Avnet Q1 2009 Earnings Conference Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Carter Shoop - Deutsche Bank - Analyst : Hi, guys.

Question: Carter Shoop - Deutsche Bank - Analyst : Wanted to better understand what you're assuming for operating margins by division. If you look at each division and you assume a similar type of corporate expense in the December quarter, it looks like you would need to see about 100 basis points of margin expansion in TS, and you would see EM be roughly flat. Can you help me understand what you're expecting by division on the operating margin side? And also what type of restructuring benefits you will realize in the December quarter? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Carter Shoop - Deutsche Bank - Analyst : So what I don't understand is how we're going to see margins in EM hold pretty steady on a, about 8.5% decline in overall sales in EM sequentially. It's -- obviously we don't have many quarters where we can look back to say what happens when sales in EM go down 8%, but I've got to think that we're going to see more margin pressure than what you guys are anticipating. Is there any -- are there substantial benefits from restructuring that we need to know about here to get more comfortable with your estimates?

Question: Carter Shoop - Deutsche Bank - Analyst : Okay. As a follow-up question, I would like to discuss the working capital velocity a little bit, particularly inventories. I was surprised by Ray's comment that you would expect inventory and EM to be flat to down versus down aggressively, given the overall sales decline in the December quarter. Obviously you'll be building a little bit for a seasonally strong March quarter, but March quarter will definitely be below where we were in the September quarter. Why can't we work that inventory lower and how should investors think about the overall velocity in a downturn here?

Question: Carter Shoop - Deutsche Bank - Analyst : Okay, guys. Thanks for the time.

Question: Jim Suva - Citigroup - Analyst : Great, thanks very much. First, quick question, with your different change of year end, with four days versus the calendar, can you just walk us through quickly, do you just do like an allocation, a look back after the calendar year has closed both on sales and margins? And then it seems like you should have a pretty profitable jump onto the March quarter with four days of high computing going into that. Can you just walk us through how you worked through that calendar close?

Question: Jim Suva - Citigroup - Analyst : All right. So you get the rebate and the credit, then, of those four days in the March quarter, which gives you a little head start for March versus what's typical?

Question: Jim Suva - Citigroup - Analyst : Great. Then my follow-up question, the rebates as far as I believe you negotiate them quarterly, and if so, have those rebate levels been reset after the meaningful deterioration in the economy, and I'm talking like after September, are we talking the first couple of weeks of October? Were you able to renegotiate lower levels there, given things have really deteriorated in the first part of October versus, say, mid part of September?

Question: Jim Suva - Citigroup - Analyst : Great. Thank you very much.

Question: Steven Fox - Merrill Lynch - Analyst : Hi, good afternoon. First question revolves around your receivables. Can you just talk a little bit about history of having levels of bad debt during recessions, what other extra steps you're taking currently given that this looks like an incredibly tight credit environment to protect your receivables? And what what would you anticipate would be the level of bad debt during, say, the next 12 months?

Question: Steven Fox - Merrill Lynch - Analyst : Right. The only one I remember is Enron, and that wasn't a lot of money, but we had a little bit of money in Enron, but we subsequently recovered some of that as well. So in connection with an acquisition.

Question: Steven Fox - Merrill Lynch - Analyst : How about from the opposite level where you have to walk away from some sales because you get nervous about the credit environment and some of the smaller customers you deal with? Is that a possibility?

Question: Steven Fox - Merrill Lynch - Analyst : Okay.

Question: Steven Fox - Merrill Lynch - Analyst : Great. That's very helpful. Thank you.

Question: Brian Alexander - Raymond James & Associates - Analyst : Gentleman, I guess just a clarification back to the mismatching of one of your suppliers. Can you quantify how much that is impacting your below seasonal guidance? I think you're normally up 22% to 27%, so if we look at mid teens sequential growth, how much of that is based on the environment and how much of that was is based on the timing of that vendor?

