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Avnet Inc. (NYSE:AVT)

F2Q09 Earnings Call

January 22, 2009 2:00 pm ET

Executives

Vincent Keenan – Vice President of Investor Relations

Roy Vallee – Chairman of the Board, Chief Executive Officer

Raymond Sadowski – Chief Financial Officer, Senior Vice President, Assistant Secretary

Harley Feldberg – Senior Vice President; President of Avnet Electronics Marketing

Richard P. Hamada – Chief Operating Officer, Senior Vice President

Analysts

Steven Fox – Bank of America

Jason Brueschke – Citigroup

Brian Alexander – Raymond James

William Stein – Credit Suisse

Shawn Harrison – Longbow Research

Matt Sheerin – Thomas Weisel Partners

Brendan Furlong – Miller Tabak & Co.

Carter Shoop – Deutsche Bank Securities

Operator

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

Vincent Keenan

Welcome to Avnet’s second quarter fiscal 2009 corporate update. If you are listening by telephone today and have not accessed the slides that accompany this presentation, please go to our website www.ir.avnet.com and click on the icon announcing today’s events. As we provide the highlights for our second quarter fiscal 2009 please note that we have excluded restructuring, integration and other items from the current year period in the accompanying presentation and slides. Additionally in discussing pro forma sales or organic growth, prior periods are adjusted to include acquisitions.

Before we get started with the presentation from Avnet management, I would like to review Avnet’s Safe Harbor statement. This presentation contains certain forward-looking statements which are statements addressing future financial and operating results of Avnet.

Listed on this slide are several factors that could cause actual results to differ materially from those described in the forward-looking statements. More detailed information about these and other factors is set forth in Avnet’s filings with the Securities and Exchange Commission.

In just a few moments, Roy Vallee, Avnet’s Chairman and CEO will provide Avnet’s second quarter fiscal 2009 highlights. Following Roy, Ray Sadowski, Chief Financial Officer of Avnet, will review the company’s financial performance during the quarter and provide third quarter fiscal 2009 guidance after which a Q&A will follow.

Also here today to take any questions you may have related to Avnet’s business operations are Rick Hamada, Avnet’s Chief Operating Officer and acting President Technology Solutions and Harley Feldberg, President of Electronics Marketing. With that let me introduce Mr. Roy Vallee to discuss Avnet’s second quarter fiscal 2009 business highlights.

Roy Vallee

In the second quarter of fiscal 2009 our financial results were negatively impacted by the global economic slowdown that seemed to worsen as our quarter progressed. This deceleration was most notable at our Electronics Marketing Group as customers reacted with unprecedented speed to reduce inventories and backlogs.

In November we saw a meaningful slowdown in our EM Asia business which was the primary reason we lowered revenue and EPS projections in early December. Our sales for the month of December were weaker than expected primarily in the Americas which resulted in revenue for the quarter coming in at the low end of expectations at both operating groups.

In total, revenue of $4.27 billion in the December quarter was down 10.2% year-over-year and 6.4% adjusted to exclude the impact of changes in foreign currency exchange rates. Pro forma revenue after adjusting for the impact of acquisitions was down 14.9% on a reported basis and 11.3% in constant currency.

The decline in revenue had a more pronounced impact on operating income as our most profitable regions EM Americas EM EMEA and TS Americas accounted for over 80% of the year-over-year decline. As a result operating income excluding restructuring integration and other items, was $153.2 million down 26% compared with the year ago quarter. Operating income margin declined to 3.6% and on the bottom line diluted earnings per share declined to $0.63.

Given the double digit drop in revenue this quarter and our expectation of continued market weakness we have decided to take additional actions to reduce our cost structure by another $50 million on an annualized basis.

Some of these actions have already started and we expect to have a significant portion of them complete by the end of the March quarter with the remainder completed by the end of our fiscal year in June. On a cumulative basis beginning in the third quarter of fiscal 2008 we have announced total cost actions to date of $155 million or $145 million at current foreign currency exchange rates, which equates to approximately 10% of our total expenses.

These cost reductions impact both operating groups and all regions as the slowdown we initially experienced in the West has spread to Asia. We will continue to react responsibly to any further deterioration in sales while working closely with our trading partners to ensure we take advantage of all opportunities to gain profitable market share.

Although profitability was negatively impacted by the decline in revenue our cash flow was positively impacted by our counter cyclical balance sheet as we generated $320 million of cash from operations during the quarter.

Working capital, defined as accounts receivable plus inventory less accounts payable, declined $208 million or 7.3% sequentially, benefited somewhat by currency. The biggest contributor to this performance was a $156 million reduction in inventory with 75% of that decline occurring at Electronics Marketing.

On a rolling four quarter basis we have generated $728 million of cash from operations which has strengthened our balance sheet and further improved liquidity. At the end of the second quarter of fiscal 2009 we had $671 million of cash which, when combined with our available credit lines, provides liquidity of $1.6 billion.

Now let’s turn to the operating groups. In the second quarter of fiscal 2009 Electronics Marketing revenue declined sharply as the technologies supply chain quickly reduced orders in reaction to lower demand and a desire to reduce inventory.

This rapid reaction had a significant impact at EM Asia as revenue declined over 20% sequentially and year-over-year pro forma revenue declined over 10% after six consecutive quarters of mid to high single digit growth.

Both the Americas and EMEA regions were also down, which contributed to a 16.1% sequential decline in EM revenue as compared to normal seasonality of flat to down a few percent. Pro forma revenue adjusted to exclude the impact of acquisitions was down 12% year-over-year in delivered dollars and 9.1% in constant dollars.

While it’s apparent the global slowdown is negatively impacting end demand it is difficult to determine the extent of that impact versus the corresponding inventory and backlog reductions. They’re definitely seeing the bullwhip effect as demand reductions at the front of the supply chain are being magnified by inventory reductions across the supply chain. Although we can’t call the bottom and end demand yet, the global electronics supply chain unlike past downturns enters the slowdown benefiting from structural changes which should mitigate the depth and length of the current downturn.

Even though the EM global team has been undertaking cost reduction actions for several quarters, the sudden drop in revenue and gross profit volume had a negative impact on operating income and operating income margin this quarter.

Operating income declined 21.7% to $99.1 million and operating income margin of 4.4% was down 74 basis points from the second quarter of fiscal 2008. Our profitable EM Americas region had the biggest year-over-year decline as they accounted for close to 65% of the operating income decline.

Our EMEA region, which has been dealing with negative year-over-year revenue growth in local currency for six of the last seven quarters, did an excellent job as both gross profit margin and operating income margin improved year-over-year despite lower sales.

As a result of the drop in revenue and income Electronics Marketing has already initiated incremental activities to reduce expenses in all three regions. Cost reductions started in December did not have much of an immediate impact but should benefit the March quarter.

