安富利 (AVT) 2015 Q3 法說會逐字稿

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

Good afternoon and welcome to Avnet's third-quarter FY15 business and financial update. As we provide the highlights for our third-quarter FY15, please note that in the accompanying remarks we have excluded certain items including intangible assets, amortization expense, restructuring, integration and other items and certain discrete income tax adjustments from all periods covered in our non-GAAP results.

When we refer to constant currency or 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. In addition, when addressing working capital, return on capital employed and return on working capital, the definitions are included in the non-GAAP section of our press release.

Before we get started with the presentation from Avnet Management, I would like to review Avnet's Safe Harbor Statement. This call contains certain forward-looking statements which are statements addressing future financial and operating results of Avnet. There 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 fourth 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 FY15 highlights. Following Rick, our Chief Financial Officer, Kevin Moriarty will review some additional financial highlights and provide fourth-quarter FY15 guidance. At the conclusion of Kevin's remarks, a Q&A will follow. Also here today to take any questions you may have related to Avnet's business operations are Gerry Fay, President of Electronics Marketing; and Patrick Zammit, President of Technology Solutions.

With that, let me introduce Mr. Rick Hamada to discuss Avnet's third-quarter FY15 business highlights.

Thank you, Vince, and hello, everyone. Thank you all for taking the time to be with us today and for your continued interest in Avnet. I believe -- for our fiscal third quarter, I believe our team did a good job navigating the continuing environment of mixed signals among various business and economic indicators including the recent additional strengthening of the US dollar.

Our organic revenue growth rate in constant currency improved to 7% in the March quarter from 4.6% in our December quarter. Our EMEA region grew 7.4% year-over-year in constant currency with both of our operating groups contributing to this performance. In our Americas region, EM and TS both grew revenue approximately 4% year-over-year, while Asia grew 6.9% driven by another quarter of double-digit growth at EM Asia. Even with the significant strengthening of the dollar from the year-ago quarter, our recorded revenue increased approximately 1% year-over-year to $6.74 billion.

Turning now to our earnings for the quarter. Adjusted operating income grew 3% year-over-year on a reported basis and our operating income margin increased 7 basis points. Although we transacted in a number of foreign currencies in the normal course of our business, the specific 17% decline in the euro from the year ago quarter had a significant impact on our enterprise results. In fact, if you look just at the combined results of our EMEA businesses, operating income actually grew 21% year-over-year in constant currency, yet this positive performance was negated when converted into US dollars.

Adjusted earnings per share of $1.04 increased $0.01 from the year-ago quarter which includes a negative impact of approximately $0.11 due to the aforementioned currency declines. Finally, our working capital and returns reflected that our team has continued to do a good job in a disciplined approach to managing our key operating assets as working capital velocities and return on working capital increased year-over-year at both operating groups.

Even given our multiple comments on the current environment and various puts and takes to our results based on these elements, we thus far have not seen any material changes to demand trends as reflected on our dashboards. With an increase in our organic growth this quarter, our book-to-bill ratio above parity at EM and a seasonal organic growth outlook expected at both operating groups for our June quarter, we believe we can continue to drive further progress towards our longer term financial goals.

Now I would like to turn the commentary over to Kevin Moriarty to provide more color on the financial performance of our operating groups. Kevin?

Thank you, Rick, and hello, everyone. EM delivered an eighth consecutive quarter of year-over-year organic growth with all three regions contributing. Organic revenue increased 8.7% year-over-year in constant currency to $4.2 billion lead by another double-digit increase in our Asia region, which grew 11.4% due to the continuing strength of our select high volume supply chain engagements.

EM EMEA continued their multi-quarter trend of high single-digit growth as organic revenue increased 8.2% year-over-year in constant currency and EM Americas was also up 3.7%. Gross profit margin increased sequentially primarily due to the expected seasonal mix shift to our western regions while declining year-over-year as Asia's share of total EM revenue increased 3.4% to 41%. Similar to our enterprise results, a strong performance for EM in EMEA was muted at the EM global level after translating their results into US dollars. In constant currency, EM EMEA grew operating income 2.7 times faster than revenue and operating income margin expanded 91 basis points year-over-year.

