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Executives

Vince Keenan - VP, IR

Rick Hamada - CEO

Ray Sadowski - CFO

Phil Gallagher - President, Technology Solutions Global

Harley Feldberg - President, Electronics Marketing Global

Analysts

Brendan Furlong - Miller Tabak

Shawn Harrison - Longbow Research

Amitabh Passi - UBS Financial Services

Scott Craig - Bank of America/Merrill Lynch

Ananda Baruah - Brean Murray

Sherri Scribner - Deutsche Bank

Craig Hettenbach - Goldman Sachs

William Stein - Credit Suisse

Brian Alexander - Raymond James

Matt Sheerin - Stifel Nicolaus

Jim Suva - Citi

Steven Fox - Cross Research

Lou Miscioscia - Collins Stewart

Avnet, Inc. (AVT) F2Q12 Earnings Conference Call January 26, 2012 2:00 PM ET

Operator

Please stand by our presentation will now begin. I’d 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 Second Quarter Fiscal Year 2012 Business and 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 second quarter fiscal year 2012, please note that in the accompanying presentation and slides we have excluded restructuring, integration and other charges from both the current and prior year periods. When discussing pro forma sales for organic growth, prior periods have been adjusted to include acquisitions and the impact of the divestiture as well as the transfer of the Latin America computing components business from TS to EM in the first quarter of fiscal 2012.

In addition, when we refer to the impact of foreign currency, we mean the impact due to change in foreign currency exchange rates when translating Avnet’s non-U.S. dollar-based financial statements 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’d like to review Avnet’s safe harbor statement. This presentation contains certain forward-looking statements, which are statements addressing future financial and operating results of Avnet. Listed on this slide are several factors that could cause actual results to differ materially from those described in the forward-looking statements. More detailed information about these and other factors is set forth in Avnet’s filings with the Securities and Exchange Commission.

In just a few moments, Rick Hamada, Avnet’s CEO will provide Avnet’s second quarter fiscal year 2012 highlights. Following Rick, Ray Sadowski, Chief Financial Officer of Avnet, will review some other financial highlights, our return on capital performance and provide third quarter fiscal 2012 guidance. At the conclusion of Ray’s remarks a Q&A will follow. Also, here today to take any questions you may have related to Avnet’s business operations is Phil Gallagher, President of Technology Solutions and Harley Feldberg, President of Electronics Marketing.

With that, let me introduce Mr. Rick Hamada to discuss Avnet’s second quarter fiscal 2012 business highlights.

Rick Hamada

Thank you, Vince and good afternoon, everyone. Thank you all for taking the time to be with us and for your interest in Avnet.

In Q2 the challenging macro environment and continued component supply chain inventory correction resulted in a second consecutive quarter of below normal seasonal revenue growth. Despite these top line challenges, the Avnet team did a very good job driving EPS beyond our expectations to a second quarter record and generating strong cash flow in the quarter.

Enterprise revenue of 6.7 billion increased 4% sequentially while pro forma revenue was roughly flat with the year ago quarter in constant dollars for the second consecutive quarter. Pro forma revenue was up 5% year-over-year in our Americas region, while EMEA remains the weakest region with two consecutive quarters of negative year-over-year organic growth in constant dollars.

Gross profit margin, which typically declines in the December quarter due to the higher mix of TS business was flat sequentially at the enterprise level as both groups realized a sequential improvement despite the softer revenue environment. These gross profit margin improvements when combined with our ongoing expense management initiatives drove significant operating leverage in the business as our adjusted operating income grew 4.6 times faster than revenue sequentially. Also, on a sequential basis, adjusted operating income increased 19% to $265 million and adjusted operating income margin increased 49 basis points to 4%. This sequential increase was primarily due to a meaningful improvement in profitability in all three regions at TS, a solid performance at EM and a temporary benefit related to higher prices for hard disk drives due to supply constraints in the market.

On a year-over-year basis, adjusted operating income margin increased 17 basis points even though sales were down slightly. Adjusted EPS increased $0.08 from the year ago quarter to $1.15 due primarily to this improved profitability and a lower share count as a result of our stock buyback program. In addition to the strong performance on the income statement, the team did a very good job managing working capital through a period of continuing supply chain inventory adjustments and the associated slower growth.

In the December quarter working capital declined $361 million sequentially, ordinarily 9% with over 80% of this reduction occurring at our EM business. Higher income and vigilant working capital management combined to generate 450 million in cash from operations for the quarter and 715 million for the trailing 12 months. Return on capital employed increased 210 basis points sequentially to 14.3% and is back within our target range of 14 to 16%.

Even though we have businesses within our portfolio that are still progressing toward their long-term financial goals our performance this quarter is indicative of the positive impact that our VBM discipline continues to have on our business. Despite the uncertainty that particular elements of the current macroeconomic environment creates, we remain committed to driving operating improvements while investing in markets and opportunities to accelerate profitable growth and shareholder value creation.

Now let’s turn to our operating groups. In the December quarter the electronic component supply chain inventory correction resulted in a second consecutive quarter of below seasonal growth for Electronics Marketing. As a result, pro forma revenue declined 6% sequentially as compared with a typical range of flat to down 3%. While EMEA declined double-digits for the second quarter in a row, Asia declined 6% and the Americas region was up 1%.

Reported revenue of $3.6 billion, which was consistent with our expectations increased 1% year-over-year although the pro forma revenue was down 3.5%. EM’s gross profit margin declined 7 basis points year-over-year but increased 30 basis points sequentially primarily due to a temporary benefit in the Americas of an increase in pricing driven by supply constraints in the market for hard disk drives and an improvement in our core business in our EMEA region. Increased gross profit margin coupled with our ongoing expense management activities resulted in operating income of $175 million, coming in above our expectations for the quarter. Operating income margin of 4.9%, declined 30 basis points from the year ago quarter, primarily due to a lower mix of business from our higher margin EMEA region. However, our Americas region improved both sequentially and year-over-year.

