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Executives

Ria Carlson – SVP, Strategy and Communications

Greg Spierkel – CEO

Bill Humes – Senior EVP & CFO

Alain Monie – President & COO

Analysts

Craig Hettenbach – Goldman Sachs

Matt Sheerin – Thomas Weisel Partners

Brian Alexander – Raymond James

Rich Kugele – Needham & Company

Joe Liu [ph] – Citigroup

Ingram Micro Inc. (IM) Q4 2009 Earnings Call Transcript February 18, 2010 5:00 PM ET

Operator

Welcome to the Ingram Micro fourth quarter earnings report conference call. At this time, all participants are in a listen-only mode. (Operator instructions) Today’s conference is being recorded. If you have any objections, you many disconnect at this time. Now, I will turn the call over to Ms. Ria Carlson, Chief Strategy and Communications Officer. Thank you. You may begin.

Ria Carlson

Thank you very much. Good afternoon everyone. 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 provide an overview of the fourth quarter followed by Bill with the financial review. We’ll then turn it back to Greg to provide business highlights and his thoughts about the future. Alain will be available for questions at the end of the call and to provide more color about our operations.

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 our website at Ingrammicro.com or by calling 714-382-2015.

In this call, we will reference non-GAAP financial measures. We believe the discussion of these non-GAAP financial measures in conjunction with our reported results under GAAP allow you to make more meaningful comparisons with analysts’ estimates and prior year results. Non-GAAP items discussed during this call will include operating expenses, operating income, net income, and earnings per share. Reconciliations of the non-GAAP financial measures are found in the presentation and reconciliation slides at the Investor Relations section of our website as well as the financial tables in our news release. Non-GAAP financial measures are not a substitute for GAAP and may not be comparable from one company to another.

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 our Form 10-K for the fiscal year ended January 3rd, 2009 for more information on the risks that could cause actual results to differ materially.

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

Greg Spierkel

Thank you, Ria, and good afternoon everyone. We closed the 2009 year with glimmers of a strong market, a far cry from how we started the year. In the fourth quarter we’ve returned to year-over-year revenue growth for the first time in six quarters despite one less sales week in the prior year period. Sequential revenue growth of 19% exceeded seasonal norms, building on the healthy 12% sequential growth we delivered in the third quarter.

We managed gross margins and operating expenses well. Gross margin, excluding the Brazilian tax benefits described in our news release, improved sequentially within the range of historical seasonality, yet declined from last year when the margin hit the highest level in a decade. During last year’s downturn, our priority was focus more on margin protection than revenue growth, while more recently we strategically leveraged our gross margins to drive sales.

Other factors having a negative impact on year-on-year comparisons are softer revenues in our fee-based logistics unit, weaker margins in our Avid consumer electronics unit, and a greater mix of businesses in lower margin markets. Operating expenses, however, improved measurably versus the prior year period despite the increases in revenues as benefits of our cost reduction programs took hold.

Operating income was solid, nearly backed 2008 level indicating that we are turning the corner for the first time since the recession began. Our recent operating improvements, which were completed as we exited the year, are expected to drive continued operating leverage.

The balance sheet remains best-in-class. Working capital days were below our targeted range of 22 to 26 days, leaving us room to fund sales growth and strategic opportunities. Cash surpassed $900 million, well above last year’s level, providing us with continued flexibility in expansion opportunities or other initiatives to improve shareholder value.

Return on invested capital for the quarter was 19.5%, far exceeding our average cost of capital. Even for the full year with its recessionary challenges ROIC remained slightly above 10% with program cost having a 1% negative impact. I am proud of our achievement in this area.

Our regions are making good progress. North American initiatives drove sequential sales increase to better than seasonal levels for the past two quarters. And Asia-Pacific generated year-over-year revenue growth. EMEA delivered impressive improvements with a 42% sequential sales increase and operating margins at pre-recession levels. Latin America, which felt the recessionary impact later than the other regions, still delivered the strongest operating margins in the company. I’ll provide more detail on the regions later in the call.

