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Ingram Micro Inc. (IM)

May 23, 2012 1:45 pm ET


William D. Humes - Chief Operating and Financial Officer

Damon S. Wright - Senior Director of Investor Relations


Benjamin A. Reitzes - Barclays Capital, Research Division


Benjamin A. Reitzes - Barclays Capital, Research Division

Let's get started with Ingram Micro. So everybody, I guess, is out of the Verizon keynote. So let's get started.

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Today, we have Damon Wright with Investor Relations, as well as Bill Humes who's now -- who's taking on the additional role of COO from -- as well as keeping the role of CFO. So now I think you're in charge here or have a hand in everything.

William D. Humes

Just about -- yes across the board. Yes.

Benjamin A. Reitzes - Barclays Capital, Research Division

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Okay. So we're going to get right into Q&A. As you guys know, a huge distributor, almost invented the category. And I don't know which came first. But we're just going to go right to questions.

I know it's an interesting an operating environment right now. But do you mind just kind of starting out with some of your longer-term goals, kind of, get us focused on the long term. And then let's drill down what happened recently in the short term. You have some pretty interesting long-term targets that are -- have the potential to drive some earnings upside from here.

William D. Humes

No, absolutely. Thanks, Ben. Overall, as we communicated at our Analyst Day back in November of 2011, we have certain goals, I mean, I'd say the financial goals, the key ones for EPS level of $2.60 to $3.10 earnings per share, which is really driven by an operating margin achievement level on a consolidated basis of 155 to 175 basis points of operating margin on a full year basis, with an ROIC of approximately 300 to 500 basis points above weighted average cost of capital. Right now, weighted average cost of capital is about a little bit shy of 9, probably mid 8s. If you consider all different factors.

So those are the overall goals. They were dependent on -- and there was a couple of assumptions that were included in there or a revenue growth expectation over the 3 years before 2015 and including 2015 of 4.5% to 6.5% revenue growth run rate. Which if you look at overall global demand and global spend, especially back in November. That was roughly around mid-single digits where IT demand was forecasted by the IDC as the gardeners of the world. And we did expect a gross margin level of 5.4% to 5.65%. Overall, we were -- when we set those targets for gross margin, which kind of built into our overall operating margin, we're coming off of what I would say a gross margin low for us in the third quarter of 2011 of about 4.95%. So that impacted some of our target setting at that point in time. Since then, we've made some great progress on that.

Now overall, so those are our overall targets. I would imagine the next question would be what are your key drivers there.

Benjamin A. Reitzes - Barclays Capital, Research Division

You got it.

William D. Humes

Sure. So I'm a good a setup man for that. As I talk about on the overall leverage side of things from the 4.5% to 6.5% revenue growth expectations, we do expect to deliver about 25 to 35 basis points of operating margin leverage by really holding OpEx fairly consistent to just slightly above half the rate of sales growth. So obviously, if there's a lower level of revenue growth, it's a little bit more challenging to drive a lot of operating leverage. But if there's higher growth rate towards the 6.5% range of revenue, then having OpEx growth monitored and managed at that reasonable level is fairly well controlled and very confident in being able to do that.

We also look at -- there's a big portion of investment in our different areas of business and adjacencies. So when Alain Monié, the new CEO, came in, this has helped even further accentuate this, is that really driving more inertia and growth and critical mass in our higher-margin adjacencies.

So for instance, our Auto Identification Data Capture/Point-of-Sale business, we've grown that to a little bit over $600 million in 2011. We believe we are the second largest globally in that areas, with ScanSource being the #1. It's growing -- obviously, it's growing higher-than-normal IT growth. It really drives a significant level of productivity, the technology software and hardware that's involved in the auto identification data capture space. And the operating margins and gross margins are much, much stronger than our core business.

Then let's continue to focus on things like the adjacencies and data center and Value business. We have got a substantial amount of, I'd say, business that we sell in a -- that would be considered in products senses -- our value business so a well -- a good degree over $10 billion in value-determined business. But it's sold, to a large degree, in a volume way.

So the play in that regard is really driving some of the services and solutions and a consultative support that help drive the gross margins and ultimately operating margins up in that area of business. So that one is not only just a growth area business, but also an operating margin area business.

And then, driving our Ingram Micro Logistics and Ingram Micro Mobility businesses to -- really would drive the one of the services element of Mobility and the services element of Logistics. Both of which, over time, will drive higher operating margins and the average and help us achieve it.

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