Avnet CEO Discusses F4Q2011 Results - Earnings Call Transcript

Aug.10.11 | About: Avnet Inc (AVT)

Avnet, Inc. (NYSE:AVT)

F4Q2011 Earnings Call

August 10, 2011 2:00 pm ET

Executives

Vince Keenan – VP, IR

Rick Hamada – CEO

Ray Sadowski – SVP and CFO

Phil Gallagher – President Technology Solutions

Harley Feldberg - President Electronics Marketing

Analysts

Amitabh Passi – UBS

Sherri Scribner – Deutsche Bank

Craig Hettenbach – Goldman Sachs

Will Stein – Credit Suisse

Brian Alexander – Raymond James

Ananda Baruah – Brean Murray, Carret

Matt Sheerin – Stifel Nicolaus

Jim Suva – Citigroup

Shawn Harrison – Longbow Research

Mona Eraiba – TCW

Operator

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

Vince Keenan

Good afternoon and welcome to Avnet's fourth quarter fiscal year 2011 financial update. If you are listening by telephone today and have not accessed the slides that accompany this presentation, please go to our website and click on the icon announcing today's event.

As we provide the highlights for our fourth quarter and full fiscal year 2010, please note that in the accompanying presentation and slides we have excluded the gain on the sale of assets impairment charges and restructuring, integration and other items for all periods presented.

When discussing pro forma sales, or organic growth, prior periods have been adjusted to include acquisitions and the impact of divestitures. In addition, when we refer to the impact of foreign currency we mean the impact due to the change in foreign currency exchange rates when translating Avnet’s non-U.S. dollar based financial statement into U.S. dollars. And finally, when addressing working capital, return on capital employed and return on working capital the definitions are included in the non-GAAP section of our presentation.

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 SEC.

In just a few moments, Rick Hamada, Avnet's new CEO will provide Avnet's fourth quarter and fiscal year 2011 highlights. Following Rick, Ray Sadowski, Chief Financial Officer of Avnet will review our progress on growing shareholder value and provide first quarter fiscal 2012 guidance.

At the conclusion of Ray's remarks the Q&A will follow. Also here today to take any questions you may have related to Avnet's business operations is Phil Gallagher, President Technology Solutions and joining us by phone from London where he gave a key note address at the RM [ph] partner meeting is Harley Feldberg, President of Avnet Electronics Marketing, also with us today is Roy Vallee, Avnet's Executive Chairman.

With that, let me introduce Mr. Rick Hamada to discuss Avnet's fourth quarter and fiscal 2011 business highlights.

Rick Hamada

Thank you, Vince and welcome everyone. Thank you all for taking the time to be with us and for your interest in Avnet. Fiscal 2011 was an exciting year to Avnet as we started the year with three significant acquisitions that expanded our footprint into higher growth markets and strengthened our competitive position in several other important markets. When combined with strong year-over-year organic growth of 17% Avnet’s total revenue grew 38.5% to a record $26.5 billion.

While managing multiple integrations spanning both operating groups the entire Avnet team did an excellent job translating that growth into improved financial performance. As a result of the leverage in our model and expense synergies adjusted operating income grew 1.4 times faster than revenue and exceeded $1 billion for the full year.

Even as year-over-year growth slow through the year after the v shaped recovery peaked in the fourth quarter of our fiscal 2010. Adjusted operating income dollars grew sequentially every quarter and adjusted EPS increased 56% year-over-year to $4.32 easily exceeding our previous record of $3.18 set in FY ’08. While the multi core string of records is very impressive the metrics we are most proud of our economic profit growth and return on capital employed. In the year in which we invested almost $700 million in value creating M&A ROCE increased 76 basis points to 15.4% which is comfortably within our targeted range of 14% to 16%. This combination of rapid revenue growth and ROCE resulted in a substantial increase in economic profit.

Turning to the fourth quarter of fiscal 2011, although year-over-year organic growth moderated from 16% in the March quarter to 13.5% in the June quarter our reported revenue was up 33% year-over-year to a record $6.9 billion and our sequential growth of 2% in constant dollars was in line with normal seasonality.

Adjusted operating income increased 25% year-over-year to $270.9 million even though operating income margin declined 24 basis points to 3.9%. The year-over-year decline in operating income margin was primarily due to the impact of the lower margin profile of some of our acquired businesses. However, gross profit margin, operating income margin and ROCE improved sequentially. On the bottom line adjusted EPS grew 33% year-over-year to $1.22 which represented a fifth consecutive quarter of record EPS.

Return on capital employed of 15.6% was within our target range for the seventh quarter in a row and cash flow from operations came in at a strong $281 million. This financial performance and our strong balance sheet when measured against our historical investment levels and acquisitions and our current stock value lead management and our board of directors to decide that now was an appropriate time to initiate a $500 million share buyback program.

With our strong liquidity position and cash generation capability we are confident we can continue to invest in organic growth initiatives and value creating M&A while opportunistically returning cash to shareholders through this share repurchase program. As we begin fiscal 2012 we remain committed to growing our business profitably and maintaining our targeted returns so that we can continue to grow economic profits and shareholder value.