As we look back on 2009, we see a year of two halves. The first six months were defined by a grim economy that clouded our businesses throughout the world. It forced us to look inward to find improvement opportunities. In the second half we set our sights forward, focusing externally to drive profitability through sales growth. Now, it’s time to reap the benefit of these two chapters, accelerating returns from a leaner, more productive and revitalized infrastructure. I am looking forward to the months ahead when our refined structure, and reenergized attitude, combined with a strengthening economy.

With that, I will pass the call over to Bill for more detail on our financial performance.

Bill Humes

Thanks, Greg. I will start with sales, which reached $8.81 billion in the fourth quarter as indicated on slide three. This represented a 1.5% increase over the prior year period with translation impact of stronger currencies having a positive effect of approximately six percentage points. While growth in U.S. dollars is modest, it occurred with fewer selling days compared to a year ago quarter.

On a sequential basis, sales increased 19% over the eight-year historical average of approximately 15%. This is on the heels of the greater-than-seasonal 12% sequential growth we generated last quarter. Foreign currency translation had a positive impact of approximately two percentage points sequentially.

On a regional basis, North America sales were $3.59 billion or 41% of total sales. The year-over-year decline of 5% was the slimmest of 2009. EMEA sales grew 4% to $3.05 billion or 35% of total sales. Foreign currency translation had a 10 percentage point favorable impact on year-over-year growth.

Asia-Pacific was the growth leader this quarter, generating a 16% sales increase to $1.72 billion or 19% of total sales. Foreign currency translation positively impacted growth by 13 percentage points. Latin America generated 5% of total sales this quarter or $446 million, down 2% versus the prior year. Currency translation had a seven percentage point favorable impact

Gross profit, as show on slide four, was $501.2 million or 5.69% of total sales. This includes $9.8 million, or 11 basis points of sales from the release of reserves related to the Brazilian commercial tax on software imports for which the statute of limitations for an assessment period has expired. The prior year gross profit was $514.3 million, or 5.92% of total sales, which included $8.2 million, or nine basis points of sales associated with the release of another portion of the commercial tax reserves in Brazil.

Operating expenses shown on slide five decreased to $354.7 million, or 4.03% of total sales, including cost of $7.7 million, or nine basis points of sales going to our expense-reduction programs. This reflects a reduction of $14 million compared with the prior year despite an unfavorable currency translation impact of $22 million and an $8 million increase in stock-based compensation, which normalized after the last year’s reversal of performance-based growth.

Operating expenses in the year ago period on a non-GAAP basis, excluding the $742.6 million goodwill impairment charge, were $368.8 million, or 4.25% of total sales. This included $6.8 million or basis points of total sales in expense reduction program costs.

Our year-over-year operating expense improvements are largely attributable to the implementation of the expenses reduction plan we began in the fourth quarter of 2008, which is now complete.

Cost of this program was $44 million at the lower end of the $45 million to $65 million range originally estimated. Coupled with the program announced early in 2008, aggregated annualized saving relative to the first quarter of 2008 are expected to be about $130 million as we began 2010. These efforts have created a more streamlined cost structure, designed to leverage operating performance.

On Slide seven you will see that worldwide operating income was $146.5 million, or 166 basis points. This includes the 11 basis point benefit from the release of reserves for Brazilian commercial taxes, offset, in part, by expense reduction in program cost of nine basis points that I discussed earlier. The operating margin is relatively stable with last year, excluding the goodwill impairment charge.

As I discuss operating income in each of our regions, please note that I will exclude the regional impact of last year’s goodwill impairment charge, so comparisons are more transparent and easier to follow. Our full GAAP results are in today’s news release.

In North America, operating income was $53.4 million, or 149 basis points of sales, including expense reduction program cost of $5.7 million, or 16 basis points of sales. In the prior year quarter, operating income was $63.7 million, or 168 basis points of sales, including $300,000, or one basis point in expense reduction program cost.

EMEA operating income was $53.9 million, or 177 basis points, including expense reduction cost of $1.2 million, or four basis points of sales. In the prior year quarter, operating profit was $28.4 million, or 96 basis points of sales, which includes expense reduction program cost of $6.5 million, or 22 basis points.

