Ingram Micro, Inc. Q1 2009 Earnings Call Transcript

Ingram Micro, Inc. (IM)

Q1 2009 Earnings Call

April 30, 2009 5:00 pm ET

Executives

Ria Carlson – Chief Strategy and Communications Officer

Gregory Spierkel – Chief Executive Officer

Alain Monie – Chief Operating Officer

William D. Humes – Chief Financial Officer

Analysts

William Fearnley - FTN Equity Capital Markets

Richard Gardner - Citigroup

Matthew Sheerin - Thomas Weisel Partners

Brian Alexander - Raymond James

Presentation

Operator

Welcome to the Ingram Micro first quarter earnings report conference call. (Operator Instructions) Today’s conference is being recorded. If you have any objections you may disconnect at this time.

Now I will turn the meeting over to Miss Ria Carlson, Chief Strategy and Communications Officer. Thank you ma’am. You may begin.

Ria Carlson

Thank you [Melanie] and good afternoon. Joining me today are Greg Spierkel, our Chief Executive Officer, Alain Monie, our Chief Operating Officer and Bill Humes, our Chief Financial Officer. Greg will lead off with an overview of the first quarter followed by Bill with the financial review. Then we’ll turn it back to Greg to provide business highlights and his thoughts about the future. Alain will answer questions and provide more color about the operation.

The financial portion of this call is accompanied by presentation slides which can be found with today’s news release at the Investor Relations section of the Ingram Micro website at ingrammicro.com or by calling 714-382-2015.

Before we get started I have a Safe Harbor announcement. During today’s discussion we will make statements that are forward-looking. These forward-looking statements and all other statements made on this call that are not historical facts are subject to a number of risks and uncertainties. Please refer to today’s news release and documents filed with the Securities and Exchange Commission, specifically the risk factors listed in Item 1-A of the Form 10-K for the fiscal year ended January 3, 2009 for more information on the risks that could cause actual results to differ materially.

In addition, this conference call is the property of Ingram Micro and may not be recorded or rebroadcast without specific written permission from the company. The presentation slides and a replay of the call will be available for one week on the company’s website at ingrammicro.com or by calling 800-678-3180.

Now I’d like to turn the call over to Greg Spierkel, our Chief Executive Officer. Greg?

Gregory Spierkel

Thanks Ria and good afternoon to everyone. As we mentioned in our last call to you, 2009 started off on a subdued note. Economic downturns spread to all of our regions. January and February were weak for many companies including ours. Technology users were admittedly cautious, waiting for greater economic confidence before ramping up their spending levels. The sentiment seemed to improve in March but not enough to signal a recovery. March is historically the strongest month of the quarter as customers and vendors drive to quarter end targets.

Sales for the first quarter were consistent with our expectations, declining 21% compared to the prior year of which 8 percentage points was due to the translation impact of weaker foreign currencies. While we look forward to returning to a time of growth, we believe the economy is still soft and will remain soft until the housing market improves, employment rebounds and economic stimulus actions take hold.

In the interim, the team is addressing the current environment well. Working capital management was excellent with the cash conversion cycle improving by four days versus a year ago. We aligned inventory quickly to the needs of the current marketplace and worked closely with our customers to improve receivables. This helped us drive our cash balance to record levels, exceeding $1 billion. We believe our financial position provides an enviable competitive advantage in this credit environment, affording us the flexibility to pursue a broad selection of opportunities and provide stability for our customers and vendors.

We also continue to maintain a strong and steady gross margin, a noteworthy achievement in this demand environment. At 565 basis points, a quarter’s gross margin is an outcome of good pricing discipline and a favorable mix of higher margin products, accounts and services. As we’ve indicated in past quarters the priority during the downturn continues to be aligning operating expenses with the pace of the sales decline.

We’ve taken a variety of actions over the last year from old-fashioned belt tightening to business exits and we’ve made good progress. Last year’s expense reduction program is fully executed and hitting its target of $20 million in annualized savings. The next phase of this program which was announced in February generated some savings in the first quarter and is expected to have greater impact in the second quarter. We expect the more recent actions will provide additional annualized savings of $100 to $120 million, reaching a nearly full run rate by the end of the year.