In the second quarter of fiscal 2009 EM reduced working capital $136 million sequentially as inventory declined $117 million or 8%. Our Electronics Marketing group is reacting quickly to the slowdown and continues to stay focused on our long term financial objectives. Though the markets have been challenging, we continue to make strategic investments where they strengthen our market position and meet or exceed our return thresholds.

In December we completed the acquisition of Nippondenso Industry Company in Japan. Nippondenso is a Tokyo-based value added distributor of electronic components, focused on a limited number of franchised suppliers with the prime objective of assisting customers with the design end of complex semi-conductors and sub-system level solutions.

In addition to sharing our core strategy of demand creation, the acquisition brings new customers and suppliers and roughly doubles our presence in one of the world’s largest markets for electronic components.

After the close of the quarter we completed the acquisition of Abacus Group PLC in Europe. Abacus is a value added distributor of electronic components and embedded systems operating in 10 countries across Europe. With revenue of £279 million for the fiscal year ended September 30, 2008 Abacus roughly doubles EMS IP & E interconnect passive and electromechanical business in EMEA and brings new customers that present additional cross selling opportunities.

Although the near-term outlook for growth is subdued we believe the combination of the actions we’re taking, organic market share gains and strategic investments we have made in key markets positions EM to outperform the market in the short term and resume progress toward our long-term financial goals when growth returns.

In the second quarter of fiscal 2009 Technology Solutions experienced a muted calendar year end as sales came in at the low end of our already below seasonal expectations. Revenue of $2 billion grew 11.7% sequentially as compared with typical seasonal growth of 25% plus.

On a reported basis revenue declined 12% year-over-year and 7.3% adjusted to exclude the impact of changes in foreign currency exchange rates. A weaker than expected close in the last week of December at TS Americas including the Avnet fiscal calendar December 27th cut off was the primary reason for the lower than expected growth. On a pro forma basis revenue declined 18% in delivered dollars and 13.6% in constant dollars with all three regions experiencing a double digit year-over-year sales decline.

At a product level servers and micro processors were down as compared with the year ago quarter, while networking and services grew. Despite the well publicized credit issues we have not seen a measurable impact on our accounts receivable delinquencies and we continue to work with our suppliers to ensure the channel has adequate liquidity.

As a result of negative organic sales growth operating income declined year-over-year to $66.9 million and operating income margin declined 103 basis points to 3.3% due primarily to the weakness at our more profitable Americas region.

We are however, encouraged with the performance of our TS EMEA team this quarter as the cost reductions they have initiated to date and the addition of Horizon Technology are having the expected positive impact on performance.

Due to the drop in revenue this quarter and expected weakness in the March quarter, we have decided to take additional actions to continue aligning our costs at TS with the market realities. The cost reductions being announced today are primarily focused on the Americas region, the majority of which have already been implemented in the month of January. However, all three regions will reduce expenses at the business units that have been most impacted by slower demand.

While growth has slowed in some of the mature markets in the west, Technology Solutions continued to invest in emerging markets that offer higher growth opportunities in the future. In the second quarter of fiscal 2009 TS announced the joint venture with the Seiko Group in Turkey, one of the largest IT markets in EMEA.

By teaming up with Seiko’s IT distribution business, Akora Technology, we will gain an excellent platform to expand our enterprise solutions footprint into the Turkish IT market which is projected to grow at a double digit rate for the next several years. Akora currently distributes servers, storage, work stations and computer components to approximately 3,000 resellers throughout Turkey.

During the December quarter we also launched our Solutions Distribution business in China. After exploring M&A alternatives to enter the enterprise computing distribution business we decided to build a value added distribution business that can scale as the domestic VAR base emerges in China. Our first major supplier partner for the Chinese business is IBM and our team is looking forward to building on our global strategy with the local IBM team.

Finally as many of you might have seen on Monday, Phil Gallagher has been promoted to President of Technology Solutions, succeeding John Pageant. Phil is a 26 year veteran with Avnet who currently serves as President of Electronics Marketing Americas. During his career he’s held a number of sales marketing and operations roles within Avnet with successfully higher levels of responsibility.

Phil brings a significant breadth of experience and a strong track record of performance, team development, relationship skills and strategic thinking. We're confident he and the TS team will take our performance to even higher levels as we move forward.

In summary, the second quarter of fiscal 2009 was unusually challenging as the macro economic headwinds intensified and we saw a significant loss in year-over-year sales at both operating groups across all three regions. Therefore we have decided to further adjust expenses based on lower top line expectations.

Our performance and values-based culture of excellence is driving our decisions, as business unit leaders have been reacting quickly and working with their teams to determine how best to protect our margins and returns. We use our disciplined portfolio management process to ensure we're making decisions that maintain our market competitiveness, while positioning Avnet to obtain our long term financial goals.

Despite declining profitability our counter cyclical balance sheet provides a stabilizing factor which is especially valuable in the tight credit market. As evidence this quarter we can generate significant cash flow that strengthens our already strong balance sheet when business slows. This allows us to continue to make strategic investments in an environment where many of our competitors can't.

Looking forward, our end markets along with the overall global economy are still searching for a bottom as economic activity slows and consumers and businesses alike cut back on spending. These declines in demand are further magnified by the inventory reductions that are occurring throughout the electronics supply chain.

It is actually healthy for the supply chain to reduce inventory quickly in this environment. Overall the technology supply chain enters this downturn leaner than in the past, which should reduce the depth and duration of the down cycle. Meanwhile we continue to monitor our end markets and react appropriately to changes in demand.

As the environment continues to weaken our relative competitive position strengthens. With our global scale and scope advantages, strong balance sheet and deep customer and supplier relationships, we are finding more and more opportunities to gain profitable market share organically and through M&A.

With our experienced leadership team and a culture of performance engrained in the organization we are confident that we can continue to out perform in this downturn and strengthen our indispensable role in the global technology supply chain. Now I'd like to turn the commentary over to Ray Sadowski, Avnet's Chief Financial Officer, Ray.

Raymond Sadowski

Let's start with a review of electronics marketing. In the second quarter fiscal 2009, electronics marketing's revenue of $2.27 billion was down 8.5% year-over-year on a reported basis and down 5.6% adjusted to exclude the change in foreign currency exchange base. On a pro forma basis EM revenue was down 12% after adjusting for the impact of acquisitions.

Sales in the Americas region were down 6.9% on a reported basis and down 8.9% after adjusting for the impact of acquisitions. For the EMEA region sales were down 13% over the prior year quarter and down 3.5% after adjusting for the impact of change in foreign currency exchange rates. On a pro forma basis EMEA sales were down 16.1% year over year and after adjusting for the impact of change in foreign currency exchange rate sales were down 7%.