However, at the EM global level, operating income on a reported basis reflected only a 2% growth year-over-year with operating income margin flat to the year-ago quarter. In the March quarter, EM's working capital was flat with the year-ago quarter on a reported basis and grew 9.9% in constant currency to support the strong year-over-year organic growth. Working capital velocity increased year-over-year and return on working capital was up 8 basis points from the year-ago quarter. While the return on working capital increase was muted by the previously mentioned currency issues, our economic profit through the first nine months of FY15 increased 41% with our Asia region accounting for nearly 30% of this increase. Overall, we believe these results illustrate that EM is executing well in its served markets.

Turning to TS. Demand for data center solutions in our western regions drove year-over-year growth of 4.3% in constant currency. Our EMEA region grew 6% year-over-year in constant currency while the Americas increased 4.9%. TS Asia declined 10.7% year-over-year primarily due to a significant decline in our computing components business.

Reported revenue of $2.5 billion declined 16.8% sequentially in constant currency which is at the higher end of our seasonal range of down 16% to down 20% for our March quarter. Gross profit margin declined from the year-ago quarter as an increase in our Asia region was offset by declines in our western regions. Operating income grew 12% year-over-year and operating income margin increased 32 basis points driven by the improvements in our Americas region.

TS EMEA, which has continued to make steady portfolio and resource alignment progress throughout FY15, delivered another strong quarter as organic revenue grew 6% year-over-year and operating income dollars increased 11% from the year-ago quarter in constant currency. Through our first nine months of FY15, TS EMEA grew operating income 22% in constant currency and operating income margin increased 38 basis points. Even though this improvement is not evident in TS' global reported results due to the previously mentioned currency issues, the focus on profitable growth is having a positive impact as TS EMEA continues progress towards their long-range financial goals.

Working capital velocity increased approximately half a turn as working capital declined 6.7% in reported dollars and was roughly flat with the year-ago quarter in constant currency. TS' return on working capital increased 365 basis points from the year-ago quarter driven primarily by an improvement in our Americas region.

Now turning to cash flow from operations. In the March quarter, cash flow from operations was $60 million as we reinvested some of our profits into working capital at EM to support the strong year-over-year organic growth. Even with this investment, our team did a good job managing working capital as our cash cycle declined half a day from the year-ago quarter driven by a one day decline in days of inventory. Cash flow from operations was $318 million for the trailing 12 months. And during the third quarter of FY15, we paid a dividend of $0.16 per share or $21.7 million and have paid $65.6 million in dividends fiscal year to date.

In addition, during the third quarter of FY15, we repurchased $38.8 million worth of our shares. Through the first nine months of our fiscal year, we have invested approximately $147.6 million in our own stock which represents 3.6 million shares. This brings our total cash return to shareholders to $213 million thus far in FY15. With over $800 million of cash on our balance sheet and $2.1 billion of available liquidity, we are well positioned to invest in profitable growth opportunities while maintaining our strong balance sheet and disciplined approach to our capital allocation.

Now turning to our outlook. Looking forward to our fourth quarter for FY15, we expect EM sales to be in the range of $4.5 billion to $4.45 billion, and sales for TS to be between $2.45 billion to $2.75 billion. Therefore, Avnet's consolidated sales are expected to be between $6.6 billion and $7.2 billion. Based on this revenue forecast, we expect adjusted EPS to be in the range of $1.02 to $1.12 per share. This guidance does not include any potential restructuring and integration charges or the amortization of intangibles. The guidance assumes 138 million average diluted shares outstanding and an effective tax rate in the range of 27% to 31%.

In addition, the above guidance assumes that the average US dollar to the euro currency exchange rate for the fourth quarter of FY15 is $1.08 to the euro. This compares with an average exchange rate of $1.37 to the euro in the fourth quarter of FY14 and $1.13 to the euro in the third quarter of FY15. Before we turn to Q&A, I would like to remind everyone that we will be hosting an Investor Day on June 9 at the New York Stock Exchange. We look forward to seeing many of you there and if you can not join in person, there will be a webcast of the event. With that, let's open the lines for Q&A.

Operator?

(Operator Instructions)

Our first question comes from the line of Brian Alexander with Raymond James.