Turning to the balance sheet, EM reduced working capital 9% sequentially with EMEA and Asia accounting for the majority of the decline. Roughly two-thirds was related to lower accounts receivable while inventory declined 5% in reported dollars and 4% after adjusting for acquisitions and currency. Working capital velocity remains below year ago levels. However, we expect this important metric to improve as we resume growth over the next couple of quarters. Return on working capital declined 483 basis points from the year ago quarter primarily due to an increase in working capital and to a lesser extent lower operating income margin.

As we mentioned on our last earnings call, we were encouraged by an improved book-to-bill across all regions through the first three weeks of October. That trend continued as EM approached parity for the quarter at 0.97 to 1 up materially from our September quarter. It appears the supply chain inventory correction is nearing its end consistent with the perspective we have held for the past two to three quarters. While the component supply chain inventory adjustments in the market has negatively impacted EM’s results for the past two quarters, I’d like to highlight that on a trailing 12 month basis, operating income margin is at the high end of our target range and ROSI is above our target. To put this performance in a broader perspective, for calendar 2011, EM delivered economic profit dollars slightly higher than calendar 2010, a year that was characterized by strong double-digit growth as the V-shaped recovery in technology was in full swing. With the return to more seasonal growth expectations in the March quarter, we remain committed to growing organically faster than the markets we serve and translating that growth into higher economic profits and shareholder value creation.

As expected, TS experienced sequential growth towards the low end of normal seasonality for a December quarter as our hardware revenue growth did not keep pace with a typical year-end budget cycle. Revenue increased 19% sequentially in reported dollars and 21% in constant dollars versus normal seasonality above 20 to 26%. Sequential growth was led by our EMEA region with reported growth of 29% and 36% in constant dollars.

Pro forma revenue grew 3% year-over-year led by Asia which grew 14% with the Americas up 5.5% while EMEA was down 5% in constant dollars. From a product category perspective industry standard servers and software revenue grew over 35% from the prior year while storage revenue was up over 20%.

Gross profit margin improved 13 basis points sequentially and 60 basis points year-over-year led once again by the EMEA region, which was up over 50 basis points sequentially and 150 basis points year-over-year.

Across all three regions, TS leveraged the year-end seasonality into an improved profitability both sequentially and year-over-year as operating income grew 4.4 times faster than revenue sequentially to a record of $119 million.

Operating income margin improved 135 basis points sequentially to 3.8% and was 56 basis points above the year ago quarter with all three regions delivering a meaningful improvement.

In AMEA, our continuing focus on profitable growth coupled with restructuring initiatives, resulted in operating income tripling sequentially to an all-time record for the region and operating income margin increasing 236 basis points. TS Asia also had a strong quarter as improvements in gross profit margin and an increasing emphasis on returns drove operating income up over 100% from the year ago quarter and operating income margin was at its highest level in over three years.

In the Americas region, operating income margin and return on capital employed remained well above our target levels and we continue to see software and services grow as a percentage of our portfolio as we enhance the value of our solutions offerings. In Latin America, where we are building our recent investments, strong sequential revenue growth and expense leverage drove returns up both sequentially and year-over-year. As a result of the improved profitability at TS, return on working capital increased 861 basis points year-over-year and over 2,000 basis points sequentially.

Well all three regions contributed to this performance, I’d like to highlight our international operations for the noteworthy progress they made this quarter toward their long range planning targets. The AMEA region which has faced a challenging market while executing a major integration significantly improved gross profit margin and grew economic profit dollars by 92% from the year ago quarter.

In Asia, where we have invested in value creating acquisitions and strategic organic growth initiatives our annualized revenue run rate is now approaching 1.75 billion while operating income margin has improved year-over-year for five consecutive quarters. As we continue to leverage our global scale and scope and apply our value based management discipline, we are confident TS can continue to make progress towards its long range targets and grow economic profits across the entire portfolio.

Now I’d like to turn the commentary over to Ray Sadowski to provide more color on the progression of our share repurchase program and shareholder value creation. Ray?

Ray Sadowski

Thank you, Rick, and hello everyone. As Rick mentioned earlier we generated 450 million of cash flow from operations this quarter and 715 million on a trailing 12 month basis. We are putting this cash to good use and took advantage of an attractive stock valuation to repurchase 4.6 million shares of our stock during the quarter for an aggregate cost of about $135 million. With a book value of approximately $26 per share and a stock price which range from $25 to $32 during the quarter, we took the opportunity to make a sound investment in our company. Since the onset of the buyback program in mid-August of 2011 through the end of the second quarter, we have repurchased a total 8.06 million shares at an aggregate cost of $226 million.

We will continue to execute on the share buyback program as long as it remains a good investment. However, our rate of investment could decline as the stock price increases. In addition to the share buyback program, we continue to invest in value creating M&A.

During the quarter we announced four new acquisitions; Pinnacle Data Systems, Nexicore Services and ROUND2 Technologies are expanding Avnet’s reverse logistics capabilities while DE2, SAS strengthen Avnet embedded in EMEA. Investments and value creating M&A will continue to be a key component of our capital allocation strategy.

