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Ingram Micro (NYSE:IM)

Q1 2012 Earnings Call

April 26, 2012 5:00 pm ET

Executives

Damon S. Wright - Senior Director of Investor Relations

Alain Moni - Chief Executive Officer, President, Director and Member of Executive Committee

William D. Humes - Chief Financial Officer, Principal Accounting Officer and Senior Executive Vice President

Analysts

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

Craig Hettenbach - Goldman Sachs Group Inc., Research Division

Osten Bernardez - Cross Research LLC

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

Tina Zhu

Operator

Welcome to the Ingram Micro First Quarter Earnings Report Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the meeting over to Mr. Damon Wright, Head of Investor Relations.

Damon S. Wright

Thank you, Tim, and good afternoon, everyone. Joining me today are Alain Moni, our President and Chief Executive Officer; and Bill Humes, our Chief Operating and Financial Officer. Alain will provide some opening comments along with his view of the business and plans for the future, while Bill will provide additional details around our financial results. The call will then be open for a question-and-answer session.

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

During today's discussion, we will make statements that are forward-looking. These forward-looking statements and all other statements made on this call that are not historical facts are subject to a number of risks and uncertainties. Please refer to today's news release and documents filed with the Securities and Exchange Commission, specifically the Risk Factors listed in Item 1A of our Form 10-K for the fiscal year ended December 31, 2011, for more information on the risks that could cause actual results to differ materially.

In addition, this conference call is the property of Ingram Micro and may not be recorded or rebroadcast without specific written permission from the company. The presentation slides and a replay of the call will be available for one week on the company's website or by calling (866) 465-0333.

I'd now like to turn the call over to Alain. Alain?

Alain Moni

Thank you, Damon, and good afternoon, everyone. I'm pleased to report that we opened 2012 with a solid quarter, maintaining the positive momentum generated towards the end of 2011.

Sales were just below last year's record first quarter despite the slightly negative impact of weaker foreign currencies. Profitability increased significantly over last year as we benefited from residual favorable hard disk drive pricing, and more importantly, strong contribution from our higher-margin specialty businesses.

Our associates throughout the world responded well to the challenge put forth to accelerate the execution of our strategic plan. We're beginning to see initial progress on many fronts.

Over the past several months, we have worked hard to rightsize our fee-for-service Logistics business. We eliminated unprofitable lines of business, restructured selected contracts and added new customers. These efforts yielded positive results in Q1 as IM revenue and profitability grew for the quarter. Our pipeline for capturing new business is robust and encouraging.

Our Data Capture/Point-Of-Sale business had another strong quarter, posting double-digit sales growth, with gross margins meaningfully above the overall company average. The demand for these products is strong throughout the world as businesses look to Enterprise Mobility solutions to boost productivity and customer service, which we expect will help continue to drive strong growth rates.

Our focus on establishing Ingram Micro as a significant partner in the mobility space continues to generate strong revenues as we're capturing the high-growth profile of this market. The operating margins are in line with company averages, and the solid return on working capital and low cost to serve more than offset the relatively lower gross margin profile. We're making organic investments here to ensure we have the expertise and infrastructure required to generate significantly greater future returns. These investments will let us leverage the excellent relationship we are building to augment our current mobility revenue streams with higher-margin products, services and solutions.

We're also channeling investments into the Enterprise technology space, data center expansion and the multitude of other opportunities to capitalize on what is now referred to as Big Data, promise to keep this a rapidly growing marketplace for years to come. We already have a large Enterprise footprint, and we know the vendors and customers well. The opportunities to leverage our significant market presence to further move up the stack into higher-value products and services, while also improving our ability to be fully recognized as a technology solutions provider.

We continue to build on our established cloud leadership position to ensure we're delivering our growing variety of efficient, effective solutions for our customers. Already this year, we have added new solutions around data protection, unified communications, business continuity and disaster recovery from partners including CA Technologies, Siemens Enterprise Communications, Descaler and Accent. Today, we have 48 cloud solutions from 27 vendors such as VMC, IBM, McAfee, Symantec and Trend Micro, which we believe is the broadest selection available by any distributor.

