安富利 (AVT) 2015 Q4 法說會逐字稿

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

Good afternoon and welcome to Avnet's fourth quarter FY15 business and financial update.

As we provide the highlights for our fourth quarter FY15, please note that in the accompanying remarks we have excluded certain items including intangible asset 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 is set forth in Avnet's filings with the Securities and Exchange Commission.

In just a few moments Rick Hamada, Avnet's CEO, will provide Avnet's fourth quarter FY15 highlights. Following Rick, our Chief Financial Officer, Kevin Moriarty, will review some additional financial highlights and provide first-quarter FY16 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 fourth 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 interest in Avnet. FY15 marked our second consecutive year of mid single-digit organic growth as reported revenue of $27.9 billion represented an increase of 5% in constant currency.

Despite an environment of mixed economic signals and the strengthening the US dollar, our team delivered consistent improvement in our financial performance in as revenue grow year over year and adjusted operating income margin expanded in all four quarters.

Adjusted operating income grew twice as fast as revenue in constant currency led by our EMEA region where both operating groups grew operating income double digits and operating income margin increased by over 50 basis points. Driven by this performance, adjusted operating income grew 4.4% or 11% in constant currency. And adjusted earnings per share increased 5.9% to $4.49.

Another highlight for the fiscal year was the $584 million in cash flow from operations, an increase of 146% over FY14. And we returned $247 million to shareholders via our dividend and disciplined share repurchase program.

Turning to our June quarter, high single-digit sales growth in constant currency at EM in our EMEA and Asia regions was offset by a decline in our computing components business at TS. As a result, revenue growth of 3.1% in constant currency equated to a 3.6% decline after translating our results (technical difficulty) from sales 5.5% year over year in constant currency, while Asia grew 2.9% and the Americas declined 1.5%.

Reported revenue of $6.8 billion increased 1% sequentially which was below our normal seasonal range of plus 2% to plus 5% for a June quarter. Gross profit margin increased 7 basis points sequentially while declining 31 basis points from the year ago quarter primarily due to the geographic mix shift to our lower margin Asia region at EM.

Operating expenses declined 8.5% year over year and were flat with the year ago quarter in constant currency as our team has continued to do a good job managing expenses while delivering study organic growth for the past four quarters.

Adjusted operating income of $243.8 million increased 5.8% sequentially and was flat with the year ago quarter due to the negative impact of currency. If you exclude the impact of changes in foreign currency exchange rates, adjusted operating income grew three times faster than revenue. or 10.0%, over the year ago quarter. Adjusted earnings per share of $1.16 increased $0.02 from the year ago quarter which includes a negative impact of approximately $0.11 due to the aforementioned currency declines.

Finally, our disciplined approach to working capital management has also contributed to our progress on working capital as a percent of revenue declined year over year at both operating groups.

As I highlighted at our recent investor day, despite the somewhat sluggish overall economic growth environment, there are exciting growth opportunities within technology being created by an accelerating pace of change. From converged infrastructure and the third platform solutions they support through to the industrial Internet of Things, we believe there are multiple opportunities where we can leverage our distinct position in the technology supply chain.

In FY15, our portfolio management discipline and the benefits from Avnet Advantage not only contributed to improved financial performance but also allowed us to redirect some existing investment towards these specific opportunities. With our strong financial position, we enter FY16 well-positioned to continue our momentum in organic growth and progress towards our long-term financial goals.

Now I'd 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 closed out FY15 with another strong quarter of high single-digit year-over-year revenue growth in constant currency led by our EMEA and Asia regions. In the June quarter, revenue grew 3% sequentially in constant currency, which was within our normal seasonal range of flat to up 4%. On a year-over-year basis, reported revenue was flat and was up 7.2% in constant currency, which represents our ninth consecutive quarter of year-over-year organic growth.

EM Asia and EM EMEA regions delivered it's second consecutive fiscal year of strong growth in constant currency and grew 7.4% and 9.7% respectively in the June quarter, while the Americas region increased 1.8%. Gross profit margin decreased year over year primarily due to the geographic mix shift to the lower margin Asia region, a reduced contribution from the higher margin EMEA region due to currency translation and the decline in Asia due to an increase in select high volumes supply chain engagements.

