Avnet Inc AVT
Q3 2013 Earnings Call Transcript
Transcript Call Date 04/25/2013

Operator: Please stand by. Our presentation will now begin. I'd like to turn the floor over to Vince Keenan, Avnet's Vice President of Investor Relations.

Vincent Keenan - VP, IR: Good afternoon, and welcome to Avnet's Third Quarter Fiscal Year 2013 Business and Financial Update. If you are listening by telephone today and have not accessed the slides that accompany this presentation, please go to our website and click on the icon announcing today's event.

As we provide the highlights for our third quarter fiscal year 2013, please note that in the accompanying presentation and slides, we have excluded restructuring, integration and other items, as well as the gain on bargain purchase associated with an acquisition and certain income tax adjustments for 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 statements into U.S. dollars. Finally, when addressing working capital, return on working 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's 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 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 third quarter fiscal year 2013 highlights. Following Rick, our new Chief Financial Officer, Kevin Moriarty, will review some additional financial highlights, our return on capital performance, and provide fourth quarter fiscal 2013 guidance. At the conclusion of Kevin's remarks, a Q&A will follow.

Also, here today to take any questions you may have related to Avnet's business operations is Ray Sadowski, Avnet's Chief Administrative Officer; 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 third quarter fiscal 2013 business highlights.

Rick Hamada - CEO: Thank you, Vince and hello, everyone. Thank you all for taking the time to be with us today and for your interest in Avnet. As our team continues to navigate through an uneven economic recovery, we are pleased that our overall third quarter top and bottom line results came in consistent with our expectations. The economic recovery that has driven sequential growth rates closer to normal seasonal patterns at the global level continues to vary by region and operating group without as of yet clearly discernible multi-quarter trends.

If you look at our TS business after a very weak September quarter the Americas region has clearly been stronger than EMEA over the past two quarters, while at EM, our EMEA region experienced typical seasonal growth in the March quarter while the Americas was weaker than normal. As a result, Avnet revenue declined 6% sequentially to 6.3 billion, which was in line with our normal enterprise seasonality for the second consecutive quarter.

On a year-over-year basis, reported revenue was roughly flat and pro forma revenue declined 4.4% in constant currency, primarily due to the slower rate of recovery in our Western regions. Gross profit margin increased sequentially at both EM and TS driving consolidated gross profit margins of 53 basis points. However, gross profit decreased $12 million, or 1.6% sequentially due to the decline in sales typically experienced as a result of the normal seasonal trends at Technology Solutions. On a year-over-year basis both gross profit and gross profit margin were essentially flat as an improvement that TS was offset by a decline at EM.

The impact of the seasonal operating income declined at TS partially offset by the increase at EM drove operating income down 12% sequentially to $195 million and operating income margin decreased 19 basis points to 3.1%.

As a result of these factors, adjusted EPS decreased $0.11, or 11% sequentially to $0.90. On a year-over-year basis, operating income decreased 17.2% and operating income margin declined 65 basis points, principally due to the slower rate of recovery in the Western regions, particularly at EM. Consequently, adjusted EPS declined 12.6% from the year-ago quarter influenced by our previously mentioned factors somewhat offset by the benefits of our share repurchase program.

Return on capital employed decreased to 132 basis point sequentially to 10.5% due the seasonal decline at TS and was down 229 basis points year-over-year given the decline in income as working capital velocity was essentially consistent with prior year. Cash flow from operations was $22 million for the quarter as our profitability in the March quarter was somewhat offset by a seasonal increase in working capital at TS. Our trailing 12-month cash flow from operations at $689 million for the March quarter continues to be above historic levels due to our consistent profitability combined with the slower market growth and the commensurate relatively flat exchanges and working capital.

Even though we met our primary financial goals in the March quarter at the enterprise level, the market volatility and regional differences in the pace of recovery have necessitated incremental resource realignment activities. As a result, we have initiated additional steps, including $40 million of annualized cost reductions that will be completed by the end of our fourth fiscal quarter. These actions, when combined with actions taken in previous quarters, bring our cumulative cost reductions in fiscal 2013 to approximately $140 million.

In this environment we will continue to react quickly to maintain consistent progress across the portfolio as we strive to deliver improving financial results and visible progress towards our long-term goals. The macroeconomic conditions we have been navigating have created some short-term setbacks, but we still play an important role contributing to a large and growing technology supply chain that continues to evolve and remains relentless in the pursuit of improved efficiency. With our strong competitive position, broad geographic footprint, and extensive partner relationships, we are confident that we can help our trading partners realize those efficiencies and leverage this growth into improved performances.

Now let's turn to the operating groups. In the March quarter, Electronic Marketing's revenue essentially met our expectations as sequential growth was slightly below normal seasonality. Reported revenue grew 3.4% sequentially, while pro forma revenue increased 2.9% as compared with our normal seasonal range of plus 4% to plus 7%. At a regional level, EMEA delivered a typically strong fiscal quarter, growing sales 18% sequentially in constant currency, while the Americas region was up 3% and Asia declined 8% coming off of relatively strong December quarter.

On a year-over-year basis, reported revenue increased 1.1% while pro forma revenue declined 1.7% in constant currency primarily due to a double-digit decline in the Americas region primarily related to our decision to exit the lower margin, commercial components business in Latin America.

