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Avnet, Inc. (NYSE:AVT)

Q4 2012 Earnings Call

August 8, 2012 02:00 p.m. ET

Executives

Vince Keenan – VP of IR

Rick Hamada – CEO

Raymond Sadowski – CFO & SVP

Harley Feldberg – SVP & President of Avnet Electronics Marketing

Philip R. Gallagher – SVP & President of Avnet Technology Solutions

Analysts

Brendan Oliver Furlong – Miller Tabak

Shawn Harrison – Longbow Research

Amitabh Passi – UBS Investment Bank

Ananda Baruah – Brean Murray, Carret & Co.

Sherri Scribner – Deutsche Bank

Craig Hettenbach – Goldman Sachs

Brian Alexander – Raymond James

Matthew Sheerin – Stifel Nicolaus

Jim Suva – Citigroup

Steven Fox – Cross Research

Mona Eraiba – TCW

Operator

Please standby. Our presentation will now begin I would now like to turn the floor over to Mr. Vince Keenan, Avnet’s Vice President of Investor Relations.

Vince Keenan

Good afternoon, and welcome to Avnet’s Fourth Quarter Fiscal Year 2012 Financial Update. If you’re listening by telephone today and have not accessed the slides that accompany this presentation, please go to our website and click on the icon announcing today’s event.

As we provide the highlights for our fourth quarter and full fiscal year 2012, please note that in the accompanying presentation and slides, we have excluded a gain on bargain purchase associated within acquisitions and restructuring, integration and other charges from all periods presented. When discussing pro forma sales or organic growth, prior periods have been adjusted to include acquisitions and the impact of divestitures.

In addition, when we refer to the impact of foreign currency, we mean the impact due to the change in foreign currency exchange rates when translating Avnet’s non-U.S. dollar based financial statement into U.S. dollars. And finally, when addressing working capital, return on capital employed and return on working capital, the definitions are included in the non-GAAP section of our presentation.

Before we get started with the presentation from Avnet management, I would like to review Avnet’s Safe Harbor statement. This presentation contains certain forward-looking statements which are statements addressing future financial and operating results of Avnet. Listed on this slide are several factors that could cause actual results to differ materially from those described in the forward-looking statements. More detailed information about these and other factors is set forth in Avnet’s filings with the Securities and Exchange Commission.

In just a few moments, Rick Hamada, Avnet’s CEO, will provide Avnet’s fourth quarter and fiscal year 2012 highlights. Following Rick, Ray Sadowski, Chief Financial Officer of Avnet, will review our progress and growing shareholder value and provide first quarter fiscal 2013 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 fourth quarter and fiscal 2012 business highlights.

Rick Hamada

Thank you, Vince and hello everyone. Thank you all for taking the time to be with us and for your interest in Avnet. In fiscal 2012, growth rate slowed in the technology markets we served after two years of double digit organic growth driven by an increase in global GDP growth and the V-shaped recovery in semiconductors.

At electronics marketing, our fiscal year started with two quarters of below seasonal growth as the electronic component supply chain dealt with a typical post upturn inventory correction as lead times contracted to more normal levels. Growth return to the low end of normal seasonality in the second half of the year which suggests the inventory correction has run its course, but customer demand is tentative given the macro economic uncertainty as evidenced by the unexpected decline in our sales late in the fourth quarter.

At Technology Solutions, year-over-year pro forma growth rates turn negative in the spring as macro economic conditions worsened and the slowdown in Europe spread to other regions.

For fiscal 2012, Avnet’s total revenues of $25.7 billion declined 3% in reported dollars while pro forma revenue was down 4% with EMEA being the weakest region at both operating groups.

As growth rates declined, we applied our value based management discipline across the portfolio and initiated targeted restructuring actions in order to focus our resources and opportunities for growth and margin enhancement.

Associated with these initiatives, we reduced expenses and exited some revenue streams in underperforming business units while realigning resources in the parts of the portfolio where we experienced revenue shortfalls.

While we could not offset all of the gross margin loss from the revenue decline, we did mitigate a meaningful portion of the impact as adjusted operating income of $958 million was down 5% from record levels in fiscal 2011 and adjusted operating income margin declined only seven basis points to 3.7%.

Adjusted net income which was down 8.8% from the prior fiscal year declined more than operating income primarily due to a negative $15 million swing in other income due to the cost related to foreign currency hedging as exchange rates were more volatile in the second half of fiscal 2012.

For the full year, adjusted earnings per share declined $0.26 to $4.06 due to the decline in revenue and the negative translation impact of changes in foreign currency exchange rates offset somewhat by the positive impact of our share repurchases.

Looking at the balance sheet, working capital was roughly flat in constant dollars as compared with fiscal 2011 while working capital velocity declined roughly three quarters of a turn to 6.4 turns which remains above pre-recession levels. Return on working capital of 23.9% declined 333 basis points as improvements at TS were offset by a decline at EM after our record setting year in fiscal 2011.

As a result of our solid operating income performance, cash flow from operations totaled $529 million and we closed the year with over $1 billion of cash on our balance sheet. Supported by this strong cash flow, we invested $318 million in our stock repurchase program and another $313 million in value creating M&A.

Turning to the fourth quarter of fiscal 2012, revenue came in at the low end of expectations at both operating groups as a change in customer settlement towards the end of the quarter resulted in June billings coming in lower than anticipated.

Enterprise revenue of $6.3 billion was roughly flat with the March quarter and organic revenue decreased 8.9% year-over-year in constant dollars. Gross profit margin of 12% was up 10 basis points year-over-year and essentially unchanged from the March quarter.

Pro forma operating expenses in constant dollars declined $43 million or 7% year-over-year as a result of the positive impact of cost reductions and lower variable expenses associated with our lower revenue levels.