A question on the currency impact in both of your businesses beyond translation, specifically from a margin perspective. Can you talk about the impact you're seeing in each business, how much of your sales would you say are naturally hedged and how much are exposed to a mismatch in currencies that you might be buying and selling in differently? And to the extent that you are doing that, can you talk about how quickly you're able to raise prices in the local markets where you're perhaps buying in dollars and selling in euros?

Kevin you want to start with the mix and then we'll move on?

Yes, Brian, I would range it for in terms of the impact on the operating margin rate for our most recent completed quarter, for EM the headwind is roughly 10 to 15 basis points on operating margin year over year. And for EM it's roughly -- I'm sorry for TS, it's roughly 5 to 10 basis points of year over year.

Brian, this is Rick. We don't have at our finger tips here a mix issue where we can identify what percentage of revenues that we buy and sell in the different currencies. Where we have those exposures, again, when we talk about dealing with these currencies in normal course of business, that's where we do execute our hedging strategies on those exposures. We don't do anything on the translation though. That's been again normal course of business for us overall.

And in the case, I think you also mentioned on the price increases, what I would tell you is that for both groups now, any of those due to the continued strengthening of the dollar has been very muted and not impactful or not causing any change either in the demand patterns or in causing us any undue margin pressure due to the inability to pass those on at this time. So all-in-all, it's certainly part of the current environment, but not having any material impact from that perspective, due to any decisions or changes being made by our suppliers in the pricing arena.

Okay that's helpful And as a follow up on the TS EMEA business, I think the revenue was up 6% year over year in constant currency and it was well above seasonal for the second straight quarter on a sequential basis. So I just wanted to get some color on what do you think is driving what looks to be renewed strength in TS EMEA? And is any of that related to maybe customers spending a little bit more today because they're sensing prices might be going up in local currency and therefore we might be pulling forward some demand?

Okay, so hello, Brian, I would say the first reason is okay, we have a lot of reorganization activities behind us. So the team is really now focusing a few quarters on the market, on the customers and I would say it's paying off. That would be the first -- the main reason for the good performance.

We have solid teams in the region and we have also, I would say, powerful relationship with our manufactures. Demand in Europe is good at the moment. Indeed you have end customers basically upgrading their IT infrastructure and we're taking advantage of it. But again the main reason for the good results and the consistent good results since four or five quarters is execution.

Okay, great thank you.

And I would add one more thing there also. So not only you are seeing growth, this is the main driver for the improvement in the performance but you have also a strong cost management which is of course accelerating, the I would say, the drop through to the bottom line.

Right okay, thanks, Patrick. Thanks, Rick.

Brian, so obviously Patrick is new to the equation so to speak but obviously TS EMEA has focused on the overall leadership team for quite a while. So I think you're very familiar with that.

Yes, thank you.

Our next question comes from the line of Matt Sheerin with Stifel.

Following up on Brian's question regarding pricing in general, there has been reports about OEMs putting through or talking about putting through price increases in Europe on the hardware side. We're also hearing some rumors on the semiconductor side, so can you share with us what you're hearing and seeing from vendors and are you seeing any reaction from customers to try to get ahead of that?

Sure, Matt, it's Gerry. I'll go first on the semiconductor side. As many of you get our market trend reports have seen we've had some suppliers institute price increases in Europe somewhere on the 3% to 5% on average basis. Today we haven't seen any negative impact at this point from customers either from an order perspective or a pricing perspective.

And I think Brian alluded to this, we had made some strategic inventory investments ahead of some of these price changes to buffer ourselves from that. And of course we're investing in inventory overall to support our growth. So from that perspective, in the short term we don't see a change in demand because of this and we don't -- so far, we've been able to pass this through.

Okay, but you haven't seen signs of customers trying to build some inventory to get ahead of that because it sounds like you're doing that, right?

Yes, we haven't seen that from a customer perspective based on demand.

Okay.

On the TS side, same remark. So we have some supplies by increasing the prices. But again, no more than 5%. So, same range as in the EM business and we haven't seen any change in the behavior of our customers because of that. I would say, in addition, because usually whole investments are capitalized, the impact is -- would not be too material on the financials of the customers.