Operating income declined $1.1 million year over year, to approximately $206 million. And operating income margin was flat with the year-ago quarter as our strong performance in EMEA was offset by the strengthening US dollar. If you exclude the impact of changes in foreign currency exchange rates, EM EMEA grew operating income 3.1 times faster than revenue. And operating income margin expanded greater than 120 basis points year over year. EM would have been at 5% operating income margin at last year's Q4 exchange rates within our long range planning target.

In the June quarter, EM's working capital declined 1.9% from the year-ago quarter on a reported basis, but was up 6.9% in constant currency to support the strong year-over-year organic growth. While the strengthening of the US dollar throughout FY15 had a negative impact on EM's reported revenue and profitability, the teams focus on value-based management was evident in other key financial metrics we track. In FY15, EM increased return on working capital 38 basis points and economic profit dollars increased 27% with all three regions contributing.

Now turning to TS, our team continued their focus on improving profitability as operating income margin expanded for its third consecutive quarter and return on working capital grew 322 basis points from the year-ago quarter, despite the negative impact of the strengthening US dollar. Even though sales in our enterprise IT business was consistent with the year ago quarter, revenue of $2.48 billion declined 9.2% in reported dollars due to the impact of currency and a significant decline in our computing components business.

Revenue declined 3.5% in constant currency, primarily due to this decline in our computing components business, which included the impact of weak demand and our disciplined review of certain low margin engagements. At a regional level, our EMEA region declined 2.3% year over year, in constant currency, while the Americas decreased 4.2% and Asia was down 14.8%. Both gross profit and operating income margins increased year over year, driven by improvements in our EMEA region and our computing components business.

A significant highlight of the quarter was the continued progress in our enterprise IT business at TS EMEA with disciplined gross margin and expense management combined to drive TS EMEA's operating income margin up 55 basis points for the full fiscal year. Driven by this improvement, TS's operating income margin includes the 3.1% for both the fourth quarter and the full fiscal year. Working capital velocity increased a quarter turn sequentially as working capital declined 6.6% from the March quarter in reported dollars and 7.6% in constant currency.

Now turning to cash flow from operations, in addition to improved profitability and returns, the team remained disciplined on working -- managing working capital which helped to drive cash flow from operations to nearly $300 million for the June quarter and $584 million for the full fiscal year. Excluding impact of changes in foreign currency exchange rates, working capital declined 1% sequentially and increased 2.4% from the prior-year quarter to support the strong organic growth at EM.

In FY15, we returned roughly 42% of cash flow from operations to shareholders through dividends and our disciplined share repurchase program. During the fourth quarter of FY15, we paid a dividend of $0.16 per share, or $21.7 million and repurchased $16 million worth of our shares.

As we highlighted on our recent Investor Day, we view share repurchases as an internal form of M&A. And with the recent decline in our stock price in July, we have invested another $64 million in our shares over the past five weeks. Even with this investment, we have approximately $238 million remaining in our existing authorization and are prepared to buy additional shares when we believe our stock represents a compelling value.

Another initiative that we introduced at our recent Investor Day was Avnet Advantage for the long run. As a reminder, this is an unprecedented approach to leveraging our global sales and scope focused on centralizing and streamlining processes to further drive productivity and efficiencies across all regions in both operating groups.

While we announced this initiative at our investor day, many projects were already underway, and as such, we recorded approximately $59 million in restructuring costs during FY15. The majority of which relates to Avnet Advantage projects and certain portfolio decisions we are in the process of implementing.

As a result of these actions, we expect to realize approximately $50 million in incremental annualized cost savings with 60% flowing to the TS business and the remainder to EM. These actions also provide improved leverage in our model, as we continue our progress towards our margin and return goals.