Even though our team did a good job managing through a challenging environment. Given our revised outlook on current growth expectations in the near term, we are in the process of taking steps to further align our resources just as we have done throughout 2012.

Consistent with our past practices, we will apply our value based management discipline across the portfolio with a focus on maintaining the trajectory towards our long-term goals. At this time we have targeted incremental expense reductions in the range of $40 million to $50 million on an annualized basis.

Adjusted operating income decreased 13.7% year-over-year to $233.9 million and operating income margin was down 21 basis points as an improvement at TS was more than offset by a decline at EM.

On a sequential basis, both operating income and operating income margin were roughly flat. Adjusted EPS of $0.99 was down $0.23 or 19% year-over-year with approximately $0.06 of decline due to the translation impact of changes in foreign currency exchange rate which was offset by the positive impact of the similar amount related to our share repurchases.

Cash flow from operations came in strong at $259 million and return on capital employed of 12.5% was down 303 basis points from the year ago quarter.

Looking back on the June quarter, it is apparent that slowing global growth is having an impact on the markets we serve. We are maintaining a strong balance sheet and with our demonstrated cash generation capability, we will continue our disciplined approach to capital allocation that prioritizes organic growth strategies, value creating M&A and return to shareholders in the pursuit of long-term shareholder value creation.

Now let’s turn to the operating groups. Electronics marketing delivered a solid performance in fiscal 2012 even as the electronic components supply chain was going through an inventory correction following the V-shaped recovery that peaked at the end of fiscal 2011. Revenue of $14.9 billion was down 1% from the prior fiscal year and pro forma revenue was down 6%.

Gross profit margin declined 38 basis points primarily due to the transfer of the Latin America hard disk drive business from TS and a geographic mix shift as the higher margin EMEA region declined from 32% to 28% of EMs total revenue.

Operating income offset was $751 million and operating income margin of 5% decreased 50 basis points from the strong performance in fiscal 2011. Although return on working capital declined 590 basis points year-over-year primarily due to lower operating income margin and a small decrease in working capital velocity, it remains above our historic levels.

To add some perspective, given the number of red arrows on the slide you are viewing, when we established the operating income margin target range for EM of 5.0% to 5.5%, the goal was to achieve that level through cycles. Prior to the ‘08-‘09 recession, EM performed within the range in an up year, but never in a year where organic growth was negative.

If you look at the past two years when EM had both an up year and a down year, operating income margin was within the range even though individual course were outside the range.

Given the demonstrated resilience of the EM model through a cycle, we are confident we can leverage our strong competitive position and scale and scope advantages to grow economic profit dollars going forward.

Now let’s take a look at the fourth quarter. EM revenue came in at the low end of expectations as the month of June closed weaker than expected. Our book to bill dropped below one-to-one in the month of June after trending above one-to-one for four consecutive months. Revenue of $3.76 billion was essentially flat as compared with the March quarter which his consistent with a low end of normal seasonality.

Reported revenue declined 5% year-over-year and pro forma revenue was down 7.8% in constant dollars with all three regions experiencing a decline. Similar to revenue, gross profit margin, operating income margin and return on working capital were all essentially flat with the March quarter.

Gross profit margin declined 86 basis points year-over-year and operating income margin was down 78 basis points due to the transfer of the Latin American hard disk drive business from TS, a geographic mix shift to lower margin regions and negative organic growth.

Operating income of $191 million declined 18% from the record level in the year ago quarter and operating income margin of 5.1% remained within our target range.

Turning to the balance sheet, working capital decreased 3.1% sequentially primarily due to a 5.7% decrease and inventory partially offset by a decrease in payables. Excluding acquisitions in foreign currency, EM inventory declined 4.2% sequentially and inventory turns increased 0.13 turns.

Return on working capital declined 542 basis points from a near record level in the fourth quarter of fiscal 2011 primarily due to the drop in operating income margin. With the drop in EMs book to bill ratio to below one-to-one in the month of June, the book to bill for the quarter was 0.9821.

With stable lead times and reduced visibility, customers are being cautious in placing new orders as they manage their inventory and backlog. In this environment of slowing growth, we will continue to vigilantly monitor our dashboards and adjust expenses and working capital to ensure we maintain our margin performance and continue to generate economic profit.

As fiscal 2012 came to a close, spending on IT equipment slowed as global growth declined. While TS EMEAs revenue performance for the year was the weakest with four consecutive quarters of negative year-on-year growth, organic growth for TS at the global level flip from positive in the first half of the year to negative in the second half as growth rates declined in both the Americas and Asia regions.

As a result, Technology Solutions revenue of $10.8 billion declined 6% year-over-year in reported dollars, while pro forma revenue was down 1.4% in constant currency. Gross profit margin improved 73 basis points driven by a significant improvement in EMEA where the team has been focused on higher margin revenue as part of its strategy to improve profitability.

Operating income grew 11.4% to $319 million and operating income margin increased 46 basis points with all three regions contributing to the improvement. Similar to operating margins, all three regions delivered a meaningful improvement in returns as return on working capital increased 389 basis points over fiscal 2011.

Despite the slowing growth that characterizes fiscal 2012, the TS team delivered study progress toward our long-term goals across the portfolio. In the Americas region, operating income is within its target range and return of working capital is well above our stated goals.

In Asia where we’ve slowed the rate of reinvestment to focus on improving profits in returns, pro forma revenue grew double digits and both operating income margin and return on working capital improved year-over-year. In EMEA which has been focused on improving profitability, operating income margin improved to its highest level ever for a fiscal year and return on working capital was up 466 basis points despite being challenged by six consecutive quarters of negative year-over-year organic growth in constant dollars.

While TS and EMEA made good progress towards this long-term goal this fiscal year, we are excited about the potential to accelerate that progress once we complete the recently announced acquisition of the Magirus Group. With complementary suppliers and high growth technologies and a strong competitive position and key geographies, we will be able to leverage cross-selling opportunities and increase our scale in the region.