In Q1 due to the macroeconomic environment and supply chain inventory correction, we fell below our return on capital target range following several quarters of consistently performing within that range. As Rick mentioned, this quarter we are right back within our target range of 14 to 16% as the quarter came in at 14.3%. In addition, we doubled economic profit dollar sequentially to over $56 million. As the current technology cycle continue to play out the team did a very good job of adapting to the market conditions and adjusting our business model accordingly. With our commitment to our VBM principles we remained focused on generating economic profits and performing to our long-term stated goals as we manage through economic and industry cycles.

Looking forward to Avnet’s third quarter of fiscal 2012, we expect EM sales to be in the range of 3.55 billion to $3.85 billion, and sales for TS to be between 2.4 and $2.7 billion. Therefore, Avnet’s consolidated sales are forecasted to be between 5.95 billion and $6.55 billion. Based on upon that revenue forecast we expect third quarter fiscal year 2012 earnings to be in the range of $0.94 to $1.02 per share.

The above EPS guidance does not include any potential restructuring charges or any changes related to acquisitions and post closing integrations. The guidance assumes 148.1 million average diluted shares outstanding used to determine EPS and 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 rate for the third quarter of fiscal 2012 is 1.3 to 1. This compares with an average exchange rate of 1.37 to 1 in the prior year third quarter and 1.35 to 1 in the second quarter of fiscal 2012. Using the midpoint of third quarter guidance our sales and EPS would have been roughly $70 million and $0.02 per share higher, respectively, if exchange rates have remained constant with the second quarter of fiscal 2012.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Brendan Furlong from Miller Tabak.

Brendan Furlong - Miller Tabak

Question on the TS in Europe which came in pretty strongly in the quarter conversely the U.S. TS business seemed a lot weaker than I had expected. Can you walk through what was going on in TS there, be it lack of budget flush or what have you?

Rick Hamada

Phil, if you want to jump in for the regional color, maybe I’ll add comments at the end?

Phil Gallagher

Yes, we saw, I’ll start with Europe, and you’re talking at the revenue line at this point I suppose? That we saw plus 36% as we outlined and it was a good quarter for us in Europe. If we look at the historical Europe typically does come in the December quarter sequentially greater than the balance of the regions in the world. And it was a positive performance and we believe we gain some share in the market as well.

In North America, actually we had a good performance in North America. I’d say the close was not as strong as we thought so slightly little bit of a tougher December close, but still came in satisfactory to us from a performance standpoint. And in general, it wasn’t overall significant. We did have some backlog that didn’t get out. It was nominal in the grand scheme of things, but it certainly added to a little bit of the shortness that we came up with. But overall, North America, we’re pleased with the performance and it’s very consistent and looking to that in the future as well.

Rick Hamada

I’d just add that I think the sequential growth performance was enhanced by particularly not so favorable September quarter for TS EMEA and on a year-on-year basis we still have growth in Asia and the Americas. And as we pointed out in the script even with that sequential growth the year-on-year growth in Europe was still negative 5%.

Brendan Furlong - Miller Tabak

I guess I’ll switch it over to semis. Lot of the (inaudible) companies reporting so far this earning season are saying there’s been a bit of a snapback or pulling in orders in the last two weeks of the quarter. I wonder if you could maybe shed some light on that for us too, thanks.

Harley Feldberg

Yes, we did see some relative strength in incoming orders towards the latter part of December and the good news is that activity and strength has continued so far at least into January.

Operator

Thank you. Our next question comes from Shawn Harrison from Longbow Research.

Shawn Harrison - Longbow Research

First off, congratulations on the margins at TS this quarter, when looking into the March quarter and maybe applying I guess typical seasonality of the revenues and then the typical fall through, it looks as if EBIT margins would still be above 3%. Am I correct in using that assumption for the EBIT margins in the March quarter at TS?

Rick Hamada

I think that’s a little stout Shawn. I think generally speaking we might expect, say, something in the neighborhood of 100 basis point decline sequentially there and if you take a note look back to Q1, we’re very focused on landing TS little better share in Q1. September quarter.

Shawn Harrison - Longbow Research

It’s still only volume there’s no incremental cost coming back on in that period?

Rick Hamada

That’s correct.

Shawn Harrison - Longbow Research

And then just as maybe a follow-up to Brendan’s question, when looking at book-to-bills regionally coming into the New Year I guess what is above parity what’s still below parity? I’m guessing Europe is below parity, but any color you could provide on just where book-to-bills are right now would be helpful.

Harley Feldberg

I assume you are talking components?

Shawn Harrison - Longbow Research

Yes. I’m sorry Harley.

Harley Feldberg

Yes, at this point we are above parity in America, Asia and Japan and at least so far in the quarter we’re still below parity in Europe.

Shawn Harrison - Longbow Research

Does Europe have a long way to go or are we getting close?

Harley Feldberg

They’ve got some work to do.

Operator

Thank you. Our next question comes from Amitabh Passi from UBS Financial Services.

Amitabh Passi - UBS Financial Services

I just wanted to clarify if there’s a way to breakdown what the positive benefit was from the former ACD pricing in the December quarter and what are you assuming for the March quarter. I also wanted to clarify whether you saw any benefit from stronger HDD pricing in the TS segment because I believe your EMEA HDD business is in TS?

Rick Hamada

You are right, Amitabh. This is Rick. Let me jump in. That’s sort of an enterprise level question because it does branch over EM and TS and multiple regions. So, in general just a rough split. The majority of our HDD business is actually now part of EM in the Americas, but we do have a portion at TS EMEA. Think of it roughly as two-thirds, one-third type of split if you look at the revenue side of things.

Now, I’m going to get to a number, but I want to provide some context as well. There is one way to look at this which would be HDDs and isolation and the volumes were down on units, but the ASPs were up. We also have impacts like what was the impact on TS system shipments at the end of the quarter because of HDD shortages, what associated components maybe microprocessors or boards or other embedded or etcetera.

