Avnet, Inc. (AVT)

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Avnet, Inc. (AVT)

F2Q12 Earnings Conference Call

January 26, 2012, 14:00 p.m. ET

Executives

Vince Keenan - VP, IR

Rick Hamada - CEO

Ray Sadowski - CFO

Phil Gallagher - President, Technology Solutions Global

Harley Feldberg - President, Electronics Marketing Global

Analysts

Brendan Furlong - Miller Tabak

Shawn Harrison - Longbow Research

Amitabh Passi - UBS Financial Services

Scott Craig - Bank of America/Merrill Lynch

Ananda Baruah - Brean Murray

Sherri Scribner - Deutsche Bank

Craig Hettenbach - Goldman Sachs

William Stein - Credit Suisse

Brian Alexander - Raymond James

Matt Sheerin - Stifel Nicolaus

Jim Suva - Citi

Steven Fox - Cross Research

Lou Miscioscia - Collins Stewart

Presentation

Operator

Please stand by our presentation will now begin. I’d now like to turn the floor over to Vince Keenan, Avnet’s Vice President of Investor Relations.

Vince Keenan

Good afternoon and welcome to Avnet’s Second Quarter Fiscal Year 2012 Business and Financial Update. If you are listening by telephone today and have not accessed the slides that accompany this presentation, please go to our website and click on the icon announcing today’s event.

As we provide the highlights for our second quarter fiscal year 2012, please note that in the accompanying presentation and slides we have excluded restructuring, integration and other charges from both the current and prior year periods. When discussing pro forma sales for organic growth, prior periods have been adjusted to include acquisitions and the impact of the divestiture as well as the transfer of the Latin America computing components business from TS to EM in the first quarter of fiscal 2012.

In addition, when we refer to the impact of foreign currency, we mean the impact due to change in foreign currency exchange rates when translating Avnet’s non-U.S. dollar-based financial statements into U.S. dollars. And finally, when addressing working capital, return on capital employed and return on working capital, the definitions are included in the non-GAAP section of our presentation.

Before we get started with the presentation from Avnet management, I’d 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, Rick Hamada, Avnet’s CEO will provide Avnet’s second quarter fiscal year 2012 highlights. Following Rick, Ray Sadowski, Chief Financial Officer of Avnet, will review some other financial highlights, our return on capital performance and provide third quarter fiscal 2012 guidance. At the conclusion of Ray’s remarks a Q&A will follow. Also, here today to take any questions you may have related to Avnet’s business operations is Phil Gallagher, President of Technology Solutions and Harley Feldberg, President of Electronics Marketing.

With that, let me introduce Mr. Rick Hamada to discuss Avnet’s second quarter fiscal 2012 business highlights.

Rick Hamada

Thank you, Vince and good afternoon, everyone. Thank you all for taking the time to be with us and for your interest in Avnet.

In Q2 the challenging macro environment and continued component supply chain inventory correction resulted in a second consecutive quarter of below normal seasonal revenue growth. Despite these top line challenges, the Avnet team did a very good job driving EPS beyond our expectations to a second quarter record and generating strong cash flow in the quarter.

Enterprise revenue of 6.7 billion increased 4% sequentially while pro forma revenue was roughly flat with the year ago quarter in constant dollars for the second consecutive quarter. Pro forma revenue was up 5% year-over-year in our Americas region, while EMEA remains the weakest region with two consecutive quarters of negative year-over-year organic growth in constant dollars.

Gross profit margin, which typically declines in the December quarter due to the higher mix of TS business was flat sequentially at the enterprise level as both groups realized a sequential improvement despite the softer revenue environment. These gross profit margin improvements when combined with our ongoing expense management initiatives drove significant operating leverage in the business as our adjusted operating income grew 4.6 times faster than revenue sequentially. Also, on a sequential basis, adjusted operating income increased 19% to $265 million and adjusted operating income margin increased 49 basis points to 4%. This sequential increase was primarily due to a meaningful improvement in profitability in all three regions at TS, a solid performance at EM and a temporary benefit related to higher prices for hard disk drives due to supply constraints in the market.

On a year-over-year basis, adjusted operating income margin increased 17 basis points even though sales were down slightly. Adjusted EPS increased $0.08 from the year ago quarter to $1.15 due primarily to this improved profitability and a lower share count as a result of our stock buyback program. In addition to the strong performance on the income statement, the team did a very good job managing working capital through a period of continuing supply chain inventory adjustments and the associated slower growth.

In the December quarter working capital declined $361 million sequentially, ordinarily 9% with over 80% of this reduction occurring at our EM business. Higher income and vigilant working capital management combined to generate 450 million in cash from operations for the quarter and 715 million for the trailing 12 months. Return on capital employed increased 210 basis points sequentially to 14.3% and is back within our target range of 14 to 16%.

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