Now let’s turn to the operating groups, electronics marketing had another strong year as revenue grew 37% year-over-year to $15.1 billion with organic growth of nearly 22%. With gross profit margin improvement for the last three quarters and continued expense efficiencies operating income grew 1.8 times faster than revenue to $832 million. Operating income margin increased 105 basis points year-over-year to 5.5% which is at the high end of our target range of 5.0% to 5.5%. The growth in operating income and continued working capital vigilance combined to drive the full year return on working capital up 460 basis points year-over-year.

Return on working capital was above our stated goal for the full fiscal year for the first time at EM since we instituted our value based management back in 2001. While the entire EM team deserves recognition for this significant accomplishment I would like to thank EM Japan team for their heroic efforts in bringing our Japan operation back on line and serving customers despite the natural disasters that disrupted both their lives and communities in addition to the business environment.

Now let’s take a look at the fourth quarter, EM closed out the fiscal year with a record breaking performance as revenue grew 26.8% year-over-year to $3.96 billion. Pro forma growth was 11.8% year-over-year or 7% in constant dollars with both EMEA and Asia excluding Japan delivering double digit organic growth. Gross profit margin improved sequentially for a third consecutive quarter and operating income margin improved 13 basis points sequentially to 5.9%. With this performance EM has delivered operating income margin within or above its target range for six straight quarters.

Turning to the balance sheet, working capital increased 1% sequentially in constant dollars primarily due to a 6% increase in inventory partially offset by increase in payables. With working capital velocity holding well above pre-recession levels the strong growth and operating income resulted in return on working capital improving 68 basis points sequentially. More importantly, all three regions excluding the impact of Japan in our Asia region are performing at or above their long-term ROWC targets.

EM saw a drop in its book to bill at the end of the June quarter as concerns over supply chain disruptions related to the national disasters in Japan anticipated and lead times have began to normalize. It appears that these factors as well as concerns over slowing economic growth are influencing customers to be cautious in placing new orders, while some of the slower bookings are due to inventory and our backlog adjustments at some customers it is not clear what impact real demand had on bookings for the quarter. In this dynamic environment, we will continue to vigilantly monitor our dash boards and inputs from our customers and suppliers and react quickly to align our working capital and expenses to current market conditions.

Following the strong quarter in here at EM we kicked off the new fiscal year by announcing two acquisitions servicing Greater China that will strengthen EM Asia’s competitive position while increasing our scale and scope advantages in the region. The addition of Prospect Technology and J.C. Tally will add approximately $250 million of annualized revenue as well as provide additional cross selling opportunities as we look to build upon the profitable growth we realized in fiscal 2011.

In fiscal 2011, the impact of acquisitions combined with double digit organic growth drove technology solutions revenue up 40% year-over-year to $11.47 billion. The acquisitions also changed the profile of the business as international markets grew to represent 53% of total revenue in fiscal 2011 versus 40% in the prior year. With the new presence in the major markets of Latin America and our standard footprint in Asia TS has increased its exposure to high growth markets where demand for ID products is growing along with the local economies. Operating income grew 14% year-over-year as the positive impact of synergies was somewhat offset by the tepid recovery in Europe and investments in Asia.

TS enters fiscal 2012 with significantly increased potential and the momentum to capitalize on the (Inaudible) of new profitable growth opportunities in all three regions. Looking at the June quarter, sequential growth of 7.4% was at the high end of typical seasonality. However, double digit year-over-year organic growth in Asia and the America’s was partially offset by continued sluggish growth in Europe.

Revenue increased 41.2% year-over-year to $2.95 billion with industry standard servers, storage and software leading the way. Operating income grew 17.8% sequentially and operating income margin increased 20 basis points sequentially with all three regions contributing to this improvement. TS Asia operating income margin increased year-over-year for the third consecutive quarter as we continue to apply our DBM discipline to both organic growth initiatives and acquired businesses.

Overall TS operating income margin and return on working capital were down from the fourth quarter of fiscal 2010 primarily due to the impact of acquisitions as portions of the recently acquired businesses have historically had a lower margin profile than the TS legacy business. While TS have made progress on many fronts this quarter its overall operating results did not meet with expectations. As a result we have taken a number of actions to improve performance and meet our long-term commitments. We remain committed to our long-term financial model for TS and we will continue to manage the business accordingly.

In addition, we decided to transfer the computing components business in Latin America from TS to EM Americas this business has an annual revenue run rate of approximately $400 million to $500 million. We already had the North American computing components business included in EM Americas embedded business and as we integrated the TS acquisitions at Latin America it became clear that by transferring this business from TS to EM we could better leverage the infrastructure and resources of the embedded group while allowing TS Latin America to focus on enterprise IT solutions. These actions are incorporated into the guidance Ray will cover next.

Now I would like to turn the commentary over to Ray Sadowski to provide more color on our return on capital employed and how that contributed to the board’s decision to institute a share repurchase program. Ray?

Ray Sadowski

Thank you, Rick and hello everyone. As Rick mentioned, this morning we announced a $500 million share repurchase program. As we reviewed with you at our most recent Analyst Day in December our long standing capital allocation strategy has been to invest in organic growth first followed by value creating M&A and when we have excess liquidity return cash to shareholders since our countercyclical balance sheet generally negates the need for significant cash reserves.