So, I only provide that context to let you know on the best information, the best and total analysis that we have been able to work through, we estimate that the EPS impact for December quarter was $0.05 to $0.07. Hopefully, part of the message there is that, it was not the entire $0.10 over consensus or over our guidance. It was certainly a story of solid execution within our businesses in addition to this temporary benefit from the HDD situation.

Amitabh Passi - UBS Financial Services

Rick if I could just clarify, so for the March quarter are you assuming any incremental benefit from HDD pricing or is anything embedded in the March quarter guidance?

Rick Hamada

Nothing really embedded in there, Amitabh. It is an extremely dynamic and volatile situation. I think you guys are all watching like we are the updates from Seagate, WD, etcetera. It’s very unclear of what’s going on with the supply situation. And remember, we came out of September and entered the December quarter in a much better hands-on inventory situation. We’re not depleted. We’re still taking care of our top OEM customers along the way, but we are starting this quarter with less than we had and therefore, we’re going to be a little more reliant on exactly what the new supply situation is going to be for the March quarter and as already stated very volatile and dynamic.

Amitabh Passi - UBS Financial Services

And then perhaps just as a follow-up for Ray and maybe this is quite subjective, Ray. I’m just curious, why aren’t you being more aggressive in terms of buying back stock?

Ray Sadowski

Well, it’s question of how aggressive to be? We think we’re being fairly aggressive and the aggressiveness relates to what the valuation is in the marketplace and obviously that’s tied to the stock price. So, early in the quarter as well as last quarter we were very aggressive with stock prices a little bit better than book value, but as the stock price moves up and gets to at a I guess I’ll say a different level of valuation which is scaling back a little bit. But overall, we believe we’re being fairly aggressive in that. We’re almost midway through with the program and we’ve only been at it for less than six months.

Operator

Thank you. Our next question comes from Scott Craig from Bank of America/Merrill Lynch.

Scott Craig - Bank of America/Merrill Lynch

Can you guys go through on the TS side? Obviously, there was improvement, it sounded like in profitability in all regions outside of perhaps the hard disk drive issue in Europe that helped profitability. Can Phil, maybe take us through some of the steps you’re doing, is it some basic blocking and tackling, is it getting rid of some unprofitable revenues along those lines? And then Ray, a question for you with regards to cash flow. How do we think about cash flow over the next couple of quarters? If the environment remains somewhat subdued like it appears it may, are we still going to be generating some pretty good cash flow numbers there? Thanks.

Phil Gallagher

As we noted all regions participated in the increased margins and increased contribution to the overall performance at TS, so very excited about that. More Europe specific as I mentioned in December at the Analyst Day, where really it’s a combination of two or three different factors; one is, and we say it all the time but we’re definitely applying our value principles, we’re looking at all cost in the business constantly and we’ll continue to do that by the way. So, we still have work to do on an ongoing basis, but we’ve definitely have reduced operating costs in Europe. We have deselected revenues, so while we got some moderate help from the HDD as Rick pointed out; the bulk of the improvement was outside of the HDD assistance.

So, as we got some help there we continue to deselect non-profitable revenue and we’ll continue to look at investments in Europe as well where there’s opportunities for organic or acquisitive investments in Europe, where it could be incremental to our current performance, we’ll continue to look at that. So, it’s really we’re really working all of the levers and just continue to drive the operational efficiency to really get the scale across Europe, which as we’ve spoken many times can be a challenge and that we’re really working towards that end.

Ray Sadowski

Scott, from a cash flow perspective, as you can tell we had a very strong cash flow quarter generating about 450 million from operations. As we go forward over the next couple of quarters, it’s obviously depending on growth rate, and also taking into account, we have a fairly sizable working capital base and so therefore, it’s difficult to pinpoint what our cash flow generation will be, and that’s why we typically look at on a rolling four quarter basis.

However, having said that our expectation right now for Q3 is that we will generate cash for the quarter, again absence some anomalies, it could certainly happen. We don’t think it’s going to be the level the 450 million we had in the December quarter, but we still think it should be positive and right now the expectation is for I’d say early expectations right now for the June quarter would be the same depending upon what levels of growth we actually see in the marketplace overall.

Operator

Thank you. Our next question comes from Ananda Baruah from Brean Murray.

Ananda Baruah - Brean Murray

Harley, I just would be interested in getting your thoughts on how we should expect the EM margins, I guess the dynamics the forces will be kind of working on the EM margins as we move over the next couple of quarters. Now that we’re back to seemingly typical EM seasonality, but with Europe still below book-to-bill of one and (inaudible) to go there. And in the past when we sort of gone through and this maybe this is more of a mini-cycle, but when you’ve gone through cycles you have actually seen the margins go through the higher end of your targeted range?

Harley Feldberg

The way I’d think about it is as you are aware the March and June quarter are typically the quarters where our regional mix falls back to 1 with a higher ratio from the West and specifically in Europe. Traditionally, as Phil said, about TS Europe in December, that is typically the case for us EM Europe in March. So, although it’s coming off a lower base, as I’m sure you’ve calculated we were in double-digit decline territory in the previous quarter, we are still expecting when we say more traditional seasonality we are still expecting some fairly attractive growth going into the March quarter, and the ratio will favor Europe. I mentioned that because as you know that has a fairly significant impact on our margin. So, our expectation in March is that we will return into our target range as one of you pointed out we fell out of that in December for the first time in quite some time, but we believe we will be back in that range in the March quarter.

Ananda Baruah - Brean Murray

And I guess I mean I know it’s not your guidance, but if something were to cause to either in March or June go through the top end of that range. Would it be purely demand related? So, that kind of current mix of business by region just was stronger with that potential.