Even though IT spending has contracted along with global GDP, we are well positioned to build in our progress this year as we continue to leverage our solutions past strategy and help our trading partners accelerate growth in all three regions.

Looking at the June quarter, revenue unexpectedly came in at the low end of expectations as we experience the change in customer sediment in the last two weeks of June as high probability high opportunities did not close as anticipated in both the Americas EMEA regions.

As a result, revenue of $2.54 billion was flat with the March quarter as compared with normal seasonality of up 3% to up 7%. Reported revenue declined 13.8% year-over-year well pro forma revenue was down 10.4% in constant dollars with all three regions posting slower growth rates for the second consecutive quarter.

On a sequential basis, growth in storage and networking was offset by declines in microprocessors and servers. Gross profit margin increased 26 basis points sequentially and a 118 basis points year-over-year led by a meaningful improvement in the EMEA region. Operating income of $67.5 million was flat with the year ago quarter despite the nearly 14% decrease in revenue resulting an operating income margin increasing 36 basis points year-over-year.

TS’s return on working capital was also flat with the prior year quarter and down 247 basis points sequentially. While growth is slowed recently, we continue to invest a new services and software capabilities to enhance our offerings and accelerate organic growth. With the acquisition of Ascendant Technologies in June and the recently announced acquisition of Pepperweed Consulting, we are now able to help VAR partners address increasingly complex and customize IT solutions needed by their customers.

When combined with our solution practices focused on high growth verticals and technologies we not only enhance our own organic growth strategies but we increased the breadth and depth of opportunities that our trading partners can’t address.

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

Raymond Sadowski

Thank you, Rick, and hello everyone. In fiscal year 2012 with the combination of strong operating income and diligent working capital management, we generated significant cash flow from operations of $529 million. This represents an increase of over 90% from the previous year and the highest level over the last three years.

As we have stated in the past, our long-term capital allocation strategy is to invest in organic growth first followed by value creating M&A and when we have accessed cash return that cash to shareholders. In light to the current value of our stock, our strong balance sheet and consistent cash flow generation our board of directors has authorized an additional $215 million for our stock repurchase program bringing the aggregate amount to $750 million.

During the fiscal year, we repurchased $11.3 million shares at an average price of approximately $28.90 for an aggregate cost of $318 million which settled in the fiscal year 2012. The fiscal 2012 share repurchase activity had a positive impact of approximately $0.18 to the diluted earnings per share which helped to offset some of the revenue decline and a negative impact from the changing foreign currency exchange rates.

In addition to the buyback program, we continue to invest in value creating M&A as we completed 11 acquisitions during the year that will enhance our competitive position and add over $900 million to our top line. I like to reiterate that investing for future organic growth will continue to remain a key tenant for our capital allocation strategy and you can count on our continued disciplined approach to capital allocation.

Now let’s look at the economic profit and shareholder value creation. As you can see from the chart, the return on capital employed was essentially flat from the March quarter are down substantially from the year ago period when our end markets experiencing strong organic growth, with return on capital employed at 12.9% for fiscal year of 2012 we are below our target range but above pre-recession levels and well ahead of our weighted average cost of capital.

So our near term visibility is limited we are competent that our board market exposure and portfolio of management discipline will allow us to outperform on a relative basis and help us achieve our long-term financial objectives. With a leadership position in the marketplace, a strong balance sheet and ample liquidity we have the ability to continue to focus on investments that we create, drive and sustain long-term shareholder value creations.

Looking forward to Avnet’s first quarter of fiscal year 2013, we expect EMEA sales to be in the range of $3.55 to $3.85 billion and sales for TS to be between $2.25 and $2.55 billion. Therefore, Avnet’s consolidated sales of forecast would be between $5.8 billion and $6.4 billion. Based upon net revenue forecast we expect first quarter fiscal year 2013 earnings to be in the range of $0.78 to $0.88 per share.

The EPS guidance does not include any potential restructuring charges, any charges related to acquisition and post closing integrations or the impact of additional share repurchases. The guidance also includes a typical sequential increase and stock based compensation and assumed to the effective tax rate in the range of 29% to 31%.

In addition, the above guidance assume the average Euro to US dollar currency exchange rate for the first quarter of fiscal ’13 is 1.22 to 1, this compares with an average exchange range of 1.41 to 1 in the first quarter fiscal 2012 and 1.28 to 1 in the fourth quarter of fiscal 2012. The year-over-year strengthening of the US dollar versus euro is significant roughly 13%, based upon the size of our business in Europe our guidance assumed a decline in year-over-year sales and EPS of approximately $260 million and $0.06 per share respectively due to the translation impact of the stronger US dollar.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from Brendan Furlong of Miller Tabak. Please go ahead.

Brendan Oliver Furlong – Miller Tabak

Good afternoon everybody, thank you. Quick question on the, I guess gross margin more important the SG&A trend and how we shouldn’t see the operating margins trend through the balance of the calendar and I guess the fiscal year.

Richard Hamada

Ray, you want to jump on that? It’s SG&A trend for the next couple of quarters.

Raymond Sadowski

Yeah if we were going forward for couple of quarters, I mean if you look out just in the first quarter we would expect SG&A to rise probably in the range of about $5 to $10 million and that’s compose of a number of different item, one what we mentioned already is the year-over-year impact increase in our – sequential impact, excuse me, of our stock based compensation and that’s roughly going from Q4 to Q1 about the $12 million.

In addition to that we have a slight increase in pension cost and then more importantly being the beginning of our fiscal year we do have inflation increases tie to merit increases across the globe which we do in the beginning of our fiscal year. And a rough estimate of that is about $25 million on an annualized basis so about $6 million there about in a quarter. So if you take all of those pluses and you make another adjustment for currency which should bring down expenses in maybe $10 million range sequentially, the difference you’ll come up with the benefit essentially some of the redemption and cost that we’ve taken during the year which will be fairly significant.