The challenges of aligning our expenses coupled with softer sales had a negative impact on our profits for the quarter. Every region experienced year-over-year declines in operating income. However, all regions were profitable with Asia-Pacific and Latin America each generating 100 basis points or more of operating margin. While EMEAs operating margin was down year-over-year on a GAAP basis, the region made good progress in bolstering its profitability. North America has more room for improvement and is actively pursuing measures to enhance its performance. I’ll give you more color on each of the regions later in the call.

As I look back on the quarter, I’m generally pleased. We’re doing a good job of managing those things within our control. Maintaining our financial strength in one of the worst economies in our industry’s history has confirmed our status as a stable, preferred business partner. We are positioned well for the eventual uptick in demand.

With that, I’ll pass the call to Bill for more detail on our financial performance. Bill?

William D. Humes

Thanks Greg. I’ll start on Slide 3 where we show first quarter sales were $6.75 billion. As Greg mentioned this was a 21% decline versus last year, in line with what we were expecting when we spoke with you in February. Aside from the 8 percentage point negative impact of weaker foreign currencies, the sales decline was primarily attributable to the macroeconomic softness that we are experiencing throughout the world.

In North America, sales were 41% of the total revenues or $2.77 billion, a 16% decrease from the prior year. The sales decline is a reflection of the impact of the contracting economy as many end users delayed or canceled new projects. EMEA sales were $2.27 billion or 34% of total revenues. Sales decreased 26% compared to the prior year with 14 percentage points due to the negative translation impact of weaker currencies. Last year’s exit of unprofitable accounts has generally stabilized and we believe our regional sales in constant currencies are tracking reasonably consistent with the overall market.

Asia-Pacific sales were 20% of the total revenues or $1.38 billion, a year-over-year decrease of 24% with currency translation having a 12 percentage point negative impact. The region continues to be selective about sales opportunities, helping to keep profitability at the highest level possible in this environment. Latin America, no longer insulated from the economic downturn, generated 5% of total revenues or $321 million, down 21% versus the prior year. The decline was relatively modest in local currencies as the translation impact had an approximate 18 percentage point negative effect on comparisons to the prior year. The region’s performance attests to skill in managing a challenging environment.

As depicted on Slide 4, gross profit was $381 million or 5.65% of sales. We were able to maintain a solid gross margin in this environment through disciplined pricing and a better mix of business. We brought our operating expenses down by slightly more than $50 million to $336 million or 4.98% of sales as shown on Slide 5. This included $14 million or 21 basis points of sales for costs related to expense reduction programs in all regions, of which North America and EMEA accounted for the greatest majority.

In the year ago period operating expenses were $386 million or 4.5% of sales. The year-over-year decline in expenses is mainly attributable to the translation effect of weaker foreign currencies, the net benefit of expense reduction programs and lower stock-based incentive compensation. The increase in expenses as a percentage to revenue is primarily attributable to the lag in aligning expenses with decline in sales.

On Slide 6 you’ll see that operating income was $45.2 million or 67 basis points of sales which included costs of $14 million or 21 basis points of sales related to expense reduction programs. In the prior year, operating income was $99.3 million or 116 basis points of sales. The decline in operating margin is primarily due to the impact of softer sales in this economic environment which includes the challenges of expense alignment.

In North America operating income was $12.8 million or 46 basis points of sales which includes expense reduction program cost of approximately $6 million or 22 basis points of sales. In the prior year quarter operating income was $40.6 million or 123 basis points. While many of the cost reduction actions announced during the first quarter of 2009 are centered in North America, substantive benefits from these actions won’t be realized until later quarters.

EMEAs operating income was $15.1 million or 67 basis points of sales which includes expense reduction program costs of $6 million or 27 basis points. In the prior year period, operating income was $26.8 million or 87 basis points. We’ve made good progress on aligning expenses with the reduced sales levels as the impact of the prior year expense reductions actions have taken hold.