Also at our Investor Day we added a new efficiency metric to our key financial goals: adjusted operating expense as a percent of gross profit dollar We view this metric as a key barometer for measuring the progress of driving productivity through a broader enterprise effectiveness initiatives like Avnet Advantage and as we continue to standardize the platforms. We are currently targeting a range of 66% to 68%. In FY15, our adjusted operating expense (technical difficulty) to 69.5%, and we expect the combination of organic growth and expense reductions to further drive improvement going forward.

Now turning to our outlook, looking forward to Avnet's first-quarter FY16 which includes the impact of an extra week in the in fiscal quarter, we expect EM sales to be the range of $4.15 billion to $4.45 billion and sales for TS to be between $2.25 billion and $2.55 billion. Therefore, Avnet's consolidated sales are expected to be between $6.4 billion to $7 billion. Based on this revenue forecast, we expect adjusted EPS to be in the range of $0.97 to $1.07 per share.

This guidance does not include any potential restructuring and integration charges or the amortization of intangibles. The guidance assumes 137 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 euro currency exchange rate for the first quarter of FY16 is $1.09 to the euro. This compares with an average exchange rate of $1.33 to the euro in the first quarter of FY15. And $1.11 to the euro in the fourth quarter of FY15. With that, let's open up the lines for Q&A. Operator?

(Operator Instructions)

William Stein, SunTrust.

I am wondering if you could comment on the extra week in the upcoming quarter, how often does that happen? And what is the effect you're expecting in each of the segments? In other words if you didn't have that extra week, perhaps maybe you can talk about what you would be guiding? And then I do have a follow up if I can.

So, hi, it's Kevin, is really a function of the calendar and how we close out the 52, 53-week year. Unfortunately, it's not one of these things that you can average 14 weeks across both businesses and determine the impact. So when you step back and you think about it in what we include in our guidance for both operating groups, the extra gross profit we get from the extra week of the revenue really is offset by the incremental week of expenses.

Okay. Maybe I'll try a different one, then. I'm hoping you can comment on what the M&A environment in semis what that impact on your business might be in particular? I think Altera is a relatively large supplier. And given that you carry AMD, I wonder if there's any anticipated either expansion or more problematic effect of that pending merger? Thank you.

Sure Will, this is Gerry. What I'd say is that it's a really hard question to answer because it's different size supplier. But generally we have been positively impacted by this trend as suppliers look to create strategic partnerships with their distributors. The DTAM continue to grow as a percentage of the total TAM over time and I don't see that changing. As the supplier portfolio continues to expand through the consolidation, we think we are well positioned to take this expanded portfolio to market given our ongoing investment and demand creation resources and our global scale and scope.

Will, this is Rick. Really there's context to each one of these deals. Sometimes there's two existing partners going together. And then sometimes it's one of our key partners acquiring some new technology or helping us expand the market a little bit which gives us more opportunity to have conversations with engineers. So there's real context to it but as Gerry said, net, net overall it's generally been a positive development for us.

Steven Fox, Cross Research.

Just first off on the component side of the business, it looked like it came in pretty much as you thought it would. Can you give us some description of how you think the channel is positioned relative to demand for inventories, what you're seeing from your customers I would suggest either better or worse trends for the next couple quarters? And any other broad comments around the chain. And then I had a follow up, please.

This is Gerry, I'll take that one, Steve. What I would say is right now, looking at everything that we see, our backlog, we don't see much change in either customer demand or cancellation rates. I think our inventory is well positioned. On our last call I talked about some of the pre investments we've made as some of the pricing change, so I think we're well positioned.

You can see we've managed our inventory well in this quarter so I think we're well-positioned for this coming quarter when it comes to inventory. We haven't seen much in the way of issues and being able to pass on some of the small price increases that have happened. So I would say based on where we sit today, we feel fairly comfortable that both our inventory level and what we're seeing in the market as far as how customers are reacting.

Great, that's helpful. And then secondly looking at the Technology Solutions business, it looked like it was mildly disappointing on the top line versus where your guidance was. Would you relate all that to computer components, and if not, what else was disappointing in the quarter?

And along the same lines, do you see a bottom yet for the computer components business? Where are we at in terms of the revenue run rate? Thanks.