So a number of different moving pieces impacted by stock compensation as I mentioned, inflation also pulling the number up and then we also add a little bit by FX and offset to some extent by some of the savings, so when you net all of that out we’re expecting a sequential increase and expense of roughly $5 to $10 million.

Brendan Oliver Furlong – Miller Tabak

Okay thank you and I guess through the fiscal year then you’re talking about lining a business model with the current slow environment, how should we view the SG&A then the following three quarters just in general sense.

Raymond Sadowski

All right, so I think that in the following three quarters you’ll start to see expenses come down, and again obviously a lot of this is impacted by what happens with currency and M&A by the way. So again numbers that would impact moving forward to be obviously any M&A activities that gets baked into the numbers as well as any impact of currency, if you exclude those items you would expect to see expenses coming down certainly in the second quarter to some extent due to the normalization of the stock based compensation which as we’ve discussed in the past is fairly high in the first quarter and then levels also that should come down as we go forward in the $5, $6 million range.

And then you get benefits kicking in going forward which will be a combination of the expense reductions we’ve taken last year as well as what we’ve just announcing today in the $40 to $50 million range, so you would see expenses trending down as we grew up through the year based upon all those factors with one caveat which is keep in mind that December is typically a strong quarter for us, we’re not giving guidance for December at this particular point in time but based on up normal seasonable uptick within our TS business we would expect some variable expense to impact that and increase it to some extent. But again overall you’ll see expenses trending down as you go throughout the year.

Brendan Oliver Furlong – Miller Tabak

Great, I’ll pass it over, thank you.

Operator

Thank you. The next question is from Shawn Harrison of Longbow Research. Please go ahead.

Shawn Harrison – Longbow Research

Hi guys, can you hear me?

Raymond Sadowski

Yes, we can Shawn.

Shawn Harrison – Longbow Research

Okay. I’m having some trouble I guess getting to the EBIT margin implied within the guidance, I understand that you’ll have some seasonal increases in SG&A but one way or the other implies a sharp decrease in profitability either EM or TS and maybe if you can just help me out in terms of where the profitability dip sequentially because it looks as if you’re saying greater than normal incremental margin pressure.

Richard Hamada

Yeah Shawn I’ll take a step, maybe turn over to Ray or even Harley at this point. I believe that this is a question we get every year at this particular time particular when it comes to the EM mix of the business. The Q1 tends to be one of the weaker quarters for both business, and EM would typically happens from Q4 to Q1 is a bit of a geographic mid shift from West to East which definitely has an impact.

And so I don’t know exactly what your model is showing but we are showing sequential up margin deterioration for EM as part of our outlook and a slight deterioration at TS based on the fact of the revenue decrease sequential. So that maybe something that’s missing from your overall equation.

Shawn Harrison – Longbow Research

I guess within that would you expect TS EBIT margins to be down on a year-over-year basis because it looks as EM would be down?

Richard Hamada

So for TS year-over-year yeah, I think of it more flattish.

Raymond Sadowski

Right, so TS would be flattish and EM would be down year-over-year.

Shawn Harrison – Longbow Research

Okay. And then just as a follow-up, I guess considering the cash flow generated this quarter coupled with the expanded buyback, what is your maximum appetite for share repurchase activity during a quarter and have you been buying ahead of the call today?

Richard Hamada

Well we’ve had active program in place Shawn and as you saw with the fiscal year totals we did not, we have not completely spent the original $500 million authorization. So that has remained active through the quarter and we’ve maintained our disciplined approach, we will continue to maintain our disciplined approach. We haven’t ever talked specifically about exactly what levels or formula we’re using but we do factor in proximity to our book value and we take a look at our internal financial projections and take a look at future earnings factor all that into the equation and produce a schedule that gets more aggressive as the equity drops.

Shawn Harrison – Longbow Research

So just not to put words in your mouth, but given with the stock down today we should expect you on a being closer book value we should expect you to be more aggressive quarter-to-quarter.

Richard Hamada

If the stock price is down quarter-to-quarter you could expect we’re more aggressive quarter-to-quarter you could expect we’re more aggressive quarter-to-quarter that’s correct.

Shawn Harrison – Longbow Research

Okay, thanks so much.

Operator

Thank you. The next question is from Amitabh Passi with UBS. Please go ahead.

Amitabh Passi – UBS Investment Bank

Hi thanks. Can you hear me?

Richard Hamada

Yes we can.

Amitabh Passi – UBS Investment Bank

Hey Rick, I think you talked about the overall business softening in the month of June. Any updates in terms of how things are trending thus far in the quarter?

Richard Hamada

Yeah, I’ll add some and again let Harley and Phil jump in if they’d like to Amitabh. From an overall level, what I would tell you is that, first of all, the unexpected developments really materialized for us in the month June. So it was very late quarter setup developments. However, it appears thus far as you see with our guidance of that lower base of the June quarter, our guidance maybe termed as more normal seasonality going forward for both businesses.

It appears more or less that there was a rest done at the end of the quarter, obviously an unexpected shortfall on revenues for us, but the outlook going forward doesn’t appear that that’s any continued deterioration overall. So we’ve got a lower reset that’s why we got to adjust the cost model and our resource allocation, we’re not calling a stair step down at this particular point and that’s factored into that what you’ve seen in our guidance for both businesses going forward here.

I don’t know Harley and Phil if you want to jump in a little bit more color.

Philip Gallagher

Yeah, well I’ll jump in. This is Phil. As best we can tell when we talk about the push outs from last quarter and as it come right near the end of June, that’s we could tell the push outs they’re not cancelled product – projects and we’re tracking really closely and we’ll monitor as we get through the quarter. Right now that’s what built in from a guidance standpoint from that sort of sentiment.