And Matt this is Gerry again, what I would add to that too is you saw our strength in Europe. I think a lot of that has to do with the fact that the euro is weaker, that's helping exports. So a lot of our mass market customers have increased their demand. So, so far we see it as a positive for our European business.

Got it, that's helpful. And just a question on TS related to the PC components business. I know in the CFO commentary that you put out earlier, you talked about another drag year over year in terms of revenue declines there, yet it sounds like the rest of TS in Europe is doing well are margins are improving. So Patrick, could you talk about your strategy for that business? Are you seeing signs that it's bottoming out here or are there more actions that you need to do to try to improve that or maybe make bigger decisions regarding divestiture or other moves?

So three reasons for the decline or for the pressure on the top line. Two are market-driven and one is really driven by Avnet. So the two market-driven reasons for the pressure on the top line is the technology refresh at some of our vendors and you had too much inventory in the channel and we are depleting it. I would say that on the latter, I think we are getting very close to the end of that phenomenon and later by Q4, I expect a rebound.

When you have an Avnet-driven decision, which is that we decided to deselect some business which was not meeting our returns and we believe that we could not meet the returns, medium and long term, so that has also impacted our top line.

Now two things have happened to react to that trend. The first one is a very strong discipline on [GP percent]. And in fact, our competent business has significantly improved it's gross margin percent. And second there has been also some actions to align the cost structure to the new norm. And the result of that is a significant improvement of the operating margins at that business. So based on what I know today, after doing an evaluation of that business, there's no intention to disengage, I would say, but the prospects are positive. And I would add that we are very close to meet our long-term targets. So I'm expecting improvements, more improvements to come.

And what are the long-term targets for that business relative to Tech Solutions?

So it's -- .

I'll jump in here Matt. So when we set up our portfolio, the way we break down our businesses across the board, each business has both an operating margin and a velocity target which comports to a certain expectation on return on working capital. And by the way, lower margin businesses generally speaking will be expected to have a higher return on working capital to offset the risk of lower margin.

So, I would tell you that from the computing components business at TS, when compared to our overall enterprise goal today, our stated long-range goal of 28% return on working capital, this business, actually their goals, exceed that particular return metric.

Okay, all right that's helpful. Thanks a lot, Rick.

Our next question comes from the line of Steven Fox with Cross Research.

A couple questions. First of all looking at some of your component vendors that have reported, it seems like you're outperforming them even in local currencies. I don't know, it's a rough estimate on my part so feel free to correct me, but can you talk about that and whether there's something Avnet specific going on in your organic sales growth that we should pay attention to?

And within that answer, could you also talk about what end markets you're doing best with? I know there's a lot of different industrial markets, but where are you seeing applications doing well right now where maybe things aren't going as well? Thanks.

Sure, Steve it's Gerry. So first of all, if you look at some of our suppliers who have already announced, if you look at the end markets they sell into they're quite a bit different where they've seen weakness in their end markets. We don't play big in those end markets, so that's one of the big differences between our suppliers and some of their bigger customers in communications and in consumer goods is where they saw downturn. We deal more with the mass market.

We then move to looking at regions in North America, our growth was mainly on industrial, aerospace and defense. This is usually a typically strong quarter for us in the industrial space, and in North America that trend continues to drive stronger.

If we look at our European business, firstly I'd like to say, is we had a very successful transition of leadership in EMEA to our new leader, Miguel Fernandez, picking up where Patrick left off. They continue to perform at a high level and we're quite proud of their performance. Automotive and industrial were strong segments for them in this quarter. We continue to see growth in those markets due to the weaker euro which is helping European exports in our mass market customer base.

And then in Asia again, pretty much across the board it was industrial where we saw the -- if we take out our high volume fulfillment business. So it was mostly in the industrial base where we saw growth.

Great and that was my second question. Can you talk about the Asia component growth specifically related to the high volume business, how did it fair versus maybe whatever your expectation was seasonally and how much did it contribute to the Asia growth? Thanks a lot.

So we usually talk about this at the EM level, so if you look at our EM overall sales, this business ranges throughout the year somewhere between 5% to 10% of our total revenues. The December quarter usually being the biggest quarter.