And for our Asia region sales were down 5.6% as compared with the second quarter fiscal 2008 and down 11.1% on a pro forma basis. Even though Electronics Marketing was impacted by the global slow down with the declining revenue, it was able to hold its gross margin relatively steady with a 12 basis points improvement sequentially and an 18 basis points decline year-over-year.

For the second quarter fiscal 2009 EM's operating income of $99.1 million was down 29.7% year-over-year while operating income margin of 4.37% was down 74 basis points. The softness in our profitable Americas region was a major contributor to the year-over-year decline in operating income dollars and operating income margin. In the EMEA region gross profit margin was up 60 basis points over the year ago quarter and the income margin improved 16 basis points.

Based on the results of the second fiscal quarter and our expectations for the March quarter, the EM team will be taking additional corrective actions to adjust expenses to align with the lower revenue expectations. EM's return of working capital was down as compared with the prior quarter due to lower operating margins and working capital velocity.

On a year-over-year basis working capital velocity at EM declined 12% and net days grew by almost eight days. EM was able to manage inventory down for the quarter with a sequential decline of 8%. However, due to a lower revenue for the quarter Electronics Marketing productivity fell to 5.2 turns with organic revenue projected to be down sequentially for the march quarter. We expect EM inventory to be down further at the end of our fiscal third quarter excluding the impact of the inventory we add through the acquisitions of Abacus and Nippondenso. It is our expectation that EM inventory turns should return to previous levels when sales begin to stabilize.

In the December quarter technology solution sales of $2 billion were down 12% year-over-year on a reported basis and 7.3% adjusted to include the impact of changes in foreign currency exchange rates. Pro forma revenue after adjusting for the impact of acquisitions was down 18%.

At a regional level revenue in the Americas was down 12.5%, while in the EMEA region revenue was down 8.1% over the prior quarter in reported dollars and up 5.2% if you exclude the impact of changes in foreign currency exchange rates. On a pro forma basis EMEA was down 25.2% year-over-year and after adjusting for the impact of changes in foreign currency sales were down 14.4%.

Sales in the Asia region were down 26.2% as compared with the year ago quarter and were down 29.3% on a pro forma basis. Despite the lower than expected revenue gross profit margin at TS was flat year-over-year with both the AMEA and Asia regions showing some improvement.

Operating income of $66.9 million was down 32.7% as compared with the prior year quarter, while operating income margin of 3.34% was down 103 basis points. In EMEA the team is gaining traction as cost reduction activities and the addition of Horizon Technology combined to drive a 110 basis points sequential improvement in operating income margin.

For the Asia region while we were able to improve gross profit margin both sequentially and year-over-year for the strategic investments we made in China to launch our value added solutions distributions business, has impacted its cost and operating income margin. Nonetheless, given the results of the quarter, additional cost reductions will be taken at Technology Solutions in order to maintain targeted levels of profitability by region.

In the second quarter fiscal 2009 TS's return of working capital declined significantly versus the year ago quarter, primarily due to the impact that the lower than expected revenue had on its operating income margin.

Working capital velocity was down about 8% as compared with the prior year quarter while net days were up by less than one day in that same timeframe. TS inventory was down 10% and 14% sequentially and year-over-year respectively, while inventory turns declined slightly as compared with the year ago quarter. Return on working capital was well above our long term [hurdle] rate of 30%.

Now let's look at the enterprise results for the end of fiscal quarter 2009 as compared to the prior year. For the December quarter Avnet sales of $4.27 billion were down 10.2% in reported dollars and down 6.4% in constant dollars as compared with the year ago quarter, and on a pro forma basis revenue was down 14.9% over the year ago quarter.

Gross profit of $533.5 million was down $63.2 million or 10.6% as compared with the second quarter of fiscal 2008, primarily due to the decline in revenue. Despite the revenue decline we were to hold gross profit margin relatively flat, with only a five basis points decline year-over-year, while our focus on driving profitable revenue and ensuring we get compensated for the value we bring to our customers has helped us maintain our gross profit margin, despite the impact of the global economic downturn.

Excluding restructuring, integration and other charges operating expenses of $380.3 million were down $8.5 million or 2.2% year over year. As we mentioned at our analyst day in December we are on track with our cost reductions and have realized roughly $60 million through the end of December quarter.

This represents 60% completion of the previously announced reductions of $105 million or $95 million if you adjust for the changes in currency, since we made the announcement initially. We should see further benefit from these cost actions in the March quarter and the full benefit in the June quarter.

On a sequential basis operating expenses declined by approximately $40 billion benefited by the impact of these reductions as well as by foreign currency. As mentioned earlier we will be taking an additional cost reduction action of approximately $50 million throughout our business, in order to continue aligning our costs with the realities of the current market. We expect these reductions announced today to be completed by the end of the current fiscal year, with the full impact being realized in the first quarter of fiscal 2010.

As we have mentioned in the past we will continue to monitor end demand and take appropriate actions based on what we know at that time. Excluding the restructuring, integration and other charges, operating income of $153.2 million was down 26.3% as compared with the prior year quarter, while operating income margin declined 78 basis points year-over-year to 3.6%.

Below the operating income line interest expense was essentially flat year-over-year while other income was down $7.3 million year-over-year due to foreign currency exchange losses, lower interest income and the elimination of the income from a minority interest in Caleb, LLC, which was sold in April of 2008.

The effective tax rate in the December 2008 quarter of 30.5% was slightly lower than our prior year tax rate, primarily due to the mix of business among various locations with different tax rates, but was in line with our continued guidance of 30.5 to 32.5% for fiscal year 2009.

Excluding restructuring, integration and other items in the current period, net income for the second quarter of fiscal 2009 decreased by $40.9 million or 30.1%, to $95 million, while diluted earnings per share declined by $0.26 to $0.63. GAAP net income, which was positively impacted by a net tax benefit of $27.3 million or $0.18 per share on a diluted basis, primarily related to the settlement of income tax audits in Europe, decreased $29.9 million to $112.3 million for the second quarter of fiscal 2009.

During the quarter we generated #320 million of cash from operations with a trailing 12 months now totaling $728 million. We continue to diligently manage our working capital including lowering inventory sequentially. At the enterprise level our net days are up by almost five days as compared with a year ago, due primarily to lower sales at EM, while on a sequential basis net sales were down nearly two days.

Unidentified Corporate Participant

Net days.

Raymond Sadowski

Net days, excuse me. Although receivable days have moved out somewhat as compared with the year ago quarter, due in part to our using our strong balance sheet to increase profitable sales, we continue to manage the risk very carefully and have not seen any appreciable change in the delinquencies. We have over 250 individuals supporting this activity around the world with experience and expertise in managing this risk.

The significant cash flow generation over the trailing 12 months has further strengthened our balance sheet and improved our liquidity position.