Speaking with divars (ph) and you want to carry out a backlog at TS as you know that as we talked to divars, talked to the suppliers we’re feeling that the call right now is what we had in for the guidance and want to just manage it closely as we get through the quarter.

Harley Feldberg

Yeah, Rick, if I could. This is Harley. Hello Amitabh. As I think that channel of color on here as I think about how June finished up and what we think so far through the first five weeks of the September quarter. What we saw in June was a week-end close to the quarter, now weaker than we would have expected, weaker than saw in March as an example.

But what we have not seen are anything that resembles significant adjustments to customer backlog. The behavior we saw or felt much more like an ever increasing degree of conservatism very short-term approach towards material management taking in inventory cautious approach towards their order books.

So we’ve seen as Rick said, fairly normal pattern so far this quarter relative to our book-to-bill. It hasn’t taken as additional step down, which I think as Rick characterized it felt like a reset of a bit off of the modest close in June.

I think if I could add one more color point, thinking of the close in June, regional color, the book-to-bill coming out of the quarter and entering this quarter was probably no surprise to the group’s strongest in Asia and Japan and a bit weaker in the west in America and Europe.

Amitabh Passi – UBS Investment Bank

Got it. And just maybe as a follow-up. Rick any updated thoughts on potentially at dividend?

Richard Hamada

Our capital allocation priorities remain intact Amitabh. And the – when we get to return to shareholders which obviously we made an announcement along those lines today, we maintain an active conversation and dialog on options for returning to shareholders including dividends but no specific update on that topic today.

Amitabh Passi – UBS Investment Bank

Okay. Thanks.

Operator

Thank you. Our next question is from Ananda Baruah with Brean Murray. Please go ahead.

Ananda Baruah – Brean Murray, Carret & Co.

Hi, thanks guys for taking the question. Just firstly, just wondering FNTS, if you’re seeing I guess kind of vendors or hearing of vendors provide any extra incentives to divars. I guess to sort of go out and push product given the softer macro environment. And if you’re seeing any, I guess, price pressure pickup or pricing aggression pickup in TS.

Raymond Sadowski

Yeah, I’ll answer that Rick. I mean anytime if the market gets a little tight, you’re going to see some more pressure on the pricing. So yeah, we certainly see that, but that’s not new and we need to manage through that. As far as additional incentives or programs into divars I’m not aware of any other than the normal way business is done on the enterprise side, others not additional rebates etc those types of things being thrown out there at least not to my knowledge at this point.

Ananda Baruah – Brean Murray, Carret & Co.

Okay, thanks. That’s helpful and I guess the comments for July seasonality seem to pertain to EM, a moment ago, do those also pertains to TS. Have you seen the same reset in TS in the same start to the July quarter that you would typically see, sorry to the month of July?

Richard Hamada

Yes, we have actually. In July, coming off the year-end and then the summer months is typically not the strongest month of the year for us either, but it’s not out of the range where it’s typically been.

Ananda Baruah – Brean Murray, Carret & Co.

Got it. Okay, thanks a lot.

Richard Hamada

Thank you.

Operator

Thank you. The next question is from Sherri Scribner of Deutsche Bank. Please go ahead.

Sherri Scribner – Deutsche Bank

Hi, thank you. Harley, I was hoping you would give us an update on book-to-bill for the month of July. Did it stay at, I think, you said it was $0.98 exiting the quarter or for the quarter. Did it stay at those levels?

Harley Feldberg

Hi, Sherri. This is Harley.

Sherri Scribner – Deutsche Bank

Hi.

Harley Feldberg

Through five weeks of the quarter, so including the last week, our book-to-bill is one-to-one.

Sherri Scribner – Deutsche Bank

Okay. And I think your competitor Arrow made some comments that they felt like business was improving. Are you guys seeing anything like that?

Harley Feldberg

I would not categorize the business as improving, no.

Sherri Scribner – Deutsche Bank

So, but maybe stable at this point at reset level?

Harley Feldberg

Yeah, for sure.

Sherri Scribner – Deutsche Bank

Okay. And then maybe, Rick, could you provide a little bit of detail on where you plan to take the cost actions in the restructuring so there are certain geographies that you’re focused on or certain, is it focused on TS or EM?

Raymond Sadowski

So, on balance it’s across the portfolio, Sherri. Our approach will be to, when we have a gap of $300 million in revenues. Obviously someone is not making their plans. That we have, the gaps breakdown and we take a look where in our business those gaps are and those usually our first targets for reallocation of resources if not reduction of resources. So we’re very prescriptive about where we look for these, because we very much shy away from peanut butter approaches where its all of a sudden we have all anti-meeting and everybody has got to take out 2%, 3% or 5% that’s just not the way we do it overall.

We’ve been active in actually identifying those areas since the close of the quarter. And some of those actions are starting to take place today. We want to be sensitive to pre-announcing actually any particular details around that and we’ll keep you posted as we realize those, but please understand that we do take a very prescriptive approach overall because the last thing that Arrow want to do as we’re doing this is impact or otherwise the indoor handicap any existing good growth stories that are going on today, of which they’re always some going on in all environments.

Sherri Scribner – Deutsche Bank

Okay, great. Thanks.

Operator

Thank you. The next question is from Craig Hettenbach of Goldman Sachs. Please go ahead.

Craig Hettenbach – Goldman Sachs

Yes, thank you. Phil, Avnet as well as a number of companies have talked about weak server growth. Can you just talk about the developments happening there and what things you’ll be looking for in terms of signs of a potential pickup in servers?

Raymond Sadowski

Yeah, thanks, Craig. Well it’s been, taken for industry standard, it’s been a great run for many, many quarters as you know. And we did see a decline this past quarter in both industry standard as well as proprietary. It’s really tough to call when exactly that’s going to pop back, so its, I’m upgrading up to, to be able to give you an exact idea on that and others.