Our business has grown significantly with revenue up 48% from pre-recession levels and adjusted operating income now exceeding $1 billion. As this slide clearly demonstrates we have been consistently delivering return on capital within our target range and generating rapid growth in economic profits. With better return to a larger business base we can also generate higher levels of cash flow than we did prior to the recent recession. As evidenced by the fact that cash flow from operations was $470 million in just the past two quarters.

With moderating growth rates resulting in lower working capital investments we are confident we can fund organic growth initiatives and pursue our acquisition strategy while strengthening our already strong liquidity position. This expectation of higher cash flow generation, coupled with our strong balance sheet and our current stock valuation were the primarily factors leading to decision to initiate a stock buyback. Similar how we have been allocating capital for growth initiatives we will allocate cash to the share buyback program when financial returns are appropriate.

Well I’ve used the slide to demonstrate why we are in a position to initiate a stock buyback there is a far more important point I would like to make. When we started our value based management journey in 2001 our intent was to transform the business and focus our returns and economic profit generation as the best way to grow shareholder value. While the tech bubble and the great recession slowed our progress along the journey this slide clearly demonstrates the positive results of that effort. In fiscal 2001, the combination of organic growth, additional scale from acquisitions as well as expense efficiencies resulted in economic profits growing 72% year-over-year. DBM is embedded in the (Inaudible) and our discipline around value creating M&A ensures that acquired companies embrace that culture and deliver shareholder value as they add to and leverage the scale and scope advantages of the Advent Enterprise.

Despite the recent uncertainty in the market with our stronger competitive position and improving financial performance we are confident that we can continue to execute on our strategy of profitable growth and create additional shareholder value going forward.

Looking forward to Avnet’s first quarter of fiscal year 2012 we expect EM sales to be in a range of $3.75 billion to $4.05 billion and sales for TS to be between $2.5 billion to $2.8 billion. Therefore, as consolidated sales have forecasted to be between $6.25 billion and $6.85 billion adjusted for the transfer of Latin America computing components from TS to EM and the impact of acquisitions these numbers reflect below normal seasonality at both operating groups. Based up on that revenue forecast we expect first quarter fiscal year 2012 earnings to be in the range of $0.90 to $0.98 per share.

The above guidance have not taken to account any potential restructuring charges, any charges related to acquisition and post closing integrations or the impact of any share repurchases. The guidance also includes a typical sequential increase in stock-based compensation and assumes an effective tax rate in the range of 29% to 31%. In addition, the above guidance assumes that the average euro to U.S. dollar currency exchange rates for the first quarter of fiscal 2012 is 1.44 to 1. This compares with an average exchange rate of 1.29 to 1 in the prior year first quarter and 1.44 to 1 in the fourth quarter of fiscal 2011.

With that let’s open the questions for Q&A. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) our first question comes from the line of Amitabh Passi from UBS. Please proceed with your question.

Amitabh Passi – UBS

Hi, thank you. Rick I was hoping maybe you could just give us sort of a broad level view of what you are seeing up there in the marketplace what the sentiment is among customer base and maybe related to that or how do you respond to that some sense of how kind of orders progress during the quarter and then what you might be seeing to date in this quarter?

Rick Hamada

Yeah Amitabh, so I would characterize it as the customers certainly there is some caution based on the current outlook in the global economic growth sectors here with all the various things around the world that I won’t go through the list here but there is some, we mentioned as part of the book to bill we saw for EM in the June quarter that was an influence as well. But other than that there is nothing directly there is no direct behavioral changes or distinct difference in the customer base in the short-term that gives us any other cause for a longer term disruption overall.

I would just tell you it’s a cautious customer base out there they are keeping an eye on things like everybody else. But outside of just I would say normal caution here no other major change that we’ve sensed at this particular point. Maybe Harley can comment on the book to bill through the quarter, but I would tell you what we’ve seen thus far quarter to date is pretty consistent with what we were seeing coming off the June quarter. Harley I know if you make a comment on that.

Harley Feldberg

Yes, hi everybody. Hi Rick. Hi Amitabh. Hope everyone can hear me okay. Yeah, the book to bill through the early part of this current quarter has really been essentially consistent with what we saw towards the end of the June month, which was below one. So we have not seen that change at this point, they are certainly into the quarter.

Amitabh Passi – UBS

And just maybe as a follow up Harley any sense of what book to bill across geographies and maybe just specifics and trends you are seeing in some of the geographic areas.

Harley Feldberg

Oddly the book to bill is fairly consistent across all of our regions, which is a bit surprising because you would expect at this point for the Asia book to bill to be above and that’s what traditional trajectory would tell us but at this point at least, as only part of the quarter all of our regions are similar in where they are book to bill wise.

Amitabh Passi – UBS

Got it and just my final one for Ray $500 million buyback plan announced if I look at where the stock is today assuming earnings probably gets to $45 in the next three four years, the return looks pretty attractive so can we assume that you will be fairly aggressive in the marketplace.

Ray Sadowski

I think based upon where we are today relative to stock price which is as you know approaching a book value I guess I would answer that by saying we will be reasonably aggressive and depending upon which way the stock price goes from here either more aggressive or less aggressive as we move forward. But it is safe to say we will be reasonably aggressive based upon the prices, price of the stock today.