Asia-Pacific’s operating income was $13.8 million or 100 basis points which includes $1.7 million or 13 basis points in expense reduction program costs. In the prior year quarter operating income was $32.5 million or 179 basis points of sales.

Latin American operating income was $5.1 million or 157 basis points which includes approximately $200 thousand or 6 basis points in expense reduction program costs. In the prior year period operating income was $7.8 million or 192 basis points of sales. Other expenses for the quarter were $7.6 million compared to $12.7 million in the prior year period. The decrease was primarily driven by lower debt levels and lower average interest rates in the current year.

The effective tax rate for the quarter was 27% compared to an effective tax rate of 26% in the year ago quarter. Net income was $27.5 million or $0.17 per share. The after tax impact of our expense reduction program costs was approximately $0.06 per share. In the prior year period net income was $64.1 million or $0.37 per share.

Please turn now to Slide 7 for a discussion of the balance sheet which continues to shine in this environment. Cash reached a record high at slightly more than $1 billion, reflecting the teams’ diligent working capital management as well as the natural cash flow from operations in our business when sales decline. The counter cyclical nature of our business model provides a financial shield during weaker economic times. Debt levels also declined $134 million from the end of 2008 to $345 million.

If you turn to Slide 8 you’ll find the related working capital metrics at quarter end. Days of sales were 37, a 2 day improvement versus a year ago. Days of inventory were 28, a 4 day improvement versus the prior year and days of payables were 43 versus 45 a year ago. This brought working capital days to 22, a 4 day improvement compared to the prior year and at the lower end of our targeted range.

Our debt to capitalization ratio was 11% versus 15% at the end of 2008. That concludes my financial overview.

I’ll turn it back to Greg for discussion of regional highlights and closing comments. Greg?

Gregory Spierkel

Thanks Bill. I’ll start my regional review with EMEA which has made significant progress in the last year. The economic downturn that has been most difficult in this region and its focus over the last several quarters has been in reshaping the business for the new demand environment. These efforts are beginning to bear fruit. Sales in local currencies are tracking generally in line with most of our marketplace peers and the region is making strong advances towards improving profitability.

While sales in every country declined versus the prior year, the two cornerstone countries of Germany and the UK were stronger than most with France and Spain among the weakest. The region is using its financial strength to attract SMB customers which represents a third of the IT distribution market in Europe. Many resellers in the SMB space have found access to credit restricted due to the uncertainty of the financial markets. We have carefully maintained and in some cases increased credit lines for many of our customers meeting our screening criteria. This has helped us drive sales within an important customer segment, securing long term relationships and demonstrating the benefits of the financially stable business partner.

The region continues to adjust to the realities of the marketplace. In March we announced the restructuring of our Nordic operation which calls for the selling of our Danish distribution business to [Octavus] and closing of our Norway and Finland classic distribution businesses. Once these actions are completed by the beginning of the third quarter, the team will be able to focus on our Swedish distribution operations which have been profitable and on growing our data capture point of sale business in all four Nordic countries.

Our DC POS business is the second largest of its kind in Europe with promising opportunities for growth. My compliments to the EMEA team for making the difficult yet necessary decisions to strengthen the operation and become more competitive in the months ahead. I’m confident we will continue to see improvements in this region.

In Asia-Pacific the years of robust growth seem to be on hold where the region is making intelligent decisions to adjust to the current market dynamics. Australia, which has been operating in a slowing economy for some time now, recently announced changes to reduce costs while enhancing customer service and drive growth in higher margin segments. These actions include a consolidation of offices, relocating some back office activities to a center of excellence in Malaysia and new organizational structures for commercial and consumer operations.

Australia has also been driving new business to adjacencies. Yesterday we signed a definitive agreement to acquire Vantex, the largest distributor of data capture and point of sale products. Australia’s neighbor New Zealand also took actions to enhance its capabilities. Earlier this month we announced the acquisition of value added distributors which specializes in the high end server storage market including IBM products. The combination provides us with greater expertise in enterprise segments that require a more sophisticated consultative approach.