There’re certainly a lot of excitement that’s came out of the conference with one of our major suppliers in that space. There’s a lot of excitement around different technologies and stacks and products that to putting out there and there’s good demand building when that kicks in its tough for me to say.

On the industry standard, you’ve got the Romley processor that’s been out now for about six months from Intel, it’s being adopted and pushed out into the marketplace and so we just take a little bit of time to that take heat. So tough to call, it’s still a huge number for us, just down this past quarter. It was a good run for a while, we’ll continue to track it and do we can to help turn it around.

Richard Hamada

Hey Craig, this is Rick. I would just add, I think also in our internal conversations on what’s going on with the mix that TS etc, it’s crossed our minds that remember coming out at ‘08-‘09 we had tremendous pent-up demand that reflected in a very strong refresh that was went throughout 2010 and to a certain extent into 2011. And it wouldn’t surprise us that if part of what we’re seeing with the server year-on-year trends right now are also partially influenced by tough compares based on, I wouldn’t call it a v-shaped recovery, but it was certainly a strong performance coming out of the recession.

Craig Hettenbach – Goldman Sachs

Got it. Thanks for that Rick. And then if I could just add to a follow-up for Harley. After a pretty big correction in components in recent quarters, it looks like the demand side isn’t there so we’re not getting that bounce back in the cycle if you will, but anything you share in terms of where you think we are in a cycle, how it compares to prior cycle or again things you’re watching for in terms of inflection point?

Harley Feldberg

Yeah. Hi, Craig. It’s really difficult to comment out very far beyond our current quarter, for obviously that all the well-known macro issues. When I think of the things that we track tactically like cancellations, reschedules, supplier behavior, gross margin, ASPs the type of words I tend to use when I talk internally are stability, modest growth, those type of words. And that’s what it feels like at least for the horizon we can see.

I can’t give you nor would I speculate on anything substantial that caused that to change in either direction at this point. We just don’t see that. So we’re going to manage the business that way. We worked on improving our asset velocity all through fiscal ‘12 with good results as Rick and Ray have talked about what we work on the productivity of our expense investments.

So we’re managing the business that way. It feels very stable. We maybe, in a period for a while that that ranges in that 0.98 to 1.05 type of book-to-bill and that’s what our short-term view is.

Richard Hamada

Hey Craig, again I’ll just add, go back a year ago for EM as well. I think Harley a year ago June quarter was 0.98 book-to-bill. But at the time we had pretty clear indications, there was a supply chain correction coming, based on – coming up two bright years. I would tell you it’s a day, Craig it feels a lot more as a demand driven phenomena as opposed to any distortions or anomalies in the supply chain right now.

Craig Hettenbach – Goldman Sachs

Yeah, okay thank you.

Operator

Thank you. The next question is from Brian Alexander of Raymond James. Please go ahead.

Brian Alexander – Raymond James

Yeah. Maybe just another question on the weakness in June in EM, for Harley. Just more color on what parts of the business you saw the weakness more pronounced from a either a customer segment or an end market perspective or was it fairly broad-based globally.

Harley Feldberg

Yeah. Hi, Brian. Knowing our business as you do, the strength, the core of our business is that broad industrial automation, broad customer set, much of it, in all regions, but much of it in America and in EMEA. And that clearly is the area where we’re seeing very, very conservative behavior, very, very modest growth projections coming out of that set of our core business. So the growth engines as you’ll see in some of our supplier’s announcements and in our own Asia and Japan growth is coming from, much more from the digital consumer from commercial space, consumer space than our core industrial business.

So it is that indeed that broad industrial base where we, our big supplier of products like analog and microcontrollers and all of those. Where we are seeing the biggest challenge today and that was what did not materialize into the growth we were expecting coming out of June.

Brian Alexander – Raymond James

Do you think any of the weakness that you saw, could be some share shifting back and forth between yourselves and your major competitor? They were coming off a weak Q1 and I think they ended up, up 4% sequentially in components versus you guys coming in at the low end of guidance and flat sequentially. So it seems to be some seesaw on the back and forth and did you see any pricing pressure along those lines?

Harley Feldberg

The data that we track that will – that would allow me to answer that question obviously rather than speculating on the composition of their numbers, would be share in common core product lines. And we share a high percentage of common product lines that make up a high percentage of both of our revenues, something in the 70% to 80% range. And in that said, of course, suppliers there was no share shift in any rituals.

Brian Alexander – Raymond James

Okay. And Harley, at a geo level, Harley, I think if we look at the last two quarters, any distortion in share really has been kind of focused plus or minus in what’s going on in Asia.

Harley Feldberg

I’m sorry, repeat…

Richard Hamada

If we’re looking at that, the competitive on a regional just broad geographic basis, it appears that the distortions have been mostly in Asia as opposed to broad-based global.

Harley Feldberg

Yes, if you take out the core profit line.

Richard Hamada

Correct.

Harley Feldberg

So there has been no share shift in the core product lines. The regional variance between the two companies, Brian, talking about was all in nation and it wasn’t in any of our core product line.

Richard Hamada

Yeah.

Brian Alexander – Raymond James

Okay. I think I know what drove that for them. Last question, just assuming normal seasonal revenue trends over the next few quarters, in EM, which are guiding to for September at least, I guess when do you think you’ll be back above 5% operating margin in line with your long-term target because it looks like you’re just below that in the next quarter. Thanks.

Richard Hamada

Yeah. Again, Brian, I will ask forgiveness not to forecast outside of September. There’s just too much unknown today. Clearly, I think either Rick or Ray said this in the beginning, September in a normalized year tends to be our low points from a margin perspective and there is nothing that I see in the windshield today that says that we’re not going to have that kind of performance looking forward.