In the second quarter of fiscal 2009 return on capital declined 401 basis points to 8.9% as compared with 12.9% in the second quarter of fiscal 2008, due to the impact of the economic downturn. However, on a trailing 12 month basis return on capital employed was at least 10% for the ninth consecutive quarter. As we manage through these turbulent times our margins and returns will be negatively impacted in the short term as the benefit of the cost reduction actions required to right size the business will lag behind its decline in revenue.

While we are not please with this performance we are committed to taking the necessary corrective actions to ensure our long-term goals are met once growth resumes in our end markets. Despite the decline in profitability we were able to comfortably able to maintain our investment grade credit statistics, reflecting our strong financial positions.

On a trailing 12 month basis debt-to-EBITDA was 1.6 and EBITDA coverage was 11.1. We exited the quarter with $671 million in cash and have $1.6 billion of availability liquidity. We hope that demand starts to pick up over the next couple of quarters, but if business gets worse we are prepared to take further corrective actions by group and region to maintain acceptable levels of profitability. We remain committed to our long-term business model when growth resumes.

Looking forward to Avnet's third quarter fiscal 2009 we expect less than normal seasonality at both EM and TS and we are providing a wider range of forecast due to the challenging economic environment. EM sales are anticipated to be in the range of $2.15 billion to $2.45 billion and sales for TS are expected to be between $1.45 billion and $1.75 billion.

Therefore Avnet's consolidated sales are forecasted to be between $3.6 billion and $4.2 billion for the third quarter of fiscal 2009. Based upon that level of sales we expect second quarter fiscal 2009 earnings to be in the range of $0.45 to $0.53 per share. The above EPS guidance does not include anticipated restructuring and integration charges related to the cost reductions and integration of businesses noted earlier in this presentation.

In addition this quarter guidance assumes that the average Euro to U.S. dollar currency exchange rate for our third fiscal quarter is $1.30 to 1 Euro. This compares with an average exchange rate of $1.49 per each Euro in the third quarter of fiscal 2008 and $1.32 for each Euro in the quarter just ended.

Although all the current macroeconomic environment is proving to be very challenging based on what we know today regarding the fundamentals of our business, we do not believe that the current recessionary environment will have a long-term material impact on our ability to reach our long-term financial goals. However, the drop in our stock price since September 2008, which is in line with the decrease of the overall market, has resulted in a market capitalization that is significantly smaller than what it was at the end of our last fiscal year and well below book value.

As a result, based primarily on the fact that our stock price is trading well below book value, we are looking at whether or not a non-cash goodwill impairment charge could be required. We expect to reach a conclusion on this in the next couple of weeks.

With that let's now open up the lines for Q&A. Operator.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question will come from Steven Fox – Bank of America.

Steven Fox – Bank of America

I guess first of all just stepping back on some of the comments you made about the component inventories, Roy, I guess I didn’t hear you say that you felt like the channel was clean, but it seems like some of your suppliers are seeming to suggest that. Can you give us your view on inventories in the channel? How you feel about inventories at the customer base relative to expectations for the next couple of quarters of demand?

Raymond Sadowski

So look, I think maybe the best way to talk about that is to just examine what's happening with our own. I think our team reacted admirably in the, sort of on a real time basis in the current quarter and we had a nice decline in inventory and yet, our inventory turns fell noticeably on a sequential basis. Our objective would be to get our inventory turns back to where they were. So that would imply that if sales were stable we'd still have a little bit more inventory to get out in order to get back to our turns, and of course the reality is we're projecting that sales are actually going to be down.

So Steve, if that applies to the other distributors as well, in other words, significant – let’s say they started the cycle with relatively lean inventory. They got hit with demand declines so turns are declining. The objective is to get returns back to where they were. It is unlikely that very many got that done in the current quarter and my expectation is that given that sales are declining further in the March quarter our inventory will be down but I'd be surprised if we get back to our returns objective and we're probably at least two quarters out on getting back to that level.

Steven Fox – Bank of America

And that turns objective will be around six times?

Raymond Sadowski

Yes, right in that ballpark.

Steven Fox – Bank of America

And then?

Raymond Sadowski

Same place we were.

Steven Fox – Bank of America

And then just to make sure I understand on the gross margin side, if the gross margins were holding steady in both business, so you're saying that all of the gross margin decline, which seems a little more than normal for the mix was a result of mix issues on the corporate level?

Roy Vallee

I'm looking at five basis points of year-over-year decline. Are you looking at sequential or are you looking at year over year?

Steven Fox – Bank of America

If I'm looking sequentially this is usually a quarter where gross margins are down from the prior quarter because of the TS business.

Roy Vallee

Yes.

Steven Fox – Bank of America

But it seems like a little bit more than normal decline in the gross margins. Would you attribute all of that to mix or is there anything else we should have considered?

Roy Vallee

It's got to be dramatically mix because as we pointed out, the margins are relatively stable. I think we indicated the EM margin year-on-year was down, what did we say, Ray, 18 basis points, while the TS margin is down looks like 2 basis points.

Raymond Sadowski

Right it's essentially flat.

Roy Vallee

Essentially flat. So Steve there's basis points in decline in both of the rest is mix.

Steven Fox – Bank of America

Last question, on just to clarify, on the EM margins going down this quarter that’s all volume related or was there anything else that caused that pressure?

Roy Vallee

It is all volume related. We actually should have under normal conditions, we should have a slightly favorable business mix in the March quarter with the Western regions being a bigger share of the total verses Asia, but based on our current projections we're seeing weakness in America that is more significant than what we're seeing in Asia or Europe and that's part of what's driving the issue.

Harley Feldberg

I wanted to add an additional point, somewhat marrying your first two questions together relative to inventory and then margin pressure. One obviously we're not privy to our largest competitor's inventory performance in the December quarter just yet, but one of the indicators that I tend to think about when we're looking at the existence of too much inventory in the channel, is pricing pressure.

So although we did see, as Roy said, basis points of year-on-year we actually were up slightly sequentially. So I don’t sense at this point that when all the results are in there's going to be a significant story in channel excess inventory in the December results.

Operator

Your next question comes from Jim Suza – Citigroup.

Jason Brueschke – Citigroup

Just a real big picture question for the group perhaps, if it hadn’t been for the $15 million in cost savings that you experienced during the quarter SG&A would have been up about 2% year-on-year relative to a sales decline of about 10%. And while I can understand that SG&A is not going to come down at such a clip as the revenues in this type of environment, but I would have thought that perhaps we would have seen it come down and not actually increase. I was wondering if you could talk a little about that dynamic and what's going on there.

And then just as kind of a follow up to that you did a nice job on slide 14 demonstrating that gross profit dollars came down $63 million and then operating expenses came down $8 million and if I take a quarterly run rate on the savings that you've outlined about a $155 million it looks like we might get to a quarterly savings rate of roughly $40 million. I was just wondering if there isn't some way to bridge the gap there and close that so that the gross profit dollar decline that you're seeing and the SG&A decline that you – so you could perhaps get us back to breakeven.