EM's gross profit margin increased 44 basis points sequentially due to the seasonal geographic mix shift as the lower margin Asia region declined from 41% of total revenue in December to 36% in the March quarter. On a year-over-year basis, EM's gross profit margin declined 38 basis points primarily due to increased competitive pressure in our EMEA region partially offset by an improvement in the Americas related to our previously mentioned decision to exit the commercial components business in Latin America.

As a result of the seasonal topline growth and gross margin expansion, EM's sequential operating income grew 4.6 times faster than revenue and operating income margin increased 46 basis points to 4.3% with all three regions contributing to this improvement. Operating income margin declined 90 basis points year-over-year strongly impacted by the lower operating income in the Western regions related to the slower pace of recovery.

Return on working capital or ROWC increased 362 basis points sequentially with all three regions contributing to the improvement. On a year-over-year basis, EM's ROWC declined 375 basis points due in great part to lower operating income in the western regions partially offset by a 3.4 day improvement in our cash conversion cycle. Our EM team has done a good job managing their balance sheet through a challenging fiscal 2013 as working capital was essentially flat with the December quarter even though sales grew approximately $124 million sequentially. After adjusting for acquisitions and changes in foreign currency exchange rates, EM's working capital decreased by 5.5% year-over-year as inventory decreased 10.7% from the year ago quarter and inventory velocity improved by half a turn. This effective inventory management helped drive EM's working capital velocity to its highest level in seven quarters.

Although it was encouraging to see EM's revenue growth move closer to normal seasonality in the March quarter and our book-to-bill ratio slightly above parity for the second consecutive quarter, we continue to operate in the electronic component supply chain characterized by relatively short and stable lead times that is encouraging customers to take a conservative approach to managing their inventory. These actions have led to some short-term pressure on gross margins, but similar to previous downturns, we expect a certain level of recovery here once growth picks up and lead times begin to increase. While any rate of recovery will certainly be impacted by macro trends, we are confident that a return to some positive momentum in our core industrial markets when coupled with our initiatives to efficiently align resources by region will help drive further leverage in EM's model and improve financial performance going forward.

After a stronger than expected December quarter, the TS revenue decline in the March quarter was within our typical seasonal range across all three regions. At the global level, reported revenue declined 17% sequentially to $2.5 billion as compared with a normal seasonal range of down 16% to down 20%. At the regional level, both our Americas and EMEA regions declined 19% sequentially, while Asia was down 10%. When compared with the year ago quarter, reported revenue was down slightly, while pro forma revenue declined 8.3% in constant currency.

In our EMEA region, which has been dealing with weak demand for two years, pro forma revenue was down 15% year-over-year, while the Americas region declined 8%. In the Asia region, pro forma revenue grow only 3% year-over-year as we continue to focus on leveraging our investments in the region to grow operating income faster than revenue.

On a year-over-year basis growth in storage services and networking and security was partially offset by declines in servers and computing components. Despite the inconsistent growth TS has faced in the western regions the team has done a good job focusing on higher margin products and services, as both regions expanded gross profit margin sequentially and year-over-year.

As a result, TS has improved gross profit margin sequentially in each of the last two quarters with the March quarter's gross profit margin increasing 25 basis points sequentially and 54 basis points year-over-year. Even with this gross profit margin improvement and the benefits from cost reduction actions operating income decline 7.5% to $63 million year-over-year and operating income margin was down 18 basis points, primarily due to a decline in the EMEA region as a result of the multi-quarter double-digit year-over-year declines in organic growth.

Return on working capital decline 439 basis points year-over-year, due to the increase in profitability and our lower share of TS revenue from higher margin Americas region. Even though our margin levers are still below a year ago the combination of gross profit margin improvement and cost reductions implemented earlier this year have contributed to steady year-over-year improvement, supporting our objective that TS can build on his performance and return to year ago levels of profitability in our June quarter.

While TS has been focused on improving bottom line performance across the portfolio, they have also been investing in expanding the products and services they offer to improve their competitive position in high growth technologies. In the Americas, our VAR partners are embracing the investments we have made in new service businesses that enhance the value they deliver and expand the breadth of opportunities they can address. In the EMEA region, we have completed the integration of Magirus' customer-facing resources and are poised to capitalize on cross-selling opportunities in the combined customer base, with enhanced offerings in converged solutions.

While it appears spending on IT has somewhat stabilized since the setback in the September quarter, we are prepared to react quickly and adjust to changes in demand trends as businesses continue to adjust their IT investments in light of the current macroeconomic environment.

Now, I would like to turn the commentary over to Kevin Moriarty to provide more color on our financial position and economic profit performance. Kevin?

Kevin Moriarty - CFO: Thank you, Rick, and hello, everyone. Despite two quarters of near seasonal growth at the enterprise level, the uneven recovery by region has resulted in continued negative year-over-year pro forma growth in our higher margin Western regions. Just as a point of reference, if you combine our two groups, year-over-year, pro forma revenue has declined in all three quarters of fiscal 2013 in the Western regions, as the Americas and EMEA regions were down 10% and 7% respectively in the March quarter.

Even with these challenges, our team has done an effective job of reacting to the choppy growth and delivered on our interim expectations with the focus on accelerating progress towards our long-term targets. Disciplined working capital management and consistent profitability combined to drive our 12 month cash flow from operations to $689 million, well above historic levels. Working capital excluding acquisitions and the translation impact of changes in foreign currency exchange rates is down 3.1%, primarily due to a 10.2% organic decline in inventory, even as revenues remain flat with the year ago quarter.