Brian Alexander – Raymond James

Okay. All right. Thanks a lot guys.

Operator

Thank you. Our next question is from Matt Sheerin of Stifel, Nicolaus. Please go ahead.

Matthew Sheerin – Stifel Nicolaus

Yes thanks. Most of the questions have been asked here. Well let’s talk about the microprocessor business you talked in new release about weakness there. I know that I think AMD is your biggest supplier there. How bigger percentage of your revenue is from microprocessors?

And then also on the disc drive business, where you had seen some strength because of pricing and constraints in two or three quarters, have you seen any incremental weakness in that business?

Richard Hamada

Phillie wants to go first yet.

Philip Gallagher

This is – let me go first. Hi, Matt. This is Phil.

Matthew Sheerin – Stifel Nicolaus

Hi, Phil.

Philip Gallagher

To some of the processors our share between the operating groups, but I’ll give you that commentary was specific to TS that Rick talked in the opening comments and it is a mix rug. And I won’t limit it just to AMD, Matt, in Europe in particular, we still have a process or a PC channel products, okay. So it’s not just a processor some of the memory goes with it and it describes and it’s roughly 15% to 20% of our revenue base in Europe still. So one of the questions comes out if you look at the mix issue, 15% to 20% is in PC products and the balance is enterprise. And we saw a pretty significant drop in that business in the past quarter which is why we noted it in the script.

So again, specific to your question, 15% to 20% in products inside of TS Europe related to PC. Biggest part of that is the microprocessors part you mentioned and that was a pretty significant drop off.

Matthew Sheerin – Stifel Nicolaus

With disk drives are also down?

Philip Gallagher

Disk drives were also down and Rick can comment on that and also some of the (inaudible) associated memory products Matt that you know that go in along with that, those PC type products that we have as well and it just had a drop off last quarter which is pretty significant.

Richard Hamada

Yeah. And I would just add our business in the Americas with EM is the volume business part of HDDs are down, but our integration business, embedded business in systems is doing quite well for us overall Matt. And as you understand, we’ve always had a mix there, right?

Matthew Sheerin – Stifel Nicolaus

Got you. Yeah, okay. And then just on the gross margin question, backing into the numbers given the revenue and the SG&A guidance, it looks like gross margin will be far too up which is somewhat understandable given that computing will be done at a greater rate than the components even though the components will be less than seasonal. But given the mix there and I assume that Europe is going to be down at a greater rate than the other regions, wouldn’t there be some gross margin pressure in the component business as well?

Richard Hamada

Yes, there wouldn’t Matt. The mix shift, the geo mix shift effects gross in our operating for EM on a sequential basis.

Matthew Sheerin – Stifel Nicolaus

Okay. And then Brain talked – had asked the question about the pricing pressure, Arrow talked a little bit about some commodity pricing pressure and components. It sounds like Harley that you’re not really seeing that.

Harley Feldberg

Hi Matt, not to a no more than degree, no.

Matthew Sheerin – Stifel Nicolaus

Okay. All right, thank you.

Operator

Thank you. Our next question is from Jim Suva of Citigroup. Please go ahead.

Jim Suva – Citigroup

Thank you very much. Maybe a clarification question and maybe I got the numbers wrong on your prepared comments, but if I’m looking at SG&A which you guided to I think you said up $5 million to $10 quarter-over-quarter. If that’s correct and I look at your business being run year-over-year to get rid of seasonality, to get rid of merit increases, to get rid of timing and management stock options, I guess I’m a little surprised to see if I’m correct that SG&A would be up year-over-year while sales are being down year-over-year. Can you help me connect or bridge that gap?

Raymond Sadowski

Yeah. So I think – it’s Ray, Jim. So if you look year-over-year, our expenses will be slightly up and you have to recognize there are three major components of that. One is M&A, so if you are comparing the expense dollars we had a year ago for the fourth quarter or for the first quarter fiscal ‘12, all the M&A activity adds a significant amount of expense dollars, roughly in $30 million, $35 million, all right.

In addition to that, you have to go in the other way to some extent, a fairly significant amount of currency, all right. The currency impact of the Euro we are using for the first quarter fiscal ‘13, 1.22 versus what it was a year ago, the average rate was 1.44, a fairly significant increase that will pull expenses down to some extent, all right. But those two items there, the M&A with increase expenses FX will not quite offset that, so you see a little bit of an increase there, roughly in the $5 million to $10 million when you net those two together. All right, so that’s a piece of it there.

When you look at the remainder, you add that out, you would see their expenses are coming down a little bit, roughly in the $40 million to $50 million range and that $40 million to $50 million is essentially the benefit from our cost cutting actions taken to date and a little bit that you’re seeing in Q1 again, we’re just taking the actions in Q1 now so you’re not seeing a significant impact in Q1, you will see them in subsequent quarters.

Jim Suva – Citigroup

Okay, that helps. And my guess just would be M&A you think it impact sales and I was kind of referring to the sales year-over-year versus the SG&A year-over-year, so I get it. The follow up then I have is I think you said in your prepared comments also about your slowed some of your Asia investments. I wasn’t sure was that means slowing about the amount that you’re injecting into your existing business or slowing your M&A pipeline in Asia or can you just clarify a little bit on that comment?

Richard Hamada

Yeah Jim, it was in my prepared comments. This is Rick. We’ve referred to our TS Asia business where we’ve established a certain level of critical mass. It’s over $1 billion run rate business today and as we grow the critical mass, we would like to increase the harvest rate and manage a little more judiciously reinvesting in the business both organically and M&A, we’re not excluding any incremental investment we’re just being a little more judicious about it there as we’re trying to increase the harvest rate on both the profitability and returns.

Jim Suva – Citigroup

Great, thank you very much for your time gentlemen.

Operator

Thank you. The next question is from Steven Fox of Cross Research. Please go ahead.