Within the Asian markets every country experienced year-over-year declines in the quarter. China’s sales seem to be assisted by the government’s stimulus package while India’s sales were dampened by slowing commercial demand. Throughout Asia-Pacific the team has done a good job of preparing for the economic downturn and pursuing initiatives that will improve its business. While the region’s near term priorities remain on cost control and business mix refinement, we believe that Asia holds multiple opportunities for stronger and renewed long term profitable growth.

Much like its colleague in Asia-Pacific, Latin America had the benefit of preparing for the economic downturn before it hit home. It began to streamline its infrastructure last year even though sales were growing. The weaker demand environment arrived earlier this year along with weaker currencies relative to the U.S. dollar, but the region was able to deliver a respectable operating margin surpassing 150 basis points on a 21% sales decline. Currency translation had a significant impact on the region’s year-over-year sales comparisons, with an 18 percentage point negative effect as Bill mentioned. At the country level, Mexico, Chile and Argentina grew in local currency while Brazil and the Miami export division declined.

While the emerging markets of this region tend to be more volatile than more mature geographies, our management team brings a consistent level of expertise and focus to dealing with its inherent challenges. We’re confident that this region will continue to address the environment successfully.

I’ll end the regional review with North America which was hardest hit this quarter and therefore has many opportunities for a near term improvement. The slow demand environment dampened sales in all of our regions business units and expenses could not be reduced quickly enough. The consumer electronics units continued to be impacted by the weak housing market and poor appetite for high end entertainment systems. Our data capture division also experienced a sales decline, but it was primarily due to a tough comparison with the year ago quarter which included a large government transaction.

Our classic distribution business also experienced double digit declines, although Canada performed relatively well in local currencies. The best performing unit was Seifert Service Logistics with sales generally flat with a year ago. The first quarter is usually the second strongest for this business as we collect fees for holiday returns and products related to the tax season. While the sale cycle is longer, we’re doing a good job of seeking out new prospects and expanding our current accounts here.

Throughout the quarter the region has been taking action to turn the business around. In February we announced a comprehensive expense reduction program that included labor reductions and productivity improvements. We realized a small portion of the benefits from this program in the first quarter and we should see additional benefits in the second quarter, growing to a full run rate by the end of the year.

The region also continues to pursue growth initiatives in services, enterprise and marketing. We have several greenfield initiatives in these areas that are relatively small but with significant potential. We continue to strengthen our ties with the reseller community, recently wrapping up a successful meeting of a venture tech network comprised of our most prominent VARS and in a few days we will hold a similar meeting for partners of our seismic managed services division. We will continue to invest in these areas as a way to drive greater margin and growth.

Another source of activity in the region is the new Dell partnership that we announced in March. After years of being exclusively direct, Dell will sell its Vostro products through Ingram Micro. This is a ringing endorsement of our capabilities within the fragmented SMB market. Over the years, we have proven our ability to expand the market reach of multiple partners and we look forward to being an effective partner for Dell without sacrificing our relationships with other vendors. I look forward to seeing these initiatives bring significant contributions to the region’s profitability and long term success.

In closing, the environment may be far from ideal but we’re not sitting on the sidelines waiting for better times. We’re improving these areas within our control and preparing to emerge from the downturn stronger than ever. Looking ahead, we do not expect a pick up of sales for several more months, perhaps for the remainder of the year. While the relative strength of March compared to the earlier two months give a sense of some optimism, we’re not prepared to declare a substantial upswing.

The good news is that we don’t feel the market is getting worse at this stage. We see second quarter sales following somewhat of a historical seasonal pattern. Year-over-year sales comparisons are expected to be negatively effected by the translation impact of relatively weaker foreign currencies, which have declined further in the last few weeks, as well as the timing of the Easter holidays which occurred in the first quarter of 2008 and in the second quarter of this year. We also anticipate additional benefits from our expense reduction programs.

As I discussed earlier on the call we should begin to gain traction with the program we announced in February which is expected to reach its full run rate of $100 to $120 million in annualized savings by year end. We realized approximately a quarter of those benefits in the first quarter and we expect savings to increase [gradibly] each quarter for the remainder of the year. With respect to the $45 to $65 million of costs related to this program, approximately a quarter was spent in the first quarter and the most of the remainder is expected to be incurred by the end of the third quarter.