This cash flow generation has allowed us to make investments in value creating M&A and our stock without negatively impacting our strong balance sheet and liquidity. Through the first nine months of fiscal 2013, we have invested $244 million in strategic acquisitions that have expanded our capabilities and competitive position in all three regions. In addition, we have returned $207 million to shareholders through our stock repurchase program and still have approximately $225 million remaining of the $750 million authorization.

Now let's turn to our return on capital and economic performance. As you can see from the chart, both metrics are down sequentially and year-over-year primarily due to lower operating income and our higher margin western regions, which as we have noted, have been dealing with a slower pace of recovery. As Rick mentioned earlier, we are initiating additional actions, including cost reductions, to align our resources with the current market conditions and as we further integrate our recent acquisitions.

While the macroeconomic environment continues to present challenges, we remain confident that our strong competitive position, deep engagement and supporting technology markets, and strong liquidity, will allow us to improve profitability that will create, drive and sustain long-term shareholder value creation.

Moving to Slide 10, looking at Avnet's fourth quarter of fiscal 2013, we expect EM sales to be in the range of $3.7 billion to $4 billion and sales for TS to be between $2.45 billion and $2/75 billion. Therefore, Avnet's consolidated sales are forecasted between $6.15 billion and $6.75 billion. Based upon that revenue forecast we expect second quarter fiscal 2013 earnings to be in the range $0.90 to $1 per share.

The above EPS guidance does include any potential restructuring charges or any charges related acquisitions and post-closing integrations. The guidance assumes 139 million average diluted shares outstanding used to determine earnings per share and an effective tax rate in the range of 27% to 31%.

In addition the above guidance assumes that the average euros U.S. dollar currency exchange rate for the fourth quarter of fiscal 2013 is 131 to the euro. This compares with an average exchange rate of $1.28 to the euro in the prior year fourth quarter and $1.32 to the euro in the third quarter of fiscal 2013.

With that, let's open the lines for Q&A.

Transcript Call Date 04/25/2013

Operator: Stephen Fox, Cross Research.

Stephen Fox - Cross Research: Just one big picture question. Just looking at the charges you just discussed. So, this year now you are talking about $140 million in charges. The margins particularly on the EM side still remain relatively depressed and revenue basis sort of – I guess I'd call it sort of flattish to maybe marginally little bit better versus a year ago on an organic basis. And also your returns on invested capital obviously seem terrible. So, what exactly are the charges accomplishing in the last six months, whether the new one is aimed at? And why is any of this not related to maybe some other secular pressures that we are not discussing yet, I know that’s a big question but any help will be appreciated.

Rick Hamada - CEO: Steve, this is Rick. I'll start it and maybe ask Kevin or Harley or Phil to chip in. It is a big question overall. If you try to separate how much of the expense actions are due to what’s going on in a macro versus what's going on in execution or performance of one of our businesses, how much of it is incremental actions due to underperforming new acquisition. It's very, very difficult to break that out overall. I'd tell you at a very high level, so our strategy has been – we talked about these interim goals and progress back to certain performance characteristics and most often in the last few quarters we have been mentioning a certain operating margin return profile for both operating groups in a certain timeframe. And what we do is we assess and drive through each quarter, everything we are learning, we are making decisions and making changes as the quarters unfold. We keep those longer term goals in mind the crossover and get back on track for the LRPT. So, it's really an ongoing continuous effort. And what we are reporting on right now as an example, the 40 that will be done by the end of the fourth quarter, there has been a substantial part of that already accomplished actually through the third quarter, we just didn't want to get into breaking up between those two quarters as we go. So, thinking about as ongoing continuous process where we're constantly trying to manage and adjust to the realities of the current market conditions, but at the same time, walk that fine line to maintain our service levels with our existing customers and not stress capacity to the point that we are unable to respond to any return to positive momentum. And hopefully, over the years and quarters of the past, we've demonstrated a clear capability of trying to manage that pretty much down the middle of the fairway and looking to balance all those competing issues overall and understanding what we would normally expect in a return to positive momentum. Those -- all those factors impact and affect the type of scorecard and report out to you and it does -- it's very difficult to try to decompose beyond that and it's very simple to say one overall number. But it's an absolute multidimensional combination of those factors that contribute to the next scorecard that we report out to you on this kind of basis.

Stephen Fox - Cross Research: And maybe just at the Analyst Meeting, if we can figure out a way to sort of get a little bit of more color for what the shareholders are getting through the investments, the charges are you taking.

Rick Hamada - CEO: Okay.

Stephen Fox - Cross Research: And then just a more specific question just looking at the EM margins going forward, I guess what kind of recovery due to in our plan on over the new few quarters and this is the market and you have made some business adjustments on the way, how quickly can you recover from (43)?

Rick Hamada - CEO: Harley, you want to jump in on that one?

Harley Feldberg - President of Electronics Marketing: So, obviously, as you suggested a moment ago, we will go into more granular detail next week at the Analyst Day. But be clear we still view 5% or greater as a very achievable goal for EM. So, don't expect to see anything next week that suggests that we no longer view that as the proper productivity measure for EM. Clearly, certain factors as Rick outlined in his script have changed the timing of when we anticipate we will cross back over that milestone. I don't want to give you a date today, because honestly I don't know it and I'd rather have the luxury of going through the logic and detail next week. But I would say I see no reason short of obviously a significant macro event that I can't predict why we wouldn't still believe that that goal is achievable at some point in our new fiscal year.

Operator: Shawn Harrison, Longbow Research.