Asia-Pacific operating income was $25.7 million, or 149 basis points, including $700,000, or four basis points of sales in expense reduction program costs. This compares with operating income of $31.2 million, or 210 basis points in the comparable period last year. A greater mix of business from China, which has a lower margin profile than other countries negatively impacted comparisons with the prior year.

Latin America operating income was $21 m`, or 470 basis points, which included the Brazilian commercial tax benefit of $9.8 million, or 219 basis points, as well as a $100,000, or two basis points in expense reduction program costs. In last year’s fourth quarter, operating income was $21.5 million, or 474 basis points, which also included a Brazilian tax benefit of $8.2 million or 181 basis points.

Other income and expenses for the quarter totaled $5.6 million compared with $14.3 million one year ago, primarily resulting from our higher net cash balances and lower average interest rates as well as lower foreign currency exchange losses of approximately $3.7 million as compared to the prior year.

The effective tax rate was 24%, which was favorably impacted by approximately two percentage points due to the release of the Brazilian commercial tax reserve, for which no income tax was applied. Looking forward into 2010, we currently estimate that the effective tax rate will be 27%.

On slide eight you will see that net income was $107 million or 64 basis points per diluted share. This includes a net benefit of $0.03 per share related to the Brazilian commercial tax reserve, offset by expense reduction program I previously discussed. In the prior year quarter, net income was $95.5 million, or $0.59 for a diluted share, excluding goodwill impairment, but including of a net benefit of $0.02 per share for the Brazilian commercial tax reserve, offset by expense reduction costs.

Now turn to slide nine, which highlights the strength and flexibility of our balance sheet. Our cash balance at the end of the quarter was $911 million, reflecting our strong working capital and cash flow management. Debt level has decreased $99 million compared to the end of 2008 t0 $379 million.

Slide ten shows our working capital metrics at the end of the quarter. Days of sales were 41 days, five days higher than a year ago, primarily reflecting longer payment terms at some larger customers, and efforts to implement flexible financing to drive sales.

This was offset by a six day improvement in days of payables, which were at 47 days at quarter-end. Days of inventory were 27 days, an improvement of one day from last year’s fourth quarter. This brought working capital days to 21 versus 22 at the end of last year and below our targeted range of 22 to 26 days.

Now, I will turn it back to Greg for a discussion of regional highlights and closing comments.

Greg Spierkel

Thanks, Bill. Let me begin with North America. The region is on the upswing, leveraging the benefits of an improvement plan that began more than a year ago. After initiating a restructuring program in the first half, the team instituted a renewed focus on profitable sale in the fall, driving sequential sales increases of 17% in the third quarter, and 12% in the fourth. Canada and EMEA were the best-performing units, while the U.S. classic distribution business performed at about the regional average.

Avid sales and gross margins continue to be weak, along with the housing market, but we expect the unit’s improvement plans will gain traction in the coming year. Our logistics business was a strong profit contributor, but fee volume was softer than last year.

The region continues to invest in expansion and innovation. During the quarter, we launched a new physical security division to take advantage of the growing connection of IT systems with the cameras, monitors, communication equipment, and other products used to secure commercial buildings. We now have a lion card [ph] of top security brands coupled with support, training, marketing resources for resellers and vendors in this space as well as cross-sell opportunities with our existing customers.

In addition, our services continues to grow, adding a record number of VARs and new offerings from system monitoring and print management to software-as-a-service. We were the first to market with a robust systems and services platform and believe this positions us well to resell technology and solutions in a hosted, fee-for-service model.

Our enterprise computing division also continues to grow, beginning to play a role in the date center expansion opportunity. We’re building valuable relationships with vendors in this space while helping resellers strengthen their enterprise expertise.

We recently expanded our portfolio with Cisco’s Unified Computing Systems data center products, and became the first distributor to offer the new Vblock virtual technology solution.

In EMEA, the impressive turnaround I mentioned earlier is due primarily to three factors. First, the reorganization and business exits of the last 18 months are generating operating leverage. The region’s fourth quarter operating income increased more than 50% on 4% sales growth. Second, the renegotiation of terms with some of our least profitable accounts, particularly in the retail sector, is proving beneficial.