Turning to some regional highlights. North America kicked off 2012 with an excellent quarter. Sales grew year-over-year for the 9th consecutive quarter, and the region drove excellent leverage as operating income increased at multiples of sales growth.

The traditional broad line business was solid, and we drove improved profitability, benefiting from favorable hard disk drive component pricing as well as stronger contribution from higher-margin Enterprise technology sales and solid IM logistics profitability.

In addition to strong performance from our Data Capture/Point-Of-Sale business, DBL Consumer Accessories, Securematics and our Physical Security businesses each delivered double-digit growth over the prior year quarter. Avid drove strong gross margins for the quarter, although revenues were a bit lower than last year as the business experienced a delay in receipt of some key product lines. These businesses are very scalable, and we're working towards driving continued strong growth rates.

Latin America also started the year very well, with record revenues for our first quarter and improved margins. The Miami export business and our growing Peru operations each delivered double-digit growth and generated strong operating margins. While Mexico's year-over-year sales growth was more modest, the country continues to generate operating margins well in excess of company averages.

During the quarter, we started the process of exiting our in-country operations in Argentina. New importation laws have made it challenging for us and other AG players to compete effectively in that local market. We have maintained our relationships with vendors and customers regionally, and we will continue to serve the country through our Miami export operations.

In Europe, the depressed economic conditions in the region continued to impact revenues, which were down as expected versus last year. While Germany and the U.K. are relative outperformers, the economic malaise facing the continent continues to be felt most in the southern countries and the Benelux region.

Performance varied by country, with pockets of relative strength in SMB, retail and corporate markets. Our focused efforts on the SMB market in the U.K. continued to be rewarded, as SMB sales in the country grew for the 8th consecutive quarter. We're expanding our targeted SMB efforts into other countries that have slower markets through specific and targeted programs.

We're continuing to invest in higher-growth and higher-margin specialty markets in Europe. The importance of these initiatives and the contribution they can make to company-wide profitability is well illustrated by the performance of our other organic investment and M&A initiatives in Europe such as DC/POS, which has experienced strong sales growth with gross operating margins significantly above the market average.

In Asia-Pacific, led by double-digit growth in China and India, sales for the region reached an all-time first quarter high. We're growing share with some vendors and are experiencing solid sales of higher-margin Enterprise technology and software solutions. Additionally, sales of handsets and tablets continue to be very strong.

Our efforts over the past year in Australia are paying off. We believe the bottom is behind us. However, there's still work to do to return Australia to profitability as time is required to regain our customer's confidence and loyalty.

We have improved our ERP system functionality to better suit our customer's needs and we're currently deploying these upgrades in countries where SAP has already been implemented. We will resume ERP deployments in other countries once we are satisfied with the effectiveness and stability of these upgrades.

Before turning the call over to Bill to review our financial results in more detail, I first want to congratulate him on his promotion to Chief Operating and Financial Officer, which we announced this afternoon. Bill continued his oversight of the global financial organization, while expanding the scope of his responsibilities to include information systems, global logistics operations and global business processes.

Leveraging my 9-year history with Ingram Micro, during my first 90 days as CEO, I have made a thorough reevaluation of our organization. I have a good understanding of what is required to execute on our strategic and financial initiatives, and I plan to focus the majority of my efforts working closely with the regions to drive sustainable revenue growth and improve profitability.

It was important to me to have a partner with an excellent understanding of our business and the underlying essential elements that are required to drive and accelerate execution on our strategic and financial goals. I'm confident I have that partner in Bill, and I look forward to the challenges and opportunities ahead of us. Bill?

William D. Humes

Thank you, Alain. I appreciate the kind words, as well as the opportunity to expand the scope of my role with Ingram Micro. I share your enthusiasm for the opportunities we have before us and look forward to working with you and the rest of the executive team to drive excellence across our global organization.

Now turning to our review of our first quarter financials. I'll start with sales, which can be found on Slide 3. Worldwide sales were in line with our expectations, decreasing year-over-year by 1% to $8.6 billion, which is roughly equivalent to the negative impact brought on by the translation effect of foreign currencies versus the prior year.

Looking at our regions, North America sales were led by a strong contribution from our specialty portfolio, along with solid broad line business and the IML contribution. The combination helped drive sales up 3% to $3.6 billion, the highest for our first quarter in more than 10 years.