Steve, it's Rick, and I'll turn it over to Patrick. Yes you have the story pretty right. It wasn't all computing components, but I'd say that was probably the biggest surprise of the overall impact to the top line. I'll let Patrick get some more color from a regional and on our enterprise business.

Okay. So for the computer component side, Indeed so that explain most of this portion of the mix. Reasoning is this business has been impacted by a sluggish PC market and then also by changing technology in that segment.

I would say that probably from the quarter-on-quarter standpoint, Q4 was the bottom and are expecting sales to rebound quarter on quarter now. Year on year we still have the impact of a day, so last year we had very high sales. So we still expect year-on-year to decline but quarter-on-quarter we believe we've reached the bottom last quarter. And year on year expect growth to materialize in this first half of calendar year 2016.

Now again I would like to highlight the fact that the team reacted extremely well to the difficult market conditions adjusting the cost base and working on the gross profit. And then we had a small disappointment in storage in North America primarily on legacy storage technology. Again on storage is really a critical area of growth for us, had a great quarter last quarter. This quarter was a little bit below expectations. We are not concerned, we believe that again our strategy to grow in converge, hyper converge, flash arrays is going to generate continued growth in the coming quarters.

Sherri Scribner, Deutsche Bank.

I want to tackle the extra week question again. I'm just trying to think about in terms of how much it adds to your revenue for the September quarter. I would assume you probably get another week of revenue. I understand that the extra SG&A costs offset any gross profit benefit, but I'm trying to think about how much that extra week adds to EM and TS sales given the guidance is relatively in line with typical seasonality.

Yes, Sherri, this is Rick let me add some color and then I'll maybe ask Kevin to follow up with any other details. The interesting part of this 14th week, I think Will asked earlier, it happens about every five years, based on the was we do our fiscal calendars. So we don't have a lot of track record and empirical evidence to do this. But we can tell you EM and TS are two different stories here.

One more week for EM is generally one year at best and perhaps slightly below because those quarter ends and calendar month ends are just not as critical. For TS, it's a whole different story. As we've talked about for the last couple of years, as we tried to handicap the calendar cutoffs. And by the way I'm going to be happy to be out of that business here for the next number of quarters. But in any event, we're talking significant in terms of hundreds of millions of dollars in maybe the first two days of a fiscal quarter for us which are the last two days of a calendar quarter has occurred for us in each Q1, et cetera. So the SKUs between the two differences are completely different.

I think what Kevin tried to reinforce was that in the guidance that we provided now for the September quarter, we factored in our best available information into the guidance for both groups. And we will see in EM it's a more muted impact to normal expectations as opposed to TS, where the guidance is moderately above, quote, unquote, normal seasonality. Because of that we're going to capture two quarter ends if you want to think of it that way, in this Q1. Kevin?

That's really helpful, thank you very much. And then can I ask a question on the SG&A as you guys have been working on some restructuring? You guys did a good job with SG&A this quarter. I assume it picks up in 1Q with the extra week, but how should we think about it for 2Q and 3Q going forward now that you've done some good cost-saving work? Thanks.

Sherri, hi, it's Kevin. I would point to for the upcoming quarter, it's in the range of [$542] (corrected by Company after the call) million to [$552] (corrected by Company after the call) million. Now there's a few moving parts there. Obviously the incremental week of operating expenses, we also have the -- our normal Q1 equity grant that we also account for in this quarter offset by a lot of the restructuring comments that we made earlier. So net, net that's what we're expecting for the current quarter.

Now, we traditionally don't give guidance past the upcoming quarter. And I would say it's the [cumulative] puts and takes depending on currency and M&A activity. But directionally we'd expect it to be in our Q2 will it go up just due to trajectory of the TS revenue, right, if you think about the calendar close to this operating expenses may go up slightly from Q1 but then stabilize from there.

Mark Delaney, Goldman Sachs.