I’m confident that the actions we’re taking today will make us stronger and more profitable when demand returns. We have a history of resiliency, emerging from difficult periods stronger and more success than ever after. I expect this cycle to be no different.

I’ll now open the line for your questions. Thank you.

Ria Carlson

Melanie we’re ready for questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from William Fearnley - FTN Equity Capital Markets.

William Fearnley - FTN Equity Capital Markets

A couple of questions, guys, on the gross margin side. You were talking about mix and you were talking about pricing discipline. Given the demand environment and the competitive environment, do you think that the gross margin pattern that you’ve developed here for the beginning of the first quarter is sustainable here in the near term? And then I have a follow up.

William D. Humes

Hi Bill. This is Bill. I’ll answer that question. Yes, I mean overall we’re pretty pleased with our gross margin management. It’s a combination of us really looking at discipline type pricing, looking at individual deals as well as overall business portfolio. You know, also a combination of the other actions we took mainly during 2008 with you know implementing the freight recovery initiatives as well as walking away from business that was not hitting our hurdle rates. So overall our gross margin has been pretty solid over the last several quarters, and we continue to be a goal of shooting for 5.4% or above and we’ve been hitting a mark above and beyond that for several quarters. But in this environment you know there can be some movements up and down in gross margin overall. So we continue to be comfortable with that 5.4 above and level.

William Fearnley - FTN Equity Capital Markets

And just a follow up on the gross margins if I could, or on the margin side. Any major changes in vendor programs here? You’ve got a new fiscal year, you’ve got for some players a competitive demand environment, were there any gives or takes or pluses or minuses here in the gross margin side from some of the vendor programs to the market development with the sales team inside?

Gregory Spierkel

Bill, its Greg here. No major shifts within the vendor portfolio to speak of that was either positive or negative. If there’s anything that we’ve been trying to do consistently is we are making decisions on the fly, if you may, based on the strength of certain customers and certain vendors who have got slightly better margin characteristics for us. And that’s been a part of the story behind the solid gross margin that we’ve had over the last two years, relatively to prior periods. But to the specific, are there any nuances or changes from major vendors at this stage, apart from HP making some changes in Europe, but HP is usually changing programs as a big partner on an annual basis, sometimes semi-annual basis in different regions. So they’re about to embark on some changes in Q2, but at this stage no impact that we can see.

William Fearnley - FTN Equity Capital Markets

In terms of Dell, I know it’s early, but any preliminary observations here from maybe your staff or the VARS regarding the fact that you now carry an expanded Dell assortment?

Gregory Spierkel

Yes, for us Dell’s agreement to work with us I think is a fantastic and a ringing endorsement of our capabilities that we bring to the SMB market. So we’re very pleased with the signing of Dell a few weeks ago. And the agreement clearly is going to be revenue enhancing for us in our mind, because we expect to do very well with all the other existing vendors that are in a similar portfolio. So for us this is upside. From a reseller perspective, the reseller perspective is generally hey there’s a certain portion of our reseller base, that was a small portion, probably 10 to 20% that were selling some degree of Dell product. They’re viewing this as a positive from an Ingram point of view that they have one stop shopping opportunity from us. And as we develop more programs and initiatives I think this will be another good vendor in the portfolio. At the end of the day we really – you know, we’ve proven over the years that we’d like to expand the reach of multiple vendors and all the vendors that we work with, so this is a key additional win in the portfolio for us and it’s all been at this stage fairly positive.

Operator

Your next question comes from Richard Gardner – Citigroup.

Richard Gardner – Citigroup

First of all, Bill, I was wondering if you could give us an update on AR aging.

William D. Humes

Sure. I mean, overall you know AR is in credit and credit management is a core competency of ours and we’ve talked about that in previous quarters. Our AR aging continues to be good. You can see that with our relative DSO at 37 days which is right in line with our normal historical level of days. So you know overall no major issues. It’s an area we continue to monitor very closely and we continue to exercise prudence across the board.

