Avnet (AVT)

Q1 2012 Earnings Call

October 27, 2011 2:00 pm ET


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

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

Richard P. Hamada - Chief Executive Officer, President, Chairman of Global Executive Council and Member of Management Board

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

Vincent Keenan - Vice President of Investor Relations


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

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

William Stein - Crédit Suisse AG, Research Division

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

Amitabh Passi - UBS Investment Bank, Research Division

Jim Suva - Citigroup Inc, Research Division

Sherri Scribner - Deutsche Bank AG, Research Division

Scott D. Craig - BofA Merrill Lynch, Research Division

Unknown Analyst -

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

Craig Hettenbach - Goldman Sachs Group Inc., Research Division

Shawn M. Harrison - Longbow Research LLC



Our presentation will now begin. I would like to turn the floor over to Vince Keenan, Avnet's Vice President of Investor Relations.

Vincent Keenan

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Good afternoon, and welcome to Avnet's First 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 first quarter fiscal year 2012, 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 from the prior year period. When discussing pro forma sales or organic growth, prior periods have been adjusted to include acquisitions and the impact of a divestiture, as well as the transfer of the Latin American computing components business from TS to EM in the current quarter.

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 capital employed and return on 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 to review Avnet's Safe Harbor statements. 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 Securities and Exchange Commission.

In just a few moments, Rick Hamada, Avnet's CEO, will provide Avnet's first 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 the second quarter fiscal 2012 guidance. At the conclusion of Ray's remarks, the 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 2012 business highlights.

Richard P. Hamada

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

Our team delivered a very solid Q1 performance despite a challenging macro environment. Enterprise revenue of $6.4 billion increased 3.9% year-over-year, and pro forma revenue was roughly flat with the year-ago quarter in constant dollars following 7 consecutive quarters of strong year-over-year growth.

While Q1 is typically our weakest revenue quarter each year, our sequential revenue decline was more than normal seasonality, due primarily to the double-digit sequential revenue declines experienced in our EMEA region at both operating groups after adjusting for the impact of acquisitions and currency. As a result, on a year-over-year basis, operating income dollars were roughly flat, while operating income margin declined 13 basis points. On a sequential basis, due to the greater-than-expected sequential decline in revenue, our adjusted operating income dollars declined 17.7% to $223 million, with margin declining 45 basis points. This sequential decline was primarily due to softness in the EMEA region, as both operating groups experienced double-digit declines in revenue. Gross profit dollars increased 4.2% year-over-year, and gross profit margin of 11.7% was essentially flat with the year-ago quarter. On the bottom line, EPS declined $0.03 per share from the year-ago quarter to $0.90, due primarily to the year-over-year change in other income, which was driven by foreign currency losses and the costs associated with hedging.

Return on capital employed declined sequentially to 12.3% and was also down from the year-ago quarter, as we work to align our businesses to current market conditions. While this is the first time in 7 quarters that we fell below our target range of 14% to 16%, ROCE is still well above our cost of capital, and we remain committed to delivering performance within our target range through business cycles.

As we announced last quarter, our board authorized a $500 million share repurchase program. We initiated buying shares during the quarter, and Ray will update you on our specific progress later on the call. While we believe our share repurchase program represented a good investment opportunity last quarter, we also continued to invest in value-creating M&A this quarter, as we completed 3 acquisitions that will strengthen our competitive position and provide additional opportunities for growth in the future.

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