If you look at our core Asia business, our core Asia business was up over 5% this quarter, so strong growth in the core. So that's kind of the mix that we see for the Asia business. This business continues to be very selective on our part. As Rick said earlier, it does run low on margins but gives us nice velocity which creates the right return profile for us. And as long as it continues to do so, we'll continue to take that business.

Thanks very much.

Our next question comes from the line of Shawn Harrison with Longbow Research.

I wanted to follow up on the industrial markets and I got off the Westco call earlier and they essentially were highlighting what was a [contagion] for them in the industrial markets. I know it's not apples-to-apples but maybe if you could describe where you're selling into industrial and have you seen any negative signs out there that would maybe put growth at risk?

I wouldn't talk about growth at risk. What I would say is, industrial automation is a nice market inside of industrial for us and that continues to grow. If you think about the Internet of things, it's sensors and getting close to the edge. So that's where we see the growth and we see the potential growth going forward. But again I can't speak to anybody else's results but we continue both in primarily in the west, seeing nice growth in the industrial business.

Okay, my follow-up question is I'm trying to I guess bridge the results this quarter to the June quarter and at the mid point on higher sales there really isn't much FX growth. And to that, is there something going on beyond currency in terms of the translational impact either on EM or TS that I should be thinking about? Is there incremental hedging expenses quarter over quarter? How do I get to the $1.07 mid point from $1.04 this quarter?

Shawn hi, it's Kevin. I think organically, you would expect a sequential increase in terms of the performance. We do have, if you were to look at the tax rate, a sequential headwind on the tax rate as well as incremental hedging costs that are causing some of that sequential headwind. But I think organically, we would expect to be, if you think about the year-on-year number, I would range it in the $0.12 to $0.15 headwind year on year from currency.

Okay, in the other income line this quarter I know you had a lot of incremental hedging cost and FX losses. What should we expect just other income or other --

The way I would model it is, I would model it in the $4 million to $7 million range for incremental costs.

Is that only -- that's a one quarter event or does that die down?

No, it should normalize. I think this quarter in the third quarter we had, obviously, a lot of activity because the currency was moving quite frequently with each passing day so we had an [upbar participation] with transactional costs. Things have stabilized recently but it's just something we continue to monitor and depending on where currencies move, we'll continue to participate in our transactional activity.

Perfect, thanks so much.

Our next question comes from the line of Jim Suva with Citibank.

A quick question. First of all just to clarify, sounds like when you said that you're investing in the business, which I think is the right thing to do, you were referring a little bit to, I don't want to put words in your mouth, but were you pre-buying some chips in inventory ahead of expected price increases for this upcoming quarter, is that the way to think about that? Or was it some product lines that you just didn't have a strong foothold and that you're moving more aggressively into?

No, Jim it's Gerry. What I would say is first of all, we're buying inventory to support our overall sales growth first and foremost. And then secondarily from there in certain commodities where we anticipate price increases due to the FX exchange rate, we made some very strategic investments in that inventory to get ahead of what we thought was going to be worsening conditions from that aspect.

Okay, in that pre-buying can you help us quantify is it a day or two of inventory, a week or two of inventory or it just seems like you're getting a little more speculative when I believe you typically are price protected for price increases in debt and decreases for the chip companies.

Jim, what I would say is the amount of inventory we bought in the space is immaterial to the overall inventory number, so it's not speculation on our part. We're not -- we don't really speculate. We have very tight controls over the investments we make in this area. And if you look at our overall inventory number compared to where our sales growth is, it all makes sense.

Jim, this is Rick. I would add that the other element hopefully to diffuse any concern about speculative nature is that frankly, we're looking at historical models and patterns that we've seen in previous moves of currency issue. So again it's a very disciplined approach to the way that we're investing in this and certainly not trying to be a market timer or anything along those lines.

Okay, then my second question is on M&A. The dollar strengthened so your dollar purchasing for M&A targets has strengthened or in essence put the other way they've gotten more attractive. But if my tracker is right it looks like its been I want to say 9 or 12 months since you've done an acquisition. How should we think of that, are you changing your strategy and now working on larger acquisitions and building up cash or looking at paying down debt and less M&A? Or how should we think about the M&A since the tempo seems to quite noticeably slowed?

