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Arrow Electronics, Inc. (NYSE:ARW)

Q2 2008 Earnings Call

July 23, 2008 1:00 pm ET

Executives

Sabrina Weaver - Director Investor Relations

William Mitchell - President, Chief Executive Officer

Paul Reilly - Chief Financial Officer

Mike Long - Chief Operating Officer

Analysts

Matthew Sheerin - Thomas Weisel Partners

Brian Alexander - Raymond James

Jim Suva - Citigroup

Steven Fox - Merrill Lynch

William Stein - Credit Suisse

[Brendan Ferlong - Miller Tamec]

Carter Shoop - Deutsche Bank

Operator

Welcome to Arrow Electronics conference call to discuss their second quarter earnings. (Operator Instructions) At this time I’d like to turn the call over to Sabrina Weaver for opening remarks and introductions.

Sabrina Weaver

Welcome to the Arrow Electronics second quarter conference call. I’m Sabrina Weaver, Arrow’s director of Investor Relations and I will be serving as the moderator on today’s call. If you would like to access today’s call via webcast, please visit our investor relations website at www.arrow.com/investor and click on the webcast icon.

With us on the call today our Bill Mitchell, Chairman and Chief Executive Officer; Mike Long, President and Chief Operating Officer; and Paul Reilly, Senior Vice President and Chief Financial Officer.

Before we move on, I would like to review Arrow’s Safe Harbor statement. Some of the comments to be made on today’s call may include forward looking statements, including statements addressing future financial results. These statements are subject to a number of risks and uncertainties that could cause actual results or facts to differ materially from such statements for a variety of reasons.

Detailed information about these risks is included in Arrow’s SEC filing. We will begin with several minutes of prepared remarks which will then be followed by a Q-and-A period. As a reminder, to members of the press you are in a listen-only mode on this call, but please feel free to contact us after today’s call with any questions you may have.

At this time I would like to introduce our Chairman and CEO, Bill Mitchell.

Bill Mitchell

Our performance this quarter is a story that I am truly delighted to tell. Sales and earnings per share exceed our expectations, driven by strong performance in both global components and global enterprise computing solutions.

We continue to execute well with new record levels of performance across the Board. As we discussed in detail at our investor day program in June, we run our business for consistent performance and this quarter is further evidence of our success. This is in the face of a macro economic climate that has not improved in the last few months. We are well aware of globally economic issues that dominate the financial markets and we watch them carefully.

We fully recognized the challenges that exist, but we’ll continue to manage our business to generate strong and consistent results regardless of market conditions. Our performance in ECS was an example of impressive execution. Sales came in above our expectations and we’ve returned our operating margin to industry leading levels. As you might imagine we spent a lot of time in the last three months answering questions about the first quarter and results for this quarter are proved that the business model has not changed.

We have the right strategy in place with an unmatched set of solutions and a growing global presence that our supplier and customer partners find valuable, and in environment were CIO’s and IT manager are being more prudent about their capital spending, our ability to generate net new demand is crucial for our business partners.

We also achieved a major ERP milestone with a successful transition of our North American Sun group. We first announced this achievement back in April on our last earnings call and I’m pleased to report that in handling with this transition, our Sun business performed well and this was during a time of economic headwinds in the U.S. market for enterprise computing.

In components, our performance came in above expectations with particularly strong above-seasonal growth from our Asia-Pacific region that significantly outgrew the market. North America remained relatively stable at the low end of normal seasonal trends. Conditions in Europe were soft; it was less than seasonal performance on a constant currency basis.

Overall, the market has continued to be relatively stable yet cautious. During this time we have taken the opportunity, to optimize or go-to-market strategies and to move forward with efficiency initiatives and vertical market objectives to ensure that we lay the groundwork for future long-term growth.

We will continue to invest in the long-term future of Arrow to increase our opportunities in higher growth markets, to better leverage our global scale and to further diversify our revenue streams. Our strategic priorities for the future are clear and have not changed. We will pursue a significant growth opportunities that excite across products, markets and geographies; and then addition to organic growth opportunities we will strategically accelerate our growth with acquisitions as evidence by our recent closing of both LOGIX and Achieva.

We will continue to leverage efficiencies of scale and built best-in-class capabilities across the board. We will move forward with our global systems implementation to enable strategic initiatives and change our value proposition. We will do this while continuing to manage the company in a prudent, fiscally disciplined manner. To increase profitability, maintains positive cash flow and strengthen our already strong balance sheet. Paul and I give you a more detailed review of the second quarter, and then Mike will discuss our business unit performance in greater detail.

Paul Reilly

As reflected in our earnings release, there are a number of items that impact the comparability of our results with those in the trailing quarter and the second quarter of last year. I will review our performance excluding these items to give you a better sense of our operating performance. As always, the operating information we provide to you should be used as a complement to our GAAP numbers. For a complete reconciliation between our GAAP and non-GAAP results, please refer to our earnings release or the earnings reconciliation slide at the end of the webcast presentation.

Second quarter sales of $4.3 billion were above our expectations and representing an increase of 8% on both the year-on-year and sequential basis. Excluding the impact of the LOGIX acquisition that closed on June 2, we grew sales 6% over last year and the first quarter. Excluding both the impact of LOGIX and foreign exchange, sales grew by 1% year-over-year with 5% sequentially.