And third, improved execution is having an impact. The regions is proactively pursuing customers, reconnecting with vendors and focusing in superior service levels. For a region that continues to be hardest hit by the recession, it’s great to be getting back on track.

While we signs of the economic recovery in some countries and not in others, we believe our efforts to reengage customers and grow profitable sales are beginning to pay off. Our strongest countries in the fourth quarter were the U.K., Spain, Italy, and Austria, which all saw growth in local currencies compared to the prior year. Germany, Hungary and Switzerland performed close to the regional average while France and Belgium were slightly softer.

In the U.K., our new Managing Director and his team are integrating the CCD acquisition, which gives us expertise in enterprise server and storage markets. He is quickly engaging associates, customers, and vendors, and in November, the U.K. operation was named CRM Distributor of the Year for 2009, recognizing our focus on vendor partnerships and ability to help our customers build strong, competitive edge.

Other awards went to our pan-European business unit, which serves many vendors on a multi-country basis, and was recently consolidated into the German operation. Seagate named Ingram Micro the Distributor of the Year, while Intel recognized it as Best Continued Business for 2009. In addition to providing top-notch service to our partners, we are looking forward to an economic recovery spreading throughout the region, and when we see that we’ll see the true power of our operational improvements.

The economic recovery is ringing loud and clear in China, helping Asia-Pacific become the regional growth leader for the quarter. Our Chinese operation grew at strong double-digit pace in local currencies. As Bill and I mentioned earlier, gross margins in China are inherently lower than those in other countries, so it’s greater proportion of the regional business had a dampening effect on year-over-year margin comparison.

Malaysia was nearly as strong as China, and our operations in Singapore and Thailand also reported local currency growth. Sales in India, Australia, and New Zealand were softer than the regional average, but entered the new year with plans for growth. India is attracting new vendors to expand in its portfolio, while Australia and New Zealand are building their enterprise, businesses, through both organic expansion and last year’s acquisition of value-add distributors.

Beyond the individual countries, the region’s date capture business is doing well, following the acquisition of Vantex, the largest date capture/point-of-sale provider in Asia-Pacific. The integration is complete and Vantex is contributing nicely to the region’s profitability.

In all, Asia-Pacific continues to be a key engine for growth. As the economy strengths region-wide and our initiatives move forward, that growth should result in greater operating leverage.

I’ll finish my regional review with Latin America. For the fourth quarter sales declined slightly due to the Mexican government’s hold on IT spending and softer holiday sales of certain consumer products. Yet, the team was able to close the year strong with the highest operating margin amongst the regions. All the operating units generally performed well.

Argentina is building momentum, generating high double digit growth in local currencies and the Miami division finished strong in both volume and value segments. Chile also outperformed the regional average, while Mexico and Brazil both lagged a bit. In Mexico, macroeconomic factors impacted sales, while in Brazil, operational and tax issues have continued to hamper growth.

We look forward to future success in this small, but vital region as it welcomes the new leader. Eduardo Araujo joined us last month as the Regional President. He is a seasoned executive with an excellent track record in – at world-class technology companies, and we are fortunate to have him on board.

Looking ahead, the New Year is off to a promising start. First quarter sales should follow a sequential local currency decline, in line with pre-recession seasonality, which has generally been in the high single digits. This should translate to strong year-over-year growth. Gross margin is expected to follow a normal sequential decline based on historical seasonality. We will also take steps to hold the line on operating expenses, investing only in initiatives designed to improve profitability through greater growth, enhanced efficiency or superior customer service.

As we look beyond the first quarter, our team is focused on three strategic imperatives. One, gross sales at or above general market rates in our core business with acceptable gross margins while tightly managing expenses; two, strengthen our more profitable existing adjacent businesses such as fee-for-service logistics, data capture/point-of-sale, consumer electronics, private-label and enterprise computing; and three, build expertise in services, establishing a lead position within the realm of hosted or cloud-based solutions.