Rick Hamada

I like the idea, I’m not advocator I’m not projecting that. I think it is demand. The reality is as I’ve said with EMEA and to a somewhat lesser degree our core business in America. We still are in negative year in your territory. As that reverses and as growth returns that would be my objective to go back through the top, but I’d not be thinking that way in the March quarter.

Ananda Baruah - Brean Murray

Just one follow-up for Philip if I could. Can you storage growth was 20% this quarter, I believe you commented. I think it has been north of 30% in prior quarters, is that correct as a clarification. And just interested in also being reminded when you guys sort of anniversary some of the new products to the EMC begin to ship through the channel and that will be helpful? Thanks.

Phil Gallagher

Yes, storage was in the 20 plus range this past quarter. It might have been a little latter than some previous quarters, but it also has become as I pointed prior it is right now our largest technology, our largest commodity within the portfolio. So, as the [base] gets larger the growth may slow a bit but it’s not we wouldn’t call that slowing down. We think storage is still going to be and continue to be an opportunity for us and one of our growth technologies moving forward. We don’t see that slowing down. So, we are actually very pleased with our performance in storage and very pleased with our performance with the key suppliers within the storage portfolio. On some of the new products that you are talking about, they are actually going well. I think, I guess you are talking about EMC and some of the lowering storage products that they have come out for the marketplace with. We are lined up well with the suppliers and that are going through the channel and it’s going to be positive news for us moving forward.

Ananda Baruah - Brean Murray

Is 20% a sustainable growth rate through 2012, calendar 2012?

Phil Gallagher

It’s tough to forecast that that far out and we are going to certainly work to keep it there that’s for sure.

Rick Hamada

So, I think as our premise has always been let’s know what the economic growth picture looks like and we’ll try to give you a little insight into what’s going on with IP.

Operator

Thank you. Our next question comes from Sherri Scribner from Deutsche Bank.

Sherri Scribner - Deutsche Bank

I wanted to get a sense you did a good job on the SG&A this quarter Ray and I just wanted to get a sense of where you think SG&A would be moving forward. Will we stay at these low levels or are we going to see a tick up in SG&A?

Ray Sadowski

So, overall we have taken some restructuring actions as we’ve indicated and the overall numbers in the roughly $30 million range overall. A good piece of that is already out, but we still have some, it has all been executed for the most part, but during the quarter so we haven’t received a full benefit yet. I don’t have the specific breakdown between the quarters, but we got a good chunk benefited certainly in the December quarter and we expect the balance to be fully reflected in our results in the March and June quarter. At this stage we are not seeing expenses go up. They will go up in dollars when you start seeing some of the acquisitions that we have announced come on line obviously. So if you exclude acquisitions and things like that we would expect that expenses sequentially as an example probably should decline in roughly 10 to $15 million range for the quarter.

Sherri Scribner - Deutsche Bank

And how much for the acquisitions then?

Ray Sadowski

I don’t know. Some haven’t enclosed yet, so I don’t know the exact number yet and I don’t think at this stage the ones that have closed the numbers are not that meaningful that’s going to skew with any great degree and it’s covered within that range.

Sherri Scribner - Deutsche Bank

Okay, so you would expect SG&A on a dollar basis to go down?

Ray Sadowski

Yes.

Sherri Scribner - Deutsche Bank

And then thinking about the TS business in terms of linearity for the quarter, I know that business is very backend loaded for you. It sounded like from some of the other supply chain companies that we have heard from that demand really wasn’t that strong at the end of the quarter. What did you see in terms of your linearity in that business?

Phil Gallagher

I’ve touched on that little bit earlier as well. I used the word softer, it was certainly a little bit softer at the end of the quarter than we expected, which drove us to be about 1% off the low end of guidance, wasn’t dramatic, but certainly a little bit softer.

Operator

Thank you. Our next question comes from Craig Hettenbach from Goldman Sachs.

Craig Hettenbach - Goldman Sachs

Harley, in the component business can you talk about any influence of early Chinese New Year this year on orders really in front of that and your expectations post Chinese New Year?

Harley Feldberg

That’s a difficult one because we are sitting right at Chinese New Year now. So, I think if the question is do we believe some of the positive booking activity preholiday were in anticipation of the holiday. I think that could be. It’s really difficult for me to answer that with clarity until we get past the holiday. Indeed the holiday being at the frontend is a little bit different. So, we are anxious to see how business returns for the couple of weeks period right after the holiday.

Craig Hettenbach - Goldman Sachs

And if I can follow-up with Rick, in Europe on the system side outside of just seasonal trends and budget flush. What are you hearing there or seeing from a demand and any expectations in terms of when that demand might bottom out in systems?

Rick Hamada

As I was saying, the year-on-year growth still and the story has been consistent for multiple quarters, still has not been very exciting. However, on our scorecard, I will tell you sequentially, in the September quarter Europe was down, this is now constant currency, they were down 12.5 year-on-year in September quarter, but they’re only down five in December. So, you could make a case. It appears that some momentum is building back hopefully to get to a crossover point in the not too distant future. But overall, I guess, I’d say the strong sequential performance, which as Phil said is very typical for the regional mix at TS for some reasons at the end of the year seemed to be consistent with our expectations and certainly not a negative indicator from a demand perspective. I don’t know, Phil, if you want to add anything?

Phil Gallagher

Not much I can add really, Rick, that’s still bumpy. It’s still bumpy and it’s still uncertain. There are some parts of Europe that are going very well other parts aren’t, so it’s tough to talk about it as one fell swoop region, that’s why we’re going to continue to manage that very closely, make the investments where we know we can get returns, and we’ll reduce where we don’t think we can, but it’s bumpy. We are optimistic, but right now it’s bumpy and a really tough call.