Richard Gardner – Citigroup

Greg, I guess this one’s for you probably, but I just wanted to follow up on your comments regarding the modest pickup that you saw in March. Could you talk about whether that was just a North American phenomenon or whether it was a global phenomenon? And also maybe give us some sort of characterization geographically in terms of which countries are getting worse, which ones are stable, which ones are getting better at this point for you. Those that have discernible trends. Thanks.

Gregory Spierkel

All right Rich. What we saw in March is interesting in the sense that it was actually fairly consistent with patterns in prior years. Maybe all of us were a bit surprised in the marketplace that January had as big a step down as it did from where we finished 2008, but once that step down established itself through January the patterns of the linearity through the balance of the weeks of the quarter was pretty consistent with what we’ve seen in prior years. So a relatively quite January because it was a real pull through in December with year end with so many companies. February showing a little bit more life, and March because again reaching the quarter end for companies, year end for many customers and customers we sell to, that there was solid growth if you may on a weekly basis through the month of March. But again fairly consistent with prior year patterns. It was just the big step down that we saw in the beginning of January that was I think what caught everybody in the marketplace by surprise in the IT industry.

As far as countries are concerned, we’re seeing as you can tell from the results there’s a consistent pattern here still, some of the economies where there’s still a little bit more growth like Brazil that we’ve talked about or Mexico, although that could change now with some other conditions there potentially with the flu, but you know places like China and a couple of smaller countries like New Zealand we’ve actually had local currency growth. But of course with the challenges of the foreign exchange rates, it’s hard to see through that and we don’t split those out in any kind of detail. Those patterns where we’ve seen some decent activity where the sales are not down as much are holding true. We haven’t seen any big significant shifts in that at least from Q1 to the beginning of Q2 at this stage.

Richard Gardner – Citigroup

How do you feel about Europe going into what is typically a seasonally weak part of the year? Does it look like it’s following normal seasonal patterns as well, Greg? Or are we looking at something a little bit worse than that potentially? And then I’ll cede the floor.

Alain Monie

This is Alain. Europe we see the European numbers and local currencies you’ve seen around 12% decline which is [re-establishization] so the comments we made around the normal seasonality also applies to Europe as we see it now. We see that [establishization] there and again difficult to call for the long term, but we’re looking at it as yes a more stable environment in Q2 versus what we’ve seen as far as the dynamic quarter over quarter in the past.

Operator

Your next question comes from Matthew Sheerin - Thomas Weisel Partners.

Matthew Sheerin - Thomas Weisel Partners

Just a question on the cost cutting program. Could you tell us what the headcount reduction when all is said and done is going to be? What percentage of the headcount that is. And how many of those jobs are customer facing jobs if you will that could distract or disrupt sales or potentially cause you to lose market share? Is there any concern there?

Gregory Spierkel

Well, first of all, no major concern on that latter part of the question. Matt here it’s Greg. Year-over-year from Q1 to Q2 we’re essentially down 8% in headcount at this stage, Matt. So around 1,100 – 1,200 people on a global basis. We expect a few other percentage points to come up with the balance of the actions this year, but it’s not only the direct actions of the reductions that have been in play here. We’ve been very actively holding down hiring and through natural attrition we’ve actually achieved more of the headcount movement to the – natural attrition activity than we’ve had with directed headcount action. So we’ve not been replacing or we’re replacing it one-tenth at the pace of the attrition, so that we’re putting back people in the targeted locations where we feel it’s still important.

We’ve been very careful to make sure that most of the actions are not touching on the sales front. There may be a few instances where we have pulled down there, but not as much as we are within backroom operations or the warehousing side of the business. So from a sales point of view and a program perspective and initiatives that work pretty closely with driving the top line of the business, both for the vendors and the customers, those things are obviously being protected a lot more so.

Matthew Sheerin - Thomas Weisel Partners

And just back to the gross margin commentary and the first question. Wouldn’t you typically be down a little bit in gross margin because of the logistics business has some seasonality left in Q1? So would it be safe to say that even if you continued to sustain your gross margins in your core business that it would be down a little bit?

