Avnet, Inc. (AVT)
Q2 2010 Earnings Call
January 28, 2010 2:00 pm ET
Vincent Keenan – VP IR
Roy Vallee - CEO
Raymond Sadowski – SVP & CEO
Rick Hamada – SVP & COO
Harley Feldberg - President Electronics Marketing
Phil Gallagher - President Technology Solutions.
Steven Fox – Calyon Securities
Ananda Baruah – Brean Murray, Carret
Sherri Scribner – Deutsche Bank
Craig Hettenbach – Goldman Sachs
William Stein – Credit Suisse
Brian Alexander – Raymond James
Matt Sheerin – Thomas Weisel Partners
Jim Suva – Citi
Brendan Furlong – Miller Tabak
Amitabh Passi – UBS
Shawn Harrison – Longbow Research
Scott Craig – Bank of America
I would now like to turn the floor over to Vince Keenan, Avnet's Vice President of Investor Relations.
Previous Statements by AVT
» Avnet Inc. F1Q10 (Qtr End: 10/03/2009) Earnings Call Transcript
» Avnet Inc. F2Q09 (Qtr End 12/31/08) Earnings Call Transcript
» Avnet, Inc. F1Q09 (Quarter End 9/27/08) Earnings Call Transcript
As we provide the highlights for our second 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. 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-US dollar based financial statement into US dollars. And finally when addressing working capital, return on capital, return on working capital and operating income drop through, those definitions are included in the non-GAAP section of the presentation.
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 are 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 second 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 third 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 a larger number of analysts who cover the company, 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 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 second quarter fiscal 2010 business highlights.
Thank you Vincent, and hello everyone. Thank you all for taking the time to be with us and for your interest in Avnet. The second quarter of fiscal 2010 provided further evidence that the recovery in the technology markets we serve is gaining momentum.
As a result of a strong close in December, revenue exceeded our expectations at both operating groups as we delivered better than normal seasonal growth for the second quarter in a row. Importantly both operating groups also improved gross profit margins sequentially following several quarters of declines, thereby providing further evidence that business conditions are strengthening.
As we mentioned on our last call due to our 52-53 week fiscal calendar, our results for the September quarter included a 14th week as compared with the typical 13 weeks. After adjusting for the extra week in the September quarter revenue growth accelerated to 22.8% sequentially in the December quarter as compared with 4.6% growth in the September quarter.
As a result of the strong revenue performance in the December quarter our year over year revenue growth rate turned positive at both operating groups for the first time since the first quarter of fiscal 2009. This acceleration of growth at TS in parallel with EM indicates that end demand is growing as the macroeconomic recovery ensues, while inventories throughout the supply chain appear to be lean and well managed.
The operating leverage in our financial model was evident this quarter as operating income grew nearly five times faster than revenue sequentially. The benefits of our cost reductions propelled sequential operating income drop through to over 100%. Strong top line growth and continued expense control combined to drive operating income margin up 90 basis points sequentially.
Turning the balance sheet, we had another very strong performance as both operating groups delivered sequential improvements in working capital velocity. The geographic shift to Asia which accelerated through the downturn has contributed to this improvement in velocity.
Additionally I’d like to point out that for the December quarter working capital velocity reached record or near record levels in the Americas and EMEA regions at both operating groups. As a result working capital velocity at the enterprise level reached a record 8.2 times. When coupled with the sequential improvement in operating income drove return on working capital for the quarter to 27.6%, nearing our recently reaffirmed business model target of 30%.
Our performance this quarter is further evidence of the operating leverage of our model and the positive impact that our value based management culture has had on our returns as we strive to optimize shareholder value creation through this recovery.
While we cannot be certain what the rate of growth will be over the next several quarters we are well positioned to translate growth into higher earnings and returns. Now let’s turn to the operating groups, in the second quarter of fiscal 2010 revenue at electronics marketing was well above both normal seasonality and the revised guidance that we provided in early December.
Reported revenue of $2.52 billion grew 11.2% sequentially after adjusting for the extra week in the September quarter. While Asia has been leading this recovery we did experience a resumption of sequential growth in EM’s Americas and EMEA regions.
All three regions delivered double-digit sequential growth after adjusting for the extra week in the September quarter which is well above our normal flat to down 3% for this quarter. Double-digit sequential growth in the western regions suggest that the industrial markets which are typically driven by corporate capital expenditures are experiencing growth in end demand.
Due to the broader account base the western regions operate at higher margins which will benefit electronics marketing’s profitability as the recovery spreads beyond Asia. Below EM’s revenue line sequential improvement in gross profit margin and disciplined expense control drove a second straight quarter of improvement in operating income margin.