Operator

Thank you. Our next question comes from William Stein from Credit Suisse.

William Stein - Credit Suisse

So, I wanted to follow-up on the Chinese New Year question. When you look at the trend in bookings that you saw, Harley in particular your business obviously in December, and then January month to-date. How China compares to other regions did they all move up and approach parity or did you see a stronger improvement in China relative to the other regions?

Harley Feldberg

Actually all regions showed some positive movement towards the latter part of December and as I mentioned before in the early part of January as well. Only comment I’d make is relative to China, remember that China is a part of Asia and there are different stories in Asia. So, we saw some very interesting positive movement out of our Taiwan operations more so than China. When we report our numbers here by region, we are talking Asia, which would include all of Asia with both Taiwan and China. So, I guess to sum that up. Good activity we saw some encouraging movement, the strongest of which out of Asia would have been Taiwan.

William Stein - Credit Suisse

And then on the HDD side, Phil perhaps in your area, can you talk to us about expectations for win that benefits that you experienced in last quarter should roll off P&L. Is that how the March quarter is already guided or is it guided such that whatever benefits you had last quarter will continue?

Rick Hamada

I believe I covered earlier. In case I wasn’t clear that, so, we took a look at quantifying the December quarter impact, but going forward a number of conditions including starting with less supply, less clear and still very dynamic, volatile new supply environment for the short-term future. So, net-net, that 5 to 7 we think should basically drop off immediately and we did not really bake any HDD upside into the guidance as provided?

Operator

Thank you. Our next question comes from Brian Alexander from Raymond James.

Brian Alexander - Raymond James

Maybe one more HDD question, sorry about that, but just from an operating margin perspective, Rick, it sounds like it caused maybe 20 basis points or so of operating margin upside in the December quarter. So, if we back that out your operating margin guidance for the March quarter would be roughly flat sequentially is that the right way to think about it?

Rick Hamada

Brian, I haven’t done the math on the enterprises op margin, but if Ray you got opinion on that.

Ray Sadowski

Go through the number again, Brian, just to be clear?

Brian Alexander - Raymond James

The question is are the operating margins going to be basically flat sequentially in the March quarter if we back out the benefit from HDDs in December?

Ray Sadowski

No, we would expect it to be up slightly, but not to any significant degree, but they will be up on an operating level.

Rick Hamada

The another way to look at this Ray isn’t it is that if you take $0.05 to $0.07 out of the current EPS, that nets out to say, $1.08 to $1.10. And our guidance on a constant currency EPS guidance mid-point would be a $1, right? So, that’s another way to look at it.

Ray Sadowski

So, you will see margins going up a little bit.

Rick Hamada

Makes sense Brian?

Brian Alexander - Raymond James

Just on the reverse logistics acquisitions, can you talk more about these companies, their key product and customer segments, how they just fit together within your strategy and just what’s the vision for this part of your business over the next few years, is there any milestones or targets in terms of revenue or color on margin profile? Because it seems like it’s going to become a bigger part of the story.

Rick Hamada

We agree with you and actually, for real details I’d say stay tuned. Let me give you some context of what we’ve got. All of the announced deals and again they’re not all closed, as Ray pointed out, if you aggregate them up, it’s roughly under 500 million in total revenues at this particular point. We’re staying rather regionally focused in the Americas. We are looking at some key services and market segments. The earlier announced deals of Broadband Integrated and (inaudible) as you remember were more in the set-top box equipment and cell phone equipment basis. I think we’ve talked also earlier that in Brazil with (inaudible) we’ve expanded into some new customer relationships with that business.

And now adding Neixcore and Pinnacle and ROUND2 are expanding some of our service offerings, but they’re still very much North Americans centric and oriented. And as we close, we will start to be more specific and more articulated about exactly how it fits, where we’re going. From an overall enterprise perspective, Brian, this is I guess I’d say a conscious effort, but deliberate, but also walk before we run pursuit of what we think is near adjacency for our business, so that we can still leverage some of our existing companies in the areas of supplier relationship, customer relationship, materials handling and management, pure logistics handling, et cetera, of technology products, taking a look at new customer segments, news services that could be a part of our growth story going forward. But before we, we’re going crawl before we walk and walk before we run and as we close these and they start to build the critical mass, we will be more pacific about exactly what the long-term plans are there.

Ray Sadowski

Brain, before you go just one clarification just making clear on gross margin or operating margin, I think the answer to my question earlier relative to margins would be more in the flattish range as opposed to my suggestion that we up. If you do make that adjustment that you suggested relative to the impact of HDDs.

Brian Alexander - Raymond James

Right. So, flattish operating margin for that?

Rick Hamada

Yes. I apologize for that.

Operator

Thank you. Our next question comes from Matt Sheerin from Stifel Nicolaus.

Matt Sheerin - Stifel Nicolaus

So, question on inventory, you worked it down in the quarter, you talked about that. Given the fact that you’re going to see some sequential growth in return to seasonality, are you at the levels that you want to be at or is there more work to be done. And given the fact that lead times on pretty much every semiconductor and component are pretty short here, I guess the question is why do you really need to build?

Rick Hamada

I assume it’s about the component business, Matt.

Matt Sheerin - Stifel Nicolaus

Yes, indeed.

Harley Feldberg

The way I think I will answer your question is that we continue to focus on our return metrics as always, and as we bring our margin into our operating range we also need to bring our asset philosophy into our target range. And there’s still some work to be done there as well. So, I think, we still need to continue to squeeze out in velocity improvements, as it relates specifically to our inventory.