European sales were down 8% to $2.6 billion. The translation of regional currencies had a negative effect of approximately 4 percentage points. The sales decline is in line with our expectations entering the quarter as challenging macroeconomic conditions persisted throughout the continent, decreasing the size of the addressable market and creating a more competitive environment.

Asia-Pacific sales returned to a year-over-year growth, increasing 1% to reach an all-time first quarter high of $1.9 billion. Sales grew 7%, excluding Australia, which continued to negatively impact the region.

Latin America sales also reached an all-time high for our first quarter, increasing 6% to $432 million. The translation of regional currencies had a negative effect of approximately 5 percentage points.

Gross margin on, on Slide 4, was 5.41% compared with 5.21% in the year ago quarter. As Alain mentioned, hard disk drive component pricing held up above our expectations, predominantly in North America, which we estimated benefited worldwide gross margins by approximately 10 basis points.

As you can see on Slide 5, first quarter operating expenses was $364 million or 421 basis points of sales, which included charges of $3.1 million or 4 basis points associated with the CEO transition and implementation of various cost-cutting initiatives during the quarter.

Additionally, stock-based compensation increased by $4 million or 4 basis points due to better performance on our long-term incentive plans in the current year. Last year's operating expense totaled $354 million or 406 basis points, which included a benefit of approximately $5 million or 6 basis points related to the release of bad debt reserves in North America.

As a result, you'll see that worldwide operating income was $104 million or 120 basis points of sales versus $100 million or 115 basis points last year.

On a regional basis, as seen on Slide 6, North America operating income was nearly $70 million or 193 basis points to sales, including the negative impact of $2.5 million or 7 basis points of North American sales associated with the CEO transition. This compares with $59 million or 169 basis points in the year ago quarter, which benefited by $5 million or 15 basis points from the release of bad debt reserves mentioned earlier.

As a percentage of sales, North America's operating income was the second highest in more than a decade. Europe's operating income was $22 million or 83 basis points of sales versus $32 million or 112 basis points in last year's first quarter.

Profitability was impacted due to a greater mix of lower-margin products, a highly competitive selling environment in many countries and negative operating leverage on the year-over-year decline in sales.

Asia-Pacific operating income was $14 million or 74 basis points of sales, compared with last year's $8 million or 42 basis points. In addition to the initial improvements in Australia, the region is benefiting from better overall performance in most countries. Australia has negatively impacted the region by 73 basis points and had a 16 basis point impact on worldwide operating income in the 2012 first quarter.

Latin America operating income was $7.4 million or 172 basis points of sales, compared with $6.3 million or 154 basis points in the prior year.

Interest and other expense for the quarter were $15.5 million, down from $18.6 million in the prior year quarter. Net interest expense in Q1 was approximately $4 million lower than last year, primarily due to lower average debt balances. Both periods were impacted by approximately $5 million in foreign exchange losses related to the translation impact on Euro-based inventory purchases in our pan-European entity, which designates the U.S. dollar as its functional currency.

The foreign currency-related charges are a function of the timing of currency fluctuations within the quarter, and a charge incurred in the 2012 first quarter should be recovered as the inventory is sold.

Our effective tax rate for the first quarter was a benefit of $1.4 million, which was driven by net discrete tax benefits of $28.5 million or $0.18 per diluted share as described in our press release. Absent this discrete net benefit, our effective tax rate in the first quarter of this year was 30.6%, in line with prior year quarter which was 30.8%. For the remainder of the year, we expect the tax rate to be around 31% to 32%.

On Slide 7, you can see that net income was $90 million or $0.58 per diluted share. Net income includes an aggregate benefit of $23 million or $0.15 per diluted share, which consists of tax benefit I just mentioned, offset partially by the negative impact of $7.9 million pretax or $0.03 per diluted share from the CEO transition and other charges and foreign currency losses mentioned earlier. This compares to the 2011 first quarter net income of $56 million or $0.34 per diluted share, which includes the favorable bad debt release that was largely offset by the foreign exchange loss discussed earlier.