The first question is on EM, I was hoping to follow up a little bit more on the cyclical environment what you guys are seeing and I was hoping you could help us reconcile the better trends that Avnet's reporting within the EM segment relative to pretty weak results from a number of semiconductor companies, including in areas that Avnet has explored too like industrial, appliances, automotive? And some of these semi companies have specifically talked about seeing weakness in the distribution end market and so any reconciliations between what number of investors have been hearing from semi companies and what Avnet and Arrow have been able to report and guide for this quarter would be helpful.

Sure Mark, it's Gerry, I'll take that one. I think if you look at the results from the suppliers it's actually been kind of mixed. Over the last couple days some of the suppliers that have gone out have been actually a little more bullish than the ones who went earlier.

I would say given the large number of customers we've serviced in many different verticals who are not as exposed to either particular customers or some of end markets that they are. Some of them sighted weakness in wireless and in comms and some of their biggest customers. So I think that's the big difference between maybe what we see what us and our biggest competitor and some of the suppliers.

If you look at by region, the Americas has been flattish. And if you look at our growth this quarter it was around GDP. Europe continues to be solid for us. And in Asia, we're still growing but at a slowing rate. And I think this is more about our expectations for our high volume fulfillment business than anything else.

So everything we look at cancellation rates, backlog, everything seems to be fairly much in line what we would expect for the quarter and what we're looking for in this next quarter.

That's helpful. And then for a follow-up question on the cost side, OpEx and margins generally were better than I was expecting for this quarter, so that was nice to see. I was hoping to get some more clarity on the Avnet Advantage program and where we stand. I know at the Analyst Day you talked about $100 million to $125 million of sales I think over three years and then Kevin you mentioned $50 million incremental. Maybe you can pull that altogether, is $50 million on top of that $100 million to $125 million you had already talked about? And then how much has already been realized? Because I think the OpEx was lower already this quarter, so how far along are you already with that process?

Hi, Mark, it's all part of the overall program. This is not on top of, so it's all part of that broader initiative that we're managing on. So we go by [comments] on the call another $50 million of incremental annualized. And the best way to think about that is an incremental benefit as we go through the current upcoming quarter of say $7 million to $10 million, we had roughly $5 million in the most completed quarter of Q4.

But the additional benefit will occur as we go through the rest of the fiscal year. And the full annualized benefit of this $50 million we expect to get by the end of our current upcoming fiscal year. So as we progress through the year, we'll continue to see the incremental benefit and we're going to continue to work on the broader project and I'll update you as we go through the rest of the year in terms of the status of the broader program.

Matt Sheerin, Stifel.

Sorry to go back to the extra week question again, but if you look at your normal seasonality that you talked about in the September quarter, you're typically up 1% to down 3% in EM. And it looks like midpoint of guidance is going to be right in the middle of that range. But even if you factor in half a week, because of the seasonality and the way the quarter falls, you're still looking at down below seasonal. And I'm trying to figure out what area or what region you're seeing the weakness in. A number of suppliers have been talking about distribution orders being cut both in the Americas and in Asia. And so are those areas are a little bit weaker than others?

So Matt, it's Gerry. Let me take a first shot at that. I wish that estimating this, as Rick said, was an exact science. If you think about our seasonality, actually at our Investor Day, we said seasonality is minus 2% to plus 2% in this quarter. So I don't know if you picked up on that.

But if you look our -- so if you look at what the extra week might be, I would say think of it as a low single-digit impact to revenue. So that would put us, depending upon guidance, that puts us either right at the low-end of seasonality or just slightly below seasonality.

When you've talked about weakness, I would say the Americas as we've been saying has been fairly flattish. So it's not surprising that maybe some of the suppliers are saying that they see weakness in orders from the Americas. I don't think it's been weaker from us than it has been.

In Asia I would say the big change for us outside of the macroeconomics stuff that you hear in Asia, is our high volume fulfillment business. If you remember this is a quarter as we've gone through and this is a quarter that's down compared to many of our other quarters. So that's where I'd say we see the weakness in Asia at this point. Back to what I had talked about earlier, everything else we see in the environment is fairly to what we would expect at this point. So Rick anything?