Amitabh Passi – UBS

Okay, great thanks. I will jump back in queue.

Operator

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

Sherri Scribner – Deutsche Bank

Hi, thank you. I was hoping you could give us a little bit of detail on the TS business you mentioned some changes and I know that you moved some of the revenue into the EM segment for fiscal ’12. But why don’t give a sense of all those changes on the European side where I know you’ve been trying to improve the profitability in that business or just a little more detail.

Rick Hamada

Hi Sherri, it's Rick. Let me offer some overall comment on the change we announced and I’ll let Phil give you some color on TS overall. The shift in business from the beginning of fiscal ’12 was a computing components business in Latin America moving from TS to EM. Alright, and again we have sized that as roughly a $400 million to $500 million business annualized. And that’s the only change as far as moving to something from one reporting year to another as we had FY ’12. Now we did make some comments about the actions in the business as well and I will let Phil talk about a more regional breakup for TS.

Phil Gallagher

Yeah sure, how are you doing? Just sort of elaborate on that and the move on Latin America is really consistent with the move that we made in North America when we acquired Bell so it really was the next logical step to move that components buying business if you will and embedded business back into EM where its core. And so TS can focus in Latin America when the enterprise side of the business which is different. In Europe we still have that volume in that components business on the EPS side of the business.

As we did that when we acquired Bell we kept it there continue to evaluate that business as we move forward. Last quarter definitely was a little softer than we anticipated in the both the components as well as in the describe area which has had the little bit more of an impact on us than we anticipated and are making the appropriate adjustments as we mentioned in the script then we did make some beyond the synergy adjustments that we committed to and executed on we made some further adjustments in the June quarter from an expense modeling standpoint and we will continue to model that this current quarter as we watch that business closely.

Sherri Scribner – Deutsche Bank

Okay that’s helpful. And then just thinking about TS Europe when we talked in the past that’s really been a segment that needs more revenue growth and it sounds like Europe continues to be sluggish and clearly there are some issues there going on. Is that still a revenue growth story and when do you expect returns to get back to sort of a corporate margin, corporate average margin level?

Phil Gallagher

We are still committed I will answer it this is Phil again, working backwards. The ownerage [ph] planning targets of over the period aggressive at this point are still the long range planning targets we have for the European market place that we committed to in December at annalistic. There are pockets of Europe owned really emphasized there but performing at or above those targets already, there are other pockets that we have is a bit more challenges within and we are working on those as we move forward.

The growth in Europe, again when you start to break it out certainly it’s been a bit softer than we have anticipated or expected, some of that driven by your previous question in the segment round components and drives. Some of the enterprise has actually done very well in Europe including software, and including power by the way it's well storage. So it really is Europe when you talk about Europe trust at one entity that really had to be broken down some regions within Europe to see what’s really happening. But long in short we are committed to (Inaudible) that we committed to in December, we have some work to do, we make some good progress we think in June and making some of those adjustments, and we continue to model moving forward in September.

Ray Sadowski

And Sherri I would add part our growth strategy is for TS EMEA include continuing to build out the franchises we have on a pan European basis. And when the opportunity is right, even as we are reconstructing that business to get to the right model, we’ll take the opportunity to invest as we did with the (Inaudible) acquisition to be able to, that really helps solidify presence for us in France major country over there so we are still looking to make sure that we do our part to help invest in to that growth.

Sherri Scribner – Deutsche Bank

Okay, great. Hopefully things are getting a little bit cheaper over there in terms of acquisitions. Thank you.

Ray Sadowski

We’ll see.

Operator

Our next question comes from the line of Craig Hettenbach from Goldman Sachs. Please proceed with your question.

Craig Hettenbach – Goldman Sachs

Yes, thank you. Ray, nice to see the buyback here, can you just talk about in terms of capital allocation relative to M&A environment you have seen today? Is that mean that M&A for the near term will be put on hold a little bit or what you have seen out there for M&A?

Ray Sadowski

No, I don’t think I would characterize that we would put M&A at I don’t think that’s our style, that’s course number one. So first going back just in the buyback overall as I mentioned in my prepared remarks. We are in a very strong liquidity position with good consistent cash flow which puts us in a position from our perspective to do all the things we would like to do which is few organic growth continue our M&A strategy. And now take the opportunity to also give back some money to shareholders especially in line of the stock crisis valuation today.

But by no mean should you take this as a view that opportunities within the M&A pipeline or in any way diminished. It’s an active pipeline we’ll continue to vigorously pursue those value-creating opportunity as we think are out there as we move forward. It’s hard to tell what’s going to happen in the environment with this is slowing down but as you know that does create some opportunities every once in a while from an M&A prospective. So overall I would say no change in our post M&A as we move forward.

Craig Hettenbach – Goldman Sachs

Okay, and then if I can follow-up for Rick. Given your notice some of the caution out there in the market place and the slower growth, can you just talk about the operating model as it stand today areas where you could potentially flex or where you could cut back if need be to a slow environment?

