Avnet Q3 2009 Earnings Conference Call Transcript

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

Question: Brian Alexander - Raymond James & Associates - Analyst : Good afternoon. The first question is just on gross margins and the EM segment. It seems like they were down 80 basis points or more year-over-year, just given the comment that TS was up and the overall gross margins for Avnet were down about 60 basis points. So I understand Asia is a bigger part of the mix, but that can't explain probably more than 25% of that decline. So if you could just talk a little bit about gross margins in EM, I know Ray mentioned competitive pressures in his remarks, it would seem like that's the biggest factor in the decline. So is that pressure coming more from the supplier side or the customer side? How widespread is that pressure and more importantly when do you see that kind of stabilizing? Thanks.

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

Question: Brian Alexander - Raymond James & Associates - Analyst : So how are you thinking about that in terms of your guidance for the next quarter? Given that you think we're closer to a bottom, do you think that gross margins are also closer to a bottom?

Question: Brian Alexander - Raymond James & Associates - Analyst : That's helpful. Just one for Rick I guess on TS. In terms of the acquisition by Oracle and Sun, how do you expect customer buying patterns to behave in the short run given it's the fiscal year end there? And are you assuming normal seasonality in that part of your business? Thanks.

Question: Brian Alexander - Raymond James & Associates - Analyst : Yes, it would seem like you're guiding to seasonality if you adjust for that. Is that right? 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 : Right.

Question: Brian Alexander - Raymond James & Associates - Analyst : Oh, okay.

Question: Brian Alexander - Raymond James & Associates - Analyst : Got it. Very helpful, thanks.

Question: Shawn Harrison - Longbow Research - Analyst : Hi, good afternoon.

Question: Shawn Harrison - Longbow Research - Analyst : Maybe just to try and put a little bit more granularity in terms of the guidance for both EM and TS. The run rate you're seeing in orders right now for April, knowing that TS is back end loaded but maybe more so for EM, would that put you at the low end of guidance? So that $1.9 billion? )r if not, what has to happen for you to get down there? Is it just your conservatism I guess is the question?

Question: Shawn Harrison - Longbow Research - Analyst : Hi.

Question: Shawn Harrison - Longbow Research - Analyst : Maybe to change gears a little bit on the restructuring savings, given that you witnessed the recovery in gross margins in TS this quarter, should we expect a greater percentage of the savings going forward maybe than just the breakout of revenues to fall within EM? And then second, within that I think there was a mention of $40 million of synergies tied to the acquisitions. How much of that has been achieved today, if any? 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: Shawn Harrison - Longbow Research - Analyst : Okay, and then just to clarify, that last $20 million of savings targeted for the fourth quarter as well as the first quarter of 2010, that's a little bit more evenly split -- it's the incremental piece that's more targeted toward EM?

Question: Shawn Harrison - Longbow Research - Analyst : Okay, thanks a lot.

Question: Matt Sheerin - Thomas Weisel Partners - Analyst : Yes, thanks. Good afternoon. I wanted to follow-up on Brian's question regarding gross margin in the competitive environment and it sounds, Harley, like you said it's still competitive because of the big drop in volume. So my question is you being aggressive in trying to take market share or more disciplined so that you're giving up certain revenue opportunities in order to maintain a certain margin or profitability?

Question: Matt Sheerin - Thomas Weisel Partners - Analyst : And the decision there is to just basically support your infrastructure with a certain revenue number or volume?

Question: Matt Sheerin - Thomas Weisel Partners - Analyst : Okay, that's helpful. And then my second question regarding the cost cutting initiatives and then going back to your analyst day when you provided us with a few slides that talked about operating margin targets at different revenue levels -- at $16 billion for instance, you had the 3.6% to 3.8% operating margin level and then you gave a $14 billion or $15 billion number at a lower level. It looks like you're going to shake out closer to the $15 billion revenue level going into fiscal 2010, so my question is what kind of operating margin targets do you have over that period of time?

Question: Matt Sheerin - Thomas Weisel Partners - Analyst : And that's when you're basically done with, you are basically out of the September quarter and all those costs are out, right?

