Avnet Inc. Earnings Call Nuggets: TS Operating Margin, Seasonal Trends

On Thursday, Avnet Inc. (NYSE:AVT) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

TS Operating Margin

Scott Craig – Bank of America Merrill Lynch: Just two quick questions here for you. Can you talk about the TS operating margin and sort of as you look out over the next few quarters, the progress that you expect to make there? Then just secondly, in the EM business, I think you noted in your script that you saw an improvement on the book-to-bill throughout the quarter. So, just wanted to make sure that that was the cases as they kept ramping up through to the end of the quarter so that we actually finished the quarter and worked into early April probably above parity?

Rick Hamada – CEO: Scott, it’s Rick. I’ll start with a couple of comments and then turn it over both to – I think to Phil and Harley. On the other TS operating margin, as we discussed back at the December Analyst Day, we are on a long-term journey and trajectory there to get to the stated long-term range for that business. Number of moving parts going on with that, but we’re still on a multi-quarter journey and we were pleased with the progress for this quarter but we still know we have ways to go with that. I don’t know, if Phil, you want to add anything to that?

Philip Gallagher – SVP, Avnet, Inc. and Global President, Avnet Technology Solutions: I’ll just add on, at the December Analyst Day we talked, Scott, a lot about the – of course we always look at the year-on-year compared, but we really focus as was in the script on the July, August, September, it was a quarter that was looking like it was aligning very similar from a revenue standpoint. We targeted to beat that operating margin for the July-August-September quarter as well year-on-year and we achieved that. We are very optimistic that sequentially as far as we’ll go out that we’ll be at the typical increase again 20 and 30 basis points or so from an operating margin improvement, which will continue on this trajectory to Rick’s point attaining the (LRPTs), we talked about in December.

Rick Hamada – CEO: So, the journey continues to TS. Scott, we like the progress we saw here in this quarter. We got (indiscernible) Harley on the book-to-bill do you want to add some color there?

Harley Feldberg – Corporate Vice President and President, Avnet Electronics Marketing: Sure, Rick. Yes, you’re comment was accurate. The book-to-bill for March in total was stronger than we saw in December, and the strengthening did occur as the quarter progressed. I think the last part of your comment was and did it continue into April and at least through three weeks we have seen it continuing in a positive way.

Seasonal Trends

Matthew Sheerin – Stifel Nicolaus: Just wanted to follow-up on Scott’s question regarding EM. So, you talked about a negative book-to-bill in Europe. Was that just for the quarter, but is that what you’re using right now. Because it looks like you had fairly seasonal demand or order trends in the March quarter. As you look at your component guidance, it looks like rolling it up, it’s seasonal, you’re expecting seasonal trends across all the three regions or will Europe still be a laggard there?

Harley Feldberg – Corporate Vice President and President, Avnet Electronics Marketing: I think what we said is that all regions finished the March quarter positive other than EMEA, but I would point out that where they did finish was stronger than what we had seen in December and if memory serves it correctly, stronger than we saw prior to that as well. So, the progression has been positive though it didn’t quite make it to positive for the March quarter. In April, it has exceeded 1 to 1, so we are above parity at least again through the previous three weeks of the quarter. So, each of the regions continues – had a positive at least through the beginning of this quarter.

Matthew Sheerin – Stifel Nicolaus: Would you say, Harley, that visibility has improved or is it still fairly cloudy because generally speaking semiconductor and component lead times are still pretty short?

Harley Feldberg – Corporate Vice President and President, Avnet Electronics Marketing: Matt, our view is that from our vantage point it appears that most of the correction that was a derivative of inventory excess has played through, and one of the data points that we think helps illustrate it is that there we have seen a modest – I would have said it is a modest expansion of lead times. So, we think that is telling us that primarily we are probably at the bottom of that supply chain correction and now starting to see a positive movement there.

Matthew Sheerin – Stifel Nicolaus: Just as a follow-up, tying that into your own inventory positions given that lead times are stable or maybe starting to stretch, is this sort of it in terms of your own correction in terms of inventories and are you going to start layering on inventory or kind of remain at this turn level until you start to see either lead times stretch or demand get better.

Rick Hamada – CEO: Exactly as you know our inventory strategies, obviously are derived from many different data points, one being lead times. Based on what we know today and based on the modest expansion of lead times I mentioned before, our principal goal remains the same which is continue each quarter to focus on improving our velocity. We saw nice improvement in the March velocity metrics sequentially, so our goal for June will be continue to focus on improving that velocity. If you consider the fact that we are projecting some growth, it probably suggests an inventory estimate for the June quarter somewhere in a very flattish area.