Rick Hamada

Yes, so Craig that would be a very specific answer looking through our portfolio we can try to match our resource allocation, number one where the growth is and take it away from where the growth isn’t overall. On a macro basis we are committed to on a go forward performing basis, we would expect a 50% drop through from our performing businesses, non-performing we might expect a little bit higher drop through as they get back to their models. So that’s from a high level perspective that’s the way we manage and organize the business. But to get more specific as to what’s happening with this particular segment, region business unit (Inaudible) that I don’t think it’s typically something we get down on those details.

Operator

Our next question comes from the line of Will Stein with Credit Suisse. Please proceed with your question.

Will Stein – Credit Suisse

Thanks. Guys, I’m going to be the maybe 10th one to ask about the share repurchase, until I should say, when is the expiry of the repurchase and how are you going to think about allocating between the two ways to invest buyback sources M&A?

Rick Hamada

Will, this is Rick I’ll take a stab and then I will break in add-on as well. So the priority scheme stays the same, number one is organic growth, number two is value-creating M&A and number three was we discussed evaluated (Inaudible) opportunities to return capital shareholders. We have committed to this buyback because we believe if you take a look at the total profile I have in here today, the scope, the returns, the cash flows as well as the capital structure that we have today. And you take a look at our historical use of capital for M&A, we believe it’s time that we are going to find ourselves in a position of excess liquidity something we referred to before but we were never there.

However, another reason we did a buyback I think it was to allow us to make these investments opportunistically ensure they blockbuster M&A deal that was very compelling for us and we saw an opportunity to invest the cash to create future value in cash flows. That might dial us back on the buyback and we would allocate the capital accordingly, just given everything we know today and with our normal steady state of the capital that we have generally dedicated to M&A, we feel pretty comfortable about the commitment. Ray if you want to add anything.

Ray Sadowski

No. I think that’s I would agree with everything Rick said, I just respond the other question, from a time limit perspective, we did not put a time lid on it intentionally in estimates and a lot will vary number one probably what Rick was said but I think equally important what happens to the stock price overall. If we think it’s in the track of investment as I mentioned earlier in the response of a question, we’ll be fairly aggressive buyers, if the stock prices who was up to a degree and that becomes a little bit less attractive then we’ll allocate capital little bit differently.

Will Stein – Credit Suisse

That’s helpful. And then as my follow-up the margins and the TS segment little bit disappointing relative to what I was modeling anyway. In the past maybe go back a couple of years to remember this but there have been rebate threshold issues in the past, this isn’t dramatic short fall but I’m wondering if that was an issue in the quarter at all?

Rick Hamada

No, but that really wouldn’t part of the story. As we noted in the script well, we were disappointed as well and we have taken some actions accordingly to get that back on track.

Phil Gallagher

Yeah, Rick I need to jump in on that as well, this is Phil Gallagher. We were definitely disappointed, the bulk of the portfolio in the brands however by countries made very good progress towards our goals. The one area that we’ve had some isolated challenges on and again we’re isolated within the region if I were going to summarize it would be EMEA and we’ve got plan to place to do that. But this was not anything due to a rebated assuring all those lines.

Will Stein – Credit Suisse

Great, thank you.

Operator

Our next question comes from the line of Brian Alexander with Raymond James. Please proceed with your question.

Brian Alexander – Raymond James

Thanks, back to the components business guys, your largest competitor talked about a bounce back and book to bill in the month of July, it doesn’t sound like you saw that. And if that’s the case and book to bill still below one through July, what have to happen in August and September in terms of revenue trends within EM, they hit your revenue guidance? Do you need to see a big snap bag and bookings in August and September or do you need to just keep see kind of normal linearity off of this lower run rate? Thanks.

Rick Hamada

Yeah, so Brian I’ll let Harley jumped in but I can start by confirming we did not see anything like the major positive July book to bill that was reported from other sources. So Harley I know if you want to make more comment on the outlooks in quarter.

Harley Feldberg

Sure Rick. Hello Brian. As you would have notice from our guidance we took a fairly cautious approach to the quarter based on multiple factors, one being the book to bill. But from my perspective more dramatically just a general a terrifically cautious feeling relative to concerns about the macro environment overall. It would not beyond with that said [ph] Brain, it would not beyond unusual for us to have the type of quarter where we exist the holiday season in August and start to see a rebuilding of our backlog and stronger growth coming out of September. Obviously, we can’t predict that and we took a cautious tone because of the macro concerns. But it will not take a gigantic snap bag for us to achieve the forecast we gave as I stated it.

Brian Alexander – Raymond James

And so adjusting for the last half transfer if we do that it looks like the midpoint for September it’s down about 4% sequentially, which would be a little bit lower than the low end of seasonality, is that the right way to read your outlook?

Harley Feldberg

Indeed.

Brian Alexander – Raymond James

Okay, thanks.

Operator

Our next question comes from the line of Ananda Baruah from Brean Murray. Please proceed with your questions.

Ananda Baruah – Brean Murray, Carret

Hi, thanks guys. Just wondering if on, I guess on TS did you go through what you saw in terms of pricing as we sort of once you do the course and how this quarter has started and any pricing comments around components that you might have visibility into as well hard drives and the such? Thanks.

Rick Hamada

Phil, maybe any thoughts on that.