Global Enterprise Computing Solutions posted very strong results and increased sales by 9% year-over-year and increased 26% sequentially to $1.4 billion in the second quarter. Excluding the impact of the LOGIX acquisition, sales were up 4% year-over-year and increased 19% over the first quarter exceeding our guidance range. This represents the 18th consecutive quarter of year-over-year growth for ECS.

Our operating margin improved by 160 basis points in the second quarter to 4.4% and we grew earnings four times faster than the sales growth on a sequential basis. Return on working capital performance was also very strong this quarter, increasing more than 50% from Q1, when you exclude the impact of the LOGIX acquisition. Our exceptional performance this quarter is proof that the model haven’t changed and we’ll continue to generate premium margins to the value we create.

As we discussed at Investor Day, we continue to focus on improving the profitability of our European ECS business with the scale and management talent gained from the LOGIX acquisition, so more to come here.

Global Component sales of $3 billion increased 7% year-over-year and 1% sequentially or an increase 2% year-over-year and flat performance sequentially excluding the impact of foreign exchange. The last four quarters, we have taken actions to improve operating efficiency here. I will continue focus on these initiatives as well as a higher mix of business from Asia Pacific, resulted in a decrease in operating expenses to sales of 40 basis points year-over-year.

However, continued softness in Europe, couples with the greater mix of business from the Asia Pacific region, resulted in a decline in our operating margin on both the year-on-year and sequential basis. In Asia Pacific, sales increased 32% year-over-year, and we are up 14% sequentially to $743 million, which is stronger than normal seasonality. We continue to raise the bar on our operating performance with gains in operating income of more than 40% year-over-year.

This was our sixth consecutive quarter, and ninth out of the less 10 quarters with year-over-year increases in operating income, dollars and percent. We also grew earnings five times faster than sales sequentially. Additionally, our focus on better asset management led to an increase on return of working capital of 420 basis points year-over-year and almost 700 basis points sequentially in the second quarter and that is almost doubled our normal seasonal increase.

In North America, total sales of $1.1 billion were down 4% compared with the second quarter of last year and down 3% compared to the previous quarter. Our focus on additional efficiency initiatives enabled us to increase our operating margin by 30 basis points year-over-year, despite the challenging macro environment.

In Europe, sales were $1.1 billion increased to 5% over last year’s second quarter and decreased 2% sequentially. Excluding the impact of foreign exchange rates, sales decreased 8% year-over-year and decreased 5% sequentially in a seasonally soft quarter. Market conditions in Europe have remained soft, though in-lined with our expectations. We do believe we have great opportunity for improvement and remained focused on initiatives to drive profitability in this region.

Our consolidated gross profit margin was 14.1%. Gross margin of our core customer base declined 10 basis points year-over-year, as the small and medium-sized customers in our Components business. While our total business saw a decrease to 30 basis points year-over-year. So it’s primarily being driven by an increase in mix of Asia Pacific business, which increased from 20% to 25% of total component sales, as well as weakness in our European Components business.

On a sequential basis, gross margin decreased 50 basis points, which is in-lined with normal seasonality given the typical increased revenue contribution from ECS and from the Asia Pacific in the second quarter. Trends in our core customer base of small-to-medium sized customer, was stronger with gross profit margins declining only 30 basis points sequentially. Operating expenses, as a percentage of sales increased 10 basis points year-over-year primarily due to increased spending relates to our ERP initiatives and decreased 40 basis points sequentially to 10.1%, the second lowest second quarter level since 2000.

It has been our consistent message, we remain committed to ongoing efforts to improve operating efficiencies across our organization and drive cost out of our business. From Q3 of last year through the last quarter we have eliminated $47 million of cost annually. We continue to see additional opportunities to improve our productivity. In this quarter we identified another $9 million in savings primarily in our European business and we actually saw $1 million of those savings in the second quarter.

Operating income was $173.2 million, a decrease of 2% year-over-year and an increase of 6% sequentially. Operating income as a percentage of sales decreased 40 basis points year-over-year, principally due to mix. With a higher mix of lower margins operating income in Asia Pac and ECS, and an increase in ERP and just to be clear the only year-over-year decline in operating income percent in our business was in Europe.

Operating margin decreased 10 basis points sequentially, primarily due to the affirmation reasons, in a normal seasonal uplift in ECS. Our effective tax rate for the quarter was 31.8%. This was higher than anticipated due to our geographic mix of earnings compared to our expectations. For modeling purposes you should assume, our tax rate for the remainder of 2008 will be between 30% and 31%. Net income was $102.1 up 1% compared with last year and an increase of 4% sequentially.

Earnings per share, was $0.84 on both the basic and diluted basis. Diluted earnings per share included $0.02 related to the LOGIX acquisitions, which was not included in our guidance. This represents an increase of 2% and 4% compared to last year’s second quarter on a basic and diluted basis respectively and represents the highest second quarter level since 2000. We are extremely proud of our earnings performance this quarter which came in ahead of our expectations despite the well-publicized and certainty in the global economic environment.