Steven Fox – Cross Research

Thanks, good afternoon. Just a couple of questions real quick, in terms of cash flow rate for the next quarter can you give us some help relative to the guidance what kind of cash flows we could be looking at? And then, go ahead, I’m sorry.

Raymond Sadowski

Okay. I guess at this stage typically we have, if you look back historically Q1 is not a strong quarter for us from a cash flow generation perspective. However, based upon different trends today our expectation is that we would get positive cash flow from operations and as you know it’s very volatile number overall but I would say right now in the range of $75 to a $100 million based upon what we know today but as you know working capital has a big impact on that, so again just taking as being a very rough range.

Steven Fox – Cross Research

Fair enough. And then secondly just from a big picture standpoint we sort of this year seem some stops and starts to IT demand on the TS side. And so it raises the question of what it’s telling us about the reminder of the year, you’ve given the guidance for the summer quarter but are these early signs that we could be in for a slow December quarter, any sort of insight as what your customers are saying for the balance of the year, I understand it’s qualitative but it would be helpful. Thank you.

Richard Hamada

Yeah Steve, this is Rick. Let me give – try to offer some color, I think if you heard on multiple occasions during this call here we really don’t want to forecast December but what I would tell you is that maybe to help bolster our general positioning of conditions now that there has been a reset but not a major sort of continuing deterioration. If we go back to the most recent shock to the system which was back in ‘08-‘09, there we had customer behavior dramatically altered for IT and it was much more at that time around cash conservation, people were getting budgets canceled, they were getting extended – everybody, it seems more of a liquidity crisis driven type of thing which drove that particular set of behaviors at that time.

Everything that we’re seeing now is much more about cloudiness, murkiness, uncertainty and therefore we’re just going to delay this decision and just kind of wait to see what happens a little bit. It’s not, don’t have to do it this quarter, so we’re going to just take a little bit of time to kind of see if the visibility could get a little better for us and we could feel a little more confident but taken a flange on this investment overall.

So I don’t know if that helps you on that December quarter question but there is a contrast thus far based on what we’ve seen here versus again the most recent dramatic shift in the behavior.

Steven Fox – Cross Research

Yeah that is helpful. And then very quickly right now if anyone is kicking out the door, but any update on the CFO search?

Raymond Sadowski

I’ll leave that one to Rick, I won’t get into that replaceable but I’ll let Rick respond to that.

Richard Hamada

Steve, we – the number one objective with the result of that search will be a high quality successor for Ray and we’re working through it, it’s important decision. It’s actively being worked and we’ll keep you posted as any developments come to fruition.

Steven Fox – Cross Research

Okay, fair enough. Thanks.

Operator

Thank you. And our final question comes from Mona Eraiba with TCW. Please go ahead.

Mona Eraiba – TCW

Yes, Rick, you mentioned the servers and the microprocessors, you guys are more exposed to the traditional server suppliers. What’s happening in the cloud, are you starting to focus on that area are do you think that’s related since building data centers for cloud computing seems to be still going very strong?

Richard Hamada

Correct. Yeah, hi Mona…

Mona Eraiba – TCW

Hi.

Richard Hamada

I’ll let maybe ask Phil to make some comments as well. I would tell you first of all on the microprocessor, yes, we’re much more about enterprise, data center products, server storage networking and the tools and middleware around that and so that absolutely is our sweat spot and I would tell you the cloud is offering two opportunities for us, first of all in some cases we’re providing the equipment for cloud implementations and hosting centers etcetera.

In other cases we are now expanding our services and offerings to offer cloud servers through our bars to their end users both in the area of computing power, incremental and access storage capacity and looking at offering hosting opportunities for their clients that would like to be able to set that up for their own data center. So that’s the multiple multifaceted play that we’re taking advantage of. I don’t know Phil if you want anything…

Philip Gallagher

I think you said well Rick, I think the biggest focus for us right now where we’ve seemed that the largest growth with the cloud is going to be in the private cloud, and I think we’ve already, we’ve been doing that for many, many years and that’s continuing to grow to different products that we’re now building and integrating for our partners and our suppliers they’re actually integrated cloud solutions for the private cloud.

The big area for folks and continue growth as Rick just pointed out in the professional services base and helping our bars, enable the customers, okay the end users out there to come up with what is the right cloud solution and how can we help them do that. We announced an acquisition the other day, (inaudible), Pepperweed, I apologize and they’re an HP provider of services and software, okay and their primary focus is in the cloud, say they go and work with our bars and our end users to help popup cloud solutions.

So we’re going to be coming out from inside the brands, okay and then providing our own service offerings around the cloud and you’ll continue to see more alliances that will announce in the future where we can provide Avnet Cloud services as well.

Mona Eraiba – TCW

Thank you, but do you think the weakness in that area maybe it is because a structure shift away from the traditional players?

Richard Hamada

Yeah it’s hard to call Mona. I would tell you that I think that the relatively higher growth rate in industry standard servers has been an indication that that is becoming a preferred sort of building block in some of these implementations. But on the overall basis why servers are down year-on-year, and is that a cloud issue at this point, no direct indications on our dashboard to point to that kind of a shift causing or contributing to that at this point.

Mona Eraiba – TCW

Thank you, just the reason I’m asking because Intel continue to see strong demand for their server related products while other suppliers, system suppliers, the traditional service providers be sluggish demand so that I was wondering if that’s contributing to the structural shift here in the industry.

Richard Hamada

Yeah, no it’s a great question and we’ll continue to share with you what we’re seeing and we’ll break it down by industry standard and total category for you.

Mona Eraiba – TCW

Thank you very much for taking my call.

Richard Hamada

Yeah, thanks Mona.

Operator

Thank you. We have no further questions at this time. I would like to turn the floor back over to management for any closing remarks.

Vincent 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

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

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