Roy Vallee

Yes, so Jason, on the first question, there's a very straightforward answer. M&A is in the mix as you compare those year-on-year figures. So had it been 100% organic, I think you would have seen expense declines much more in line with the level of sales decline. But part of what's happened here is we have inherited expense infrastructures, some of which we're integrating and getting out in the form of cost synergies and some of which is now permanent cost into the cost structure, okay?

So the explanation is that expenses are not down consistent with sales, or more specifically, expenses were up year-on-year while sales were down. That is due to M&A. Make sense?

Jason Brueschke – Citigroup

Yes it does and maybe just a quick follow up specifically to that statement then. I know that you've been struggling to integrate some things in Europe, maybe you could just give us an update on that since a lot of the M&As come in Europe and when the timing and progression of those integrations might happen and as far as bringing some of that SG&A down?

Roy Vallee

Yes, actually as of the last couple of quarters, we feel very comfortable with the status of our integrations. I think we had referenced back in the March and June timeframe, specifically in March, that we hadn't gotten as far along as we would like. But I can certainly say that as of this quarter we are very comfortable and in fact, that has shown itself in the results of the TS EMEA operation.

For Electronics Marketing, there was nothing to work on last quarter, but as of last week they now have the opportunity to begin the integration of Abacus. That integration plan is completely done, laid out, documented and is in the process of being executed. So they are working rapidly on that and in addition to that, we are integrating Nippondenso over in Japan, so that activity is underway.

Jason Brueschke – Citigroup

Okay and then just another question about being able to bridge the gap between the $40 million per quarter and the $60 million; $40 million a quarter in cost savings which you've announced and the $63 million decline in gross profit dollars we saw.

Roy Vallee

Right, so I want to answer that this way. At our annual analyst day, we provided our investors with some scenarios, and essentially what they said was through the September timeframe, our intent was to remove enough cost from the business to protect the margins that we had operated at in the fiscal '08 timeframe.

And then we said that if in fact revenues get worse, we will take more cost out of the system and we stated margin targets. I want to say that we talked about operating income margin in the 3.6 to 3.8 range at the enterprise level if sales declined by another 10%. And based on what we're seeing, interestingly enough we weren't trying to be clairvoyant at that time, but we're seeing a slightly greater decline than that but roughly in that ball park.

So Jason, we have specific margin and return targets by group and by region based upon a variety of circumstances surrounding those business units, but in aggregate, we're not saying that we can hold to our existing levels of profitability at any level of sales, but at this point we're saying that we would expect to keep operating margins above 3.5% once we have the benefit of the expenses coming out of the P&L.

Jason Brueschke – Citigroup

Okay great, that's helpful. Thank you.

Roy Vallee

You're welcome. I should make a comment there about assuming that revenues don't decline further than our current expectations.

Operator

Your next question comes from William Stein – Credit Suisse.

William Stein – Credit Suisse Group

Hi, TS guidance, I think in the press release and in the script you guys said that in both segments, guidance is a little bit below normal seasonality, but I think that the guidance is actually a hair better than normal. Do I have that right? I think the norm, the midpoint is down 21 normally and you're guiding down 20.

So the question is, first is that right? And then do you think that we'll continue to see that later in 2009, in other words, TS on an organic basis, perhaps we've bottomed in terms of the sequential growth relative to normal seasonality?

Roy Vallee

So I think I'll ask Rick to take that question, just explain to you what's in the guidance. And I think what you'll see is that there are some anomalies, or some specifics that are driving those numbers, so Rick?

Richard P. Hamada

On the specific guidance for Q3 keep in mind that we had a fiscal cutoff for our calendar, excuse me, our fiscal year cutoff on December 27th, and we were shipping obviously through the calendar year end with many of our suppliers.

But we had talked about that I think when we were in New York. We expected a neighborhood of $100 to $200 million of spillover. We actually billed about $180 million those first three days. By the way that was about 2x the spillover from a year ago calendar when there was only one day, one calendar day we missed.

So keep in mind that that's getting us off to a good start for Q3, therefore, "normal seasonality" is actually handicapped a bit.

William Stein – Credit Suisse Group

Any thoughts on when we might start seeing a normal seasonal progression? Do you have any, maybe it goes to the point of visibility and I recognize today it's a bit murky now, but any comments on both sides of the business, whether there's kind of an end to the worse than normal seasonality progression in each part of the business?

Roy Vallee

Yes, Will I think there's a common denominator and then there is a specific uniqueness between the two groups. So from our perspective, the common denominator is that it is unlikely that end demand is going to stabilize or improve until economic growth stabilizes or improves. So at this point, I don't think we know yet whether the December quarter was the trough for economic growth or if it's going to continue to worsen in the March quarter.

I think your guess is probably far better than mine, but I don't think we're going to see a resumption of growth until we see a stabilization or growth in the macro economy. So as a result of that this notion of limited visibility I think applies until we get into a stabilized macro environment. So that applies to both groups.

The part that's different is I think it's crystal clear that the December results in the component part of the business is a function of both the decline in end demand, as well as the reductions of inventories across the supply chain.

So for an Avnet point of view, we're being affected by the decline in our customer's demand plus any inventory reductions that are occurring at the OEMs or the EMS companies that we're selling to. And then for our suppliers, they're susceptible to all that plus the declines in inventory that are taking place at distribution.

So there I think as long as the economy stops getting worse and demand stabilizes, you could actually see an improvement in orders and even revenues from the components business prior to end demand actually increasing. Okay? So in other words, when inventories stop contracting, you could see a rebound in components even if end demand has not begun to rise.

William Stein – Credit Suisse Group

Makes sense. One more quick one, can you talk a bit about maybe one or two-year goals of the new TS business that you established in China?

Roy Vallee

In China?

William Stein – Credit Suisse Group

Yes.

Roy Vallee

I don't, I guess the way we would classify that is we're currently making an investment, Rick, what's the magnitude?

Richard P. Hamada

About 50 people, a little less than $1 million a quarter expense right now.

Roy Vallee

Okay, so Will, we've got 50 people in the country with the IBM franchise. We're actually being pursued by other global supplier relationships that would like to go with us in China. I think that expectations for say calendar '09 would be tens of millions of dollars of revenues. And perhaps fiscal '10, maybe start thinking about 100 million kind of revenue in that market.

Operator

Your next question comes from Brian Alexander – Raymond James.

Brian Alexander – Raymond James

Okay, just on the issue of credit, credit issues still had an impact on your business, Roy in particular in TS where I think there is more potential risk. And I’m just wondering why you think that is and do you think that it’s because we’re too early in the cyclical downturn? In other words your TS business just started to decline by double digits in the December quarter organically.