This will mark our seven consecutive quarter of positive cash flow generation, with cash flow from operations of $101 million. Our balance sheet remains very strong with conservative debt levels and debt-to-capital near record low levels. Focused management of working capital enabled us to maintain a near record low level of working capital sales of 15.5%. Additionally, our commitment to creating value for our shareholders was reflected in our return on invested capital, which exceeds our cost of capital for the 18th consecutive quarter.

Mike will now discuss our performance and business trends in Global Enterprise Computing Solutions and global components.

Michael Long

Enterprise Computing Solution posted excellent results for this quarter and significantly exceeded our expectations. Performance was driven by double-digit year-over-year growth in storage, software and services with year-over-year growth in proprietary server. Our customer base continues to see the importance of building out mission-critical systems, evidenced by the sequential growth in all of our product segments and a notable 50% gain in proprietary servers.

From our industry standard servers have slowed a bit and customers have been more cautious with their discretionary IT spends. Yes if there is evidence by the strength and all other product segments, the need for complex technology systems to provide security and storage solutions have not diminished.

Our performance in this quarter further demonstrates the leverage we have created in our model. Earnings grew at almost four times the pace of sales and more than 90% of the incremental gross profit dollars fell directly to the bottom line. This finalizes the execution on our strategy to achieve scale and the productivity gains, the best scale enables.

We worked hard to get here and we have a lot more to do. As we discussed at investor day, we continue to build the scope and the efficiency level of our EPS business in Europe. On June 2, we announced the closing of LOGIX, a leading value-added distributor that has almost doubled the size of our European operation. This acquisition has brought a scale, in an expanded geographic footprint and we are now in the top three economies in Europe. It’s also brought us some talented management and strong relationships with key vendor’s better integral to the success of our European strategy.

Integration is underway and we are executing to our action plans to bring our profitability levels in this region closer to the industry leading levels we’ve already achieved in North America. There is also more to come with our ERP implementation, our walk-through at investor day, how this technology will create the infrastructure to provide best-in-class services to our partners and truly change the value proposition of ECS.

As Bill, mentioned earlier on April 1, our North American Sun business transitioned smoothly without any delay in processing orders or shipping and receiving products. This transition exceeded our expectations and our employees have immediately become more efficient and more effective. I would like to take this opportunity to thank the teams at Arrow that have worked very hard to make this happened.

In summary, we had a great quarter and we are delivering on our strategy despite the back drop of an unsettled economy, but before I move on to component, I’d like to spend a minute talking about the seasonality in our ECS business. In the last 18 months, Arrow ECS has transformed from a $2.5 billion North American business to a $5 billion business with a richer set of solutions.

Now spanning 28 countries worldwide, with this our business has become more seasonal and in order to increase the transparency we laid out an anticipated quarterly revenue trend during our Q4 earnings call. With the addition of LOGIX these trends will change a bit. So we want to make sure you understand the current seasonality of our ECS business and update the schedule we provided to you back in February.

Now that Europe represents a meaningful portion of our ECS business, the summer holiday season well have a more material impact on the third quarter. We believe typical seasonality with LOGIX will be between 5% to 15% decrease in Q3. With the stronger seasonal increase that LOGIX experiences at year end, the seasonal uplift for ECS is anticipated to be between 35% and 45% in Q4, and Q1 we’ll see a more significant seasonal decrease of the Q4 high in the range of 30% to 35%.

Along with the changing sales trends our operating performance has also become more seasonal. You should expect to see stronger seasonal increases and decreases in operating margin, than we typically generated prior to the acquisitions of KeyLink and LOGIX.

Global components also posted a solid quarter with sales above our expected range of $3 billion. In Asia Pac our stronger than seasonal growth was driven by performance in China, Taiwan, Australia, New Zealand and the ASEAN region, in spite of the headwinds posted by the earthquake we took advantage of market opportunity and significantly out through the market. Our strategy in this region continues to take shape with prior investments paying off through consistent gains and profitability.

Asia Pac remains an area for both strong organic and acquisition related growth. A few weeks ago on July 7, we announced the closing of Achieva. This acquisition improves our position in the Asian region, strengthens our regional team and enhances our existing demand creation capabilities. In North America, the market was pretty stable with higher book-to-bills in the second quarter of last quarter, despite weakening economic conditions.

Year-over-year softness in North America was again driven primarily by weakness in the transportation end market. Yet our vertical market initiatives are providing us with growth opportunities, evidenced by another quarter of double-digit growth in our defense and aerospace segment. We continue to focus on operational excellence, making further efficiency gains that Paul had mentioned earlier and increasing our operating margin amidst a choppy market condition.

Last quarter, we spoke about the weakening conditions in the European marketplace and performance came in as expected in the phase of a weaker macro picture and a less competitive export market. Though this market weakness, we are moving forward with our ongoing efforts to broaden our existing customer base and drive for more consistent and productive operations throughout the region.

Taking a look at leading indicators lead times and pricing remains stable. Lead times were within normal ranges between eight to 12 weeks and cancellation rates were within normal levels. Inline with the normal seasonal trends, our book-to-bill decreased quarter-over-quarter and hovered near one on a global basis for the quarter.