The expected return of IT spending maybe a key catalyst for growth this year, but we are not patiently waiting on the side for the economy to improve. We have mentioned in previous calls we are proactively pursuing profitable sales and expect to be a performance leader with our resellers, vendors, and markets. Our organic efforts may be completed by acquisitions that make financial and strategic sense. The improvements we’ve made over the last several years should drive operating leverage, which, coupled with our skilled management of working capital, should continue to list ROIC above our cost of capital.

I feel good about this year and look forward to delivering results that will contribute to greater shareholder returns. After two ultimately beneficial challenging years, we are entering a new chapter. We are reenergized, we are refocused, and we are ready to win.

With that, we’re ready to take your questions.

Question-and-Answer Session

Operator

(Operator instructions) Craig Hettenbach from Goldman Sachs, your line is open.

Craig Hettenbach – Goldman Sachs

Great. Thank you. Greg, you mentioned the renewed focus on sales growth while remaining focused on profitability as well. Can you just talk about by region what areas do you – had to see more of a trade-off where you are seeing better sales growth but potentially at the expense of some lighter gross margin?

Greg Spierkel

Well, again, we have some degree of seasonality, Craig, through the year, which could influence things, but if you are looking short term, the momentum that we have in Asia is – remains robust. The emerging markets primarily, the China-India domain are looking very encouraging. That could create a little bit of margin pressure on the top, gross margins. But we have very healthy cost dynamics in those two countries. So that could be a little bit of a factor if you go forward, but generally the rest of the other regions, normal seasonality seems to be at play from Q4 to Q1, regular mix of business through the rest of the regions seem to be at play again. We are looking at year-over-year positive growth for the company given the market conditions that are in play right now.

Craig Hettenbach – Goldman Sachs

Okay. And if I could follow-up, can you just given any color by end market you know the overall commentary is much stronger exiting the year and entering into 2010, but if we look at what end market applications were you think might grow at the fastest rate and potentially what applications might lag in the current environment?

Greg Spierkel

Alright. Well we have a broad cross-section of product categories and end market relationships. What we have been seeing thus far is that our retail relationships are doing pretty well, particularly in emerging markets. Retailers did well in the finishing the close of the quarter. We had very strong growth around mobility as a broad sector, and that touches on probably a few major product areas, definitely the mobile laptop space, mobile software related products with some of our vendor partners, networking infrastructure to support mobility, all are looking fairly healthy at this stage as far as I would call broad categories. I think the tide generally is rising, but those areas are tending to do a little bit better for us.

Now, there are some new product areas we are getting into, growing fairly healthily but they are small. So again, in terms of the broad categories, that’s what is happening with the Company or at least what we are seeing right now.

Craig Hettenbach – Goldman Sachs

Okay, thanks for that color.

Greg Spierkel

You’re welcome.

Operator

Matt Sheerin, Thomas Weisel Partners, your line is open.

Matt Sheerin – Thomas Weisel Partners

Yes, thanks. So I just wanted to ask about the – back to your up in the demand you saw there, they are up 40 plus percent. Is part of that because you are more engaged in retail so you saw a better than a seasonal than you’ve seen in last few years?

Greg Spierkel

Alain?

Alain Monie

Yes, this is Alain, I can't take that. It’s a combination of things. The strength in our European scene as far as the top line comes, yes, retail is part of that, but not only that. As you know, we have made a very specific effort to change notably our engagement with customers and vendors. And so we have been doing this across the market and the sequential 42% increase that you just mentioned, comes from really across the spectrum of customers or vendors and geographies. So it’s not only related to retail, which indeed is stronger this quarter than it was a year ago.

Matt Sheerin – Thomas Weisel Partners

Okay. And then Alain, would you then expect the guidance I guess is for normal seasonality, but would be a – would normal seasonality be what down in the mid-teens or something sequentially for Europe?

