Start: 9:30 ET

End: 9:55 ET

Avnet, Inc. ( AVT)

UBS Global Technology and Services Conference

November 17, 2011, 9:30 ET


Raymond Sadowski – Senior Vice President and Chief Financial Officer

Vince Keenan – Vice President, Investor Relations

Good morning, everybody. Welcome to our third and final day of the UBS Global Technology and Services Conference. My name's Amitabh Passi. I'm the senior research analyst covering technology supply chain and wireless handset companies. It's my pleasure to welcome Avnet. Presenting on behalf of Avnet would be the Chief Financial Officer, Ray Sadowski. Accompanying him is Vince Keenan from Investor Relations. Thank you.

Ray Sadowski

Thank you, Amitabh. Good morning, everyone. Just going to spend a couple minutes with some opening remarks about Avnet in general, in case anyone here is not familiar with the company overall. I'll go quickly through the Safe Harbor statement which I think everyone's fairly familiar with overall.

First to start off, just an understanding of the market position, the market place available to Avnet overall. If you look at the total available market, and this takes into account various sources in compiling these numbers, but, essentially, we're in a $1.3 trillion industry today. Although the majority of this does go direct, the distribution portion of this is roughly in the $300 million, $300 plus million range. The market overall that we participate in growing roughly 5% to 6%, that's the expectations over the next few years.

So, the key takeaway from this slide essentially is that there's a lot of opportunities for Avnet to grow as we move forward. Obviously, our goal is to see how we can take advantage of those opportunities to grow faster as we move forward.

Two business segments for Avnet are Electronics component. The business overall represents a little bit less than 60% of our business overall. It markets and distributes a variety of different components and embedded systems to a number of different customers in the OEM, ODM and EMS provider space.

Our Technology Solutions business again representing a little bit more than 40% of the business as you can see here. It does a variety of different things, more on a high-end complex computer products. We sell those to VAR system billers and OEMs, and ISVs as well.

The importance of down on the bottom is a recognition of the different business models between EM and TS as you can see with the split of 57% sales for EM and the balance going to TS. Yet, EM makes up roughly 75% of our profits overall. So a higher margin business is the takeaway from there.

However, they also consume a significantly higher amount of working capital than does our TS business. When you pull that together, the way we run our business, is from a return perspective. Both return on total capital and return on working capital. These two businesses just get their different ways from an earns and turns perspective.

It's important to keep that in mind because as those businesses grow, depending on how they grow relative to one another, it certainly is going to have an impact on Avnet's margins overall. Less of an impact on our returns, but more of an impact on our margins overall.

The same is true if you do a deep dive within both EM and TS. Whereas an example, if you look at an EM business, you'll have different earns and turns characteristics with our Asia business than you will see in the EMEA or Americas business. How they grow relative to one another will have an impact on our margins and that's something that's important to note as you look at the company overall.

This is a slide that we've shown not too often and something where we'll continue to show as we go forward. It's trying to give you a sense of how we look at the company overall from a portfolio perspective. The size of the bubbles are simply how large the particular business operation is. The blue is essentially our TS businesses. The green is our electronic marketing businesses.

If you look on a horizontal axis, it's looking at what expected market growth will be over the next three years. On a vertical axis, it's looking at their return on working capital relative to what our individual targets are for those regions. Good thing to be above that line and not such a great thing to be below the line.

The importance here is to show what the possibilities are without a significant amount of growth, just getting all of our businesses up to what our long range targets are. It has a fairly significant impact on our profitability potential going forward. Hence the reason for the slide performance and potential.

Clearly, you can see the biggest bubble down there that we struggled with over the last couple years has been TS EMEA. We've made good progress. The acquisition of Bell certainly helped that business overall.

We've seen some improvement over the last few quarters. Our expectation is that we'll see continuous improvement as we move forward as they move higher towards that long-term planning target line that you see there. That again will impact profitability very nicely for us, just as a way of continuing to improve on what we've done so far.

If you look at current market conditions, this just gives you a snapshot of what happened during Q1 towards the top there. EM doing about $3.8 billion, TS doing about $2.6 billion. It provides our guidance for the second quarter. We're at the midpoint.

We would expect EM to do about $3.6 billion and TS to do about $3.2 billion. Those numbers are at the low end for TS. Low end for what we'd consider a normal seasonality. For EM, slightly below a normal seasonality for EM overall is what we're seeing.

If we look at the electronics marketing overall, book-to-bill has been improving. It improved through March and that trend seems to be continuing so far through the November time frame. We're in a situation where, for the most part, average selling prices seem to be stable and lead times, as well, earn a normal low range about six to eight weeks overall.

Looking at TS, a lot of the growth has been driven by industry standard servers and storage as of late, and as we go into the December quarter, we're looking for a fairly good quarter. No indications at this particular point in time that would suggest hitting those numbers are going to be a challenge in any way.

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