Shawn Harrison - Longbow Research: I guess I wanted to follow-up on EM but more on the book-to-bill ratio, so I guess, Harley, this is your queue to jump in. I guess where have they been in April and maybe if you could give it I guess April relative to March and then maybe some regional perspective as well?

Harley Feldberg - President of Electronics Marketing: Sure. Book-to-bill in April has continued along the same pattern as the March quarter and indeed the December. So one of the factors that does provide a degree of confidence for us as we attempt to look forward is the fact that we now are in essence six months and let's call it three weeks of positive book-to-bill widespread across all regions. So, we feel good about that. I think you probably saw that, called out our number of the commentaries in transcripts from the many of EM suppliers that have announced over the last 48 hours, couple of them I recall, specifically made note of some beginning of an inventory refresh from their channels, so we can validate that indeed our book-to-bill continues positive, and of course that will drive some adjustment to our pipelines of inventory.

Shawn Harrison - Longbow Research: Then as a follow-up question, servers are weak. There's been some news about one of your larger TS customers' maybe divesting that business. I guess if you could update in terms of the IBM I guess on the high-end and if you've seen any disruption as they've added some incrementals, players, and then also just kind of how you think about your server exposure going forward?

Philip Gallagher - President of Technology Solutions: Yeah, Shawn, this is Phil, I'll jump in on that. So we anticipated the question around the IBM. So, it's really two parts. So let me answer that one first. Obviously, we're in regular contact with IBM on what they're going to be doing with their server business and there's nothing, as you know, that's official there at all. So, we're in contact with IBM. We feel good obviously with where we are with IBM and roughly that server business for us represents in the 5% to 6% of our total TS business worldwide. So, if you look at it that way, it's somewhat limited exposure and we'll react and do what we need to do if in fact, something comes to fruition there. But I don't it's going to happen that quickly. We're in contact with all of our partners obviously around that as they contact us. And again, there's been very little disruption at this point in time. It's only been a week or two. With regards to the additional distributors that IBM added I got to say there's been no impact at all, no disruption to our customer base, the partners as we see it today, and we really don't expect that to be any issue moving forward either.

Operator: Amitabh Passi, UBS.

Amitabh Passi - UBS Financial Services: Rick, maybe just another bigger picture question. If I look at the drivers of return of capital, whether that be margins or asset velocity, you've done well on the asset velocity side, you are probably in the eighth or ninth inning. On the margin side we seem to be stuck in the sort of cyclical ebbs and flows. And I just want to revisit, is there any concerted effort to structurally drive margins higher outside of cost cutting in your two core businesses. Few quarters ago we were talking about ITAD, we were talking about services, and I haven't heard much lately. So, just wanted to see if you could address the margin question? Is there a concerted effort to try to structure enhance margins outside of your two core segments?

Rick Hamada - CEO: So, great question. And actually it's a bit of a tee-up for our conversation next week, Amitabh. We are looking and adjusting and turning some dials in a variety of our investment areas; for example, M&A; and bringing some more sensitivity to prioritizing activities that do lead to margin expansion, both organically and M&A, by the way. So, if you don't mind, take a rain check on the big answer there, because we're going to be careful to present the context of the overall strategy, and then talk about – think of it is taking our VBM philosophy to the next level.

Amitabh Passi - UBS Financial Services: If I could just follow-up then cash flows and buybacks for the June quarter. If I look at the trend last year, you had a nice snapback in the June quarter. Should we expect something similar? And Kevin when can we expect you guys to resume your buyback? A little disappointed to see that you didn't procure any shares in the March quarter.

Kevin Moriarty - CFO: Sure, I'll take the two questions. In terms of cash flow for Q4, based on the guidance we are providing, we expect to generate approximately $150 million in free cash flow this quarter. And then on the buyback, you're right, we did not buyback any shares. We still have approximately 225 million outstanding on the previously announced program. As we've highlight in the past, we've become more (extern) on book value and have become more aggressive when it goes closer to tangible.

Rick Hamada - CEO: So, Amitabh we do have a standing authorization in place. So, depending on the ups and down in the market that we could be participating again and of course we'll report on Q4 in the August timeframe. So just let you know we do have a standing authorization and schedule in place.

Operator: Scott Craig, Bank of America Merrill Lynch.

Scott Craig - Bank of America Merrill Lynch: Two questions. First question how was pruning businesses so to speak are focusing on better profitability businesses and letting some go in both TS and EM impacting you guys Rick? Then from a pricing perspective, you've mentioned Europe competitive pressures on a year-over-year basis. Have you seen any changes there quarter-over-quarter or recently I guess? Thanks.

Rick Hamada - CEO: Yeah, Scott let me start with the pruning and overall then I'll ask maybe Harley or Phil chime in on Europe. So, Scott when it comes to portfolio management, you would understand that probably our starting point on any investment we began is that we're going to make it successful. However as part of our commitment of VBM I would tell you that we've come to the conclusion in some small segments of the overall business and sometimes you get a segment with a large acquisition that maybe isn't going to make it in the long run and you give it a certain amount of time to demonstrate a certain amount if performance and if it's not there and we do not believe that long-term we can sustain the committed returns of capital that we show avidly share with you then we can make the decision to exit. That also has impacts as you'll see if you look at the details of our special charges, and that's real money and we treated that way by the way. However, as we evaluate our entire portfolio it's not just always about how to make it better. There's a sort of start stop continue philosophy and in some cases, we come to the conclusion we needed to stop and that we want to reallocate those resources somewhere that they can now generate the acceptable return. So, just part of the overall portfolio management philosophy and like I said look through the details of the special charges and you will see segments where we decided we are getting out and moving on and reallocating the resource. The Europe, Harley or Phil, you want to jump in?