Phil Gallagher

No, again we have the volume business and component business both in Asia tax value visibility too, that’s more process are driven as well as in Europe, we do not drives in Asian pack. But from component standpoint, it’s the market in an Asian pack actually we saw relatively good growth our last quarters, it’s really a tale of two cities. But as far as the margin pressures in components I guess is based on supply and demand and right now the market is being down you are going to get some additional pressures in the components and in the drive area. But nothing dramatically out of the ordinary it’s more about a volume issue being lower than what we anticipated.

Ananda Baruah – Brean Murray, Carret

Okay, guys and then on the system side, are you seeing, can you just talk about sort of what you saw from a pricing perspective across the different system segments or I guess the different product segments in TS?

Rick Hamada

Nothing really overly significant in the enterprise space the markets are naturally competitive but there’s nothing that really has changed that much since the past several quarter driven year-on-year, even if you look at when you get into the regional P&Ls you look at it by country and then by brand, margins when you break out the mix, okay geographic mix and some technology mix of the products. So the margins are holding up okay, alright so nothing really but the speak are there if we standard servers and naturally competitive, I’ll just make a note because they are not usually get there. But we have saw with the growth and storage and networking and even proprietary, we are actually saw initial standard servers as a percentage of our server business, actually declined quarter-on-quarter which is a positive for us, okay.

Phil Gallagher

And then I would just add that on the TS on a global level gross margin basis it was very stable sequentially.

Ananda Baruah – Brean Murray, Carret

That’s helpful guys. If I could just ask one quick clarification, it sound like on hard drives you said may be a little bit softer but nothing to hear out is that correct?

Phil Gallagher

That’s correct. The volume was down more than we anticipated but the pricing pressure we are just abnormal with that type of volume swing.

Ananda Baruah – Brean Murray, Carret

I got it, I got it. That’s helpful. Thanks a lot.

Operator

Our next question comes from the line of Matt Sheerin from Stifel Nicolaus. Please proceed with our question.

Matt Sheerin – Stifel Nicolaus

Yes, I’m just sticking to tech solutions here. It sound like I mean your guidance, you are guiding for that division as well as components to be a less than seasonal. But it also looks like North America has been holding in very well; you had good growth there organically. Are you seeing weakness now in North America as well in tech solutions?

Phil Gallagher

Yeah Matt, this is Phil. See our normal seasonality is -1 to -5 when you just for Latin America, you’re right we are coming just outside that about -6% in total. So back to Harley’s one may be a bit conservative but that’s the route we wanted to take. The North Americas specifically is actually looking pretty good, so now that our pipelines look well, post a team recently just before this call I met with some suppliers recently, couple of partners and as we sit here today business activity looks good and our month-of-month, quarter-to-quarter from our booking standpoint in coming business and opportunities looks healthy.

Matt Sheerin – Stifel Nicolaus

So it sounds like you’re up at still as a biggest concern here?

Phil Gallagher

That’s correct, Asia continues to be inline and Europe, as I mentioned earlier, is the one that we’re continuing to watch very closely.

Matt Sheerin – Stifel Nicolaus

And then I know you went to an IT integration with Bell Micro when you’re up in the first quarter and that was created some hiccups [ph] on margins and also on sales, was that a distraction as well this quarter or was it more demand related?

Phil Gallagher

Yeah, we like through the IT integration actually it was in the February, March time frame when we effectively put the switch to do on the systems. So you definitely have a little bit of drag into the next quarter just from a education and process and still moving some buildings and what not, since I would say, there is definitely a bit of a disruption.

But it’s much demand as it is, as we see it, okay demand, as it is the integration at this point in time. And keep in mind again, we combine the revenues at this point, when that the components has volume side was down little more than normal, okay, which then go Europe in total down more as well from a revenue standpoint.

Matt Sheerin – Stifel Nicolaus

Okay and just last thing on inventory, Ray, I think you said that component inventories were up 6% sequentially and do you expect to work that down this quarter and into the December quarter?

Ray Sadowski

Yeah, I think at this stage, inventory came in as we mentioned modestly higher and I guess based upon the tone of business right now, we’ll have to see how things progress. I would say that, inventory is more likely to be on the flattest side for the quarter going forward that suppose any dramatic move we need are up or down, but that will depend upon what we see as we go through the balance of the quarter.

Rick Hamada

And Ray was that enterprise level was that EM specific?

Ray Sadowski

That’s EM specific obviously.

Rick Hamada

Okay, got it, got it. Okay

Ray Sadowski

EM specific.

Matt Sheerin – Stifel Nicolaus

Alright. Thank you.

Harley Feldberg

Rick, this is Harley, could I add a little color to Ray’s comments?

Rick Hamada

Yeah, please do.

Harley Feldberg

Hi Matt. I think the point I’d like to make on inventory, the concept of course with our below seasonal guidance for the September quarter, we want to be very, very careful relative to manage our inventory and our expenses to be quite one, but we are wanting them very, very carefully, of course we’ve already adjusted our pipeline commenced with our backlog, which we would do on a natural basis.