Yes, Jim first and foremost I would like to strongly reconfirm that we are open for business when it comes to M&A. It's a very important part of our capital allocation priorities and it remains an important part of our long-term profitable growth strategies.

That said, I would characterize that we are being more selective and more strategic about the additions we're considering. And we would very much like of course to align them to the growth strategies our groups are laying out and then make our make versus buy decisions as we invest in those strategies for growth. So understand there's been a little bit of a lull here. The facts are what they are, but that is not due to any specific decision on our parts and not be in the M&A business, it's just a matter that we just haven't had one in awhile.

So, we are open for business, ready and willing and able here and with Kevin keeping our balance sheet in really good shape and access to capital; we've got the powder to go ahead and execute if and when we find the right opportunities that have the right culture, strategy, and economic models.

Great. Thank you so much.

Our next question comes from the line of Amitabh Passi with UBS.

A couple of questions on my part. Just wanted to get a sense of uses of cash and how we should be thinking about cash flow over the next couple quarters?

Hi, Amitabh, it's Kevin. I think as I look forward, the number can move within a short period of time due to working capital requirements and our fiscal close, the calendar close of our suppliers and customers. But as I'm looking forward to our fourth quarter here, I would say in the range of $100 million to $150 million of cash flow from operations. It's a rough range and tied to linearity of our working capital requirements.

The other thing I would point out we are focused on the trailing 12-month number and again when I look at our June quarter, I expect us to be within the $400 million to $450 million range for the trailing 12 months at the end of our fiscal year.

Got it, and then just a quick one on your maybe some of your sub segments within Technology Solutions. Was hoping you could maybe touch on the demand drivers in some of the categories including networking and storage if you could maybe just update in terms of what you saw there during the quarter and your expectations for June?

Okay, so it's Patrick. Storage and networking were particularly solid this quarter and have been driving most of the growth.

Patrick, just maybe follow up, on networking any specific reason for the sources of strength or any particular sub categories there?

So our strategy is really to go for converge, so we are really pushing hard when we go to our customers to sell them the full solution and this is driving the demand at the moment.

Got it. Okay, thank you.

Our next question comes from the line of Louis Miscioscia with CLSA.

Continuing along with the question in the IT area, some of the largest storage companies actually have not been doing well over the last quarter or two. Could you comment as to where you're actually seeing the majority of your strength? Is it just the SMB market or is it more product and company oriented?

I would say so first thing we have seen strength in all the regions and we have seen strength of course in the SMB market but also in the enterprise market. So it's really a solid quarter across the board from a geographic or from a customer segment standpoint.

I would also share Patrick, I believe its also been very balanced among our storage -- portfolio of storage or vendors.

Absolutely.

Going back to Europe then also on TS, and congratulations on the good restructuring and the new Management team, maybe you could relate the performance that you had, to what you actually were seeing with end demand. Do you think the demand level was at the same level that you were doing or do you think that you were regaining maybe some lost share?

So for the moment we still don't have much market information. We had some indication from a limited number of vendors and we have been gaining a little bit of share. But I'm waiting for some more market information to confirm that.

Okay, great. Thank you.

Our next question comes from the line of William Stein from SunTrust.

I'm hoping you can talk about the strength that you're seeing in Europe relative to the possibility that customers may be trying to arbitrage the lower euro and buy either systems or components from you in Europe and ship them to where they really need them. It may sound somewhat of a conspiracy theory but it's something I've heard from some of my industry contacts. I'm wondering if you can comment as to whether you think that's happening and whether you have any good ways to prevent it? Thank you.

Hey Will, it's Gerry, I'll go first. So we haven't seen that phenomenon yet. Given what's happening on pricing, I think there would have to be a significant price delta that we haven't seen yet to make that transition from buying in one region, shipping it to another makes sense at this point. We haven't seen anything like that and so I can't comment much further except to say that's not a phenomenon that we normally see unless there's extreme price differences and usually that winds up sorting itself out in the marketplace.

And Gerry, wouldn't it be fair to say if there was a systematic arbitrage taking place at this point, the suppliers would be pretty much --

Yes, they look at how their pricing models work, they look at their prices by region so they're not going to let too much of that arbitrage happen because it erodes, at the end of the day, their profitability and their resales.