Book-to-bill in Europe was flat, North America held above one with a higher level than last year’s second quarter despite macro weakness and Asia Pac declined slightly and in our quarterly survey of over 300 customers in North America results show that inventory levels are well positioned for the majority, yet their outlook for purchase requirements modestly softened for the second consecutive quarter.

Overall, the market continues to be relatively stable, yet cautious. In response, we continue to manage our business responsibly and take advantage of the growth opportunities while at the same time, focusing on ways to further leverage our global scale to take us to the next level of profitability. Bill?

Bill Mitchell

Thanks Mike and congratulations to your teams for a terrific quarter. Overall this quarter’s results exceeded our own expectations and the business in the marketplace that continues to be cautious and we’ve used that word a lot and I hope the market is cautious, but be mindful of all the macro economic conditions that we see but continue to push forward.

I commented in my closing last quarter that our performance in ECS did not meet our expectations and we would not accept sub par levels of profitability and as evidenced by our strong results this quarter, we worked very hard to raise the bar and we did it.

We continue to manage the delicate balance of taking advantage of opportunities in the marketplace to ensure continued growth while at the same time managing our company prudently to make sure we are in tune with prevailing market conditions.

Now several years repositioning Arrow and the end result was a company with a solid balance sheet, stable earnings, consistent cash generation abilities, a diverse revenue stream and very strong growth opportunities. This allows us to perform consistently throughout economic cycles and to generate cash and returns in excess of positive capital regardless of where the market is.

Overall, the macro economic has not improved in the last few months and we are definitely not immune to the turbulence of the financial markets. We have certainly put ourselves in a position to better manage fluctuations that’s what we’ve shown we can do and we’ll continue to do so.

Looking forward we’ve been monitoring the marketplace and all of the leading indicators that we watch to keep a close watch on trends with our customers and suppliers. Looking ahead into the third quarter, we anticipate normal seasonal trends in both of our businesses.

We believe that total third quarter sales will be between $4.1 billion to $4.4 billion, the global component sales between $2.85 billion and $3.05 billion and global enterprise computing solution sales between $1.25 billion and $1.35 billion. We expect earnings per share on a diluted basis excluding any charges to be in the range of $0.73 to $0.78 per share.

As I said in early June at our Investor Day event, I was bullish on Arrow as I’ve ever been and that’s in spite of what’s going on in the broader markets. We occupy a unique value added space in the supply chain with growth opportunities across every customer segment free end market, every geography and in many technologies. I believe that we are in a very powerful position to provide true value to our customer and suppliers who are the best technology companies as we connect both sides of our equation through value added service that simply can’t be connected the other way.

Just hear the words of a supplier partner, who participated in our investor day presentation “Arrow puts together man generation, leads, customer seminars, education programs. To be able to go out and create that reach, that’s real value.” We will continue to create value not only for our business partners but also our shareholders as we move forward about the strategy we have laid out to catch a more profitable growth and improve our return on invested capital.

As always I want to thank the team at Arrow for their wonderful commitment to building the future of our company and with that I will turn it back to Sabrina.

Sabrina Weaver

Please open up the call to Q-and-A at this time.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Matt Sheerin - Thomas Weisel.

Matthew Sheerin – Thomas Weisel Partners

My first question is regarding the computing operations which was better than expected both top and bottom line. So, the first question in terms of why you saw stronger than expected demand, how much of that was just due to the fact that the push out that you saw in the March quarter got done in the second quarter, that’s number one and number two on the operating margin side I know there was some leverage on the expense side and some cost cutting, but how much of that also benefited from the fact that you exceeded your rebate thresholds and other agreements with suppliers that enabled you to get a better gross margin?

Michael Long

Our performance for this quarter exceeded the expectations as you had indicated and we did achieve sequential growth from all of our product segments. While we did close on a number of deals that we’re pushed out for the first quarter, excluding these deals we still actually experience normal seasonal trends for the second quarter. So the sales trends in general were healthy for us.

Getting towards the second question regarding the operating margin, our performance this quarter I think demonstrates a little bit of a leverage we’ve created in our model. Our earnings grew at almost four times the pace to sales and actually more than 90% of the incremental gross profit dollars fell directly to the bottom line. I think this highlights part of the strategy for us was to achieve our scale and some of the productivity gains that that scale we said would unable us.

The last quarter we spoke about how those rebate levels adjusted to the changing conditions and this is really a normal process Matt. These get negotiated quarterly and they’re negotiated based upon your forecasted sales. So, we didn’t get any rebate if you will to make up first quarter, if that’s what’s your insinuation is. This model is a consistent model where these rebates are negotiated and you still have to hit your sales plateaus to get that, so there really wasn’t anything that we got as a benefit from Q1, if that answers your question.

Matthew Sheerin – Thomas Weisel Partners

Regarding the components business, in your guidance you’re basically saying that you’re expecting seasonal trends in the business overall, but you have seen weaker than normal trends in Europe for at least two or three quarters now, U.S. has been so would you characterize all three regions as seeing seasonal trends or is Europe still going to be a little bit weaker than normal given what’s going on there?

