Avnet, Inc. (AVT)

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Avnet Inc. (AVT)

F1Q10 Earnings Call

October 29, 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

Craig Hettenbach – Goldman Sachs

Steven Fox – Calyon Securities (USA)

Brian Alexander – Raymond James

Matt Sheerin – Thomas Weisel Partners

Shawn Harrison – Longbow Research

Jim Suva – Citi

Sherri Scribner – Deutsche Bank Securities

William Stein – Credit Suisse

Amit Pachori – UBS

Brendan Furlong – Miller Tabak & Co.

Ananda Baruah – Brean Murray, Carret & Co.

Presentation

Operator

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

Vincent Keenan

Good afternoon and welcome to Avnet's first quarter fiscal year 2010 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 event.

As we provide the highlights for our first quarter fiscal 2010, please note that we have excluded impairment charges and restructuring, integration and other items from the current and prior year periods in the accompanying presentation and slides.

When discussing pro forma sales, or organic growth, prior periods are adjusted to include acquisitions and finally, when addressing working capital, it is defined as accounts receivable plus inventory less accounts payable.

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 SEC.

In just a few moments, Roy Vallee, Avnet's Chairman and CEO will provide Avnet's first quarter fiscal year 2010 highlights. Following Roy, Ray Sadowski, Chief Financial Officer of Avnet will review the company's financial performance during the quarter and provide second quarter fiscal 2010 guidance.

At the conclusion of Ray's remarks, Roy will wrap up with closing comments after which a Q&A will follow. Since we have added key new analysts to our coverage universe, I would ask that you limit yourself to one question and if we have time at the end of the call, we will take any follow up questions.

Also here today to take any questions you may have related to Avnet's business operations are Rick Hamada, Avnet's Chief Operating Officer, Harley Feldberg, President of Electronics Marketing, and Phil Gallagher, President Technology Solutions. With that, let me introduce Mr. Roy Vallee to discuss Avnet's first quarter fiscal 2010 business highlights.

Roy Vallee

Thank you all for taking the time to be with us and for your interest in Avnet. For the September quarter, our revenue exceeded expectations at both operating groups, which suggests that the business environment is improving in our end markets.

As we have previously mentioned, due to our 52 – 53 week fiscal calendar, our results for the just completed first quarter of fiscal 2010 include a 14th week as compared with the typical 13 weeks.

Since there's no way to precisely quantify the impact of that extra week, we simply have taken the average of the first and last weeks of the quarter to develop an estimate of what revenues would have been in a normal quarter.

Using that methodology, we estimate that the extra week accounted for approximately $400 million of revenue at the enterprise level, with about $250 million attributable to Technology Solutions and $150 million for Electronics Marketing.

Even after adjusting for the extra week of revenue, both operating groups delivered sequential growth that was better than normal seasonality for a September quarter. And our year-over-year rate of decline improved. And Avnet improved from a trough of down 25% year-over-year on a pro forma basis in the June quarter to down 15% in the September quarter, again excluding that extra week of revenue.

Since the downturn hit us with full force in the December 2008 quarter, our year-over-year rate of sales decline had been worsening. This is the first quarter that we've seen an improvement in this metric and we believe this is further evidence that the technology markets we serve bottomed in the third quarter.

Across the supply chain and in Avnet specifically, inventories seem well aligned to the current levels of demand. It is difficult to ascertain how much of this quarter's growth was due to supply chain adjustments and how much was due to growth in end demand.

However, based primarily on our performance at tech solutions, it does appear that end demand is improving gradually. Although the rate of decline in gross profit margins slowed materially from the third quarter, it declined sequentially, primarily driven by the mix shift to Asia where both operating groups have a business model characterized by lower profit margins, offset by a higher asset velocity and lower taxes.

For the September quarter, our enterprise revenue in the Asia region grew over 23% sequentially and 11% year-over-year. As Asia has been less impacted by the global downturn, the region has grown from 18% of Avnet's total sales to 25% in just the last three quarters.

Gross profit margin also declined sequentially in the EM EMEA region where, similar to the June quarter at EM America, we experienced a decline due to a variety of late cycle market driven pressures. We are encouraged by the fact that this prior quarter decline in the America's reversed this quarter, as EM Americas posted a 63 basis point sequential improvement.

Since EM EMEA bottomed after the America's, we expect to see gross profit margin improvement in Europe in the coming quarters as inventory stabilize and demand begins to improve.

The sequential increase in volume and higher productivity at both operating groups drove an improvement in profitability across the enterprise. Each region, at both groups, delivered a meaningful increase in operating profit margins from the June quarter.

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