Alain Monie

You know again we don’t split out the details by region on the seasonality specifically there, Matt, but – and I don’t have the number off the top of my head from quarter to quarter, but clearly Q4 is our strongest by far for Europe as it always is. We had a quieter Q3 than clearly in prior years. We closed the gap on the revenue differential that we saw through several of the quarters earlier in the year. So, I am expecting, and we are expecting that Europe, the momentum that we just saw coming through with the quarter that we just announced is still holding pretty nicely and if anything there is a chance that we do a little better than what might have been seasonal patterns out of Europe, given each passing month in Q4 was getting slightly better on let’s say less of a decline and we are seeing that trend continuing. Europe still is relatively soft compared to other economies, but we are starting to see some decent traction in the region overall.

Matt Sheerin – Thomas Weisel Partners

Okay, great. And then on the gross margin, you talked about why it was perhaps less than it normally is, and are you still sticking to that goal of keeping the floor at around 5.4%.

Greg Spierkel

Very much so, Matt. You know, again, there could be periods of times and inflections that will go up and down a little bit from quarter to quarter and given our mix of everything, but if you look at our pattern over the last four or five year, I know you’ve been following us pretty closely, there has only been one quarter I think in that period of time where we just fell below it slightly. We feel that we’ve got the right kind of mix of business still going in, coming through the business right now around all the geos that we are in, so we are trying to make sure that on an annual basis we are well above that number, and we’ve been delivering close to that or staying close to that over the last few years. And that’s still important to us.

Matt Sheerin – Thomas Weisel Partners

Okay. And if I can just throw one quick question which is related, you talked about in the third quarter that you saw some volume business from some vendors, I know on the (inaudible) side, vendors that wanted to go through distribution as opposed to going direct through resellers, did you also – with the incremental sales that you saw in the December quarter was that still a overflow if you will from some of that business?

Greg Spierkel

Wouldn’t call it that way. We didn’t have much of the shortage across the board. Clearly the print space that you are alluding to was probably the singular largest area where there were some shortfalls in the supply chain, but they were not large enough, Matt, to make a – what I call a dent in our overall growth Q3 to Q4. Relatively de minimus in the total picture. This was a broad based good movement across the board for all our regions and I wouldn’t single out any one product area. Where there were some shortages in products areas, there is still some –still coming out of Q4, but they are small again relatively de minimus, and I think as we go into the current quarter, most of our suppliers are kind of catching up where there have been some pockets of shortfall, or at least most of the signals that we are seeing, that’s the case.

Matt Sheerin – Thomas Weisel Partners

Yes, well thanks for that. I really wasn’t – I wasn’t asking about the product shortages as much as the fact that I know you had some volume business come through distribution that used to go directly to retail customers or retailer customers and I know you’ve picked up some business in the September quarter and I want to know if that continued into December.

Greg Spierkel

Yes, and I mean to that – I am sorry, if I didn’t quite catch it completely there, I would say generally again we’ve been targeting certain key relationships to probably pick up a little bit of our position that we’d held in prior quarters. So in some instances in large accounts in particular we might have done a bit of that strategically, but again generally the pattern has been just solid execution and the tide rising and we are executing better against that tide.

Matt Sheerin – Thomas Weisel Partners

Okay, thanks very much.

Operator

Thank you. (Operator instructions) Brian Alexander from Raymond James, your line is open.

Brian Alexander – Raymond James

Thanks. Good evening everyone. The factors that you mentioned for gross margin, there are about four of them, where they listed in order of importance, I am just trying to get a sense for whether the strategic pricing factor was probably the least important in terms of the year-over-year gross margin decline.

Greg Spierkel

Yes, let me give you a sense of that. You know there is probably really about five or six factors. I know I tried to touch on most of them in the call, so thanks for listening there, Brian, but the largest factor at least on the year-over-year comparisons was really softer sales in IML. It’s – as you know it’s a very strong contributor in Q4 for us, so we had softer revenues in IML quarter and that was a function actually, Brian, of a couple of major factors, one partner opening and utilizing a bigger warehousing infrastructure on their own and another bringing a lot of goods over by air because of some supply challenges or product delivery challenges that they had. So, at the end of the day, that had an impact that was probably the largest impact of a number of others. I did say greater mix of revenues from some of the lower margin geographies, a softer Avid sales and margins. I would say a mix of more system revenues – system based revenues as opposed to other products in the portfolio, which have a slightly lower margin characteristic for us. And I would say a limited amount of what I’d call strategic pricing here and there on certain accounts. All those other variables outside of IML were all about the same size, smaller amounts, so no particular order of importance in there as opposed to the IML piece maybe being a bit more.