Harley Feldberg - President of Electronics Marketing: I was thinking as you asked the question, in a way it ties back to the question asked earlier by Steve Fox around the charges and what we are getting and the intent. And I'll use America and obviously I'm speaking specific to EM as an example. If you look at the way we categorize the region. We correctly categorized America as being below typical seasonality and EMEA being above. But one of the drivers to that aggregated result in America is the pruning of some of the business that we deemed not long-term and not strategic for us and we've been moving away from that in a very premeditated way. If I pull that out for example, our core component business in America really would be better categorized at maybe low end of seasonality as opposed to below. So when you take it down a detail lower, it gives you a bit better view on how the business in total is acting. Reinforce what Rick said; when we think about these pruning decisions, on the EM side we think about is it a business that is permanently changed and therefore we should adjust investments to match the reasonable volume and profit expectation of that business. And inside of a portfolio as large as ours there are some. But in addition to that, there are some businesses that are not altered in a sense, as I mentioned on the previous, but more so we have determined that over time the opportunity for us to achieve the long-term goals we need to (aggregate) up to our total goals are not predictable; therefore, we're moving away from them in total. So our moves are really a combination of those two tactics.

Rick Hamada - CEO: Yeah, from TS perspective, I think this is a great question in particular with (indiscernible) next week at the Analyst Day Graeme Watt will be there who is our leader in Europe, where we can do lot more deep-dive formally and informally during the Analyst Day and obviously from a TS perspective little different than EM. This is our noted public challenged market that we need to – as we like to say, move the bubble up, on the returns. So the team is working diligently. Rick touched on expense reductions. We've been managing expense reductions in Europe throughout the year, quarter on quarter. Sometimes you don’t see those necessarily based on new acquisitions coming like Magirus, in some case you don’t see the apple-to-apple, and this goes back to Steve Fox's question as well as lot coming in and lot going out. But on the revenue de-selection, if you will, this is happening. Some of these are more public in nature, if you will, like when we decide to pull out of Italy, all right. Others are just where the team's managing the business day in and day out. But part of the challenge is once you do get out, then it hits your organic growth for the next year. That revenue is not in your businesses. So some of these do tend to haunt you a little bit as you look at the top line growth, but as long as you're seeing the benefit on the bottom line, we find a business that's terminally ill, if you will then we're going to manage out of it, okay. We go in a more detail next week and there is a few case that we can share with you, but it's got to be -- it's everyday operating of the business.

Operator: Ananda Baruah, Brean Capital.

Ananda Baruah - Brean Murray Carret & Co.: I guess along the same lines, if the demand environment stays relatively as it is through the balance of this year, so say softer kind of seasonal -- just softer than seasonal. At what point do you expect the cost actions that you are sort of taking fairly regularly now to begin to drive leverage again?

Rick Hamada - CEO: Ananda, it's Rick. I'll ask Kevin to maybe to comment as well. So, it's always -- remember as we take the actions they will be realized and impacted in the following quarters. Normal seasonality as you follow our patterns for the rest of the -- we don't provide multi-quarter guidance, but if you go with your assumption of the normal seasonality going forward, typically September quarter is a little bit of sequential down and then, of course, we head into the big hit year end for TS, with some very mild growth I think for EM typically in that quarter overall. If you are planning for those particular environment, if you intend normal seasonality going forward, the $40 million we're talking about today will kick in in the first half of the year, and of course, any adjustments that we're adding along the way including by the way, if the $40 million ends up being a different number when we are done, we'll report on that, when that's finished and you'll know exactly how that modeled that out into the first half of our fiscal year. It is an ongoing process. It's constant evaluation and again, we are trying to balance between the need to have cost reductions be a part of the margin improvement plan, while at the same time as I said staying sensitive and being able to respond to the marketplace and provide the proper service levels for the business that we do have today. So it's that full combination that's keeping us busy and is a constant evaluation quarter-in and quarter-out.

Kevin Moriarty - CFO: Rick, to amplify a little bit more, I think the other thing we look at is obviously we take into account the impact of the completed acquisitions the past quarter over the last 12 months that clearly we're continuing to work on. Clearly, the weakness in the business we're seeing is due to market environment has lasted much longer than we have seen historically. The team here knows what needs to be done and we're going to keep that.

Ananda Baruah - Brean Murray Carret & Co.: Is it your intent to pass all of the cost savings through to the bottom line?

Rick Hamada - CEO: With the $40 million we're announcing today yeah, that should a 100% through to the bottom line will net you out on the puts and takes any of their influences to the total cost factor of course when we report out on the fourth quarter.

Operator: Brian Alexander, Raymond James.

Brian Alexander - Raymond James: If I could go back to EM profitability and if I look at the March quarter and compare it to March of 2008, I know that's a long time ago, but a five-year period, EM revenue was up by I think $1.2 billion. Operating income is only up about $8.5 million. So, we've seen an incremental margin of less than 1% over five years. I realized regional mix has gone against you, but it seems like there might be other factors at work here outside of cyclicality and mix and I was just wondering if you can talk about that and why we haven't seen more margin expansion over the last five years, and is any of it structural in your mind or is it all really mix and cyclical and partly related to that, I think you said earlier you're striving to get back to 5% operating margin with an undefined timeframe and I know we'll talk about that more next week. But I just wanted to make sure the goal is still 5 to 5.5 or is that come in?