Michael Long

Well, I would characterize the current demand that we are seeing really the book-to-bill in Europe is flat, North America held above one. Typically in the quarter North America is flat to down, Europe is flat to down a little bit more given the summer holidays and in Asia Pac we had such strong performance this quarter that we may experience a little less than the seasonal uplift there going into the quarter just because of that strong performance.

William Mitchell

Again the comment that says we are going to see normal seasonality, everything we are seeing is within the normal seasonality given that we have seen weakness for the last couple of quarters in Europe and it’s an area that’s a real focus for us to make sure we stay on top of that. We had a really strong quarter in Asia, just a terrific, terrific quarter. In the U.S. its okay, pretty stable.

We certainly watch all of those indicators very, very carefully and from where we sit today and what we know it looks like everything is within normal seasonality. The issue always for us in the third quarter is our visibility is relatively limited until we get into September due to the summer slowdowns primarily in Europe to a lesser extent in the U.S. and also to see what the summer bill brings in Asia, because this is a big period and really peaks in the September period.

So, this is always our toughest quarter to provide guidance around just because of the seasonality trends, but as we see it now it looks like it’s within normal trends.

Matthew Sheerin – Thomas Weisel Partners

Inventory was up a little bit, you also had an acquisition there, how much did that effect inventories and one of your biggest semi suppliers the other day basically said that the distributors had taken, basically put the breaks on orders later in the quarter, watching inventories, so what’s your component inventory situation like in your overall philosophy about inventory building right now?

Paul Reilly

As you look at it we prefer first off to manage working capital in total. We’d like to think that if we invest a little bit more in inventory we can do better in receivables or payable and in fact at $15.5 we’re at near record levels of low levels, which is a good thing.

Look at it sequentially, sales were up 6% and working capital was only up 2% excluding the impact of LOGIX, so another measure of our efficiency. To get to your question specifically LOGIX and foreign exchange contributed somewhere between right around a $25 million number as an increase in inventory from the first quarter, so if you shook that out that means basically that inventory was up for the corporation less than 3%.

Interestingly when we look at it, North America and Europe increased or decreased, but it was less than 3% and Asia Pac was above the 3% and that makes sense in light of the fact that is the fastest growing regions. So, we feel pretty good where we are right now on inventory and we’ll always take the opportunity to make sure that we can meet the demands of our customers, while at the same time being as prudently as possible managing the total level.

Operator

Your next question comes from Brian Alexander - Raymond James.

Brian Alexander - Raymond James

I want to clarify the response to Matt’s question on the computer business, the profitability. Is the 4.4% operating margin that you realize in Q2 for ECS, is that a normalized margin level for the second quarter with all the acquisitions in or is that somehow inflated by the strong rebate performance that you were able to achieve in light of the total resetting you did at the end of the first quarter?

Paul Reilly

No, significant impact from the LOGIX acquisition, it was only in for one month. So, when we look at it much like we talked about it at Investor Day, we see that as a more traditional level 4.4% for a second quarter. So, when we look at it we think that’s normal operating business as we talked about in the first quarter, tremendous amount of operating income is driven by sales and ability to leverage our cost structure and there was no make up in the second quarter if you will to get more rebates than what we normally would receive based upon levels of revenues.

Brian Alexander - Raymond James

Paul, could you just touch on the linearity? Last quarter you saw somewhat expected weakness in the last couple of weeks. At the Analyst Day you raised the low end of your earnings guidance but I don’t recall you adjusting your sales guidance at that time, so I’m just trying to get a sense for whether the sales upsides particularly on the computing side that you saw really came in the last couple of weeks of the quarter.

Paul Reilly

I would say that the pace of business is pretty consistent with what we seen in more normal times which is that many of the deals and computer products and in fact in components to that matter had been in the last month. So for sure that’s the way we see it happening as a matter of course in our business.

Brian Alexander - Raymond James

On the profitability decline you saw in Europe on the component side. It sounds like from a profit standpoint it’s a little worse than you expected; how much of that was driven by the weak top line versus maybe more aggressive pricing or some other factors and could you just comment more specifically and what you’re doing to restore margins in Europe to more historical level? Thanks.

Paul Reilly

When you look at it, it’s interesting, we did see a decline year-over-year, yet the European operating income percentage is ahead of our corporate average and that’s a positive thing for us and in fact it’s ahead of the segment average.

When I look at it, it’s really driven more so by top line, because of the fact that we’re just not getting the same level of sales. When we look at it in fact GP in our core customer base in Europe was relatively flat year-over-year, change of maybe 10, 15 basis points. So really it may not certainly be a head-on analogy but very similar to what we had in the first quarter, an ECS way. If you don’t have the sales volumes you get a little bit caught with having fixed costs and we all know that Europe is more fixed cost in nature.

So actually what we’re seeing right now as far as the change in operating income percent, as far as action’s going forward I’ll turn it over to Bill and Mike.

Michael Long

Yes Brian, I think we can tell you we continue to be a little concerned about Europe. That market’s clearly weakened in the first half of the year, but I think what we have to remember, a portion of this is historical.

If you look when North America had their decline, when it started, in historical days Europe has usually had a decline starting about six months later and so we’ve seen that normal lag behind North America and then due to the euro strength that’s impacting some of the export competitiveness and that’s the other side of this which we believe is making it a little deeper than before and we do believe that Europe will remain soft in the third quarter.