But we also watching very, very closely going back really to the question that Brian asked, around what do we think that quarter is going to shape up, if the quarter doesn’t show with some rebalance and stronger income levels, then we’ll make more dramatic adjustments toward the end of the quarter. And the plays after way we believe you, then we’ll continue and I think Ray prediction into some flatter service probably correct, okay?

Matt Sheerin – Stifel Nicolaus

Okay. Because and these bookings don’t pickup and you’re going to be looking at another below seasonal quarter for December quarter, right?

Harley Feldberg

Let’s say, that wouldn’t important as of today, but I think it would be logical.

Matt Sheerin – Stifel Nicolaus

Yes.

Harley Feldberg

And one thing that you keep in mind is that when you talk about book-to-bill (Inaudible) that the March quarter was actually the 8th of eight positive book-to-bill quarters in a row. As a matter of fact, I was actually looking at the numbers before the call, for our fiscal ‘10, for example, our book-to-bill was in a neighborhood of 1.2.

So it does make sense that the permutation in the book-to-bill will smooth out a bit and I think we are seeing that now. One has to wonder to deal the Japan issues caused a bit of a thinking what the overall market was doing and cause a bit of a delay which now quite frankly coupled with the strong caution in the market, the macro concerned, is probably at least for my perspective causing what we are seeing today. And our belief continues to be that we’ll manage through it and we’ll adjust as we need to as the quarter further developed.

Matt Sheerin – Stifel Nicolaus

Okay. Make sense. Thank you.

Operator

Our next question comes from the line of Jim Suva from Citigroup. Please proceed with your question.

Jim Suva – Citigroup

Thank you and congratulations to you and your Avnet team. The question I have is specifically to the outlook that forward looking guidance. When we look at the outlook for your sales, let’s take for example, just to make math easy, the midpoint of your range, you’ve got sales that are going to be up year-over-year, mid single digits pretty easily may be 6% or so, yet, earnings per share are not growing at the midpoint.

And it’s, to be pretty blunt there, people would like to see the sales and the EPS both growing together. Are there some things that you’re working through in the September quarter that are pressuring that earnings and it so when will those be resolved or when should we look to see some leverage to the bottom line on the forward looking numbers?

Ray Sadowski

So hi, it’s Ray, Jim. So I guess the first thing I would probably mention is, so one of the things when expense perspective overall that impacts us in the quarter each year, but little bit of a anomaly this year, is and we’re talking about and the passes are in center of compensation, our equities sense of compensation and the way that gets expense where it’s fairly fund loaded in the quarter.

And you may recall what happened last year, essentially we round up splitting a significant amount of that expense between the September quarter, December quarter, simply because we have enough shares. And so what that means is that, in essence if you look at it from the year-over-year perspective, last year’s expenses from a normal type perspective we are understated versus what they are today.

And the impact of that overall is, I’d say roughly $8 million, so did it essence, last year’s first quarter, probably it’s been about $6 million, $7 million higher and this quarter just because the increases, it’s $1 million or $2 million higher, so the net event is roughly about $8 million number overall. So that’s certainly one other things is impacting the overall leverage at you probably seeing overall when you look at things.

In addition to that as we work through the softer environment, some of the drop through we get adjusted as we move forward, just dealing with the overall mix of business by the region or where we sit the clients or what we see our expense structure looking like at this particular point in time. But we are still managing our business overall to, what I guess we characterize as a $50 drop through of no less than 50% and it will manage as we go forward.

Jim Suva – Citigroup

Great. And then when we look at operating expenses, your SG&A had been expenses, given that we’ve had, several tokens of acquisitions and things. Are we have a run rate of revenues now, currently where you see things or given your changes to the macro environment, should we be looking at that coming down or they’re actually some step up features due to acquisitions, just kind of to help us, look at the operating expense line.

Ray Sadowski

So I guess a couple of comments. One, if we looking at it sequentially, so we did announce a couple of acquisitions earlier in the year and that will cause a little bit of a step up expensive, companies are not huge but of course it will add some multiple billions of dollars of expenses going forward.

In addition to that, we have taken expense actions, some limited expense actions targeted around the world which will pull expenses down. At this particular point in time, in terms of whether we’re looking at doing something from that much larger scale, I guess, I’d say it’ll depend upon what we see as we go through the quarter.

We did just come of a very, very strong quarter with record results. We certainly do see a slowing as it’s been indicated in the discussion today and then in our prepared remarks. And we’ll the do the things as we’ve done in the past, consistently and responded accordingly.

But I’d say at this particular stage, it’s little bit early, we might see a little bit more in terms of what happens as we go to the quarter and obviously over the next two months. And we’ll take the appropriate actions that we think are necessary in order to maintain our certain level of profitability.

Jim Suva – Citigroup

Thank you and congratulations to you and your team.

Ray Sadowski

Thanks.

Rick Hamada

Thank you Jim.

Operator

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

Shawn Harrison – Longbow Research

Hi, just first clarification, will it be a $8 million, that’s a sequential increase in the September quarter for the equity compensation, correct?

Ray Sadowski

It is a sequential increase, no, I’m sorry year-over-year, the sequentially, the $8 million is a roughly year-over-year $7.5 million, $8 million year-over-year, sequentially, we are looking more about $11 million, $12 million, $13 million number sequential increase.

Shawn Harrison – Longbow Research

Okay.

