Ingram's Management Present at Bank of America Merrill Lynch Global Technology Conference (Transcript)

May.11.12 | About: Ingram Micro (IM)

Ingram Micro Inc. (NYSE:IM)

Bank of America Merrill Lynch Global Technology Conference

May 08, 2012 02:00 pm ET


Bill Humes - COO & CFO


Scott Craig - Bank of America Merrill Lynch

Scott Craig - Bank of America Merrill Lynch

I am Scott Craig and I am the hardware, storage and distributor analyst here at Bank of America Merrill Lynch. Again, welcome to the 2012 Technology Conference here, and we're excited to have Ingram Micro management with us next.

To my immediate left is Bill Humes, Chief Operating Officer and Financial Officer, a newly created role for him, and then Damon Wright here on the end, Investor Relations. And so with that we're just going to kick right in to some Q&A and I'll kind of kick it off and hopefully get some participation from the audience as well.

So thanks a lot, guys, for attending and taking the time.

Bill Humes

No, absolutely thanks a lot for inviting us. Good to be here.

Scott Craig - Bank of America Merrill Lynch

Bill, you’re not doing a presentation, but maybe from a high level step us through your handful or the company's handful of sort key focus items as we work into calendar 2012?

Bill Humes

Sure absolutely it dovetails right into our overall strategy for the first year. First and foremost and I probably heard along and talked about it over the last couple of earnings releases and earnings discussions is first and foremost is execution.

Executing first on our core strategies and core operations and working through our systems implementation and continue to effectively deploy, work on finishing that as well as optimizing the existing core business. So that's sort of the bread and butter and you have to really drive that and drive the efficiencies there as best as possible.

The other part is continue to expedite and extract the execution on our adjacent markets and adjacent products revenue. So if you think about auto identification, data capture, point of sale business one that's a great business for us, its we started back in 2004 with small acquisition in the US and a series of many acquisitions around the globe, we become, we believe the number two globally on auto-identification, data capture, point-of-sale space. So that’s great.

We continue to drive and optimize that business potentially look forward to both internal as well as external investments to continue to grow that.

Second of all would be obviously invest in the datacenter and expedite some of our business, our capabilities, our expertise in the sense of engineering for pre-consulting services as well as a lot of our authorization.

So having focused area for us in this year we are expediting some of Greenfields or internal investments to drive better capabilities to hire faster in the sense of technical experience. So we are making some internal investments there as well as look externally. So if you look our acquisitions over the last couple of years, we have a focus around the enterprise datacenter space.

Focused on mobility, mobility is very, very important and very key. So trying to drive internal investments in mobility to make it a global project. We already have some very, very nice level of revenue on tablet and other handsets around the globe; so we have very high market reading handsets in India. We have tablet sales pretty much around the globe, not in every country, but in the region. And we are doing very, very well there in that regard.

A little bit different business in the sense of little bit lower margin at this point in time, the gross margin. But the operating margin is very well. It’s very nice. It’s kind of around the company average and the return on capital is nice. So it’s a good business and we have to invest in this area of business basically so we can get the critical mass and then start tying services around there, so we think about refurbishment services.

We got activations; we continue to tie around additional services around the mobility space and tie it overall with the system convergence. So mobility obviously driving convergence between consumer and enterprise and we basically and definitely have to play. So it’s a good business and we’re focusing on expediting the overall execution in that in 2012.

Ingram Micro logistics, our fee for service business, again its an area strategically where we over the last probably 13, 14 months really worked on revamping some of the contracts and driving out more efficiencies in the process and really working on obtaining new businesses and its really operating well. But our view is drive growth and drive authorization concurrently to really drive success. Q1 was a very nice quarter for us and we expect that continue to grow with our nice pipeline of potential new business going forward.

And lastly, with execution on developing our cloud infrastructure and cloud exchange business, so as many of the people know that cloud value proposition is very similar to a hard goods or physical distribution value proposition. In the cloud there is going to be both on-premise technology; there is going to be cloud technology and support that’s going to be people that integrated that existing ERP systems or systems with cloud software and hardware computing power.

So in the end and this is very emerging in these business, but we definitely we appreciate the position where we are in right now with our competitors versus that we need to continue to execute and invest in that to become the basically the one stop shop for cloud and physical goods.