Matt Sheerin - Stifel Nicolaus

So, in other words on a day’s basis, you would expect to bring it down?

Harley Feldberg

Correct.

Matt Sheerin - Stifel Nicolaus

Okay. And looking at the TS again, I know that you are closed or pulling out of Italy, is that just a small revenue contribution, because you still saw sequential growth and are there other pockets of Europe that you are looking at either exiting or specific product areas that you are deselecting?

Phil Gallagher

I’ll answer Italy first. So, we’ve been in Italy a long time and we’ve worked very hard with our partners and all the constituents to get that to an operating model that was giving us the returns we needed. And finally just made the decision that we couldn’t get there and we are going to move our resources somewhere else. So, it’s a very isolated, specific move in Italy and we’re still doing some business in Italy just not physically present. Okay, and of course EM still has operations in Italy as well. But this is not something that you can expect us to do often. We don’t like to pull that of countries or any places in the region the last resort really.

As far as any technology moves, the answer is no. As far as deselecting certain revenues, that maybe by, that will be by customer, by product within a technology what have you and that’s done on a very isolated basis as well. The last comment I want to make is while we exited Italy, we made investments in France, in Amosdec, which further build out our portfolio in VMware and in services. So, it’s that constant and in multiple leverage we are driving there to get the right returns.

Matt Sheerin - Stifel Nicolaus

So, could you give us a ballpark revenue run rate for Italy?

Phil Gallagher

Yes, somewhere, let’s call it between 20 and 30 million a quarter.

Harley Feldberg

Matt, this is Harley again. Let me add one additional point of color on the inventory, because I don’t want to only give an incomplete answer. Sitting here just three weeks into the quarter, I think it’s important to recognize also as we talked earlier about what looks to be potential ending of the inventory oversupply of the downturn. We want to be very cautious and very aware of what the positive book-to-bill is telling us. So, I’d not want to send the message that says we’re going to drive down inventory myopically focused only on the velocity metric, although of course that drives how we manage the business, always has and always will, but we also want to be very sensitive to the fact that if there is a hinge period coming is coming, demonstrated by a continued strength in incoming orders and positive book-to-bill, we of course would want to adapt to that as well.

Operator

Thank you. Our next question comes from Jim Suva from Citi.

Jim Suva - Citi

Question I have is more also on the component side. Again, back to the notion of several chip companies, whether it’s Texas Instruments, Intel, or whatever, basically are calling for a bottom in the March quarter. I just wanted to know, I’m sure you’re hopefully of it, is that more of a hope or are you seeing evidence of a true bottom and are you guys really started to see the demand rebound here from the components orders in your visibility, or do you just not have as much visibility as those guys with the lead times? Just trying to see if you actually are seeing that as a bottom rebound or more of a hope and kind of start to come to pass?

Harley Feldberg

I have never seen much upside in critiquing my suppliers’ projections, so I won’t comment on that, nor am I brave enough to call the bottom. I think it’s fair to interpret an improving incoming order, positive book-to-bill environment as one that maybe signaling that in general our broad customer base has reached some type of bottom relative to inventory excess. I think that’s fair.

I don’t know that I would be brave enough to call it in March or June or any particular period, but some of those indicators I do think suggest that and historically speaking that is what we have found. One of the things that makes it, not reflecting on my earlier comment about supplier guidance, one of the things that make this particular quarter maybe more challenging than most is if you track our broad line card and look at their guidance from March, which obviously we do and I assume most of you do. More that most quarters I recall the projections are quite diverse. Even inside of common commodities you may see apparently narrow commodity where the principal players have shared with us very divergent views on what their march quarter is likely to look like.

We don’t know, we were not privy to the details that that support their guidance, but we do think that a number of these variances are driven by the industry’s largest customers, and those particular suppliers’ success, or lack of success at some of the key customers. So I do think in mapping our suppliers as a basket averaging can be a very dangerous approach.

Jim Suva - Citi

Then as quick follow-up on different topic, but related to the previous question about the inventory work down. I fully understand how you talked about in the form of components. How you talked about days of inventory that’s needed to work down and you know a lot of that is there is a numerator and a denominator. The question I have is given the lead times that have been more normalized now, do you need to work down the dollar level or are you comfortable with that. I know you have been working it down for a little bit, but how you feel about the absolute dollar level?

Harley Feldberg

I think that with lead times as short as they have been we tend to manage this particular metric fairly tactically. In other words, we can react to it even inside of a quarter and that was really the point I was making on book-to-bill. If we are in a static environment, I would say yes, we should probably look to take down the inventory dollars to a degree not dramatically, but I always say every quarter, what we do fixate on is aging and quality. That’s remained quite acceptable because we had not seen dramatic cancellation reschedules this cycle. So, I wouldn’t advocate a dramatic reduction from a dollar perspective, but if the market stays in what looks like a very modest growth area, I do think there is some room to take down the dollars modestly.

Operator

Thank you. Our next question comes from Steven Fox from Cross Research.

Steven Fox - Cross Research

Two questions from me. First of all, I think Phil referenced the scale on TS Asia at this point. I was just curious if you could talk about the growth prospects you are looking for this calendar year and how it can maybe buck some of the economic trends? And then secondly, with the restructuring that you’ve mentioned, it occurs to me that that the company is fairly lean at this point and I was just curious if you have made some tough decisions around potentially taking out other services that you might’ve offered in the past to focus on others, etcetera, besides the Italy factor?

Phil Gallagher

I lost part of the second question I think it was on expense reductions, and that we are going too lean or?