Ray Sadowski

That would be more in line with, what we typically would see, other than our expenses up a little bit, but we are not dramatically, so.

Rick Hamada

$8 million was year-over-year.

Shawn Harrison – Longbow Research

Okay, thank you. And I guess I missed it, I guess the actions that are being taken in regards to TS EM and improving returns, what I guess are the exact savings that are forecast from those actions, when should we see that, on top of that, where are the full synergies from Bell Micro that were expected here exiting the June quarter as well?

Rick Hamada

So Shawn I’ll jump in here. Here’s how I would characterize it, that the synergies are done and the magnitude of the actions that have already been planned and executed are in the neighborhood of say $16 million annualized, $4 million a quarter roughly.

Phil Gallagher

That’s yeah.

Rick Hamada

Yeah.

Shawn Harrison – Longbow Research

Okay.

Rick Hamada

But as we indicated, we’re still staying close to the business and monitoring, what we need to do to get it back on track.

Phil Gallagher

And those actions actually we are taken in the June, this is Phil and the June timeframe but now we executed them. So it trip to little bit into July, so we should start to see the benefit this quarter.

Shawn Harrison – Longbow Research

Okay. And then where there any cost associated with those actions and the SG&A this quarter, it was maybe a little higher than I thought it would be or maybe just some M&A for the June quarter that was in the SG&A because it didn’t pickup probably more than anti that would for sales growth?

Ray Sadowski

There was some charges, I think we’ve outlined them, some restructuring integration charges, I don’t have the exact number in front of me, but it was not huge in the scheme of things very simply because we also have some reversals over referrals related to past restructuring charges, so the net of the two turndown are not to be huge number overall.

Shawn Harrison – Longbow Research

Yeah, I think that was you say $4 million but within I guess the SG&A ex that callout item or is there anything else in there that led to be a sequential inflation seems just a little bit greater than that, what have expected with the sales growth?

Ray Sadowski

No, nothing that’s sticks out, just that one here about, the $4 million that we noted in the special charge kind of section, nothing else that I can think of sticks out is being or any one particular item.

Shawn Harrison – Longbow Research

Okay. Thank you so much.

Operator

Our next question is a follow-up question from Amitabh Passi. Please proceed with your question.

Amitabh Passi – UBS

Thank you. Ray, just a quick question for you, if we would assume sales kind of stay flattish for fiscal year ‘12, is it fair to assume that OpEx or SG&A should stay flat, just trying to get a sense of what levers you have to sort of contain spending and should we expect under that scenario were sales are flat can you hold OpEx relatively flat?

Ray Sadowski

So, obviously a challenging question, we’ll see as we go through the environment, but the question in terms of, as you know our expense structure overall is, I’d say reasonably variable and depending upon what does happen overall to top line, we’ll adjust the expenses accordingly.

But I think once you bake it all the M&A and everything else, I would not see a significant shift in expenses, one way or another unless we decide to take revert actions. And again that will depend upon what do we actually see as we go to the balances fiscal year.

Amitabh Passi – UBS

Okay. And then just one for Phil, quickly. I don’t know, I apologize if you touched on this? Just curious what your expectations might be for a typical IT budget flush at the end of this year?

Phil Gallagher

Yes, Amitabh thanks for the question. I’m probably not really qualify to answer we can’t answer it’s a tough one the call at this point. So with everything going around the world that I’d be and try to respond to that.

Ray Sadowski

To get better idea on next quarters call.

Amitabh Passi – UBS

Okay, I appreciate it.

Phil Gallagher

Yeah, thanks.

Operator

Our next question comes from the line of Mona Eraiba from TCW. Please proceed with your question.

Mona Eraiba – TCW

Hi, congratulation guys for your great execution and a difficult fund. Could you just give us a color like some, your compensative are saying like since we got weak at the final two weeks of June and then improved somehow. Is there any change that in between weekly basis just the color is things are getting softer, getting standardizing, or what do you see?

Rick Hamada

Yeah, hi Mona, this is Rick. And maybe I’ll ask Harley to jump in as well. But typically, again coming off the June at 0.95, we’ve seen a continued less than one-to-one to the first five weeks of the quarter, but not dramatically different then how we ended the quarter. So Harley, I don’t know if you want to add anything?

Harley Feldberg

No Rick, I would agree completely.

Rick Hamada

Yeah.

Mona Eraiba – TCW

Is that goes in the components and the system business or this is?

Rick Hamada

Yeah, on the systems business Mona, that typically is almost always a one to one book-to-bill type of business, very quarterly driven right, yeah, we’re not really a supply chain business per say. So, but the income in business for the month of July was very consistent with our outlook.

Phil Gallagher

Yeah, FGS.

Rick Hamada

FGS.

Operator

There are no further questions in the queue. I’d like to hand the call back over to management for closing comments.

Rick Hamada

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 the further description of certain charges that are excluded from our Non-GAAP results. This entire slide presentation including the GAAP financial reconciliation can be accessed in downloadable PDF format at our website on to the quarterly result section. Thank you very much

Operator

Ladies and gentlemen this does conclude today’s teleconference. Thank you for your participation, you may disconnect your lines at this time and have a wonderful day.

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