Brian Alexander – Raymond James

And do you think on the IML topic, Greg, do you think that that’s more of a temporary issue, where that business will return to growth over the next few quarters, or is there something more structural going on–?

Greg Spierkel

No – it’s a good question, Brian. And it’s definitely not structural. We feel pretty much that these were a couple of items that are short term in nature. Again, IML becomes less relevant for us in the coming two quarters or three quarters than it does in Q4. We are very active with looking at additional opportunities there from both the relationships that we have as well as some new business opportunities that we are working on. So, we are encouraged with the success of that business and we’ll continue to put the pedal to the metal on trying to take that to a much higher level as we get to this segment [ph] – next year by adding some additional clients to it.

Brian Alexander – Raymond James

And then just a final question, and I apologize if it’s a little bit too near term focused, but when I look at your gross margin trend sequentially, they’ve historically declined anywhere from 15 to basis points from Q4 to Q1 as the IM Logistics seasonality traditionally falls off. But given your comments about IML not being as strong as strong as we expected in the fourth quarter, should we expect that the quarter-on-quarter decline in gross margins will be less than it’s been historically because if not it seems like you could reach that 5.4% for at least a quarter.

Bill Humes

Again, I would be able to give you a hard view on that. In essence, we feel that we are going to be pretty good with our stated floor. We think the way the quarter is progressing right now and the overall mix of the business, we are in a relatively healthy state, Brian. Yes, there is going to be quarter-on-quarter mix change as is typical seasonally that we’ve seen in prior years, pre-recession year, but in general I don’t feel that that’s – that there is a big, big risk there.

Brian Alexander – Raymond James

Great, nice job. Thank you.

Greg Spierkel

Thank you too.

Operator

Rich Kugele, Needham & Company, your line is open.

Rich Kugele – Needham & Company

Thank you, good afternoon. So, just a couple of questions, I guess first given some of the uncertainty that’s out there in the market in Europe from some of the well let’s say more depressed economies and the impact of that on the euro, you comments seem to suggest that you are not seeing any impact on the demand side beyond the (inaudible) ahead of time. Is that a fair characterization of what you are seeing in Europe thus far here in Q1?

Greg Spierkel

Yes, you know at the end of the day we – as I mentioned earlier, we saw some decent momentum as we went through each passing month in Q4, slightly less down on prior year with each passing months and that’s the case definitely for Europe. So, definitely start to start seeing some improvements in the IT space and market situation overall. If you’ve followed a little bit context [ph] data that comes out of Europe, it’s been encouraging to see that there has been general market improvement there at least in IT better than what I would say the overall GDP growth rates have been which are still negative. That being said, there is still some risk I think longer term with Europe. And if anything there is a very volatile situation with foreign exchange rates still going on, clearly we saw a tailwind assisting us in Q4 quarter as we make our way through the current quarter right now, Rich, we are seeing exchange rates kind of almost flat on last year when you looked at a mix. That could continue to change again with the currency moving as violent they’d have with some of the economies there particularly the southern economies showing some degrees of weakness. But, overall, we are encouraged at this stage in the quarter with the progress that we are seeing in Europe of at least the IT market.

Rich Kugele – Needham & Company

And then secondly on HP’s call obviously they were basically highlighting three refreshes in various stages of taking place between servers, printers, and hopefully later this year even on the corporate side. And any comments on how you think that that plays out over the balance of 2010 and Ingram’s way of participating?