Rick Hamada - CEO: Go ahead, Harley.

Harley Feldberg - President of Electronics Marketing: Brian, what I said was 5 and above, okay. But, yes, we will give definitive detail in the next week. So, Brian, I can't add a lot of intelligence to a contrast of the current quarter to five years ago quarter. I can next week if you like, but I don't have that data in front of me. But I think your question was more general question about from secular perspective things that are fundamentally changed in the industry over that multi-year period that are additionally impacting our ability to drive proper margin and drop through. Is that fair?

Brian Alexander - Raymond James: Exactly.

Harley Feldberg - President of Electronics Marketing: The difficulty I have here is that the benchmark of comparison the March quarter to a previewed period is very difficult to contrast for many reasons. Now, I was looking at the some data actually this morning and preparing for this, one of the data points that I track for example is design win revenue growth as a comparison to overall revenue growth and in periods of exciting drop through and margin production, there will be – I shouldn't say there was, there will be because historically it has happened this way a fairly significant gap between those two data points. Design win revenue contrasted to overall revenue. One of the impactors and one of the reasons why you see us talk often about revenue de-selection is if there is a secular trend that has driven or created a higher degree of profitability not only with EM but in the channel. It is that ratio changing of fulfillment and lower margin revenues to demand creation revenues. And in many ways when we talk about this selection we're not saying that this is bad business. We're saying that the ratio in the balance is out of whack from where we need to drive the portfolio. So, one of the things I talk a lot about in my in my talk next week is premeditate balancing of the portfolio and number of the decisions and by the way number of investments that we are making to create a better balance. It indeed is that balance that is out of whack. We talked in the script for example, about gross margin pressure in Europe and we will also have our European President there next week, so he can talk in more intermit detail. But one of the factors that's driven those results because our performance there is still quite good and the sequential growth was what we were indeed looking for. But even in Europe, an area that we really have here to for not experienced just to a great degree, our percentage of revenue coming from high volume fulfillment is higher than it's been in the past and quite candidly it's higher than I like form a portfolio management standpoint. So, that is probably the biggest secular change Brian that I could offer you up here and prompt to your question.

Brian Alexander - Raymond James: That's very helpful, Harley, maybe just one follow-up on cash flow. Was there anything unusual from a timing standpoint that impacted cash flow in the quarter or is this just a natural result given the mix shifted toward EM and within that towards Western regions? Kevin did you say free cash flow next quarter would be $150 million was that for the June quarter or did I misunderstand?

Rick Hamada - CEO: Cash flow from operations will be 150 million in the fourth quarter. And Brian, nothing from a timing standpoint on the Q3 cash flow from operations number. And in fact, it's very comparable to last year.

Brian Alexander - Raymond James: So, the 150 million I think that’s down year-over-year versus what you did in June of last year, I guess my question on an annualized basis, do you think you had a plateau in cash flow or do you think that can reaccelerate as we will be on Q4.

Rick Hamada - CEO: I think it really depends on the market and growth and where we are in terms of the end-markets.

Operator: Sherri Scribner, Deutsche Bank.

Sherri Scribner - Deutsche Bank: I just wanted to dig a little bit into some of the P&L numbers, in terms of looking at the SG&A a bit higher than I'd expect. It was that related to acquisitions and what type of levels would you expect SG&A to be going forward. And then thinking about the restructuring actions you are undertaking, will you see any benefit to SG&A from the restructuring or do you think that will all be in the COGS line of things?

Kevin Moriarty - CFO: I think as we were talking about a little bit earlier, a number of factors when we look at the change in operating expense sequentially and year-over-year, obviously with the complexity of the business, few moving parts. We have taken two account, the impact of the completed acquisitions in the past quarter, the M&A over the last 12 months coupled with the impact of foreign currency exchange rates and inflation. But we do believe, based on the actions we have taken previously and what we tied up to have completed by the end of the fiscal year. We are expecting a sequential reduction of $5 million to $10 million in our fiscal fourth quarter operating expenses versus Q3, assuming no changes in foreign currency exchange rate or acquisitions.

Sherri Scribner - Deutsche Bank: And then going forward do you think you'd be able to keep the SG&A flat?

Kevin Moriarty - CFO: I think based on – again, assuming M&A activity that would be our kind of objective as we go forward, but we have to balance with M&A, foreign currency, and those type of elements. And Sherri just to remind you, in Q1 next year in our fiscal year, we have the Q1 spike on the executive compensation.

Operator: Mark Delaney, Goldman Sachs.

Mark Delaney - Goldman Sachs: I was hoping you could maybe help us understand the inventory dynamics a little bit better. I understand your inventory is down 10% year-over-year organically. Can you, maybe, put into context your view of inventory levels across the supply chain and then what your plans are for your own inventory in the June quarter?

Rick Hamada - CEO: It's Rick. I assume that primarily related to the component inventory?

Mark Delaney - Goldman Sachs: Correct.

Rick Hamada - CEO: All right. Harley, you want to jump in?