And so for TS, I would say that this is really at the moment primarily a local type of business and our customers are really looking -- okay, coming to us for local needs. I have not seen or have not been reported any of those behaviors.

Very well. One other question, if I can, on the component side. A moment ago you were asked about areas of strength and weakness and we heard about industrial and maybe to a lesser degree automotive. That's very well in line with what we've heard elsewhere among your suppliers. But I'm wondering about the weaker spots in particular if you have any meaningful exposure to comm infrastructure, whether you've seen that fall off or if you anticipate it falling off later in the year. If there are any other noteworthy areas of weakness. Thank you.

This is Gerry again. I would say no we're not exposed to the comm infrastructure like some of our suppliers are. Those accounts generally are big and direct for them, so we don't have that same kind of exposure. And again, being a mass market broad line distributer across our account base, a lot of those smaller ups and downs get normalized out. So there's no area I see in our (inaudible) markets that we serve, industrial being the biggest, where we see much in the way of weakness today.

Yes, I would say just generally, Will, if and when we have disconnects and by the way it can go both directions depending on where the market is at. The major categories of significant, I would say, CapEx comm infrastructure as well as the consumer device areas are usually the usual suspects when it comes to any differences to some of the market characterizations you may hear from us versus our suppliers.

And just to follow up on Rick's comment, we've had six quarters of positive book-to-bill so I think that bodes well for the backlog we have within the strength of the core markets.

Thank you.

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

A quick one for me for Patrick. Patrick, did I hear you correctly in the beginning of your comments that you're actually seeing what feels like an upgrade cycle in TS in Europe? Thanks. And if so just any context would be helpful, thanks.

So the question was around upgrade cycle, which I'm not sure he made a comment around upgrade cycle, Ananda. I think he was just talking about the improved execution leading to what we believe are some perhaps better than market growth numbers as TS continues its progress on its financial goals. So would you make a specific comment on any other -- .

Yes, that was really what I meant. So we have the team really again being externally focused and it's paying off. And we've done also a few changes, there will be some more changes to come, but I would say we have the base is solid. And again, the last four quarters we've been surfing on that much stronger base now and taking far more advantage of the market opportunities.

And back to a previous question, have we gained share? I'm really waiting for some market data to confirm it. At this moment I'm not able to confirm or to make a judgment on that.

Got it, thanks for the clarification. One more quick one on the storage component of the European strength, could you provide some context around what you're seeing there, types of deployment, what's driving the appetite, something similar to what you provide on networking would be great. Thanks.

I'm not sure we have a specific driver on the storage strength other than the overall market appetite that's going on, Ananda. In other words, trying to drive it down to a specific marketplace like increased video storage or demand increased regulatory, et cetera. Just don't have that level of resolution available to us. But again I think our overall characterization is that storage in aggregate continues to be one of the more positive growth stories within the overall TS portfolio, by the way in all regions.

Got it. Appreciate it, thanks a lot.

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

I wanted to ask Kevin about the CapEx spending this year. It seems to be higher than its been historically and is that related to acquisition, is there something in particular going on there and how should we think about CapEx going forward?

Sure, Sherri, a couple things I would point to. We've been continuing our ERP investments over the last few years but specifically over the last 12 months specific to replacements that we've been working on. In addition, I would point to this quarter we acquired a property in Europe for distribution capability and that really caused the year-over-year impact. When we come to Analyst Day I'll be sharing more in terms of the go forward outlook, but I would think it to be moderating in the $130 million to $160 million range as we move forward.

Okay, thanks. And then you guys have been -- in terms of big acquisitions, you guys have done a number of big acquisitions over the past five years. I just wanted to get a sense of at this point where are the areas that you think there's some capabilities that would be attractive to Avnet? Thanks.

Yes, so Sherri, it's Rick. As I said the most desirable opportunities for us are probably very much in line with the fundamental growth strategies in our businesses. So you look at EM and fundamental value propositions around design change, supply chain, opportunities to expand and grow on that; the consolidation play is not 100% over particularly in some of the Asian markets as an opportunity. Continue to expand the value propositions into adjacent opportunities as we did with MSC and embedded systems. These all make sense to us as targets of opportunity.