Turning to some key balance sheet metrics highlighted on Slide 8. Our cash balance at quarter end was $991 million versus $891 million at the end of 2011 and $1 billion at the end of the year ago quarter. Our debt balance at quarter end was $388 million, flat with the end of 2011 and our debt's capitalization ratio was 10% at quarter end.

Moving to working capital on Slide 9, days of sales outstanding were 41, 2 days higher than a year ago. Days of inventory were 35, an increase of 2 days from a year ago quarter, due primarily to seasonality of significant restocking as required after strong Q4 sales. And days of payable were 51, 7 days better than last year.

This brings working capital days to 25, down 3 days from Q1 last year and up 3 days sequentially from Q4. The team continues to do a good job of maintaining working capital with our target -- within our targeted range of 22 to 26 days.

CapEx for the quarter was $25 million, and depreciation and amortization was $14 million.

That completes my financial review. I'll now turn it back to Alain. Alain?

Alain Moni

Thank you, Bill. Prior to providing our outlook for the second quarter, I want to spend a few minutes covering my perspective on capital allocation.

In our business, as in any other, capital allocation is a critical strategic tool for driving growth and profitability. It is also an important element of creating value for our shareholders. When examining our capital requirements, we must first ensure that we have ample flexibility to run our business and grow organically.

As most of you are aware, with our current mix of businesses, for every $1 billion in additional revenue we generate, we require another $65 million plus in working capital to support the growth. Additionally, again based on our current business profile, each additional working capital day requires more than $100 million of investment.

I believe we can accelerate the growth of our higher-margin businesses through incremental organic investment. However, some of these investments could drive different working capital dynamics, and we want to maintain our ability to capture the opportunities we select.

I also believe that selective, but accelerated acquisitions, is needed to more rapidly expand our capabilities in high-growth regions and markets. We have been actively evaluating opportunities for the past 3 months and will continue to add businesses that meet our strategic and financial objectives.

In examining our current capital structure, our business model and the cash flows we expect to generate, I believe there is also room to selectively continue with our share repurchase program, which has $174 million and approximately 18 months remaining on our authorization. However, our current bias for the majority of our available capital remains investing in the business.

I believe this multifaceted approach is prudent to ensure we're driving the business for long term and for the sustainable benefit of our shareholders.

For 2012 second quarter, we currently expect sales to be flat to slightly up sequentially. Second quarter 2012 gross margin is expected to trend down sequentially, reflecting the removal of the residual benefit from hard disk drive pricing realized in Q1, as well as normal seasonal declines such as lower IML business.

And now I'd like to open the call to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Brian Alexander.

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

So it sounds like gross margins are going to be flat to down in the second quarter, and I was just wondering why that would be the case given the improvements you've made in Australia? And it sounds like IML is improving its profitability. So I'm just trying to understand kind of the offsetting factors that are limiting gross margin improvement on a year-over-year basis?

William D. Humes

Brian, this is Bill. Overall, I'd say not necessarily saying we're saying they're going to be down year-over-year. What we're really talking about is sequentially. As you know, IML has strongest quarters are Q4 by far and then Q1. So then going into Q2, it is less -- it's one of the lesser quarters for IML. We are making good progress in Australia. That being said, it's still an in-process work so there has been improvements on gross margin, but it is a small portion of the overall piece of business. So our goal is ultimately, if you exclude the hard disk drive pricing benefits in Q1, is to continue to drive gross margins. But I'm not sure it's going to be -- it should be decent, but we can pretty much map it from our Q1 sequential kind of dialogue here.

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

What's the normal dropoff, Bill, from Q1 to Q2 related to IML?

William D. Humes

Yes, I'd say it's probably half so much as or less than the Q3 to Q4 sequential, so maybe mid-single digits roughly impact from IML.

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

Okay. And congratulations, Bill, on the promotion. I forgot to mention that before. Alain, what's the willingness for Ingram to engage in a large acquisition? I know -- could you put some parameters around the size of acquisition that you're willing to tolerate at this point?

Alain Moni

Yes, we don't use the size as a gate. We really look at the strategic fit with our financial goals as well as our strategic goals. We look at a lot of elements like in the culture of the company is one. We have typically been looking at what I would call midsize acquisitions, so complementing well one or several of our strategic tailors. We cannot rule out the fact that if there was one that is of bigger size, we'd obviously consider it. It is not by definition what we're looking at. Where we're looking at is really the midsize acquisitions that really would help us develop pillar-by-pillar or geography-by-geography the businesses we want to increase the mix of.