Scott Craig - Bank of America Merrill Lynch

And then again congratulations on your new role. What was thought process behind those combining those roles and how is your particular focus changed here going forward?

Bill Humes

Well, it would be probably be best to ask along that, but I’ll give it my best shot. In the end, one idea was IT and the idea was the global warehouse operations and logistics business on a daily basis anyway, so it is not a huge stretch in that regard, so it’s a learning curve.

With working through everything that they do generally need to approve being CFO, so now it just becomes in depth in that regard and it really comes down to spreading some responsibilities around so one can truly, truly focus on the regional operations and can focus on driving and expediting sense of urgency on execution and hammering that down, day-in and day-out and also setting and helping with working with all of the team to drive longer strategies as well.

So in the end there is a lot of synergies in the stuff we already do and there is a lot of support functions. I continue to have the CFO function; I will ultimately hire couple of internal and external hires for one of the business process and standardization position which will help a lot in driving efficiencies in optimization and the system deployment.

And then (inaudible) of finance who have direct support a lot and have the responsibility of finance and that will report to me which will allow me to spend more time in the IS infrastructure and IS system management, as well as the business processes (inaudible).

Scott Craig - Bank of America Merrill Lynch

You guys obviously have reported earnings. Most companies have just reported earnings as well. Maybe take us through your thought process on the revenue line and where you’re seeing some of the positive and challenges as you’re looking through the earnings?

Bill Humes

Sure. So we did report earnings for Q1 pretty much in line with what we expected. It was down about 1% and we had a 1% negative impact effect as well. Geographically speaking, North America and Latin America are going to be relatively strong for us. We saw about 3% growth in North America, 6% in Latin America, and those are really across-the-board in all our businesses.

And the core business, in mobility, value-added data center products, and logistics were all very strong. We look little further field internationally; Asia Pacific continues to be relatively strong. It was up 8% if we back out the Australia issues we’ve been having. And even with Australia issues, Asia Pacific returned to growth of 1%.

We had a lot, as Bill mentioned, some of the strong volume business we have in mobility, but also some relatively strong core business as well. And Europe is -- shouldn’t come as a surprise to anyone. Its a bit wild card, down 8%, had a negative 4% impact of FX there.

We have a bit larger retail presence in Europe, so we’re feeling some of the negative consumer sentiment over there. We have approximately 35% retail presence there. It’s just more than 25% in our other businesses. But it’s more macro. We’re not necessarily seeing anything specific to any of the micro. And it is kind of tends to be where -- will there be growth coming back in there.

Our key market of SMB has been relatively strong. In fact, in the U.K. it’s grown for the last 24 consecutive months. It’s really kind of the big engines of Germany and the U.K., they both have been relatively strong, saw a little growth year-over-year in Q1, while there’s been a lot in the southern – the southern region remains a lot slower. So it’s kind of where we see the geographic break-out.

Scott Craig - Bank of America Merrill Lynch

Okay. And then just focusing maybe on a couple of the issues that you guys have had over the past year. So Bill, let’s start in Australia and sort of take us through where we are now with that and how that evolves.

Bill Humes

Sure, absolutely. I’ll just give a little bit background for the individuals who may not be as familiar with us. Back in Q1 of 2011, we implemented SAP and SAP was deployed. One of the issues that we had is it was an Australian business separate from the six, seven other entities that we had already deployed or were deploying SAP.

Australia was the largest place for us. So, there were a lot of differences with Australia than the other businesses; most complex business in the sense of a big mix of value products, complex orders, complex ordering process and sales process. It also had our proprietary warehouse management system, which we have in our most high volume and largest warehouses.

So it was our first integration, the SAP system, the ERP system with our warehouse management system. Unfortunately, initially that didn't work out. Some of the interfaces weren’t working as well, and so we weren't able to take orders for the first -- we took some orders but it was very, very cumbersome and there were auto errors in the sense of system processing.

So we had to work through fixing that. In that meantime we struggled with some of our customer bruising relationships. Then as we started – as we fixed that after about the first 30 to 40 days, we did notice that some of the front-end processing on and the customer-facing and vendor-facing processing was not as robust as what we had experienced under the legacy system, which the other point on Australia why it was different.