William D. Humes

Yes, Matt, that’s a good point. Ingram Micro logistics which is mostly the North America business has its strongest quarters in Q4 and then second is by Q1. So as we go into Q3 and Q2, those aren’t impacted quite as much. But also understand that it’s been doing fairly well relative to some of the other business, so the mix of it is still pretty strong. But it’s a good point in the sense of a normal sequential slight decrease because of the lesser amount of IML business in Q2 and Q3.

Matthew Sheerin - Thomas Weisel Partners

And regarding the operating leverage that you may see with these cost cutting programs taking effect, do you have any time line or care to share any goals of what revenue run rate you might need in North America? For instance to get back over 1% operating margin and perhaps a revenue run rate for the company to hit certain operating margin goals?

Gregory Spierkel

That’s a tough question. I don’t have a good answer for you, Matt. I’d say we feel good about everything we’re doing right now and what we said in our overview comments that where we’ve got ability to control things around costs, margin management, balance sheet management, we’re doing a very good job. You know, top line was down 21%, operating costs down 17% year on year, so we’re chasing this quickly. Maybe not quite on top of it nor do we want to be completely on top of that number in some ways because we’re still investing in a few areas through acquisitions and infrastructure. So we think again all these things are the right things to do for the long term.

We feel though as we’ve been taking these steps and we’ve been following the market down, that our cost situation will put us in a great position for when the market does come back and then we’ll be able to give you probably a better sense of what those numbers look like. But right now we’re still in a pretty opaque operating environment. Our assumption is that things get better next year, but for the balance of this year I don’t think the economies turn notably better. They may not slide any further as we’ve kind of alluded.

And I think again strong balance sheet, best balance sheet that we’ve had in a long time gives us again a fair bit of flexibility to go either make some types of acquisitions happen like we’ve just closed on two in the last few weeks, they’re not large but they’re strategic and we’re still looking at opportunities like that. And if some competitors struggle it presents great opportunity to step into the breach quickly as well, again with the flexibility we have with the balance sheet. So we’re keeping our powder dry for the right kind of conditions as they churn here hopefully in a positive way in the coming quarters.

Operator

Your next question comes from Brian Alexander - Raymond James.

Brian Alexander - Raymond James

Just to talk about the profitability in the Americas region, Greg, 70 basis points I guess surprised me. And I understand some of your higher margin businesses like data capture and consumer were weak, so kind of a three part question. How much of the margin decline in the Americas was due to mix versus declines in margin in your core distribution business? And then secondly how quickly do you think you can get the Americas margins back to acceptable levels which I would define as north of 1.3%? Thanks.

Gregory Spierkel

Alain do you want to take that or do you want me?

Alain Monie

Yes I can start and please add. Brian, this is Alain. You know on the mix question, the core business has been I would say very aligned with the market and we haven’t seen any major degradation there due to any share whatsoever. You know that the pricing environment although still fairly rational is a competitive environment there for the core. Now as far as our units, you know, we talked about IM logistics that is doing well and is better and so that should give us a solid in the future a solid contribution, given that the mix of IML business is higher. Our Canadian operations are doing better also.

On the consumer electronics side you did mention some weakness. However, within that segment we have a couple of segments that are really working fairly well with double digit growth in PC accessories and games accessories. DC POS right it compares in itself versus last year and so that business will need to come back a little stronger for us to see the results there.

But I think the key to the overall operating income here will be as we execute on our cost savings and as we discussed before we’re looking at probably two-thirds of the $120 million savings are going to come this year with a full run rate on that two-thirds towards the end of this year. And that’s where I think we will have a very strong infrastructure if you will in order to leverage our revenue base.

Gregory Spierkel

Yes, Brian, I guess the back end of your question and how long before we get to a healthier operating margin as Alain points out it’s going to be a function of two things. One, we’re taking the cost out of the equation and we think we’re going to improve just with that set of actions and other things we’re trying to do to get our position, you know, the company better here in North America over the next two, three quarters.