Steven Fox - Cross Research

The question basically is what else have you had to look at in terms of expense just around given where the efficiencies of the Company is already at besides going out of Italy, what else are you doing?

Phil Gallagher

Let me start with your first question, I think it was really around Asia-Pac and the growth we are seeing in the Asia-Pac and it continues to be, as I pointed out a growth region for us. Part of the issue we’re driving in Asia-Pac is controlled growth as well. So even though, it’s growing year-on-year and quarter-on-quarter continuously, we’re looking to be sure we also manage that growth for the returns. On our end growth isn’t necessarily the issue in Asia-Pac, particularly in China, it’s a matter of how we are going to get the appropriate return. So, we have new leadership in Asia-Pac of William Chu. He understands exactly what we need to do and are going to do. And one thing you may have noticed is that we’ve slowed down some of our acquisitions in Asia-Pac as well, okay. We’ve had other opportunities and we’re really focused on the operationalizing of that business across Asia-Pac as it goes to from 1.5 to 1.7 to 2 billion plus very near future on run rate going as we start preparing for fiscal 2013.

So, we definitely see it as a growth region and exciting. As far as expense reductions in Europe, I’ll answer the back end of your question first, we’re not looking to reduce services or anything that went in from a value standpoint in any of our regions. By the way, we want to continue to drive the value and the solutions and the specialization we bring to the market, but that doesn’t mean that we don’t need to particularly across Europe be sure that we can scale those appropriate in each given marketplace. What Graeme Watt and his team are doing is continuing to look at all the expense, all the OpEx in each region, each country, and then by brand to be sure we’re getting the appropriate returns.

So, Italy was I want to comment again was a difficult decision, it was the right decision, but at the same time, we did do that in a vacuum. We’re very much aligned with our suppliers on that, very communicated well in advance and they understood what we were doing. And we also did everything we could to place all of our employees to be sure they were taken care of, but outside of that when you’re managing the business across any region, let alone Europe, we break out our P&Ls again by country, by brand and we just look to be sure we’ll continue to drive to the returns that we’re looking for without sacrificing the value that we bring to the market.

Rick Hamada

I’d just add on top of the TS Asia and specific question. I think it’s a big part of the TS global strategy. We’re very excited about the long-term growth prospects of the footprint in the emerging markets, not just Asia-Pac but also, for example, Latin America. In the short-term now we’ve got 1.7 billion worth of critical mass in Asia-Pac and we’ve decided to focus a little bit on driving increased returns and moving that bubble up the chart that we’re all getting very familiar with. So, at various times through the development and maturity of a business we ebb and flow with some of that focus, but the long-term growth prospects for both of those exciting and emerging regions, we’re very excited about the long-term prospects there.

Operator

Thank you. Our next question comes from Lou Miscioscia from Collins Stewart.

Lou Miscioscia - Collins Stewart

Rick, I think you had mentioned that maybe some hardware was put into backlog because maybe it couldn’t go out in the December quarter, maybe you could just expand on that a little bit, was it due to the hard disk drives situation or just lack of the availability of something else?

Rick Hamada

Lou, what I was trying to characterize really was the difficulty in trying to assess the net impact of the entire HDD situation on our overall business. From a TS backlog perspective, again very difficult to pin down specifically but we believe maybe 35 to 50 million that could have shipped in December quarter has now slipped in to the March quarter. It’s not the worst scenario in the world, but if there had been free flowing supply without any disruption, whatsoever, we might have had that kind of revenue impact.

Lou Miscioscia - Collins Stewart

What category would that be? Would that just all hard disk drives or was it a combination?

Rick Hamada

I’m speaking specifically now to more of the TS Systems impact

Lou Miscioscia - Collins Stewart

Another thing, just to dig in a little bit deeper also on the hard disk drives, I really would have thought that you would have completely drained your inventory just given that demand was pretty strong in the December quarter for hard disk drives.

Rick Hamada

The demand was there Lou. We have been very careful to make sure that the supply that we have and the supply that we can garner we are allocating, I think the day after the announcement of the tragedy in Thailand, we went to a very specific allocation process, which prioritizes our long-term ongoing embedded system integration customers, followed by our long-term OEM customers, followed by looking to attract and build some OEM relationships and then the more market priced oriented customers around perhaps independent white box, builders, retailers or other dealers, etcetera, they are way at the bottom of the food chain for us here. So, we did carryover consciously to make sure that we’re doing our best to be the best supply chain partner for those long-term bread and butter customers.

Lou Miscioscia - Collins Stewart

One quick follow-up for Ray. The 30% tax rate, I realize a lot of the businesses in the U.S. and Europe, maybe there’s now an ability, but do you see any ability I guess looking out maybe not this year, but next year to maybe get that down help the bottom line a little more?

Ray Sadowski

We’ve spent a fair amount of time looking at the tax rate and it’s come down from historical levels, but the challenge that we have in terms of opportunity to reduce tax rates was really the way we do business and the way we make profits, which is in a country-by-country basis. So, the opportunity of setting up businesses in certain lower tax rate jurisdictions doesn’t work for us because we are going to be where we need to sell product overall and at the end of the day other than some certain tax strategy we do have, it’s really going to be more of a blend of the tax rates in the jurisdictions where we do business.

Operator

At this time we have no further questions. I’d like to the call back over to Vince Keenan for closing comments.

Vince Keenan

Thank you for participating in our earnings call today. As we conclude, we will scroll through the non-GAAP to GAAP reconciliation of results presented during our presentation along with a further description of certain charges that are excluded from our non-GAAP results. This entire slide presentation including the GAAP financial reconciliations can be accessed in downloadable PDF format at our website under the Quarterly Results section. Thank you.

Operator

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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