Avnet Earnings Call Nuggets: Expense Actions and Book-to-Bill Perspectives

Avnet (NYSE:AVT) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Expense Actions

Stephen Fox – Cross Research: Just one big picture question. Just looking at the charges you just discussed. So, this year now you are talking about $140 million in charges. The margins particularly on the EM side still remain relatively depressed and revenue basis sort of – I guess I’d call it sort of flattish to maybe marginally little bit better versus a year ago on an organic basis. And also your returns on invested capital obviously seem terrible. So, what exactly are the charges accomplishing in the last six months, whether the new one is aimed at? And why is any of this not related to maybe some other secular pressures that we are not discussing yet, I know that’s a big question but any help will be appreciated.

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Rick Hamada – CEO: Steve, this is Rick. I’ll start it and maybe ask Kevin or Harley or Phil to chip in. It is a big question overall. If you try to separate how much of the expense actions are due to what’s going on in a macro versus what’s going on in execution or performance of one of our businesses, how much of it is incremental actions due to underperforming new acquisition. It’s very, very difficult to break that out overall. I’d tell you at a very high level, so our strategy has been – we talked about these interim goals and progress back to certain performance characteristics and most often in the last few quarters we have been mentioning a certain operating margin return profile for both operating groups in a certain timeframe. And what we do is we assess and drive through each quarter, everything we are learning, we are making decisions and making changes as the quarters unfold. We keep those longer term goals in mind the crossover and get back on track for the LRPT. So, it’s really an ongoing continuous effort. And what we are reporting on right now as an example, the 40 that will be done by the end of the fourth quarter, there has been a substantial part of that already accomplished actually through the third quarter, we just didn’t want to get into breaking up between those two quarters as we go. So, thinking about as ongoing continuous process where we’re constantly trying to manage and adjust to the realities of the current market conditions, but at the same time, walk that fine line to maintain our service levels with our existing customers and not stress capacity to the point that we are unable to respond to any return to positive momentum. And hopefully, over the years and quarters of the past, we’ve demonstrated a clear capability of trying to manage that pretty much down the middle of the fairway and looking to balance all those competing issues overall and understanding what we would normally expect in a return to positive momentum. Those — all those factors impact and affect the type of scorecard and report out to you and it does — it’s very difficult to try to decompose beyond that and it’s very simple to say one overall number. But it’s an absolute multidimensional combination of those factors that contribute to the next scorecard that we report out to you on this kind of basis…

Stephen Fox – Cross Research: And maybe just at the Analyst Meeting, if we can figure out a way to sort of get a little bit of more color for what the shareholders are getting through the investments, the charges are you taking.

Rick Hamada – CEO: Okay.

Stephen Fox – Cross Research: And then just a more specific question just looking at the EM margins going forward, I guess what kind of recovery due to in our plan on over the new few quarters and this is the market and you have made some business adjustments on the way, how quickly can you recover from (43)?

Rick Hamada – CEO: Harley, you want to jump in on that one?

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Harley Feldberg – President of Electronics Marketing: So, obviously, as you suggested a moment ago, we will go into more granular detail next week at the Analyst Day. But be clear we still view 5% or greater as a very achievable goal for EM. So, don’t expect to see anything next week that suggests that we no longer view that as the proper productivity measure for EM. Clearly, certain factors as Rick outlined in his script have changed the timing of when we anticipate we will cross back over that milestone. I don’t want to give you a date today, because honestly I don’t know it and I’d rather have the luxury of going through the logic and detail next week. But I would say I see no reason short of obviously a significant macro event that I can’t predict why we wouldn’t still believe that that goal is achievable at some point in our new fiscal year.

Book-to-Bill Perspectives

Shawn Harrison – Longbow Research: I guess I wanted to follow-up on EM but more on the book-to-bill ratio, so I guess, Harley, this is your queue to jump in. I guess where have they been in April and maybe if you could give it I guess April relative to March and then maybe some regional perspective as well?

Harley Feldberg – President of Electronics Marketing: Sure. Book-to-bill in April has continued along the same pattern as the March quarter and indeed the December. So one of the factors that does provide a degree of confidence for us as we attempt to look forward is the fact that we now are in essence six months and let’s call it three weeks of positive book-to-bill widespread across all regions. So, we feel good about that. I think you probably saw that, called out our number of the commentaries in transcripts from the many of EM suppliers that have announced over the last 48 hours, couple of them I recall, specifically made note of some beginning of an inventory refresh from their channels, so we can validate that indeed our book-to-bill continues positive, and of course that will drive some adjustment to our pipelines of inventory.

Shawn Harrison – Longbow Research: Then as a follow-up question, servers are weak. There’s been some news about one of your larger TS customers’ maybe divesting that business. I guess if you could update in terms of the IBM I guess on the high-end and if you’ve seen any disruption as they’ve added some incrementals, players, and then also just kind of how you think about your server exposure going forward?

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Philip Gallagher – President of Technology Solutions: Yeah, Shawn, this is Phil, I’ll jump in on that. So we anticipated the question around the IBM. So, it’s really two parts. So let me answer that one first. Obviously, we’re in regular contact with IBM on what they’re going to be doing with their server business and there’s nothing, as you know, that’s official there at all. So, we’re in contact with IBM. We feel good obviously with where we are with IBM and roughly that server business for us represents in the 5% to 6% of our total TS business worldwide. So, if you look at it that way, it’s somewhat limited exposure and we’ll react and do what we need to do if in fact, something comes to fruition there. But I don’t it’s going to happen that quickly. We’re in contact with all of our partners obviously around that as they contact us. And again, there’s been very little disruption at this point in time. It’s only been a week or two. With regards to the additional distributors that IBM added I got to say there’s been no impact at all, no disruption to our customer base, the partners as we see it today, and we really don’t expect that to be any issue moving forward either.