So maybe your customer base hasn’t yet experienced the significant contraction in their revenue and profits and therefore their banks haven’t become more restrictive on their credit lines. I’m just trying to see if maybe if there is more risk to come or if you’re still comfortable two to three quarters from now if we’re still contracting at this rate, that the credit risk won’t intensify?

Roy Vallee

Let me – I’ll take the first pass Rick feel free. But Brian you know the business model of the reseller, it’s essentially you know a group of people in an office with little or no working capital employed. No inventory whatsoever and limited capital expenditures. So what they’re managing from a cash flow point of view is salaries, and the propensity for that kind of an organization to get of whack between cash flow and it’s P&L is relatively limited and the remediation action is a matter of reducing staff.

So I think that the ones I worry about are the ones that are doing enough business, you know, tens of millions where there’s significant amounts of cash flow going through the operation and they're not recognizing the timing difference between the cash flow and the reality of their P&L, and they find themselves spending tomorrow's finances today and then having no place to go for liquidity when they need it the most.

So the point that I’m trying to make is I think the nature of their model lends itself to have limited capital requirements and therefore limited bankruptcy potential. But if it’s going to happen it’s going to happen where the reseller allows – spends tomorrow's cash flow today. Rick, you want to add anything?

Richard P. Hamada

Roy, The only thing that I would add is Brian I think you are on to something that as we look at the growth rates in the region with the TS business I think that’s where it will show up. In other words if liquidity becomes a problem it’s going to prevent the orders from getting placed rather than causing a delinquency or a back end problem. It's more of a front end than a back end problem in my opinion.

And by the way we’ve watched very, very closely the pipelines and the opportunities and the only place that we’ve seen any indications of changes and shifts in spending patterns and having things drop out is primarily related to the financial services sector.

Roy Vallee

And Rick, didn’t we have a sort of a medium size reseller liquidate but without liability?

Richard P. Hamada

That’s correct.

Roy Vallee

Because he kept his cash flows in balance and he’s just closing the operation and laying off the team.

Brian Alexander – Raymond James

Maybe as a follow up, Roy, any changes with credit insurers in terms of incremental cost for credit insurance and/or them scaling back coverage in any particular segments or regions?

Raymond Sadowski

Hi Brian, it's Ray. Probably a little both, actually I more on the cost side, obviously in this environment there is more risk out there and so to the extent we use insurance which is primarily outside of the U.S., costs have risen but we have not yet really had an issue where we’re having difficulty getting the insurance where they’re really pulling back that to any great degree.

But certainly pricing is going up, and do we hit a wall at some point in time where our ability to get the appropriate insurance we'd like starts to have impact? At this point it hasn’t happened. We certainly have some isolated pockets of that, but overall it’s more of a cost issue than an availability issue.

Brian Alexander – Raymond James

And then just one final one for me, back to the OpEx question that Jason touched on, and specifically in EM can you remind us how much of the operating expense structure there is variable because given the negative 13% contribution margin you had year-over-year in EM, and the fact that gross margins were relatively stable it would just appear that the variable cost ratio is well below 50% in that business and I though historically it was higher than that. Thanks.

Roy Vallee

Hey Brian, I think I depends on your definition of variable cost.

Ray Sadowski

What’s you definition of variable?

Roy Vallee

Yes, I think that one definition would be what cost declines automatically when revenue declines and you start thinking about things like commission expense and transportation charges. Those are things that move up and down directly with the volume. But our perspective is we’ve got a little over 70% of our total cost in people. On top of, you know we have some cost that are just classically variable, and so something like 80% of the total cost is variable, but we have to choose to take actions in order to get that cost out.

Brian Alexander – Raymond James

How much do you think the pure variable component is what you alluded to earlier in terms of commissions and transportation?

Roy Vallee

It’s pretty limited. I’m going to say it’s below 10% or in the 10% range of cost.

Operator

Our next question comes from Shawn Harrison – Longbow Research.

Shawn Harrison – Longbow Research

Just getting back to a point that was touched on earlier regarding pricing, I was hoping you could maybe delve into a little bit further in terms of maybe what you’re seeing in terms of pricing pressure regionally both at EM and then maybe at TS if there was anything abnormal in the December quarters as you know we look here early in the March quarter?

Roy Vallee

Okay. Shawn, I’ll bet both of the guys talk about that but typically pricing is more of an issue at EM that it is at TS but, in fact Rick, why don’t you comment first and then we’ll flip it over to Harley.

Richard P. Hamada

Sure, hey Shawn, I’m just refreshing on the TS business model overall generally speaking we have longer term engagements with these resellers with contracted pricing arrangements that are generally not driven deal to deal. Sometimes special bids come into the deal, sometimes special pricing comes in for certain customers.

But it’s generally pretty stable there and as we talked about earlier year-on-year TS overall margin globally was really, really flat. Only place we might be subjected to it is some of our computer components business. Sometimes in the processor our memory segment and by the way that’s been on the decline, but business that we have been booking there haven’t seen a major shift. It's certainly noticeable but it’s a smaller part of our business and when it gets below a certain level we have the discipline to not participate.

Roy Vallee

So Shawn, just one summary comment on TS and I’ll flip it over to Harley for EM. So we could be affected by things like industry standard or commoditized products being a bigger part of our mix and therefore ASPs declining, but that doesn’t affect in a gross margin percent decline.

It’s just that the devices we’re selling, in fact frankly it seems like every quarter the devices we sell this quarter are cheaper than the devices we sold last quarter and so on and so forth. But it doesn’t affect gross margin. Does that make sense?

Shawn Harrison – Longbow Research

Correct, it would just be a gross profit dollar impact.

Roy Vallee

Correct unless we sell more units. Okay. But that is a long-term multi-quarter phenomena that’s baked into the growth rate. So Harley, EM that’s where there is a lot more potential anyway for pricing action.

Harley Feldberg

Your question originally I believe was about pricing pressure overall but also any variances or significant variances by region, and I would say in response to the second question first, although we’re in a very price sensitive competitive market, I don’t know that I could point out any significant differences region to region.

To the larger question on competitiveness it’s a bit of a puzzling one actually in that I would say if one could measure, which I don’t know that you ever can, pricing pressure is not as severe as one would think considering the radical drop off in revenues that occurred throughout the quarter.

And I can only go further on to comment and speculate and obviously offer an opinion, and the opinion is really back to where we were earlier in the call, which is that in this environment, and it may be fueled by liquidity issues and cash flow concerns, we find companies are very focused on their overall supply chain and really it’s not an environment where we’re seeing a lot of auction activities where in order to hold onto business we have to cut price.

People are really focused on capital and we just have not seen the degree of pressure that one might think considering the reduction of revenues.

