Avnet, Inc. (AVT)

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Avnet Inc. (AVT)

F2Q09 Earnings Call

January 22, 2009 2:00 pm ET

Executives

Vincent Keenan – Vice President of Investor Relations

Roy Vallee – Chairman of the Board, Chief Executive Officer

Raymond Sadowski – Chief Financial Officer, Senior Vice President, Assistant Secretary

Harley Feldberg – Senior Vice President; President of Avnet Electronics Marketing

Richard P. Hamada – Chief Operating Officer, Senior Vice President

Analysts

Steven Fox – Bank of America

Jason Brueschke – Citigroup

Brian Alexander – Raymond James

William Stein – Credit Suisse

Shawn Harrison – Longbow Research

Matt Sheerin – Thomas Weisel Partners

Brendan Furlong – Miller Tabak & Co.

Carter Shoop – Deutsche Bank Securities

Presentation

Operator

I would now like to turn the floor over to Vince Keenan, Avnet’s Vice President of Investor Relations.

Vincent Keenan

Welcome to Avnet’s second quarter fiscal 2009 corporate update. If you are listening by telephone today and have not accessed the slides that accompany this presentation, please go to our website www.ir.avnet.com and click on the icon announcing today’s events. As we provide the highlights for our second quarter fiscal 2009 please note that we have excluded restructuring, integration and other items from the current year period in the accompanying presentation and slides. Additionally in discussing pro forma sales or organic growth, prior periods are adjusted to include acquisitions.

Before we get started with the presentation from Avnet management, I would like to review Avnet’s Safe Harbor statement. This presentation contains certain forward-looking statements which are statements addressing future financial and operating results of Avnet.

Listed on this slide are several factors that could cause actual results to differ materially from those described in the forward-looking statements. More detailed information about these and other factors is set forth in Avnet’s filings with the Securities and Exchange Commission.

In just a few moments, Roy Vallee, Avnet’s Chairman and CEO will provide Avnet’s second quarter fiscal 2009 highlights. Following Roy, Ray Sadowski, Chief Financial Officer of Avnet, will review the company’s financial performance during the quarter and provide third quarter fiscal 2009 guidance after which a Q&A will follow.

Also here today to take any questions you may have related to Avnet’s business operations are Rick Hamada, Avnet’s Chief Operating Officer and acting President Technology Solutions and Harley Feldberg, President of Electronics Marketing. With that let me introduce Mr. Roy Vallee to discuss Avnet’s second quarter fiscal 2009 business highlights.

Roy Vallee

In the second quarter of fiscal 2009 our financial results were negatively impacted by the global economic slowdown that seemed to worsen as our quarter progressed. This deceleration was most notable at our Electronics Marketing Group as customers reacted with unprecedented speed to reduce inventories and backlogs.

In November we saw a meaningful slowdown in our EM Asia business which was the primary reason we lowered revenue and EPS projections in early December. Our sales for the month of December were weaker than expected primarily in the Americas which resulted in revenue for the quarter coming in at the low end of expectations at both operating groups.

In total, revenue of $4.27 billion in the December quarter was down 10.2% year-over-year and 6.4% adjusted to exclude the impact of changes in foreign currency exchange rates. Pro forma revenue after adjusting for the impact of acquisitions was down 14.9% on a reported basis and 11.3% in constant currency.


The decline in revenue had a more pronounced impact on operating income as our most profitable regions EM Americas EM EMEA and TS Americas accounted for over 80% of the year-over-year decline. As a result operating income excluding restructuring integration and other items, was $153.2 million down 26% compared with the year ago quarter. Operating income margin declined to 3.6% and on the bottom line diluted earnings per share declined to $0.63.

Given the double digit drop in revenue this quarter and our expectation of continued market weakness we have decided to take additional actions to reduce our cost structure by another $50 million on an annualized basis.

Some of these actions have already started and we expect to have a significant portion of them complete by the end of the March quarter with the remainder completed by the end of our fiscal year in June. On a cumulative basis beginning in the third quarter of fiscal 2008 we have announced total cost actions to date of $155 million or $145 million at current foreign currency exchange rates, which equates to approximately 10% of our total expenses.

These cost reductions impact both operating groups and all regions as the slowdown we initially experienced in the West has spread to Asia. We will continue to react responsibly to any further deterioration in sales while working closely with our trading partners to ensure we take advantage of all opportunities to gain profitable market share.

Although profitability was negatively impacted by the decline in revenue our cash flow was positively impacted by our counter cyclical balance sheet as we generated $320 million of cash from operations during the quarter.

Working capital, defined as accounts receivable plus inventory less accounts payable, declined $208 million or 7.3% sequentially, benefited somewhat by currency. The biggest contributor to this performance was a $156 million reduction in inventory with 75% of that decline occurring at Electronics Marketing.

On a rolling four quarter basis we have generated $728 million of cash from operations which has strengthened our balance sheet and further improved liquidity. At the end of the second quarter of fiscal 2009 we had $671 million of cash which, when combined with our available credit lines, provides liquidity of $1.6 billion.

Now let’s turn to the operating groups. In the second quarter of fiscal 2009 Electronics Marketing revenue declined sharply as the technologies supply chain quickly reduced orders in reaction to lower demand and a desire to reduce inventory.

This rapid reaction had a significant impact at EM Asia as revenue declined over 20% sequentially and year-over-year pro forma revenue declined over 10% after six consecutive quarters of mid to high single digit growth.

Both the Americas and EMEA regions were also down, which contributed to a 16.1% sequential decline in EM revenue as compared to normal seasonality of flat to down a few percent. Pro forma revenue adjusted to exclude the impact of acquisitions was down 12% year-over-year in delivered dollars and 9.1% in constant dollars.

While it’s apparent the global slowdown is negatively impacting end demand it is difficult to determine the extent of that impact versus the corresponding inventory and backlog reductions. They’re definitely seeing the bullwhip effect as demand reductions at the front of the supply chain are being magnified by inventory reductions across the supply chain. Although we can’t call the bottom and end demand yet, the global electronics supply chain unlike past downturns enters the slowdown benefiting from structural changes which should mitigate the depth and length of the current downturn.

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