As with any business we have, we are working on things to become more efficient, but we’re really looking at a 90-day window here and we don’t see any signals that that market is turning around for us especially going into the summer holiday season.

William Mitchell

One other thing to note and we did note it at Investor Day, but I’d reemphasize it; some of the biggest benefits that we will get from our ERP conversion in fact are in Europe. In inventory management, in operating efficiencies, in margin strengthening etc, but we have real trouble getting at it today because of our three separate systems that we run in Europe, that will get better but we won’t begin to see that until late in 2009, 2010 is when we’ll begin to see some of those benefits.

However, there are things and Mike just laid out a number of them that we can and will do to improve the profitability in Europe. We know what they are and we’re moving forward with them to improve the operating efficiency and to really focus on making sure we get more than our fair share of the top-line demand that in fact is out there. So, we will make that better.

Operator

Your next question comes from Jim Suva - Citigroup.

Jim Suva – Citigroup

When we look at the acquisitions that are now being folded especially LOGIX and Achieva, can you help us with a run rate for SG&A, because I believe a lot of them came in not for the full quarter and it’s really trying to get apples-to-oranges and trying to give a super good run rate.

Then in addition a follow-up question; if you can talk about the acquisition pipeline, because I believe now all your announced acquisitions have been closed and with what you’re seeing out there should we expect something to keep coming in here in Q3, Q4 time period or the acquisitions are starting to taper of a little bit?

Michael Long

LOGIX closed on June 2, so that was in our numbers for the month. Operating expenses in that business are probably about 200 to 300 basis points less than our corporate average, but remember on quarter or one month of that business on our quarter doesn’t have much of an impact. Achieva was not closed until July. So, that’s not in our second quarter results. Their operating expenses will be in that 7% to 9% range also.

William Mitchell

We don’t comment on the specifics of any specifics of any acquisition on the pipeline, clearly we have signaled that we are and will continue to look for strategic acquisitions that accelerate our strategic priorities and we will continue to do that. We have the balance sheet to do it and wherever we can see an opportunity that will accelerate our strategic plan, we are ready to move.

Jim Suva – Citigroup

Just a clarification on Paul’s comments on SG&A, more so for our outlook for September and going forward, do we need to take up the run rate that right now is at $421 or $422 that you just announced; do we need to take that up say another $20 million or $10 million or how should we think about it directionally for the September quarter?

William Mitchell

I would suggest that if you were in that $12 million to $15 million range, that would be a good number for expense increase.

Operator

Your next question comes from Steven Fox - Merrill Lynch.

Steven Fox – Merrill Lynch

One question on the computer business, you updated us on the potential seasonality for the Q4, Q1 period; are you endorsing that or something that’s reasonable still based on what you’re seeing in your customer base or is it too soon to stay whether you would have such strong seasonality in the fourth quarter?

William Mitchell

If you take the change as we were taking about what we’ve done is we’ve essentially in the last year doubled our business and as we’ve done that now half of our business falls within Europe which actually has different seasonality history than the North America market does. So, what we did Steve is we took the revenue growth for North America and that seasonality and the seasonality of Europe and combined them and that’s how we came to our numbers.

Steven Fox – Merrill Lynch

So you are saying it’s more of a function of the fact that Europe is extremely slow this quarter than it is with any confidence going out into the fourth quarter?

William Mitchell

Yes, the summer time are slowdown. Remember Europe still has their holiday season in the summer, that actually helps change the seasonality of that market versus North America and as a result you see a higher Q4 up-tick in the new seasonality chart that we had showed in the slides and what we are trying to do Steve is to make sure we’re completely transparent with what’s happening with our market and how we think this business is changing cyclically so we can all have the same expectations going into each quarter.

Steven Fox – Merrill Lynch

On Europe on the component side you mentioned that the book-to-bill was flat but it’s still below; one, can you just give us a better sense we’re how far below and when you say you’re still cautious on it, is that a implication that your order book has been deteriorating as you’ve gotten into July or is that not the case in Europe specifically?

William Mitchell

No, I think what we’re telling you is we’re expecting Europe to have normal seasonality and again this is the vacation time when Europe traditionally goes soft into the quarter. As I said we’re still concerned about the market, because of the euro strengths and does that have another impact on what is already a seasonally slow time of the year, but we are still believing that we’re going to be seasonal in Europe.

Steven Fox – Merrill Lynch

How far below one is Europe in the book-to-bill?

William Mitchell

Slightly.

Operator

Your next question comes from William Stein - Credit Suisse.

William Stein – Credit Suisse

I’d like to touch on the guidance again if I can. It appears to me that when I pull out some expected revenue from Achieva from the components business or looking at the guidance appears to be round down 1% organically on a sequential basis.

I think normal is up a couple of percentage points and then likewise in the systems it looks like you’re guiding down about 15% and that’s again if we back out most to the LOGIX revenue that will be new this quarter and that seems to be up, so the system seems to be at the low end of what you’re saying is the new seasonality. Components appear to be slightly below what we normally see. How do I reconcile that with the comments around normal seasonality is if you’re taking a prudent approach given the macro backdrop or am I missing something?