For TS, taking a look at the market developments as the evolution of the third platform, I think to use the IDC term, converged solutions, adding select opportunities to grow in software and services makes strategic sense to us along those lines. So these are the -- as the businesses continue to articulate their plans for their long-term growth, the make versus buy decisions that line up in those categories make an awful lot of sense to us.

And then once in awhile a deal will find us based on some other entity making a strategic decision to look for perhaps strategic acquirers, et cetera, and of course we would deal with those on a, as they come basis overall. But what makes most sense to us is to lay out the road map on the fundamental strategic pillars for growth that we're counting on and hopefully we can align the deployment of capital inorganically as horizontal organic investments towards pursuing those opportunities.

Great, thanks.

Our next question comes from the line of Mark Delaney with Goldman Sachs.

First question is a follow up on some of the industrial trends that the Company has been discussing on the component side of the business. And maybe you could provide us with some context about in past cycles when larger industrial companies have seen weakness, how long that's taken to impact Avnet if at all? And I understood some of the comments that you haven't seen anything yet but there's just a lot of industrial companies, be it Grainger or Dover or Pentair, in a pretty broad swath of the market that have talked about weakness beyond just direct oil and gas exposure. So just trying to get a sense if that's something that's going to still impact you in some of the coming quarters, so any context there would be helpful.

Mark, it's Gerry. I really couldn't comment on that. I don't know if there's a high degree of correlation. I don't think we've ever looked at it when looking at a Fastenal or Grainger against our business. I think they're different.

And again, all I can base it on is the dashboards that we have and what we're looking at. And when I -- again our book-to-bill in the mass market customer base has been solid for six -- been positive for six quarters now, so we have a pretty strong backlog. And there's no signals in the environment today that lead me to believe that will change.

Again, as Rick said in the lead off, we're still in a mixed signal environment so things could change that way. But there's nothing that we see today that would lead me to believe that we're looking at some weakness in the short term.

Okay.

Mark, it's Rick. I would just reinforce, we remain very vigilant on a number of fronts, watching key indicators not only on the macroeconomic front and what's going on with GDPs, but we're watching PMI, we're watching business confidence, we're watching manufacturing indices. Believe me, we do not believe we're going to be immune from any protracted significant changes in the marketplace that do -- that will eventually impact in the industrial space that's more important to us.

But as Gerry pointed out vis-a-vis some of the other sort of distribution entities with a different look at the industrial markets than we have, at this point we don't consider that a major disconnect causing us any undue amount of concern.

Okay and did you guys try and account for any of those macro headlines in the guidance?

Well again, guidance just being on a quarterly basis at this point it's much more driven by our internal dashboards, the currently scheduled orders that are on the books and supply chain engagements, the activity levels we're seeing from our partners and bars, quotes, proposals, configurations, et cetera. So that really is much more impactful as the way we look at it. However, as I said we keep an eye on the more macro indicators as well to be alert to any signs of any particular impact on our business. But the best information we have as of today, is reflected in the guidance that we provide.

Okay and I appreciate that context. And then if I can kick at one last one on FX translational impact, and trying to make sure I understand the right exposure and so that we can get the modeling correct going forward. If I go back to the March quarter, my understanding was every $0.02 move in the euro was about $0.01 of translational impact for Avnet. And I think the Company had guided for $1.18 exchange rate that averaged, my math about $1.13, so about a $0.05 move should have been about a $0.025 headwind and the Company was talking about $0.11 or so is what it actually ended up as So maybe we can just get an update about what that disconnect was and then what's the right formula for us to think about going forward.

Sure, hi Mark, it's Kevin. To clarify the $0.11 is versus the year-ago quarter we provided on a sequential basis. The number we had referenced earlier was on a sequential basis, so the math actually calculates directionally to what you provided from on a sequential basis in terms of the $0.02 to $0.03 impact from currency. But the $0.11 is attributable to the year-on-year number.

Understood. Thank you very much.

Thank you. I would now like to turn the floor back over to Management for closing remarks.

Thank you for participating in our earnings call today. Our second-quarter FY15 earnings press release and related CFO commentary can be accessed in downloadable PDF format at our website under the quarterly results section. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.