Roy Vallee

So, Shawn, I’ll make one summary comment there, in the Western regions the distribution industry has become fairly highly consolidated. So, you know the old saying that you could only be as good as your worst competitor; we have limited numbers of competitors in the Western regions. So typically in today’s timeframe, when you think about price competition you think more about Asia where the market is more fragmented. It is consolidating but it's more fragmented than the west.

The interesting thing is that the credit squeeze has many of the Asian distributers a bit defensive about what revenues they’re taking on, and as a result of that they’re not being particularly price aggressive. So I think all of that is sort of combining to help us hold our ASPs and margins.

Harley Feldberg

Roy, if I could, I just want to be very clear relative to my remarks. It is a very competitive market environment, let us not mislead anyone, it is a very competitive market environment, but it does puzzle us when we think about that compared to the propriety of the drop-offs.

Roy Vallee

[Shawn], there’s other factors too, like the amount of demand creation we’re doing as a percent of our total and the margin is therefore being enhanced by the vendors who are compensating us for that work beyond the traditional distribution role. So there's a variety of factors.

Shawn Harrison – Longbow Research

Then maybe switching gears to the savings from some of the initiatives you've implemented over the past two quarters. If my math is correct, maybe there was something like $15 to $20 million in annualized savings in the December quarter, implying that there would be something like $35 to maybe $40 million plus of annualized savings in the March quarter. I was hoping just maybe for some comment here and A, whether those numbers are correct and B, the linear area of those savings, are they going to be back end loaded in the March quarter.

Ray Sadowski

So let’s kind of summarize where we are overall from my expense perspective and blending all the announcements that we’ve put in together, which is roughly $145 million. As we mentioned in our prepared remarks we have removed, since we started back in the let's say April timeframe, $60 million on an annualized basis or $15 million per quarter. Okay?

Right now, I would say based upon the actions and where we are today, we would remove or be impacting in our March statement probably another $10 million per quarter, so that’s $25 million per year and that will get us up to $100 million out of the $145 million by the time we get through the March quarter, assuming everything holds to plan the way we are right now. The balance of the benefit will come out in the next Q4 and the Q1 of the beginning of our fiscal year.

Shawn Harrison – Longbow Research

And just the timing of this, it looks like that $10 million this quarter, is it going to be a little bit more voted to the back end and should we kind of expect that?

Ray Sadowski

That $10 million is what we expect to impact the quarter, so it’s actually taking place. Some have already been done towards the end of the December quarter; additional ones are taking place in the quarter so the impact to our expenses during the quarter will be in incremental $10 million.

Shawn Harrison – Longbow Research

Okay and then tailoring that maybe into a mix question just because…

Ray Sadowski

Let me just mention one thing before I forget, so just for the sake of when you do modeling and everything else, recognize the fact that we have the two acquisitions we’ve mentioned earlier so their expenses, those incremental sales dollars, GP dollars, and expense dollars, will offset that to some extent.

Shawn Harrison – Longbow Research

I guess the follow-up I just had is, looking at where the numbers shook out in terms of an all-in basis this quarter, it appears mix is the biggest factor quarter to quarter in terms of maybe driving I think people’s numbers lower than where the consensus would be. Is that a fair statement, or is there something else I’m missing say beyond the acquisitions?

Ray Sadowski

Are you talking about Q3, Shawn?

Shawn Harrison – Longbow Research

I’m talking about the March quarter, correct.

Ray Sadowski

No, I think the overriding factor is that we are feeling uncertain about revenue and we feel that we needed to take the revenue guidance down. The overall revenue, I think is perhaps flattered, if you can use that word, by the M&A that’s coming in so that’s perhaps making it look a little better than it is. But we are clearly below seasonal revenue guidance in our groups and that’s what’s putting pressure on the margins. Now we’re taking the cost actions, to get the margins back up, but that’s what our current view of the March quarter looks like.

Operator

(Operator Instructions) Your next question comes from Matt Sheerin – Thomas Weisel Partners.

Matt Sheerin – Thomas Weisel Partners

Most of the questions have been asked, but just to touch on the guidance if I can just one more time, Roy, has your visibility gotten any better particularly in the component business in the last two months?

Roy Vallee

Matt, I think you know I love that word, visibility, I don’t know how to define it, even when we have backlog it’s fungible in that the customers can manipulate it, and they do frequently. No, I would say if anything its gotten worse. Our book-to-bill went negative in the December quarter on a worldwide basis. It was most negative in Asia, still greater than 0.9 in America but below 0.8 in Asia for the quarter as we cleaned out some backlog that was no longer valid.

So we go into this quarter, I would describe it as more naked, needing more turns business as a result of the de-booking that was going on pretty rapidly across the supply chain. So if anything I would say visibility is even more limited right now than it we thought it was 90 days ago.

Matt Sheerin – Thomas Weisel Partners

And then why do you think America is weaker right now than the rest of your regions in components, and then as a follow-on to that, would you say that the larger EMS customers are the weakest area right now, and if that’s the case, wouldn’t that help your gross margin in that business?

Harley Feldberg

Surprisingly, what we categorize as global EMS revenues in that sector did not deteriorate in the December quarter at any rate higher than our overall business; pretty consistent with the total business. We would have expected otherwise, and it did not, so we really didn’t see a margin benefit from that.

Relative to why the Americas region was weaker than we would have expected, and probably weaker than the other two regions, I’m not sure I know the answer to that, honestly, other than it’s a macro environmental issue, which really falls a bit out of my expertise. I can’t give you a market segment. It’s still a very diverse market, as I said the CMs held up, so honestly I don’t think it's more – I don't think you’ll find specific answers in our industry, is my opinion.

Roy Vallee

Matt, it’s Roy; one anecdote I can give you is that different from prior years in America we had more customers close their factories for the extended holiday period. I think that’s just the manifestation of the point Harley’s making about the macro environment. So my guess is we’re going to see some fairly negative GDP data relative to the U.S. for the December quarter.

Harley Feldberg

As an additional data point, Matt, in preparation for that question, I looked at the global transfer business that we track, which in essence is business that’s migrating primarily from the West to Asia and it did drop off a bit in the quarter, but again nothing real dramatic, pretty consistent with the overall business. What I was looking for was did we see another wave of global migration in either direction? Did it drop off abruptly or did it increase? And it really didn’t, which has lead me to my conclusion that it’s a regional macro issue.

Matt Sheerin – Thomas Weisel Partners

That’s helpful, and then just a follow-up for you, Harley, on the earlier question concerning ASPs in components in semiconductors. In most cycles when there’s a lot of inventory at the supplier base and demand is weak, when volumes start to come back we start to see ASP erosion if not severe erosion. We haven’t really seen much ASP erosion at all in the last couple of years so wouldn’t you expect as volumes come back that we’re going to see pricing pressure at the supplier level on semiconductors and won’t that impact your revenue pass through?