Greg Spierkel

I wouldn’t disagree with Mark or the HP organization there. In essence, we’ve been of the view and we are hearing it back from our customer base as well as some of the vendors we are working with that the success if you may and the confidence that’s in place with some major players like Microsoft with its releases of Win 7 and I think the early trials and prototype successes of Office 2010, they are going to present I think after a dearth of under spending or a lack of spending over the last two years by corporate relationships, small through large, I think it’s going to lead to additional growth for the sector. I think it’s showing in the results already right now with companies that are just announcing their results in the last two, three days. Again, growth rates in – of GDP are nowhere near the levels that we are starting to see growth rates pick back up in the IT sector. So the tide is improving after basically a period of almost a year and a half of under investment by many relationships and customers out there. It was the consumer that was helping to keep the industry a little bit buoyant than the commercial side of the equation. I think the commercial side now is starting to sort of kick in to some extent. That’s partly what we are seeing.

Rich Kugele – Needham & Company

Okay, great, and well done. Thank you.

Greg Spierkel

Thank you, too.

Operator

Thank you. Our last question comes from Richard Gardner of Citigroup. Your line is open.

Joe Liu – Citigroup

Thank you. This is Joe Liu [ph] on behalf of Rich Gardner. My question is on the – I mean obviously you had a well above sequential growth in your revenues and obviously some of that was currency, but just wanted to get a sense of how much that – was industry growth and how much was market share gains?

Greg Spierkel

Well, we think it’s a mix of both, but probably more – another factor (inaudible) there is definitely some degree of the sector coming back without question the tide is rising again. Two, I would highlight that we feel that we are executing better, and we are much more externally focused in Q4 than we were in Q1 or Q2 or Q4 of 2008. I’ve made a big deal of this. We make a big deal of it internally. We had – we were very, very focused internally with cost reductions, moving out of businesses that didn’t work well, renegotiating terms where we felt we were not getting the right kind of returns that we wanted. And so as an organization, we felt that we needed to change the tide there in thinking on the last quarter to the year, which, I believe has happened because of the good sequential movement.

Hard to determine the share gain. I think I kind of mentioned a little bit before, we feel that we are, if it’s not regaining, it’s reestablishing a good position we might have had with certain clients before that could have drifted in the – over a period of two, three quarters. So I think there is bit of a – getting back to where we rightfully belong with certain relationships whether that’s customers or vendors. And then also there is a call it an order of things that we are comfortable with. But again the breadth of new things that we are bringing in focusing on some unique vendors, some of the small acquisitions, they are all helping in the mix here, Joe, to improve the results and obviously help our sequential movement.

Joe Liu – Citigroup

Great, thank you, Greg. I mean on that point, how – when you talk about coming back or regaining back customer relations, how many quarters do you believe that you need to actually get back to where you were may be a year and a half ago?

Greg Spierkel

Well, it’s not an exact science here. We – I think again you have to earn the relationships back with the vendors, so you want to get in front of mind with them with our ability to put some good programs on the table, which we’ve been working hard on, trying to be more creative than some of our competitors on those programs. Again, the customers got to feel that we are relevant tools. We’ve been investing very significantly on some new capabilities around – web capabilities that we are going to be launching more and more nice things to the marketplace this year and next year on, which we think will serve us well because the vendors will see some great capabilities that they haven’t seen from us before. Those are the types of things that we are going to try to build on here, Joe, that could lead to a number of quarters of – and that’s what we are hoping for, where we are working again at market or above market growth rates if we execute well on some of these initiatives and are very focused on those key relationships.

Joe Liu – Citigroup

Great, thank you.

Operator

Thank you. I would now like to turn the call over to Greg Spierkel for closing remarks.

Greg Spierkel

Thank you very much and thank you for your questions. As we close the call, I’d like to reiterate our commitment to you and all of our shareholders, our improvement efforts through the recession, and our growth and profitability plans going forward are designed with our shareholders in mind. We believe that consistently generating ROIC above the cost of capital will drive greater value to everyone and I feel optimistic about combining our improvements with a recovering economy and look forward really to a successful year. We appreciate and value your ongoing support and look forward to being in touch in the coming quarters.

Ria Carlson

Thank you very much, Greg. That concludes our call. A replay is at 800-678-3180 and that will be active for one week. Thank you very much for joining us. Bye-bye.

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Source: Ingram Micro Inc. Q4 2009 Earnings Call Transcript
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