Operator

The next question comes from Craig Hettenbach.

Craig Hettenbach - Goldman Sachs Group Inc., Research Division

Just a follow-up on the comments of M&A and really as it relates to buybacks, any thoughts with the stock is still 10% below tangible book? And if I look back over the last 12 to 18 months, the company had been a little aggressive in buying at those levels. And now it seems to be a little bit of a shift, so if you can just kind of walk me through that?

William D. Humes

Sure. Craig, I wanted to take the first 90 days to really understand the situation more. I mean, that's more something that is related to me than anything else. I really wanted to understand where we were, what kind of capital allocation we should be looking at in the future? What are the alternatives? As I mentioned before, we're not excluding at all purchase or repurchases when and if appropriate and you know a good return. Looking back, if you look at 2011, we'd probably were pretty active then, and I'm not sure we would be as active in 2012. But at the same time, we are also increasing significantly our intent to invest in the business both organically, as well as through acquisitions. So that's the mix that we -- I'm really interested in finding and having the balance on.

Craig Hettenbach - Goldman Sachs Group Inc., Research Division

Okay. And as my follow-up, as you look at flat to slight sequential growth into the June quarter, can you talk about trends you expect by geography and particularly within Europe?

Alain Moni

Well, particularly within Europe, I wish I had a better crystal ball. It's certainly the vibrations we're getting are not getting that much better right now. As you probably -- as you know, as you follow the news, the elections in France also, I think are adding some questions about depending on who gets to get the presidential slot there. How is that going to impact Europe, because obviously, that size of country would then be more meaningful than the countries that have been in doubt now. On our side, we're trying to really leverage the 3 big engines we have, which are Germany, the U.K. and France. Germany and the U.K., we feel pretty good about how they're performing given the environment. France, we had weak -- I would call it weaker-than-usual quarter, but that's due to a couple of events there. One of our customer's going on receivership and then one of our large retailer's being taken direct, but we don't think that's going to have an impact on our operation in France. And the rest of southern Europe is really, as you know, not very strong right now. In Asia, we are having very solid growth both in China and India, double-digit growth, very healthy. Australia is taking -- still taking us down, but remember that we went into the new ERP system in the first quarter of last year, so the comparisons are still quite unfavorable. But I would say the rest of the region in general is growing very nicely. This first quarter, we were up, I think it was 8% in local currencies. And North America is fairly solid, I would say. We had this pretty solid first quarter, and we don't see anything that would stop us from continuing good growth and particularly in our specialty portfolio, but with a solid broad line business as well. Latin America is doing very well, by the way. Mexico and Miami exports are doing well. The economies are going well. Our local currency growth was 11% this quarter, and we have a pretty solid outlook.

Operator

The next question comes from Osten Bernardez.

Osten Bernardez - Cross Research LLC

My first question has to deal with how should I be looking at SG&A going forward as you take into consideration these investments, particular acceleration in your specialty businesses?

William D. Humes

Right. This is Bill, Osten. I would overall say, in general, on the core business, we really try and manage tightly to growth of SG&A expense and about half or less of the overall growth rate. Now obviously, as growth rates are slower, that becomes a little bit on the higher end by natural design or occurrence. But on the Specialty businesses, that will tend to be a little bit higher growth on OpEx, but you're also driving higher gross margin as well. So it's a favorable related item. And then you kind of layer on some of the investments that we're making to drive future profitability and growth in the enhancements. So I would say overall, we'll continue to watch OpEx very closely and those are kind of the different dynamics on the business.

Osten Bernardez - Cross Research LLC

Okay. And then secondly, could you provide greater color on some of the competitive environment you'd commented on during your earlier presentation? But what specifically are you seeing in Europe? And do you think that the sort of the extended environment that you're seeing there has changed sort of structurally how you do business in Europe?