Paul Reilly

On the guidance when we look at it we don’t see it being any different than what we’ve seen in the past from normal seasonality, so there’s a range of normal seasonality that’s not a particular quarter or that is a number that hits all the time.

When we look at it there is not a tremendous uplift from either business in sales in the coming quarter. I used it is an example; the month of June is strong for LOGIX and we know that there’ll be shutdown in the month of August, so August virtually had no impact. So, when you start to piece it apart and look at the individual components, we think we’ll be right in the range of what happens in a normal summer period.

William Stein – Credit Suisse

On the component side, the best way I can read what happened this quarter is that you gained share in Asia, is that right and if so do I think about it being from smaller local vendors or maybe the DTAM versus TAM split is changing or do I think of this as share gains versus another global competitor?

William Mitchell

We believe it’s going to come out clear that we gained share in Asia. What we’ve got to really temper that with is that we are still early after the quarter for the reported risk to come out and really balance that share. We make the other markets, we were probably flat, but the overall share gains and the big share gain flow will come out of the Asia region. Does that help you?

William Stein – Credit Suisse

Meaning share gains from smaller local competitors or potentially from another big local competitor?

William Mitchell

I think we’ll have to see. I think there were other competitors that have put out where they thought they would fall and we’ll just have to see when those numbers come in and most of those people announced behind us, so we’re looking at it as you are.

Michael Long

Yes, typically it is hard for us to be really precise as to where share gains come from in terms of specific competitors. What we have seen quite consistently is that the share of the top 10 distributors in Asia has been growing over the last several years and the share of the top three have been growing faster than the share of the top 10. So, we think this is part of a long-term circular trend that’s going on and this quarter was just another piece of what’s been a longer-term story, but in terms of specifically where it comes from what we’ve seen in sort of the all other one has been the one that’s been shrinking more in that and we have almost no visibility into it.

William Stein – Credit Suisse

. In the past I am not sure if it was last quarter, but certainly in several quarters in the last few you’ve talked about slower sales to the EMS channel. I think in particular among the big North American EMS vendors. Can you comment on how that channel performed or that market performed for you in the quarter please?

William Mitchell

Yes, we’ve seen the EMS company; the large EMS companies if you will for us pick up a little primarily in Asia Pac, that’s where the largest activity has been for those customers. The pricing has remained stable at that customer base, but it has not been double-digit type growth. This business is slowly picking up for us from what we saw in the quarter and that pick up was primarily in Asia.

Operator

Your next question comes from [Brendan Ferlong - Miller Tamec].

[Brendan Ferlong - Miller Tamec]

On your European ECS business, which is obviously growing to be a quite substantial part now. Can you give us some color on the demand environment in Europe? You obviously made comments on the U.S. but if you can give some comments on Europe it would be great and then secondly, the seasonality, thank you for the color on seasonality, but do you think that the weakness in Q1 of this year might be too from distortion of Q4 seasonality? Thank you.

Michael Long

What we’re showing for Q1 is what we actually believed happened in that business now that Europe is half of it. The combination of the two markets and the changes that they do have does lend as you can see a smaller down size but the range now also shows a higher upside than in the past and that will be equated dependent up on the mix between North America and Europe and that’s why those ranges are where they are.

In terms of that the demand we’re seeing, we’re keeping a pretty close watch on this now as you can imagine but we see a relatively stable market, but we’re still conscious about it. Server demand was soft in the first quarter and then did rebound for us in the second quarter. We’re seeing a stability in the proprietary servers but the IT departments as we believe in the industry standard servers are slowing some of their discretionary spending and we think the forecast we put out there for the third quarter to you is as accurate a reflection as we can get on that market.

William Mitchell

I would like to come back just for second on the seasonality issue because many of you commented on that and that’s really an important issue. We have taken a very strong strategic position in building our European foot print and I am really pleased with how that’s come together particularly with the addition of LOGIX which now enables us to have a complete set of capabilities across all of the countries in Europe and allows us to really begin the full integration of the European operations, which will lead us to returns that our far closer to North America.

The side effect of that is that has increased the seasonality of the business, it just has. Europe is more seasonal because of the summer season, because of the winter quarter, the first quarter, than is North America and that’s what we’re trying to reflect to you. So, that’s just an out growth of the mix of business which we have chosen to pursue. That’s overall positive for the business. It does have that side effect of increasing the seasonality.

As Mike says we want to be as transparent as we possibly can about the change so that you all understand that and know what we are seeing in our marketplaces. Strategically I am really, really pleased with where we have positioned and how we have positioned ourselves in Europe. I think we have lots of upside ahead of us.

Operator

Your next question comes from Carter Shoop - Deutsche Bank

Carter Shoop - Deutsche Bank

I wanted to talk briefly about the quarterly survey that you referenced. I believe that’s most of the North American survey. You mentioned about the order book I think it was that came down to the second quarter in a row, can you discuss that a little bit more detail please?

Michael Long

Sure, we do a survey every quarter and what we ask on the survey will be what we believe or what buyers think they’re buying habits are going to be. On the inventory piece customers were fairly confident that the inventory levels were still stable and close to being in the right place.