It was running on a stand-alone legacy software system, ERP system that we acquired as part of Technology Pacific acquisition in 2004. So that kind of aided in the overall complexity. We have made a huge amount of progress since last year’s first effective quarter. There’s still a long way to go. We -- in Q1 of 2012, we did lose less money than we did last year this quarter, as well as the fourth quarter.

So sequentially, I think roughly in the $10 million. We expect to continue to deploy more enhancements on the optimization of the front-end systems, customer-facing systems, and we’re doing that over the next two quarters. We lot – we had less revenue decrease. Now Q2 will be kind of somewhat of an anniversarying of the deployment. So it should get a little bit better in comparisons as well.

That being said, when you start having system problems, you do have customers that hang on for a while, and then you have this tail of loss of customers. And that’s why we ended up having higher losses of customers on the back-end of last year, Q2 through Q4, than we really did in Q1.

So -- but anyway, we do expect to retain and maybe continue gradual in regaining some of the share that we did lose. We did cut a good chunk of expenses to kind of lower the overall cost of doing business and kind of meet somewhere in the middle where we expect to regain market share, as well as cost reductions.

Now, our margins are also -- gross margins are creeping back up because, one, we’re starting to hit new rebate targets, which is also good, as we knew they would get reset over a period of time anyway. We’re also -- we’ve been able to -- now there’s a lot of training. People are comfortable with the systems.

We reduced a lot of the leakage we had on inventory and vendor receivables and other things. So the operation in Australia is starting to get better. It’s got a long way – it’s got ways to go. We expect to gradually improve with our ultimate goal of kidding around breakeven exit run rate in Q4 of 2012, and then hopefully profitability in 2013.

Scott Craig - Bank of America Merrill Lynch

And maybe describe Europe; some of the changes that you think are going to happen there. How does the system roll-out sort of go across the rest of the company?

Bill Humes

Yeah, but right now, we’ve got on the overall system changes, we have decided – we have put it on hold has we continue to fix and develop designs on a lot of the enhancements that we’ve determined that we do need to install in the overall global template. So we’ve been doing that over the last three quarters. We probably have another quarter, quarter and a half to go to continue to optimize.

We’re retrofitting our existing businesses, including Australia, with these -- with all the changes we’re going to test and monitor and manage those businesses very tightly to make sure that the system is running very, very effectively, very smoothly so that we avoid significant disruptions in future deployments. So we’re not going to deploy anything material until we’re ready to do new deployments.

So that kind of gives you a view. As they -- most likely, not any significant ones in 2012 end, and then we’ll start redeploying in 2013. But we’re only going to do it when we are you know very, very comfortable and confident that we can do it without major disruptions. And I think you know that's probably you know that answers your Europe question as well.

Scott Craig - Bank of America Merrill Lynch

And Bill over the past couple of years there has been whether it's you guys or Tech Data for example exiting certain countries that have been less profitable or maybe the return on capital metrics not quite there, you know are we finished with that pruning by the industry or I mean you'll always have you know ones that are underperforming and ones that are outperforming, but do you think the worst of the ones that you want to get over done?

Bill Humes

I mean I think you know as you said it was an industry-related question, but I mean I'd say you can never -- well I can't answer for the industry on where have they decided to enter and where they have decided to exit, but you know overall I think you have to continuously evaluate your countries and look at the business, look at the long-term prospects, how long it is going to take to get there, understand the local regulatory environment, you know local demand environment how big and you know what type of potential you have for that business.

So one of the reference you are probably referring to I mean our decision to get out of Argentina is one of the areas and you know certain of our competitors have gotten out of other areas, but at the same time we have entered into new areas like at the beginning of last year we did start a new operation in Indonesia because there is some you know up until that point in time we are concerned about the business practices and therefore we entered into Indonesia even though we have tremendous growth opportunities and a very large IT market size.