No, and Matt, I think another theme I'm hearing in a couple of the questions is around some of the commentary from some of the semi suppliers on the status of distribution quarters. And I would just remind everybody, we are quite transparent and open on what our working capital and velocity goals are. We're really transparent about what's going on with our levels of inventory, et cetera.

And I hope you will conclude as we do that we believe that we're managing that to the appropriate expectations and the kind of guidance that we're providing. So very consistent with hopefully the external expectations we've set for the way we look at the market and the way we invest for that growth.

Okay. And then turning to TS and the PC components business, which I know can be down pretty significantly, could you give us -- quantify the magnitude of the drop either year over year and quarter on quarter and do you think that's bottomed in terms of deselecting the low margin business and demand in general?

Okay, so this is Patrick, so the drop down levels 30% in delivered dollars it was really significant. And I would -- as I mentioned before, I think we've reached a bottom in terms of volume in Q4 because can expect now the sales to be down. And again, it's the result of the combination of the market conditions and also from portfolio management whereby we have deselected from some business where we know that. We really not get to our returns.

So the combination of the two, we still have some work to do on the de-selection. Now on the other hand we expect the market of PC some improvement in the market conditions. So again for the next quarter, we expect the quarter-on-quarter increase and so the bottom. And year on year again, we believe that we see the growth again year on year from the second type of our FY16.

Jim Suva, Citi.

Congratulations to you and your team there at Avnet. My first question is you mentioned that this stock buyback is your version of M&A. I wanted to ask a little bit of detail on that. First of all can you talk about your pipeline of M&A activity? And before you start or stop and say hey, it looks pretty robust, let's take a step back and look at this statistically. Because if it is robust, the statistical probability of over a year of no M&A would not really support a very strong robust pipeline.

So therefore when guided for (inaudible) unless you want to go to Las Vegas and play roulette, but one would have to believe that your M&A pipeline has either slowed or you've been more selective or internally you're focused on other things? So can you help us calibrate now maybe stock buyback maybe a notch higher on the list than what it was before?

And then my follow up, can you help us understand you stock outlook for your share count, does that include the additional stock that you mentioned you repurchased thus far in the month of July? Thank you.

Jim, it's Rick, let me take a stab and then I'll turn it over to Kevin. First of all starting with your last question first, the number Kevin quoted the $64 million that we spent, that is during the month of July so that is all in our fiscal Q1. I think we highlighted earlier in the script that the actual repurchasing activity in Q4 was $16 million. So we tried to make the point with the recent pullback in the stock, which really started to occur in early July, we kept true to our word to step up and put our money where our mouth is on the buyback.

Now on the bigger question of buyback as an internal form of M&A, we always tried characterize that's the way we look at it. We like investing in our own equity when we believe it's a compelling value and we will continue to approach it that way. You're absolutely right, if you look at the facts and say hey look we've had less M&A activity, I can not argue or dispute that with you.

And instead of just saying maybe a robust pipeline, et cetera, I would like to clearly reinforce as I think I did on last couple calls that deploying capital for the -- towards the creation of future EBITDA and cash flow and the growth of Avnet remains a very important part of our overall profitable growth plans.

We will only do so when we find a combination of good culture, of good strategic fit, and acceptable sustainable projection on returns that makes sense. Based on the commitments we've made to all their own constituents including shareholders.

So I cannot argue with the fact that there has been less activity. But I can continue to reinforce that this has not dropped in priority at Avnet. Secondarily we did talk about the nature of M&A has changed from Avnet even more from serial acquirer to more selective and strategic acquirer. That's still an overall part of the story.

But that doesn't mean that we're not interested in continuing to find ways to contribute to Avnet's long-term growth perspective with intelligent investment of that capital.

Shawn Harrison, Longbow Research.

Congrats on the results. Two quick clarifications before my real question. Did I miss a book-to-bill ratio for the quarter and where that is right now? And then the second part would be on fulfillment business in Asia, are you taking on less fulfillment business this year or is it you're seeing what's in that business weaken a little bit versus normal seasonality?

