Avnet, Inc. (AVT)

AVT 
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Avnet (AVT)

Q1 2013 Earnings Call

October 25, 2012 2:00 pm ET

Executives

Vincent Keenan - Vice President of Investor Relations

Richard P. Hamada - Chief Executive Officer, President, Chief Operating Officer, Director and Chairman of Global Executive Council

Raymond J. Sadowski - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Assistant Secretary

Philip R. Gallagher - Senior Vice President and Global President of Avnet Technology Solutions

Harley Feldberg - Senior Vice President, Member of the Management Board and President of Avnet Electronics Marketing - Global

Analysts

Brendan Oliver Furlong - Miller Tabak + Co., LLC, Research Division

Shawn M. Harrison - Longbow Research LLC

Amitabh Passi - UBS Investment Bank, Research Division

Scott D. Craig - BofA Merrill Lynch, Research Division

Ananda Baruah - Brean Murray, Carret & Co., LLC, Research Division

Sherri Scribner - Deutsche Bank AG, Research Division

Craig Hettenbach - Goldman Sachs Group Inc., Research Division

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division

Jim Suva - Citigroup Inc, Research Division

Steven Bryant Fox - Cross Research LLC

Louis R. Miscioscia - Credit Agricole Securities (USA) Inc., Research Division

Presentation

Operator

Please stand by. Our presentation will now begin. 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 2013 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 first quarter fiscal year 2013, please note that in the accompanying presentation and slides, we have excluded the gain on bargain purchase associated with an acquisition and restructuring integration and other items for all periods presented. When discussing pro forma sales or organic growth, prior periods have been adjusted to include acquisitions and the impact of divestitures.

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-U.S. dollar-based financial statements into U.S. dollars. And finally, when addressing working capital, return on working capital employed and return on -- I'm sorry, 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 would like 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 first quarter fiscal year 2013 highlights. Following Rick, Ray Sadowski, Chief Financial Officer of Avnet, will review some other financial highlights, our return on capital performance and provide second quarter fiscal 2013 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 first quarter fiscal 2013 business highlights.

Richard P. Hamada

Thank you, Vince, and hello, everyone. Thank you, all, for taking the time to be with us today and for your interest in Avnet. Our Q1 results represent a disappointing setback in our short-term performance expectations. Key segments of our served markets slowed during the quarter beyond our initial expectations, leading to a dramatic impact on our bottom line results as our revenues in the higher margin Western regions declined double-digit percentages year-over-year. Our Americas region was the weakest relative to our expectations as pro forma revenue declined 14% both sequentially and year-over-year. Our EMEA region, which has been dealing with slowing economic activity for the past year experienced a fifth consecutive quarter of year-over-year revenue decline as pro forma revenue was down 8% in constant currency. As a result, enterprise revenue of $5.9 billion decreased to 8.7% year-over-year and 8.4% on a pro forma basis in constant dollars.

While Q1 is typically our weakest revenue quarter each fiscal year, our sequential revenue decline was beyond normal seasonality due primarily to the unexpected double-digit percentage decline in our Americas region across both operating groups.

Gross profit margin was essentially flat year-over-year, but down 37 basis points sequentially. The negative leverage from the loss of gross profit dollars due to the decline in revenue in the higher gross profit margin Western regions had a significant impact on our bottom line as operating income dollars declined 41.3% sequentially to $137 million and operating income margin of 2.3% was down 137 basis points from the June quarter.

Given these developments, we increased our previously announced $40 million to $50 million of planned expense reductions and completed $90 million of annualized reductions that will positively impact our December quarter. Consistent with our portfolio management methodology, the majority of the expense actions are focused on those parts of our business that have been most impacted by the loss in revenue and where profitability is below our stated goals.

On the bottom line, EPS declined $0.31 per share from the year-ago quarter to $0.59 due primarily to the year-over-year decline in operating income as a result of the significant drop in revenues. Return on capital employed declined both sequentially and year-over-year to 7.9% and was below our cost of capital for the first time since the Great Recession.

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