But when we got comfortable through our own design of figuring out how we will do business and making sure we do business the right way, we decided to slowly start up Indonesia business. So but at the same time you know there is exit, there is also entries Scott, so the Argentina business you know this decision is in the end it's a relatively -- it's a challenging smaller market in IT, it has very difficult banking and regulatory and import-export regulations that make it very, very difficult to make any money especially for a distributor for you know anyone doing business in there and in the end you know it ends up, when it ends up being know more investment and capital you know and destroying value and ultimately taking up more energy resources, capital and allocation of time, then it will ever be worth you have to make the decision. And so you can't say is it done, but I think we are pretty comfortable and we are happy where we are at and you know we will continue to evaluate countries as we grow our business operations because it could be a business operation within a well-performing country that you decided to prune or expand. So that it happens all the time.

Scott Craig - Bank of America Merrill Lynch

And then from a longer-term perspective how do you think about the growth rate of the IT distribution industry and you know where do you fit into that?

Bill Humes

So as you probably see some of that third-party reports as well Scott. The projections seem to be coming down at least for 2012 and numbers the IDC numbers has recently came out in constant currency they are going up about 40 basis points, but in US dollars it comes down a little over a point and so Gartner lowered their forecast a little bit earlier this year again.

I think what we see – if we talk about this 2012 first, it's similar to what we saw in the first quarter with relative strength in North America kind of growing in the low-single digits. We think we well that's how we will track as well. We will grow at the kind of IT spending may be a little bit better, but our target is that at the rate. Latin America kind of the mid to higher single digits and then Asia-Pacific also mid to higher single digits where we may see some benefits as we start coming into easier comps with Australia and if we start seeing the growth we expect in Australia we may see some incremental growth on top of what the region is doing for Ingram Micro.

Again not surprisingly Europe really is the wild card. We believe it's probably going to be down a little bit here in Q2 and it's so hard to tell until the macro environment comes back and we get some better clarity there and then so this past weekend obviously aren't going to help things out. So it still remains pretty muddled. If we are looking longer term we have some growth projections and overall targets, financial targets out there for 2015 and kind of the assumption we are making is basically a 4% to 6% growth kind of compounded annual growth rate between now and 2015 that will help us achieve those targets. So that's basically the blend we are looking in any sort of regions.

Scott Craig - Bank of America Merrill Lynch

Okay and then from a pricing perspective on a near-term basis Bill or Damon, where have we seen some of the challenges, has it been mostly in Europe or you know how does Australia figure into there as you're trying to gain back some market share.

Bill Humes

Overall pricing globally has been you know it's always competitive in our industry I mean we all know that. And always you have to essentially win your customer everyday for the most part and you have to you know deliver and have great SLAs and then be price competitive. So it's always competitive but now if you look at overall you know where pricing I would say North America, Latin America you know fairly stable you know competitive, but competitively stable. You look at a lot of Asia-Pacific you know it's for the most part pretty stable.

You still have some heavy price competition and hungry competitors in Australia you know and that's why our recovery and regain of share has been much more gradual, both in our own systems as well as very tight competition in the marketplace and we are not going to trash margins you know to try and gain it back at all costs.

So it's much more gradual mini quarter type effort there but you know so competition is pretty tight there. I would say in the end Europe albeit not irrational and you know when you have a smaller pie that people are chasing you know around for demand you tend to have you know a little bit more price competition especially because you mirror that with cost reductions that always takes a long time to think about or execute cost reductions in EMEA. So in the end for short periods of time you know rather than lose revenue people lose the level of revenues that they are used to. That supply, the costs you know that they are doing business with. You know there tends to be a little bit of price competition just you know retain that revenue of the smaller pie.

But overall it's not irrational, it's just a little bit tighter in Europe and just because of macro, but that's not surprising.

Scott Craig - Bank of America Merrill Lynch

Okay let me take a break there and see if we have any questions in the audience or I still have a few more, so. I think Sam has one up at the front here.

Question-and-Answer Session

Unidentified Analyst

Can you talk about your operating margin targets by region? I know you guys, you have given us what the overall company, but can you talk about it regionally, that would be helpful.

Bill Humes

Well we are not going to give individual targets or goals for the overall regions, but what I would say is you know as we said in 2015 you know our stated target goals are range of operating margin 165 to 175 and hopefully those are conservative but in the end for us to be able to hit those we need pretty much almost all the reasons to be in that 150 range and that will be our internal goal, some will be higher and some obviously will carries lower operating margin in regions like Europe and up above the weighted average of hopefully much higher performing North America and Latin America region will be offsetting maybe Europe that’s in the lower end of the spectrum.