So I'll take both of those, Shawn. I'll start off with the first one. So we finished Q4 at 0.97 which was below 1, but that's not an unnormal thing for us in that quarter. It's our year end so we generally have very high shipping days in the June quarter. So current book-to-bill is above parity at 1.3 and it continues to --

1.03.

1.03 (that would be really good) and it continues to trend in the positive direction. So I'd say in general the market we serve looks relatively stable giving the backlog and the bookings.

If you think about the fulfillment business, we continue to monitor that on a quarterly basis and as long as the metrics makes sense to us we continue to take the business on. As I continue to say, it's opportunistic. Right now if we look at what we're projecting from a down trend in that business, it's market-driven not de-selection on our part at this point.

Okay. And then my follow up, Kevin as I look at trying to triangulate free cash flow for next year, do you have a CapEx estimate? And then also you guys are making improvements in working capital management each year. Is there a certain amount of maybe a day of working capital that you could take out next year? Is there a certain target you can highlight?

Sure. I'd say on the CapEx I would range it in the $140 million to around $170 million range for next year. And on in terms of working capital improvement obviously there are things that we continue to work on and are focused on whether it be a full day (inaudible) that we're focused on that specific type of goal but we are obviously very focused on return on working capital improvement and return on capital deployed improvement.

And Kevin, I'd say, Shawn I'm not sure we've done the calculation but obviously you guys know our long-term goals, you know our current performance, our gaps to get there and there are contributions both from a profitability and a velocity point of view that will get up there. So --

Brian Alexander, Raymond James.

This is Adam in for Brian. I had a question specific to the EMEA components business. Both you and your major competitor grew double digits in the quarter in EMEA components. You've talked about the goal of growing above the long-term industry CAGR of somewhere around 3% to 4%. As you think about the drivers behind the current level of growth in EMEA, do you believe that this will sustain above market? And can you talk to us a little bit about that?

So it's Gerry, Adam. Yes, it's always hard to predict what the markets going to do, so we try not to do that past the current quarter. I would say if we look at the drivers of what's growing our business in Europe, I think automotive and industrial continue tostay strong there. I think a lot of that has to do with the FX rate. So I think the weak euro is helping exports particularly in some of these markets we are strong in such as Germany. So based on what we've seen from a growth perspective and normal seasonality in Europe I don't see any big changes on the horizon at this point.

Okay, thanks. Maybe I'll try to tackle the you versus semi commentary in a different way here. So working capital was up both year over year and sequential due to the components business. Do you expect this to normalize over the next few quarters as you focus on your return on working capital target of 28% considering you were at 22.5% this quarter?

I don't know, Kevin if you want to take that our return on working capital, you're talking about --

He's talking about the enterprise.

So I'll let you answer the enterprise.

Obviously the discipline at first that we follow our stated goals to what Rick said earlier, that was obviously inventory management is a key component. But other elements as well are critical to, but it will both come from profits as well as working capital management.

But maybe drill down a little more specifically. Adam, I think the question you're after is, so Gerry, how do we feel specifically about inventory velocity of the entity globally?

Yes I think when you look at inventory velocity, if you look where our working capital grew at the end, it was in receivables. So that's really driven by the big uptick we had in customers at the end the quarter. Inventory has been relatively stable, we grew inventory 2.4% this quarter. And I think given some of the earlier investments we made last quarter [even in Europe], I feel very good about where our inventory is.

I would be forecasting our inventory will be flat exiting Q1 versus Q4, given the market dynamics where we're at. I think that that's fairly good management of working capital. I think if you look at some of the things that the suppliers have said about lead times, I think lead times are very stable right now. I think customers have become accustomed to that.

And so if you think about us having to hold more inventory for customer demand, that's just not -- that just doesn't make sense right now given how well lead times are. So I think we're doing the appropriate job managing inventory and we have those conversations constantly with our suppliers when it comes to lead times. So I feel pretty good on our inventory position at this point.

And Adam on our scope to our inventory turns for EM globally, I've been very consistent throughout basically the second half of FY15. And very, very slightly, I would say flattish but actually just a very slightly up on a year-over-year basis in Q4.