Harley Feldberg - President of Electronics Marketing: As you probably saw on the release, we achieved another good performance – I'm hesitating, I don’t know if it's a record but a good performance in the March quarter on our inventory velocity, which is really what we track far more than dollars. It's an interesting question because we're trying to decide if we're at an inflection point or if we're going to be having the same conversation three months from today. We watch lead times by commodity closely. There have been a couple where we've seen a little bit of stretch. Hard to declare yet if that is an indicator of a broader trend, so we'll watch that aggressively through the quarter. At this point, our guidance implies that we will manage inventory similar to the way we did in the March quarter. But we are eagerly watching it, because indeed one of the areas where we have been denied a degree of profitability that we typically enjoy in a healthier market, a market with longer lead times, and to be candid some volatility on lead times is some upside margin on multisource commodity type products. And in this environment, that has not been area that's reduced the profit that we typically would look for. So, we watch it eagerly because we feel very confident about our financial position, and if we see some opportunities to invest, we will indeed do that. But to be clear, our guidance based on what we see this quarter does not suggest a significant investment, but as I say make my day, we'd love to do it.

Rick Hamada - CEO: So Harley probably fair to always remind, it's probably two key signals we're looking for, demand signals are one thing and then any movement in lead times would be another, right?

Harley Feldberg - President of Electronics Marketing: Right.

Mark Delaney - Goldman Sachs: As my follow-up question on the TS side, first, can you guys give us an update on how big within TS the PC component business is currently? And then kind of related to that maybe tell us within the other – within all your different product categories, which one are going to be most important to drive gross margin?

Philip Gallagher - President of Technology Solutions: Yeah. Let me look at the PC components. This is Phil by the way. The PC components business roughly in the $500 million to $700 million range, okay that's a range for you, I don't have exact number right in front of me here, but that's about accurate, okay. And the second part of the question was that within the PC components or driving margins in general?

Mark Delaney - Goldman Sachs: More generally storage services software…

Philip Gallagher - President of Technology Solutions: We're really pleased with the past two quarter's performance in margin increasing both sequentially and year-on-year. Much of this is going to be driven by mix as we've been stating we will talk more next week in Analyst Day. It's going to be busy day by the way. The drive to mix our services and software as a greater percentage, that's been a driver in a strategy for us the team executing on. And storage you just mentioned storage continues to be the lead technology for us, and our success rate with the storage product lines extremely positively, so that's good news. But I'm just say those couple key areas mix drive the services software and of course mix we can get – we're pleased with the margins levels in Europe and Americas by the way, as well Asia for the level that it runs. So, we get – as I said earlier we get the European team operating a bit more efficient, okay we should see good drop through in any kind of growth is going to see good drop through as well.

Kevin Moriarty - CFO: Just to be clear, we're pleased with the gross margins get some work to do on…

Philip Gallagher - President of Technology Solutions: Yeah thanks for the clarification. I hope it helps more.

Operator: Matt Sheerin, Stifel Nicolaus.

Matt Sheerin - Stifel Nicolaus: First question for Harley on components. Are you talked about book-to-bill Harley being slightly above 1% in all regions, it just came off below seasonal quarter in North America better in Europe? How do you look at trends because your guidance for the next quarter it's within that 1% to 4% seasonality range for the overall business? So, are you still expecting North America to be down again or rather to be below seasonal?

Harley Feldberg - President of Electronics Marketing: No. I think I probably would categorize North America as low-end of seasonal, as I likely would for all regions. I hesitated because the one question that evolves this time of year is around Asia and we are all waiting to see the incoming booking levels in Asia through into May actually tell us a lot about the upcoming business environment over the summer. And why Asia is so important because Asia does have an impact depending on the strength of our business overall, it can have an impact on lengthening lead times and creating a degree of volatility around lead times for the balance of the industry as well. So today, based on how we view the business I'd categorize the west as low-end of seasonality and categorize Asia as a question mark.

Matt Sheerin - Stifel Nicolaus: And in earlier I think your point on the design revenue versus fulfillment revenue was important, and I know in past cycles increase in design activity has often been a good leading indicator of forward demand. Are you seeing any pickup at all on the design side?

Harley Feldberg - President of Electronics Marketing: Well, it's interesting Matt, I'll give you data. It won't mean a whole lot to you, but were a pretty broad barometer of the market. Year-to-date, so for us that's nine months, our design win, and to be clear, it's design win not design registration, they are two very different things. Our design wins are up 12.5% year-to-date. But our design win revenue is up really consistent with our overall numbers which as I'm sure you would guess is somewhere approaching flattish year-to-date. So, there is a real disconnect there and that was the point I was trying to make earlier is as that gap changes historically speaking that has meant good things for us from a profitability perspective. Are there signs? Well, I like the bookings. I saw some positive comments in some of our suppliers' transcripts. TI for example who also is a relative broad barometer singled out some improving conditions they've seen in their broad industrial base, which is where we connect with them as their largest distributor partner. So, there are some encouraging signs. I saw one actually this morning that somewhat obtusely gave me some encouragement and that is Teradyne reported extremely strong bookings in their announcement this morning, which is encouraging because I think the overall semiconductor equipment industry was down double digit in 2012. So, I'll be looking for the other big semiconductor equipment guys notes this quarter to see if indeed they are seeing increased booking activity, which to me would be another sign that people are preparing for better environment coming forward.

Matt Sheerin - Stifel Nicolaus: That's quite helpful Harley and just a quick one for you Kevin on the June quarter you gave us sort of a ballpark for your OpEx number so that would imply that gross marign for the whole enterprise would be down 10 to 15 basis points give or take and is that – it is just the function of seasonality in the computer business and also a stronger revenue in Asia versus the western markets in the component business?

Rick Hamada - CEO: That’s correct, Matt.

Operator: Jim Suva, Citi.