Asia Pacific obviously as you have seen in the past has pretty good opportunities of higher operating margins. We have done in the past and even pre acquisition, entire pacific was very high in operating margin as well. So I would say once we fix, Australia continues to be around the hurt average on operating margins versus a drag on operating margin and the region can perform at higher levels of our overall operating margins in the regions.

And so that’s kind of our overall, I am not going to give specifics within the dynamics of the regions, but we are pretty committed to driving those operating margin targets.

Scott Craig - Bank of America Merrill Lynch

From a mobility perspective, I know you guys obviously already do a lot of mobility with laptops and tablets and so that taking it a step further is the techies made investments more in the handset side of things if you want to call it that; are these areas that you think you ultimately need to be involved in to help around in a bigger way around your mobility portfolio?

Bill Humes

I would absolutely say yes, if you think about in India, we are already doing a substantial amount of handsets sales. We do handset related sales also as well as the non-physical as large volume in North America including some other services and overtime many years ago we did a decent level of handsets sales in Europe as well.

So yeah, I think we need to continue to enhance that piece of the business, handsets, handhelds, continue to grow our exposure on tablets and then most importantly so gain that critical mass across the board, both basically globally and develop the consistency and performance, and consistent, it’s already being performing very, very well there.

But drive additional services to wrap around it, so increase the ability to do activations, increase their returns, refurbishments, universal logistics, a slight configuration as well. So those are all types of things that we want to kind of mirror around, one to drive higher gross margin, drive stickier with vendors and our customers and ultimately really take advantage of the mobility convergence.

Scott Craig - Bank of America Merrill Lynch

And just going back to the 1.55 to 1.75 operating margin target goal, what are the couple of biggest things that drive you into that range overall, obviously we've talked about Australia a lot today, but when you think about it how big is that of a factor and then kind of the other factors and if you can put them into size per factor?

Bill Humes

Yeah, sure, then to Australia factor, a lot of the drivers on operating margin are for instance fixing Australia, just to breakeven as well as Brazil to breakeven, those two individuals, not including getting up to the hurt average where they were. But to getting so they are not a drag on earnings; that improves our operating margin on a global basis by 15 basis points. So that's one first step.

Second step is, we are even deploying SAP and working on SAP with half of those expense or the portion of the expense, the other portion is capitalized and so on and so forth. We are also running two systems, we are running our old Europe mainframe, cobalt based ERP system. We are also now running whole infrastructure for SAP as well. So as we get more critical mass, we can reduce the whole legacy system operating wise.

So we are running about and there are some other efficiencies we can drive as we get more critical mass on SAP deployment. So that's about 15 to 20 basis points of easy to get as soon as we are done type of some savings.

We also have if you think about leverage even at 4.5% to 6.5% projected growth as long as we maintain our expenses we are actually conservative when I said at the Analyst Day in November last year and gave guidance of 4.5% to 6.5% and we grow in the 60% to 70% of revenue growth, of OpEx growth, the revenue growth, we do deliver I think it was like 30 or 40 basis points of, yeah it was 25 to 35 basis points of operating leverage.

So that obviously the higher the growth rate, the easier it is to drive leverage and given consumer price increases and labor and so on and so forth. But yeah then I would say there is a lot of other initiatives that we've been driving through that we’ll continue to drive through you know Alain and I will have a major play as also rest of our executive team in driving some savings through global strategic sourcing. So that’s basically taking all non-trade procurement and using our global leverage to drive benefits and procurement -- standardizations and procurement versus country negotiation. And so, we’re really using that global leverage and we’re getting some benefits already.

I will continue to drive those throughout the organization, throughout the next several years. We’re working on ways to drive shared service capabilities. So think about repeatable transaction processing systems that are done and people that are done within all of our 25 countries, while some of that can be extracted out and put in certain areas and can be put in lower cost. Areas, as well as optimized in the sense of process standardizations; so that drives a lot of benefit.