Alain Moni

This is Alain. I don't see any structural change in the way business is done. We obviously see the competitive forces play when the market is not very strong. But I wouldn't say in an erratic manner at all. It stays I would say very disciplined so far. Now I think there is a wait-and-see -- a bit of a wait-and-see attitude from every player there, and trying to understand if this is going to be a much longer, prolonged situation that would call for other decisions to be made. But at this stage, I would say it's fairly stable on the competitive front.

Operator

The next question comes from Matt Sheerin.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

So wanted to talk about Europe and the operating margins there. At 0.83%, if you look at it, I mean certainly, it's been down because of volumes, but if you look a couple of years ago, you're running at a similar revenue level at much higher operating margins. And I know obviously the decline in volumes hurt your leverage. But what else is going on there? Is there mix issues? And I know you've had issues in the retail space. There's some gross margin pressure there. So how are you managing that business? Are you selectively walking away from certain business opportunities in order to improve gross margin, operating margin? And also, could you talk about continued cost cutting plans in Europe?

William D. Humes

Matt, this is Bill. I mean, overall, yes, Europe continues to be an interesting geography that we have to tightly manage all the time. But overall, part of it is a little bit of a mix area, mixed items, still slightly lower margins, lower operating margin products that's driving into the mix. Some of it's, like you said, the overall negative leverage of reduced sales, so which would require us to continue to evaluate and look at the cost structures going forward. And we do that continuously, but obviously, it's prolonged then you need to do it a little bit more aggressively. But we continue to drive some of the other adjacent higher-margin businesses and focus on there to really enhance that business so that's one of our goals and then drive synergies through the back-office as well. So all of those factors combined, as well as continue to operate in a challenged environment there are all things we're managing day in and day out. So...

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

So does that mean there is some cost cutting plans in place here? And could you give us an idea? And not just Europe but in other areas as well?

William D. Humes

Yes. I mean, I would say overall, and we always look at costs, so I'm not going to particularly speak to any one individual geography or region, but it's something we always have to do and that's pretty much where I got to leave it off there.

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And just a question on your promotion, Bill, and congratulations. I know you're -- the company plans to hire a couple of people underneath you. Is your intent or is the intent for you to maintain those 2 positions or that joint role for long term? Or is it planned to eventually promote the finance person into the CFO role and focus more on the operations?

Alain Moni

Matt, this is Alain. We looked at several configurations possible here, and I think we ended up with really the right configuration with Bill, taking not only the finance role, which he is very familiar with and has done a tremendous job, but also adding a number of other more infrastructure-related operations and groups, which by the way, are led by very strong professionals, as you know themselves. So the addition of a couple of more senior new positions as well to support Bill really gives me the confidence level that this is not Bill having 2 jobs. This is Bill having a different job that includes finance as well as other areas. And I feel personally very comfortable with the fact that we're going to be in good shape here.

Operator

[Operator Instructions] Our next question comes from Ananda Baruah.

Tina Zhu

This is Tina for Ananda. And can I talk a little bit about how you're differentiating in your Enterprise on the cloud service strategy? And it's a strategy that differs in different geographies?

Alain Moni

I'm sorry, could you -- the question is around differentiating between...

Tina Zhu

Yes. In your Enterprise and cloud service strategy?

Alain Moni

Enterprise and cloud and around the world, right?

Tina Zhu

Yes.

Alain Moni

We do -- Enterprise and cloud are separate. They're obviously could be considered the same but in our jargon here or the way we organize, we do have the distribution, a more traditional distribution business and the value business that we would link to Enterprise in all data centers, as well as the software that goes with it, storage, networking. And we have specialty divisions that provide and offer the solutions in those areas and execute on the distribution to our customers. We also have a separate, not initiative because this has been going on for 7 years now, but cloud services offering, which is led by a different group, which of course relies on different Enterprise dynamics, systems that provide those. But those are separate in our organization. And as far as globally, we are approaching the cloud strategy on a global basis because we feel that those are solutions that we're going to be putting together on a global basis. The Enterprise solutions then is more region-by-region or country-by-country.

Tina Zhu

Okay, that is very helpful, but I have one follow-up. So is these services part of your cloud and Enterprise strategy, is this something that you can meaningfully monetize? Or is it just the more of a way to see product?