All right, guys. Thanks a lot.

Ananda Baruah, Brean Capital.

Congrats on the solid results. A couple if I could. The first is on the cost savings and on the operating margin expansion. Would you -- the margins are strong this quarter. Could you talk about the drivers that in the context of your cost savings plan and if you're getting more drop through than you originally anticipated, can you talk about where that's coming from and how we should expect those dynamics to manifest going forward? And then I have a follow up. Thanks.

Ananda, it's Rick and I'll let Kevin weigh in as well. Want to paint the picture a little bit here. On the margin expansion specifically, it's a combination of I believe really solid gross margin management as well as the cost. So it's not 100% of cost contributing. And then Kevin, I don't know if you want to break down the leverage any further there?

Where I would point to is when you think about where we're saying specifically where the savings are going to be coming from I'd point to 60% coming out of TS and 40% coming out of EM. So -- but to Rick's point, gross margin improvement plus with the tight cost control is really leveraging operating margin rate.

So gross margin management is that's a way of life for us. But some of the trends and the topics we've talked about today such as the decline in the computing components business generally helps with the gross margin. The teams have been working within their core businesses along those lines as well. It's a multi-faceted multi-lever approach so it's great to be able to look at specifically what's going on on the cost equation, but the margin -- op margin expansion is a multi-faceted story.

If you guys -- if we were to normalize or whatever the margin impact, negative margin impact from the PC components business would be, would you guys have still generated leverage above what your expectations were for the June quarter?

Yes, we would have.

And so then to follow up on that, Rick, should we expect something to normalize back from your current leverage profile that you put up in the June quarter or for all intensive and purposes are you actually tracking ahead of where you thought you would be right now with regards to business model?

Yes, I would say there were some upside to surprises in Q4. And we've integrated that new information into our expectations going forward.

Okay, that's awesome. And a follow up for me is sticking with PC components, you guys have talked about a couple times on the call about expecting a sequential uptick in the June quarter -- in the September quarter from the June quarter. Both Western Digital and Seagate have talked about flattish PC environment, actually maybe even flattish best case you can make an argument that you are actually talking about slightly down in September quarter.

So maybe you can put some context around your comments about expecting sequential growth during the quarter, is there inventory build that's involved in those comments because if inventory through the supply chain is pretty shallow or are you actually expecting stronger sell out to customers as a part of that outlook? Thanks.

Okay, Patrick?

So you talked -- so one of the inconsistincies in the last quarters was excess inventory in the channel. excess inventory has been addressed. It's not yet completely fixed but it has been addressed. And so the demand from our own standards is increasing, and so that's going to have a positive impact.

The second thing is we continue to invest in some newer technologies, especially when it comes to memory. And we are seeing some good traction here. So we have expanded our lines out with very interesting partners and we expect some momentum coming off of that. So these are two reasons for the sequential improvement.

Amitabh Passi, UBS.

Hi, this is [Tagis] on behalf of Amitabh. I had a quick question. I was wondering if you could comment on the trends you're currently seeing in the storage and networking end market? Thank you.

The storage and networking? So networking continues to be very strong for us. It continues to be a very attractive technology. So as I was mentioning before, what we see is a clear acceleration of the demand for converged and hyper converged solutions. And obviously it has a positive impact on us.

And on the other hand, we see some slowdown on the legacy storage technology again that we believe is going to be compensated or over compensated by the growth on converged and hyper converged.

And then in storage you have an acceleration also have growth for flash array coming by the way from new entrants or from new manufacturers but also from legacy storage manufacturers. So I would say that across-the-board we see strong demand on the newest technologies.

Legacy storage technology is impacted and it has had a negative impact for us this quarter, not a massive one, but an impact. But overall I would say the trend we remain positive on the trend on storage and it remains a strategic growth initiative for us.

Okay, gentlemen, there are no further questions at this time.

Okay thank you for participating on our earnings call today. Our fourth quarter FY15 earnings press and the related CFO commentary can be accessed and downloaded PDF format on our website under the quarterly call section. Thank you.

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