Jim Suva - Citigroup Investment Research: First the housekeeping question then two questions. The housekeeping question is could you know on the tax rate outlook. And then my real question is on M&A can you help us understand your M&A view this year say last year. As we think about your cash levels and where they sit today versus say for example you know a year or two ago – I'm sort – a year ago or so ending last year. Your cash levels are down quite a bit, but does that mean you are going to take your foot off to the M&A level or would you actually consider using debt to do so. Or is it just a matter of timing of the seasonality for the cash flows, but now look on M&A. And then the second question is, a while though both yourself and aero mentioned our focus on after-market services such as recycling or repair refurbishment and their profitable was materially above your corporate profitability today. Can you verse now that’s still a focus. What were the margins like in that business and how bigger a percentage of your business it is today and looking ahead.

Rick Hamada - CEO: Let me start and see if I get your answers, I think couple of things we have already covered in the script, just to reiterate on the tax rate, I think we said expectation is 27 to 31. And then M&A, we are not out of the M&A business. I think we shared in the script that we $244 million fiscal year-to-date into new M&A. We maintain an active pipeline, we consider M&A still a very relevant and important part of our overall profitable growth plans and provide more details on that next week. And some of that M&A has included investments into providing life cycles service and I'll just say we are going to have a much more robust update on that specific topic also next week at our Analyst Day overall. So you've got the tax rate, M&A still part of our profitable growth plans, we like the financial footprint that we have, the cash flow characteristics, the total liquidity that we have available today, we feel we are rested and ready and investment ready to take advantage of opportunity. And then more specifically, we see those opportunities and what they do to us longer-term from a margin perspective and growth perspective that's what we'll give you more details on next week, if that's okay.

Jim Suva - Citigroup Investment Research: Well I guess we'll look forward to next week.

Operator: Lou Miscioscia, CLSA.

Lou Miscioscia - CLSA Asia-Pacific Markets: I got in a little bit late, so I apologize if someone else asked this already. But maybe you could give us a little bit more granularity on the TS side, just which areas you saw a little bit more strength (or if you saw) strength anywhere, maybe in the storage or maybe in areas of virtualization?

Philip Gallagher - President of Technology Solutions: I'll take it from a technology standpoint. This is Philip Gallagher. We actually saw very good growth in the double-digits in storage, continues to be strong year-on-year. We saw good growth in networking and security also double-digit. Virtualization continues to be strong. Converged in general, okay, as a focus and a market that's continued to evolve, we're seeing great success in all the converged solutions that we have for the marketplace, and also (in our own) services, so back to Jim's question, (which was a good one) Jim on the whole services offerings, we're seeing good growth in that space. We're really doing a lot of work to impact the whole IT lifecycle, so we will expand on that again next week in much greater detail as to what we're doing from. As I like to say womb-to-tomb in the IT lifecycle of the products. But anyway that’s in general where we saw the growth and we are very pleased with it. And to the question little bit earlier where we saw some of the weaker growth was in the computing component space. So, it's a good question. That’s an area that we did see some declining growth which make sense, because lot of it's tied to the PC and more the consumer space that we still have that small business operating. But it was down pretty significantly.

Rick Hamada - CEO: This is the story, the overall topic of convert solutions overall. It's interesting to see some traction there with the customer as well gaining momentum in the marketplace.

Lou Miscioscia - CLSA Asia-Pacific Markets: And just one quick follow-up, which is very quick to answer in just a short sense or two, but obviously there is a tremendous amount going on with the cloud especially with lot of S&Ps putting more of their applications up on AWS or maybe with Rackspace. Either now or if you want to hold it to next week, if you can just maybe give us a thought at how you are sort of trying to address those new applications possibly shifting off of a normal over to the cloud.

Philip Gallagher - President of Technology Solutions: I got a number that you asked me, the answer to cloud in a sense or two. So, yes little tongue and cheek there because it's so complex. We are ready in the middle of this and this is where we touched on again next week, so we don't want to sound like we will defer everything, this one is definitely strategic position for us in the marketplace. We feel we are really well positioned. We are working with many partners, obviously in building alliances with lot of service providers. We will talk about that next week. Guys like Savvis where we've gone public with that, Amazon, as well as our current supplier base. So, even when you talk about your convert solutions, I mean what are you talking about people opt fewer VCE, a cloud metrics from HP all of those are being marketed and sold as private clouds , okay. So we are right smacking in the middle of that one as well, and we're really playing the role of the great aggregators I'd like to say. So, whether it's a traditional product in integration solutions that we're going to go provide great, if it's more of a virtual solution that the partners are looking for, we're providing that as well. One of the most recent acquisitions we did and we announced two quarters ago Pepperweed. Their primary service delivery is around the cloud, okay and they 're working with our partners and end users to pop clouds up. So whether it's us providing it as an Avnet brand and work with our partners enabling them or working with our suppliers selling their cloud solutions. We're building alliances outside our traditional partner network. We think we're right in the middle of it, okay. Again, a lot more to come, but we're pretty excited about it frankly.

Rick Hamada - CEO: I'd say we're big proponents that for datacenters of the future are going to be combinations of on-premise, off-premise, physical and virtual and we still think we play a very integral part of bringing those together, and I would tell you that the top services interest, I think that we are finding among our partners today, cloud enablement top of the list, web portal second and then analytics third right now. And again, we'll have more details for you on that next week to.

Operator: Gentlemen, there are no further questions at the time.

Vincent Keenan - VP, IR: 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 on 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.

Rick Hamada - CEO: Thanks everybody.

Operator: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your presentation.