Alain Moni

We are -- in the cloud strategy, we have, as I mentioned in my comments before, we are putting together what we think is a pretty strong service offerings to our customer base, but we're in a growing mode. As you know, this is still something that is growing in the industry as far as being able to aggregate all these services. So it is our solid intention, of course, to have this become a meaningful part of our operations, but it's still in the growing mode.

Operator

Our final question comes from Brian Alexander.

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

Yes, coming back to capital allocation, guys. Just going back and doing some math. So you've got $1 billion of gross cash, $600 million net. You'll probably generate $275 million or so in net earnings in this relatively stable environment. Your working capital required to support, let's say, 5% or 6% growth organically would only be about $150 million, I believe. CapEx is only about $100 million. So barring a major acquisition, which Alain, you said you weren't really considering earlier, it seems like you've got plenty of dry powder to buy back stock below tangible book and support the growth objectives that you outlined. So I hate to beat the dead horse, but can you tell me what I'm missing and why you can't accomplish both objectives?

Alain Moni

Sure, Brian, and I don't think those are -- that's not a -- there's nothing you're missing. I think that there is an interpretation, also a possible divergence of interpretation. You're quoting a major acquisition, the only alternative here. As I mentioned before, we're looking at several fronts, and we have possibilities in several fronts for acquisitions. If you do -- if you continue your math down and you started with $600 million net and then $275 million, et cetera, even if you look at what's left at the bottom of that, that -- we are looking at potential acquisitions that total more than the number you get to. So it is not the fact that only one big acquisition would be the only alternative to invest in if we were to utilize that capital. Right now, we have several fronts on which we see real good opportunities that we need to consider. And those amount to a sizable total.

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

And those could all be done within a 12-month period? Or I guess, you would contemplate acquiring several companies within a year?

Alain Moni

We, of course, are very careful in being able to manage those integrations. At the same time, by experience, I can tell you that when we did the Tech Pac acquisition, we integrated 7 countries in one year. And those were really 7 separate integrations because they were different ERPs, different teams, different locations. So again, I don't want to pre-assume how many and when they will happen. That will be -- they will be more driven by opportunities available. But I think that as we reinforce our team here and the strength in each of the regions, we should be capable of having several acquisitions being looked at within this year, yes.

William D. Humes

And Brian, just a little bit of an add-on to what -- not on the M&A front but on the capital and outstanding cash and debt balances. Obviously, we've talked about it many times before, but the working capital fluctuates quite a bit within a quarter. And generally at quarter end, it's at a pretty good place. So you have to always balance. There's some float out there on the cash balances, and there's some variability to the working capital as well, so factor that into your thought process.

Alain Moni

And to wrap it up, we did not exclude share repurchases.

William D. Humes

Right.

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

Okay. And final quick one. It sounds like you're making progress in Australia. Could you just say whether the operating losses, which it sounds like they improved this quarter, but were they below $10 million in the quarter? And should we think about those operating losses diminishing by the third quarter and then reaching profitability in Q4? Or has that timeline changed?

William D. Humes

Brian, they are pretty close to what you say. I mean, they are still a decent sized loss, but we are making improvements both on a sequential from Q4 basis as well as the year-over-year basis. So positive results there. But obviously, we have a long way to go. We do expect it to continue to improve, and hopefully towards the end of the year, we're on a very good run rate and hopefully exiting at least in a profitable to breakeven spot by the end of the year.

Alain Moni

Right.

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

Is the competition over there? I know it's intense, but is it relatively stable at this point? Or is the aggression still, I guess, accelerating for lack of a better word?

William D. Humes

No, it's still intense. So it's been as intense as it has been for most of 2011.

Alain Moni

Yes, but I would say that obviously, there was a high level of aggression when we started having some problems. But I would say it has come down in the last 2, 3, 4 months. And frankly, I mean, our intention is to regain the majority of our customers so that will not happen without intense competition.

Operator

There are no further questions. I'd now like to turn the conference over to Mr. Moni for closing remarks.

Alain Moni

Well, I just would like to thank everyone and give you a date for 3 months from now for the next quarter. Thank you very much for having and listened to us.

Damon S. Wright

That concludes today's call. As a reminder, a replay of the call will be available at (866) 465-0333 for one week. Thank you for joining us.

Operator

This concludes today's conference. Thank you for joining. You may disconnect.

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