Question: Matt Sheerin - Thomas Weisel Partners - Analyst : Okay, thanks a lot. 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: Jim Suva - Citigroup - Analyst : Thank you. Switching gears, focusing more on the cost structure, and understanding you've done a lot of restructuring, I guess it's quite a bit of disappointment to investors to see that operating SG&A has come down about 2% quarter-over-quarter and down 7% year-over-year while revenues have come down multiple times at it. It just seems like your SG&A number, and I don't know if you're operating it bare bones and there's not much more room for it to go down, but it seems like maybe that line item isn't as nimble? And what should we kind of expect going forward, because it seems like you're not keeping pace with adjusting the model?

Question: Jim Suva - Citigroup - Analyst : Absolutely.

Question: Jim Suva - Citigroup - Analyst : And then looking forward what should we expect on the SG&A line then? 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: Jim Suva - Citigroup - Analyst : I like to think about it both ways.

Question: Jim Suva - Citigroup - Analyst : And what to expect for the June quarter then?

Question: Jim Suva - Citigroup - Analyst : And a quick housekeeping item. The other income line moved, there was about $8 million relative to Forex, which was about a $0.04 hit to EPS. I know it moves around a lot. Should we just model that flat? Or is there any other way to think about modeling that item which again moved about $0.04 this quarter?

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

Question: William Stein - Credit Suisse - Analyst : Hi, thank you. I'm wondering if you can talk a bit about sales and booking trends by channel in terms of your OEM customers versus the EM and ODM?

Question: William Stein - Credit Suisse - Analyst : And earlier you said there was a mix shift away from your core industrial OEM base -- the mix shift is away from them and EMS is falling faster -- where is the plug? Remind me of what I should be looking for as the remainder there?

Question: William Stein - Credit Suisse - Analyst : Should I think of that as a more consumer focused business, and is that also when you spoke about not getting more aggressive on price, but taking lower price business that was higher inventory turns and there for equivalent ROIC -- is that more consumer focused business? Is that how I think about that?

Question: William Stein - Credit Suisse - Analyst : Fair enough, and then just one follow-up. Any credit issues during the quarter? You said there war no significant delinquencies on receivables, but any writedown issues in the quarter?

Question: William Stein - Credit Suisse - Analyst : Thank you.

Question: Brendan Furlong - Miller Tabak - Analyst : Good afternoon, gentlemen. Just going back on a bunch of other questions, but in the TS segment, gross margins up and slightly

Question: Brendan Furlong - Miller Tabak - Analyst : Yes.

Question: Brendan Furlong - Miller Tabak - Analyst : Okay, understood. Thank you. And then going back to the broad based customers and I guess EMS as well, from talking to them, what are they saying -- and you mentioned that they are probably lagging everything else by about a quarter or so. So if I'm talking to them and looking into September back half of the year, what any color, what -- you also mentioned that inventory drawdowns are done. You get some normalization pattern, you should get a little bit increase in demand, factor all those things in -- what are you thinking back half of the year in EM?

Question: Brendan Furlong - Miller Tabak - Analyst : Right.

Question: Brendan Furlong - Miller Tabak - Analyst : Great. Thank you very much. I guess my last question related to that then is on the -- nice job on the working capital metrics this quarter. Inventories, you kind of mentioned you'll take them down again next quarter. How aggressively -- is it going to be significantly less than the last couple of quarters?

Question: Brendan Furlong - Miller Tabak - Analyst : Understood, thank you.

Question: Steven Fox - CLSA Emerging Markets - Analyst : Thanks, good afternoon. 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: Steven Fox - CLSA Emerging Markets - Analyst : Just one question for you. On the inventory turns in the components business specifically, some of your suppliers are talking about an inventory restocking that has to go on at the distribution level. You've talked about your own customers, but your inventories are below what you would consider reasonable levels. So it seems like there's a little bit of a disconnect there. So can you talk specifically about your own stocking levels and how comfortable you are if -- given that you've seen some acceleration in the last month and probably see some for the next few months?

Question: Steven Fox - CLSA Emerging Markets - Analyst : No, you haven't. That's sort of an inference from your suppliers.

Question: Steven Fox - CLSA Emerging Markets - Analyst : Great. That's very helpful, thank you.