Question: Brian Alexander - Raymond James & Associates - Analyst : Okay. Thank you. And then just, Roy, on pricing, the gross margin performance, if I look at your business versus your major competitor, is pretty startling. Your gross margins were up year on year. They were down almost 60 basis points. In the components business you were flat. They were down around 100. Computer business, you were up 50. So they talked a lot about the difficult pricing environment on their call and I haven't really heard that come through yours. So I'm just trying to reconcile why your performance and tone, particularly around margins and pricing, are so different than theirs, and it may be difficult for you to answer, but then tie into that your outlook for the components business for next quarter. I think the decline you're looking for sequentially is about 400 to 500 basis points less severe than theirs. So I guess what I'm looking for, is there anything structural or mix-driven that you think is explaining that or are there other explanations? Thanks.

Question: Brian Alexander - Raymond James & Associates - Analyst : Okay, great. Maybe as a follow-up to your first point on design wins, as I recall, that used to be roughly 25% to 30% of your EM revenue and I know it differs by geography, and I'm not sure if you're willing to update that for competitive reasons, but if you are, just curious how that's changed, particularly since the Memec acquisition a few years ago -- what are those rates today? Thanks. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Brian Alexander - Raymond James & Associates - Analyst : Hi, Harley.

Question: Brian Alexander - Raymond James & Associates - Analyst : Okay. Thanks.

Question: William Stein - Credit Suisse - Analyst : Thanks, guys. Frankly, I was a little bit surprised by the opening comments as to the characterization of the end markets. It sounds like you're characterizing the current environment as an ongoing slowing demand environment as opposed to one in which you saw a more sharp downturn, let's say in mid-September. Am I just missing that, or maybe you could clarify as to how you see the change in demand, let's say, from September and then the current month to date.

Question: William Stein - Credit Suisse - Analyst : So forgetting both what your sales are and have been recently and the media, if you look at your customers' order rates, you are either backlogged or they are forecast, whatever we want to call it -- you're saying there hasn't been a sharp or sudden change, say, in mid-September or to date relative to what we've seen in the recent history? Is that right?

Question: William Stein - Credit Suisse - Analyst : And overall, level visibility today versus let's say what it's been in the last couple of quarters, has it fallen off significantly or is it really very different? I mean your competitor talked in a much more negative way historically.

Question: William Stein - Credit Suisse - Analyst : Okay. Thank you very much.

Question: Matt Sheerin - Thomas Weisel Partners - Analyst : Yes, thanks. A lot of the key questions have been asked, so I'll try to ask them in a different way. Regarding the component revenue guidance, which at the midpoint is around 8%, down 8% or 9%, in previous years you've been down and mid single digits -- some years more, some years less. This year you do have -- I'm assuming that the three fewer, or four fewer selling days, that also is true in your components business, correct?

Question: Matt Sheerin - Thomas Weisel Partners - Analyst : Okay.

Question: Matt Sheerin - Thomas Weisel Partners - Analyst : Okay. And then also, AVX this morning I thought brought up a very interesting point, which is that they thought some of their larger customers would have longer periods of shutdown at the end of the year, which makes sense. Now, in your supply chain engagement type of business, your larger volume business, are you assuming the same thing's going to happen? Has that been factored into your forecast?

Question: Matt Sheerin - Thomas Weisel Partners - Analyst : Thanks, Roy. That's a good point. That leads to my follow-up question on the expense line because just doing the math on your EPS guidance, sounds like gross margin could be up a little bit, but even to get to the mid or low point of your revenue guidance, you still have to get SG&A, it looks like down sequentially. So we'll be -- I know you've got cost cutting actions from earlier this year that will flow through, but are we to assume that the courtesy will work in your favor on the expense side in the December quarter?

Question: Matt Sheerin - Thomas Weisel Partners - Analyst : And what percentage of your revenue is in Euro versus dollars, because I know in some of your larger customers, it may be in dollars.

Question: Matt Sheerin - Thomas Weisel Partners - Analyst : And then what about in, on the component side?

Question: Matt Sheerin - Thomas Weisel Partners - Analyst : Okay. Great. And just lastly, Roy, on acquisitions, I know you're planning to continue to -- you talked about putting the free cash flow to work through acquisitions and you've got a big one coming online in the next couple quarters. In this environment, are you going to still continue to look and try to take advantage of opportunities or are things so uncertain now that you just want to conserve the cash, run the business and then wait a while? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Matt Sheerin - Thomas Weisel Partners - Analyst : Okay, great. Thanks.