Harley Feldberg

I think the answer, we’re prognosticating now, is probably yes. If you asked do I think it's going to [inaudible], the answer would be no. Our ASP data that we track actually showed an increase in December, although in all fairness it is heavily mix driven. So no, we just don't have any indicators yet, Matt, that we're heading for that kind of environment.

Roy Vallee

I think we've got to keep one thing in mind and that is more of the industry's wafers, and again let's exclude memory from this for a minute, because I think memory is a different category and is behaving differently from an ASP perspective. But outside of memory what the vendors are now doing is reducing wafer orders from the foundries as opposed to a couple of cycles ago where they were trying to figure out how to fill their own factories. And without that motive to fill their own factories they're less inclined to drive average selling prices lower.

Harley Feldberg

I think Roy, playing off of that, if I think back over the last four quarters or so, the only segment of our product mix that has really followed the traditional pattern is memory and you can see the health of that particular industry. Our biggest product category as you're probably aware is high performance analog or analog in general and you don’t tend to see that type behavior from those suppliers. On the digital side of what we sell, high design end content, we're not seeing it. Not yet, not seeing it in significance yet.

Roy Vallee

So Matt, just real quickly, what I think is to the extent that depending on how low demand goes and how much inventory is accumulated, to the extent that there's excess inventory to be liquidated you could see some price pressure there, but I think that's very different from the price pressure associated with trying to fill factories. And as a result to Harley's point, there's probably going to be some but it's probably going to be mild as opposed to severe.

Harley Feldberg

Yes, Roy, I don't want to keep beating this – it's like you and I are having the conversation now, but I would not discount the theory you brought up earlier for a different question around the impact of our Asian competitors vis-à-vis the credit issues.

Roy Vallee

Yes, that could be helping it as well.

Harley Feldberg

I would not discount what that's doing.

Matt Sheerin – Thomas Weisel Partners

And this is my last question, Roy, switching to Technology Solutions and the management change announced this week. It looks like part of it was for operational reasons, but can you just talk about any potential changes of strategy in general from Tech Solutions, how different that might look?

Richard P. Hamada

I would tell you at this point the fundamental strategies, when you think of what's going on at TS regarding focus on solutions distribution, the continued growth of the global footprint and then some of the internal operational issues we're doing with our operational excellence and internal information systems. These are all solid, on track and as far as I'm concerned very consistent going forward. Finer points of strategy regarding the components part of the business, should we focus more on M&A or perhaps focus on the core to get some things working in some of the troubled areas? Those will be the finer points of detail that we'll work through, but the fundamental strategies you've heard from us consistently now I think for the last couple of years, are very, very solid and still intact.

Roy Vallee

So Matt, the change was made not for ideological reasons but for performance reasons. So I think you're going to see the strategies, as Rick said, largely stay intact although we certainly did feel the right to come in and do his assessment and determine where he wants to go from there.

Ladies and gentlemen, we know we're running late. I think we're going to try to squeeze in two more questions.

Operator

Your next question comes from Brendan Furlong – Miller Tabak.

Brendan Furlong – Miller Tabak

Quick question, one on EM, one on TS, on EM, do you look at your, particularly analog with semi guys in general down, call it anywhere in the region of 25 to 30% sequentially and your – on a reported basis down 16% sequentially. So that delta, any thought process on as the calendar year progresses how that delta continues to go for the next three, four quarters?

Harley Feldberg

From our perspective the variance is primarily driven by two issues. One we've already talked about and that is what we internally call the bullwhip effect whereby there are hidden [inaudible] in demand as well as distributors behind less inventory. The other piece that's a significant variance at least for the December quarter is regional mix in that the vast majority of our suppliers get over 50% of their revenue from Asia whereas our mix is fairly evenly split between our three major regions.

So we're less impacted by an Asia slowdown, which was clearly the largest contributor to our results in the December quarter. How will that play out over the calendar year? I think the real answer is how do we think Asia will react in calendar '09 and it's very difficult to make a call today, especially today sitting here a day or so before the onset of Chinese New Year.

So I think until we see the impact of Chinese New Year on the Asia business overall and not just our own but the market, it'll be difficult to make a call past current state.

Brendan Furlong – Miller Tabak

Actually that's a good explanation. On the TS side just if you can talk to the dynamics on, obviously servers continue to be weak across the board so there aren't within your TS business between servers and pretty much everything else like networking and storage and software?

Richard P. Hamada

If I use the overall down 12% reported growth rate as sort of the benchmark, what was – what grew faster or what didn't decline as fast and what was above the bar, overall servers were down at the global level high teens. However, industry standard servers within that segment were still very close to growth plus or minus a couple of points of growth year-on-year within that category. Networking was strong for us, up about 39%. Storage was down very low single digits so again, compared to the tide it was still doing relatively well and overall hardware was down 13%. Services were up about 20% so there certainly were winners and losers throughout the portfolio, but for the major categories, servers, storage, networking, etc., that's what the report card shakes out.

Brendan Furlong – Miller Tabak

And do you, sorry, do you think that kind of dynamic continues for the rest of, you know, for the next two, three quarters?

Richard P. Hamada

I'm not sure which particular dynamic you're picking on but the relative strength in areas like industry standard servers and storage, absolutely.

Operator

Your last question comes from Carter Shoop – Deutsche Bank.

Carter Shoop – Deutsche Bank

Two quick ones. Within EM, where do you see the most opportunity to reduce inventory levels by geography and component types?

Richard P. Hamada

Where do we see the most opportunity to reduce inventories…

Carter Shoop – Deutsche Bank

By region and also by component type?

Roy Vallee

The way we manage inventory globally is exactly the same and that is all the regions have a current objective that is consistent with the realities of that region. So as you would guess, Asia's going to be higher; America would be second and Europe is third because of their broad industrial base. So we will stick to those ratios and we'll take action on all three to adjust accordingly to get back to our goals. As we said earlier, we obviously are not satisfied with where we ended December, although we think we made good progress overall.

I can tell you I don't have an inventory issue in any region more significant than anther so I don't really have a regional-differentiated answer to your question.

Relative to component types again, we don't really differentiate. We don't speculate a hell of a lot on inventory types so we are really following our algorithms for all commodities. So I don't think there's a lot of variance in any of those.

Carter Shoop – Deutsche Bank

And as a follow-up question, how much incremental revenue do you expect your two recent EM acquisitions to contribute in the March quarter on a sequential basis?

Roy Vallee

Roughly we'd say about $100 million.

Vincent Keenan

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 our those items that are excluded from our non-GAAP results. The entire slide presentation, including the GAAP financial reconciliations, can be accessed in downloadable PDF format at our website under the quarterly results section.

Roy Vallee

Thanks everybody.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation.

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Source: Avnet Inc. F2Q09 (Qtr End 12/31/08) Earnings Call Transcript
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