The change we saw for the second quarter was a small deterioration and what they thought the volumes would be going into the third quarter. So we did see a little more instability I would say from the buyers regarding their volumes and we actually believe all of that is reflected in our numbers for the quarter. Now, Paul you want to add anything to that.

Paul Reilly

The real issue is unfortunately it’s not a specifically based sample, so we look at it for more around what might be a change or trend. In fact if you look at the actual results, the change that we’re seeing as Mike mentioned is marginal, and in fact if you were able to go out and get the pundits that do political surveys they might say what’s in the band of acceptability are no change.

So, we’re watching it closely, we want to make sure we’re talking to customers and suppliers around the globe to understand what their summit maybe right now, but don’t see it as much more than a nominal change in thoughts about the next quarter. That’s probably also reflective of the fact that the economy as Bill mentioned earlier is probably a little bit softer today than it was three months ago, so they’re probably equally cautious as we move forward.

Carter Shoop - Deutsche Bank

Say like usually you don’t comment on any changes there in lead times or ASPs and for you to signal out that this is the second consecutive quarter of that coming down, I thought that was interesting. So, just to wrap all these data points up together, in the U.S. we’re seeing the market deteriorate a little bit.

In Asia, we’re going to see where are the normal seasonality and the components following the strong 2Q and then in Europe you are concerned about foreign exchange and also deteriorating macro conditions there. That environment usually tracks the U.S. market by roughly six months lag time. All that said we feel good about the seasonality in 3Q. All of those comments, pretty much the way you are thinking about the market right now?

Michael Long

Yes Carter, let me just try to get it synchronized. Agree that what we expect in Asia Pac is still good performance, lower end of normal seasonality, watching the Olympic impact very closely. In North America, I wouldn’t say getting worse is much as more of the same, so what we’re seeing is I would say, within the range of normal seasonality.

In Europe I would say also more of the same and that we’ve been calling it for us anyway not sure about anybody else for being a soft business for two to three quarters, so we’ll work off of normal seasonality over two to three quarters of softness not necessarily trending worse. As Mike mentioned, we’re looking hard at the business, to grow the top line as well as to make sure that we’re spending where we are doing expense prudently.

Carter Shoop - Deutsche Bank

In regards to Asia, do you have any visibility in regards to which type of components you’re taking share at, be it PLD’s, analogs, connectors etc?

William Mitchell

The short answer is no. The short answer is we actually don’t. We almost never get that level of detail and we certainly wouldn’t have it at this point in time, but we’re pretty sure that it’s going in the right direction.

Carter Shoop - Deutsche Bank

In regards to management succession, we’ve seeing a lot of people switch positions over the past several quarters in the computing division while the executive suite has been pretty consistent, any thoughts on management succession at the executive suite level over the next 12 to 18 months?

William Mitchell

Well, one of the things that we spend a lot of time on at the Board level and at my executive team level is making sure that we have the right people in the right spots and what you are seeing is normal succession activities, getting the right people into the right places, working for with development plans. We have very thorough talent reviews and development reviews that go on a couple of times a year, that cascade throughout the whole organization and what you’re saying is normal activity that’s going on.

I personally spend a lot of my time on this. I think it’s one of the most important things where I can spend my time and my team spends a lot of time on it, because at the end of the day we got to make sure that we have the right leaders in the right spots with the right training and the right capabilities. I’m proud of what this team has done and we will continue to have that as a high focus for us going forward because if you have a good team, lots of good things happen to you and I think we’ve got a good team.

Carter Shoop - Deutsche Bank

In regards to restructuring charges, what is you outlook there for the next six month and then also going into ’09 should we expect it to be $5 million to $10 million of restructuring charges per quarter, indefinitely or how do you think about that?

William Mitchell

Well it’s interesting; when we look at our restructuring charges we usually have a payback period of less than a year on them with payback being the costs savings. So, we’re constantly looking to make the business more efficient, more effective as we go forward. Sometimes they might be a bit bigger because there’s real estate involved, sometime they’re less.

The other interesting thing was when we look at all the charges we’ve had over the last several years, they virtually net to zero because we get better performance and tax, we sold facilities at gains, we’ve recovered some warranty money offset by restructuring and other clients from acquisition.

So, when we look at it, it’s netted out over a period of time and we look at it as a savings over the long-term for the business, they say that the paybacks at about a year, but that’s depending on how efficient we can get the business, so we’ll just have to see each quarter. It’s hard to call. We’ll do probably $10 million a quarter because we don’t have a target internally. The target we had is each and every time we speak to the management team, speak to the employee base how can we be more efficient? How can we spend more effectively? Where should we invest? Where should we cut back?

Paul Reilly

I think that’s exactly right. That an area of focus we continue to look at that and so that’s just part of the way we run the company and we will continue to look at the ways we can get more efficient all the time as we move forward.

Operator

We have no further questions at this time.

Sabrina Weaver

Before ending today's call, for those participating in today's webcast, we will quickly scroll through the slides referenced in our webcast that contain reconciliation between GAAP and adjusted results. This reconciliation is also included in our earnings release and both the earnings release and the presentation are available on our website. I would like to thank all of you for taking the time to participate this afternoon. If you have any questions about the information presented today, please feel free to contact Paul or myself. Thank you and have a great afternoon.

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