So I would put that in about the 15, 20 basis points type of saving. And the rest is essentially continuing to work on driving our adjacencies, market benefits in the higher operating margin business with AIDC, with the data center, with the Cloud drive, IM logistics. So all those mixed issues -- expediting our execution on some of those areas and driving quicker, faster results in our adjacencies drives operating margins because of the different mix of the business and higher margin stuff.

And we’ve built in there some bolstered contingencies to offset any one of those individual areas it will hit, as well as being the best in greenfield and internal investments. So we’re pretty confident we are driving towards those operating margin levels. And hopefully, they’re conservatively driving higher but this is just a milestone. Ultimately, we’re not stopping there. We’ll continue to drive that.

Scott Craig - Bank of America Merrill Lynch

Okay. One question we get from investors is Romley -- and I guess you have a lot of server sales, obviously, and the industry is kind of terrific. Is Romley a big incremental driver of the server cycle, or do you think so far what you’ve seen from the data is just sort of the status quo of what the growth is and is not really driving any incremental?

Bill Humes

Well, it’s hard at this point in time. It’s still early yet. But I think it’s going to reduced costs of certain server types and sometime G Ethernet. And so, it’ll be making it available, that technology, for more people. But who knows. It’s a little too early to answer that. But it is a potential catalyst to help drive investment in that type of technology, as well as help facilitate further investment and further cost-effectiveness of cloud-based technology.

So I think it’s all part of this technology evolution. We still continue to prop up the growth on technology higher than GDP. So I do think that overtime it will drive further investment, but probably more gradual. Because the way I was thinking about it is in the end unless you’re putting in new technology, if you’ve already invested in other servers and other computing technology, you’re going to try and extract as much value out of that as possible.

And then, you’re going to think about, well, what’s my business in case to switch to the higher performance but lower cost type technology. And say, at some point that ends up being a positive ROI. But if you just invested in servers or whatever your technology was, in a short period of time you’re going to say, well, I’m invested but I’ve got to drive that investment. There’s no way my CFO is going to approve me in investing on a whole another technology when I just you know came to him a year ago for a big investment later.

Scott Craig - Bank of America Merrill Lynch

And maybe just one last one and then I think we'll be unless there is any others from the audience at all. Okay maybe one last one from me, cash usage and cash flow generation expectations, how do you prioritize that as you work through 2012?

Bill Humes

Now I would say first and foremost prioritization is you know it definitely for you know one running the business as I mean with each incremental of billion dollars in a year of business it takes about 65 million of incremental capital invested in the business. I mean we are a working capital investment business. I mean I don’t have the whole lot of investment in long-term fixed assets are planned it's really working capital. Working capital today is we do have some volatility and you know the working capital today is you know even at a 20 to 26 day range, each day represents $110 million of capital invested in the business.

So we have to kind of allocate enough capital just on a normal quarter-to-quarter basis and then as I have talked about throughout you know last couple of years is there is volatility within you know a quarter so it could swing from you know if it was 24 days that came out of the quarter you know it could swing you know 5 to 7 days in any one day in between that quarter and we have to keep cash flow so that normal operation of the business you know usually the quarter end just by the nature of the industry and by the nature of whatever a customer -- customer payments coming in and vendor payments being able to not -- to be able to manage those affectively quarter ends and month ends.

And we tend to be you know better looking than you know 15th of the month or say. So it just happens to happen that way but we manage the business to the peak levels of requirements are. And like I said so if the swing is 5 to 7 days at $500 million-$700 million of capital that we have to kind of allocate from our views of managing business to allocate and then second of all would be to be – we talked about as you know our key focus here is execution on our strategies and actually accelerating the execution.

The strategies are same – the strategies are the same that they were a year ago but I would say we are going to get more aggressive on executing our strategy and that may mean internal investments, will mean internal investments as well as external investments, so potential acquisitions. Those two are probably primary but then you know lastly opportunistically we continue to look at stock repurchases as a definite avenue for use of capital as well, but we definitely have a bias towards investing and accelerating our execution in the business.

Scott Craig - Bank of America Merrill Lynch

With that I think we are out of time. So Bill and Damon thanks a lot for your time it is appreciated.

Bill Humes

Yes thanks a lot. Thanks a lot for everyone for joining us. Thank you everyone.

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