, as I like to say. So whether it is a traditional product and integration solutions that we are going to go provide, great. If it is virtual, more of a virtual solution that the partners are looking for, we are providing that as well.

One of the most recent acquisitions we did and we announced two quarters ago, Pepperweed. Their primary service delivery is around the cloud and they are working with our partners and end-users to pop clouds up. So whether it is us providing it as an Avnet brand, work with our partners, enabling them or working with our suppliers selling their cloud solutions or building alliances outside of traditional partner network, we think we are right in the middle of it. A lot more to come, but we are pretty excited about it frankly.

Lou, I would say we are big proponents that the data centers of the future are going to be combinations of on-premise, off-premise, physical and virtual and we still think we play a very integral part of bringing those together. And I would tell you that the top services interest that I think we are finding among our partners today, cloud enablement top of the list, Web portal second and then analytics third right now. And again, we will have more details for you on that next week too.

Thank you.

Gentlemen, there are no further questions at this time.

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 reconciliations, can be accessed in downloadable PDF format at our website under the Quarterly Results section. Thank you.

Thanks, everybody.

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