And if we start to see any sort of improvement in the overall economy and market conditions in the IT sector I think it will swing back into a healthier picture of some sort next year. Exactly when do we hit that number you’re asking for? I don’t have a timeframe for you right now, but I’d say it’s a few quarters down the road. You know, really dependent somewhat on the market conditions improving here.

Brian Alexander - Raymond James

And then a question on cash, your cash balance has built up significantly due to a great job managing working capital so given that sizable cash balance in your discussion about some acquisitions, are you willing to take on large acquisitions? Or is the strategy going to be more focused on niches and adjacencies?

Gregory Spierkel

Well our track record over the last let’s say two years where we’ve made five or six small acquisitions happen is that they tend to be strategic. They’ve been more point of sale, data capture, definitely enterprise computing and storage virtualization. Those have been the areas where there’s been healthier margin and healthier contribution opportunities for us. We have looked at some bigger pieces but again I think it comes down to at points in time, you know, how willing is the seller and what’s the big overall fit and what’s the price points? So we’re not adverse to looking at everything. The last significant deal is really going back four years ago in Asia, but since then it’s been small.

So it’s a combination of what’s the selling environment like and those conditions that would make that kind of a decision come to the table. And clearly we’re not going to give any guidance specifically on that because at this stage we’re always looking like a lot of other companies are. And with the environment as it is, there may be more opportunity but you have to be careful and we’ve got a good cash position from which to deal from if something interesting does show up.

Brian Alexander - Raymond James

And then finally on the Dell business, any way you can talk about the potential significance of the relationship in terms of expected sales over a one to two year timeframe? Or maybe a better way to think about it, what percentage of their direct to reseller business do you think could transfer to distribution, i.e., Ingram and your largest competitor? It seems like this has the potential to be a $1 billion business when fully ramped. Is that too aggressive or is that in the ballpark?

Gregory Spierkel

Yes, we haven’t given a specific number but it order of magnitude you probably wouldn’t be too far off in a couple of years time or more. It really depends on how well things work and the number of company locations that we could get moving on. Right now we’re working with Dell in the U.S. We will probably start in Canada and we have established a relationship with them in Thailand and we’re doing a little bit of work with them already in Latin America and a few countries, small ones, associated with central Latin America. And in those cases looking at the Latin America business as a good example, Dell actually provided Ingram Micro a number of accounts that it was selling directly to that it felt we could manage and administer better than they could.

So there will be opportunities like this that will present themselves. I think in the low end, you know, of their M market and the S market is really where they’re expecting good things of us and our competitors. And that’s where we’re putting the emphasis right now and as we get comfortable with how we work together and the expectations I think things will accelerate and maybe we’ll get a chance to talk a little bit further.

But we tend to not break out vendors detail as you know in any kind of explicit detail because again we’d rather they make the statements of where things are and we could be influencing their stock and we’re not interested in trying to do that either.

Brian Alexander - Raymond James

Just a last one on that topic. Directionally any reason to believe that the margin profile would be any different than other systems vendors that you have?

Gregory Spierkel

No. None whatsoever. If there’s been one thing that we’ve been pretty careful about is that we would not start something with another relationship if it’s not as good as if not better than what we already have with the vast majority of our relationships in this space. And we’re dealing with close to 8 to 10 relationships on a global level, different vendors in the systems, PC server space.

Operator

And I would now like to turn the call over to Greg Spierkel for closing comments.

Gregory Spierkel

Thank you. I would like to close the call with a few points to remember here. First our balance sheet continues to shine. Our cash position is strong. Net debt is at its lowest in the history of the company and working capital metrics are at the low end of our targeted range. Second, gross margin remains real solid, a true demonstration of our management discipline and the commitment to profitability. Third, we are aggressively pursuing our strategic initiatives, reducing costs and developing new opportunities for profitable growth. You know, these actions are designed to drive powerful growth earnings in the future and we feel good about, you know, the steps that we’re taking in that regard.

Ria Carlson

Thank you Greg and this concludes our call. There is a replay until May 7 at 800-678-3180 or at ingrammicro.com. Thank you very much for joining us today.

Operator

That does conclude today’s call. You may disconnect at this time.

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